Company Stakeholder Responsibility: a New Approach to CSR

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Company Stakeholder Responsibility: A New Approach to CSR

R. Edward Freeman S. Ramakrishna Velamuri Brian Moriarty p er Bridge Pa

www.corporate-ethics.org

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Bridge Papers™ Uniting best thinking with leading business practice. Contents

Foreword ...... 2

Introduction ...... 2

Company Stakeholder Responsibility in Practice: Four Levels of Commitment to the Stakeholder Approach...... 4

Ten Principles of Company Stakeholder Responsibility ...... 5

A New CSR – Company Stakeholder Responsibility ...... 8

Thought Leader Commentary™ with Charles O. Holliday, Jr...... 9

About the Authors ...... 13 Foreword

The Business Roundtable Institute for Corporate Ethics is an independent entity established in partnership with Business Roundtable—an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees and $4.5 trillion in annual revenues—and leading academics from America’s best business schools. The Institute, which is housed at the Darden Graduate School of Business Administration, brings together leaders from business and academia to fulfill its mission to renew and enhance the link between ethical behavior and business practice through executive education programs, practitioner-focused research and outreach. Institute Bridge Papers™ put the best thinking of academic and business leaders into the hands of practicing managers. Bridge Papers™ convey concepts from leading edge academic research in the field of business ethics in a format that today’s managers can integrate into their daily business decision making. Company Stakeholder Responsibility: A New Approach to CSR is an Institute Bridge PaperTM based on the research of R. Edward Freeman and S. Ramakrishna Velamuri. Based on a stakeholder approach, this paper outlines a new capability for organizations to develop. The accompanying interview with Charles O. Holliday, Jr., Chairman and Chief Executive Officer, DuPont, provides a CEO perspective on how to embed a Company Stakeholder Responsibility mindset across the enterprise and in a firm’s overall value proposition.

BRIDGE PAPER™: Company Stakeholder Responsibility: A New Approach to CSR introduction Corporate social responsibility (CSR) reinforces the “separation thesis”—the idea that we can separate “business” Assume that the CEO of a well- from “ethics or society.” This separation respected corporation is asked the following: “Your company’s products is an idea that reaches very deeply into improve consumers’ lives. Suppliers Western culture. It is reinforced by the want to do business with your company disciplines of business, by our major because they benefit from this theoretical frameworks in management, relationship. Employees really want and by many executives and business to work for your company, and are thinkers themselves. At its worst it satisfied with their remuneration and generates an absolutely destructive idea professional development. And, you’re a of capitalism—that capitalism is about good citizen in the communities where “anything goes.” After all, the theory you are located; among other things, says, “it’s just business.” Viewed in you pay taxes on the profits you make. this way, corporate social responsibility You compete hard but fairly. You also becomes an “add-on” to ameliorate the make an attractive return on capital supposedly harsh consequences of this for shareholders and other financiers. view of capitalism. However, are you socially responsible?” Let us go back to the example of If a company like the aforementioned the previously described corporation. organization is enriching the lives of its By hiring employees, has it done stakeholders, then asking the additional something that is “for the business?” question of whether or not it is “socially The answer to that question is a responsible” simply makes no sense—it resounding and unqualified, “Yes.” Has is a meaningless question. If a firm is it done something that is “for society?” doing all the things that this company The answer to that question is also a does, then it deserves to be applauded resounding, “Yes.” So, how do matters and offered as an example for other firms of employment count—in the social to emulate. If it is not doing them as ledger or the business ledger? A similar satisfactorily as particular stakeholders argument can be made for customers, think it ought, then these stakeholders communities, suppliers and financiers. could perhaps offer to help it do them These individuals and organizations are better, rather than appeal to actions and all full-fledged members of society—if responsibilities that lie outside its day to they benefit in their dealings with a day activities. company, then society benefits too, By talking of business and social directly and indirectly. responsibility as if they are two separate Corporate social responsibility is things, we unintentionally promote the often about seeming to “do good works.” idea that they involve discrete thought And, while there is certainly nothing processes and activities. The challenge wrong with doing more good, there can is to promote a different way of doing be an implication that companies need business that integrates considerations of to do good works because the underlying business, ethics, and society. structure of business is not good, or Herein lies the problem with morally neutral. This is a destructive “Corporate Social Responsibility.” idea—it fails to recognize the central role

