The Separation Fallacy
The ideas behind the Stakeholder Orientation principle of Conscious Capitalism are drawn primarily from the work of Ed Freeman, a professor at the University of Virginia. This section summarizes Professor Freeman’s work to help you understand the foundation of this pillar.
To create value for stakeholders, executives must understand that business is fully situated in the realm of humanity. – Freeman, Harrison, Wicks, Parmar, and de Colle 1
The traditional view of business posits that the chief responsibility of business leaders is to maximize value for the owners of the business. Be they stockholders, mom and pop owners, co-op members or other investors, the success of a business is measured in profits returned to the owners.
Business scholarship has sought to uncover the factors that contribute to or detract from the all-important goal of profit maximization. That was true in 1984 when business professor Edward Freeman, published a book called Strategic Management: A Stakeholder Approach. In it, Freeman and his colleagues argued that, paradoxically, the best way to create value for shareholders was actually to balance the interests of all of a company’s stakeholders, considering none to be more important than any other.2
This blasphemous idea was ridiculed and dismissed by many and, even those willing to consider it, hotly debated who should and should not be worthy of being considered a stakeholder. In the intervening years however, this view has begun to take hold, finding ever-greater empirical (if not mainstream) support.
The Separation Fallacy
In Mario Puzo’s classic novel, The Godfather, the separation of “business” and “personal” ethics allows the characters to justify truly heinous actions because “It’s only business.” But in the Godfather, as in real life, companies conducting the “business” are simply a collection of individuals. There can be no separation between individual ethics and business ethics. Ed Freeman and his co-authors in Stakeholder Theory make this point, but they take it one big step further.
In a capitalist society, we rely on businesses and markets to distribute goods and services to provide the basic stuff required for a dignified human existence. Without the basic stuff required for survival, philosophical debate about what comprises ‘a good life’ is rather pointless. In this system, ethics and business are inextricably intertwined. To assert otherwise is to fall into the separation fallacy.3
Furthermore, ethics and business are both about people. We use ethics to determine how we should behave toward one another in the course of our lives. We spend the majority of our waking adult lives at work for some type of business. As such, Freeman and his co-authors conclude:
It makes no sense to talk about business without talking about ethics.
It makes no sense to talk about ethics without talking about business.
It makes no sense to talk about either business or ethics without talking about human beings.
1 R. Edward Freeman, R.E., Harrison, J.S., Wicks, A.C., Parmar, B.L., and de Colle, S. (2010) Stakeholder Theory: The State of the Art. Cambridge University Press, New York.
2 Freeman, R.E. (1984) Strategic Management: A Stakeholder Approach. Pitman, Boston.
3 Freeman, R. E., Harrison, J. S., & Wicks, A. C. (2007). Managing for stakeholders: Survival, reputation, and success. New Haven: Yale University Press.