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Stakeholder trust: A proposal for a global business ethics principle

What standards should businesses observe in their own countries, or abroad? Businesses now have resources and influence that rival or surpass those of governments and certainly of ordinary people. Yet finding globally appropriate rules for business behavior has been a formidable challenge for business leaders and academics.

We propose to fill the gap with this unifying global business ethics principle: A basic duty of every organization is to earn stakeholder trust.

Earning stakeholder trust requires that business satisfy not only owners, but also key interest groups related to the business — e.g., customers, employees, creditors, suppliers, government.

Trust is based on both competence and character. It reflects personal experience with the organization’s products or services, its representatives (e.g., fellow employees, customer contact representatives) and to organizational culture, policies, reputation.

Analyzing what behaviors are most likely to create trust is a challenge to every organization, and priorities will likely vary by industry, by national culture, by institutional strategy, etc. But it is significant to note that what benefits one stakeholder tends to benefit all: research indicates that there is a strong correlation between employee trust and customer trust; and that employee trust and customer trust both positively influence shareholder value.

For emerging economies, where corruption can be seen as inevitable in business, it is especially noteworthy that research indicates that the single most important element in economic development is trust, specifically “bridging trust,” or the willingness to cooperate across groups.

Milton Friedman, a Nobel economist, famously wrote in 1970 that “The social responsibility of business is to increase its profits”. This evolved in the 1980s to the market economy mantra: “The purpose of the corporation is to maximize shareholder value,” where “value” was nearly always assumed to mean “financial value.”

One of the world’s most successful shareholders, Warren Buffet, provides a different definition of “shareholder value”: “Lose money and I will forgive you. Lose even a shred of reputation and I will be ruthless. …… Wealth can always be recreated, but reputation takes a lifetime to build and often only a moment to destroy.”

The West, we believe, has done a serious injustice to emerging economies to have exported a version of capitalism that measures success by money only. It is time to correct that error.

This post is adapted from an article that first appeared on the Russian International Affairs Council website. A full version is here.

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Patricia E. Dowden is President of Center for Business Ethics and Corporate Governance and Managing Director of the Russian Compliance Alliance, an online compliance self-evaluation system. Ms. Dowden also has extensive U.S. commercial bank management experience. She holds a BS from University of North Carolina (Phi Beta Kappa) and an MBA from Georgia State University.

Philip M. Nichols is an Associate Professor of Legal Studies and Business Ethics and Director of the Social Impact and Responsibility Program, The Wharton School of the University of Pennsylvania. His research focuses on emerging economies and corruption. Dr. Nichols holds a JD, Duke University; LLM, Duke University; AB, Harvard University.

We’re grateful to Professor Donald Mayer, whose generosity in sharing his extensive knowledge and experience in the field of business ethics has been a valuable contribution to this article. 

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1 Comment

  1. While the proposal is no doubt correct (although hardly original), this summary strikes me as a disingenuous. I am not aware of any statement by Milton Friedman promoting, accepting, or acquiescing to public corruption as a method for maximizing a firm's value. And let's not forget, the objective of management is to increase the firm's value (including avoiding things such as fines and penalties and promoting practices and norms that enhance the company's market strength).

    This summary accepts a definition of capitalism that is unrestrained and rapacious and cherry picks a quote to make an editorial point. The model of free markets supported by Friedman assumed a system built on the rule of law with accepted norms for the conduct of business and resolving disputes. That is fully consistent with with the objectives of conducting business with integrity.

    We do ourselves and our clients no good by staking a position that there must be a trade off between a profitable company and an ethical one.


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