Business Roundtable Institute for Corporate Ethics business plays globally in improving the In short, if you take a “creating value well-being and prosperity of hundreds for stakeholders” approach to business, of millions of people. And, it can cause and if you acknowledge that ethics companies to act in bad faith and get and values are as important in these involved in matters where they have little relationships as they are in our other expertise. relationships with one another, then the This is not Milton Friedman’s idea of “corporate social responsibility” argument that the only social responsi- is superfluous. A conceptual scheme bility is to increase profits; rather it is a that separates the social responsibilities practical matter—giving money to the of a corporation from its business opera doesn’t make up (in any moral responsibilities has long outlived its sense) for short-changing customers usefulness. or communities.1 We need to focus on It is time to replace “corporate social how value is created in the basic business responsibility” with an idea of “company proposition. How does this company stakeholder responsibility,” assigning a make customers, suppliers, communities, different meaning to CSR.3 This is not employees, and financiers better off? just semantics, but a new interpretation Capitalism is a system of social cooperation—a system of working together to create value for each other, value which A conceptual scheme that sepa- none of us could create on our own. In rates the social responsibilities this sense, business is already an enterprise with moral ramifications. Seeing it of a corporation from its busi- any other way can lead to dangerous so- ness responsibilities has long cial policies, and to the tarnishing of the one institution—business—that still has outlived its usefulness. to play a central role in lifting hundreds of millions of more people out of poverty of the very purpose of CSR. “Company” across the globe. signals that all forms of value creation The second problem with corporate and trade—all businesses—need to be social responsibility is that it is focused involved. “Stakeholder” goes back to on “corporate” social responsibility. the first paragraph of this paper and Why is it not called “business social suggests that the main goal of CSR is to responsibility?” The focus on “corporate” create value for key stakeholders. And implies that corporations, due to their “Responsibility” implies that we cannot size and success and perhaps their separate what we do in the workplace shareholding pattern, have to shoulder from ethics.4 responsibilities that smaller and more closely held businesses do not. Why? This view is highly problematic when companies with fewer than 50 employees employ more than three times the number of U.S. workers (47,347,000) than companies that have 1,000 or more employees (15,138,000).2

BRIDGE PAPER™: Company Stakeholder Responsibility: A New Approach to CSR Company Stakeholder Level 3 - An understanding of broader Responsibility societal issues Today’s managers must recognize in Practice: and respond to a rising number of Four Levels of Commitment to international issues, without the moral the Stakeholder Approach5 compass of the nation, state or religion as a guide. Managers may need to take positions on issues that apparently are Company stakeholder responsibility not purely business related. A pro- requires that companies be committed to active attitude is necessary towards all a stakeholder approach to management stakeholder groups, both primary, i.e., on the following four levels. those that have direct business dealings Level 1 - Basic Value Proposition with the company, and secondary, such At this most basic level, the entrepreneur as NGOs and political activists, who can or manager needs to understand how the affect the operations of the company. firm can make the customer better off, • Do we understand how our basic and simultaneously offer an attractive value proposition and principles value proposition to employees, suppliers, fit or contradict key trends and communities, and financiers. opinions in society? • How do we make our stakeholders Level 4 – Ethical leadership better off? Recent research points to a strong • What do we stand for? connection between ethical values and positive firm outcomes such as sustained Level 2 - Sustained stakeholder profitability and high innovation.7 cooperation Proactive ethical leadership is possible The competitive, macro-economic, only if there exists a deep understanding regulatory, and political environments of the interests, priorities, and concerns are so dynamic they necessitate constant of the stakeholders. revision of the initial stakeholder arrangements. Each revision upsets • What are the values and principles the delicate balance struck in the that inform my leadership? basic value propositions to various • What is my sense of purpose? What stakeholders. Managers must have a deep do I stand for as a leader? understanding of how these trade-offs There are 10 general principles that affect each stakeholder, the amount of collectively develop a “mindset” sacrifice a given stakeholder will accept, necessary for entrepreneurs and managers and how these current sacrifices can be to understand and practice all four levels compensated. of Company Stakeholder Responsibility. • What are the principles or values on which we base our everyday engagement with stakeholders?

Business Roundtable Institute for Corporate Ethics Ten Principles of Employees are far more motivated Company Stakeholder to give their time, energy and creativity when they believe in their firm’s overall Responsibility mission and goals. The firm in turn needs to live its values. (1) Bring stakeholder interests together For example, Merck’s stated mission is over time. “to provide society with superior products The very idea of managing for stake- and services by developing innovations holders is that the process of value and solutions that improve the quality creation is a joint process. Companies of life and satisfy customer needs, and to need to show returns to its shareholders, provide employees with meaningful work meet obligations to debt holders, banks, and advancement opportunities, and 8 and others. Profits don’t conflict with investors with a superior rate of return.” other stakeholders—they are a scorecard Led by CEO Roy Vagelos, in 1987 indicating how well the company is Merck decided to develop, produce and managing the whole set of stakeholder distribute millions of doses of a medicine relationships. Managers must keep these to treat river blindness—a terrible fly- stakeholder interests in balance, hopefully borne parasitic illness affecting tens of mutually reinforcing each other. millions of the world’s poorest people 9 The online auction firm eBay in the African and Asiatic tropics. This constantly updates its user interface was an extraordinary action, because and back office processes to meet the Merck did it free-of-charge—the people expectations and desires of multiple in need of the drug could not afford it. stakeholder groups—in particular, In so doing, Merck lived its value of people who use the site to buy and “preserving and improving human life,” sell goods. The company’s ability to and showed all of its stakeholders that consistently meet the needs of a broad the core purpose of the company was range of consumers and sellers—from alive in practice. small startups to leading national retail (3) Seek solutions to issues that satisfy operations—has also been of great multiple stakeholders simultaneously. benefit to the firm’s shareholders, with Issues and problems come at the stock price increasing roughly 400% managers from many sources, in many from 1999 to 2006. forms. Managers need to find ways to (2) Recognize that stakeholders are real develop programs, policies, strategies, and complex people with names, faces even products and services that satisfy and values. multiple stakeholders simultaneously. We often make assumptions that The first step in that process is to business people are only in it for their actually recognize the need to look for own narrowly defined self-interest. Most simultaneous solutions. human beings are more complicated. In developing new products, Sun Most of us do what we do because we Microsystems focuses on both customer are both self-interested and interested in needs and environmental impact. When others. Business works in part because of the company launched its Sun Fire x64 the urge to create things with others and servers, the product consumed about one for others. third the energy and cost half as much

BRIDGE PAPER™: Company Stakeholder Responsibility: A New Approach to CSR as comparably configured servers—while (5) Commit to a philosophy of providing one-and-a-half times the voluntarism—manage stakeholder performance. Sun was able to offer its relationships yourself, rather than customers great value—with the bonus leaving it to government. of cheaper energy costs—by having a The challenge for managers is to sustainability mindset in their product reorient their thinking and managerial development.10 processes voluntarily to be more responsive to stakeholders. A situation (4) Engage in intensive communication where a solution to a stakeholder and dialogue with stakeholders—not problem is imposed by a government just those who are friendly. agency or the courts must almost Obviously we need intensive invariably be seen as a managerial failure. dialogue through multiple methods Spurred on by Warren Buffett, the with customers, suppliers, employees, widely-admired Chief Executive of and shareholders, but communities, Berkshire Hathaway and corporate the media, critics, and other secondary investor, the Coca-Cola Company and stakeholders count as well. Critics are The Washington Post Company have especially important dialogue members— been leaders in the movement to count they represent unmet market needs. stock option grants to employees as After declining to issue a corporate compensation. Both companies began responsibility report for three years, reporting these awards as compensation Nike decided to issue a comprehensive in 2002, well before the U.S. Securities report in 2005. As part of this process, and Exchange Commission began to consider requiring similar reporting The very idea of managing measures in January, 2006.12 for stake-holders is that the (6) Generalize the marketing approach. process of value creation is a We need to “over-invest” on understanding stakeholder needs, joint process. using marketing techniques to segment stakeholders to develop a better understanding of their individual needs Nike invited experts from academia, and using marketing research tools to trade unions, NGOs and the investment understand the multi-attribute nature community to help them shape a report of most stakeholder groups. “Investing” that for the first time not only listed the may be in terms of more time, more company’s 700 active contract factories, energy, or whatever the relevant resource but also graded each of these factories in that is required by a given stakeholder terms of safety and labor conditions.11 group. Within a span of months, Nike trans- Johnson & Johnson ( J&J) is one formed itself from being a routine of the biggest investors in terms of target of these secondary stakeholder proactively assessing stakeholders’ needs groups to a leading model of corporate and taking the pulse of their firm’s transparency. reputation among various groups. By all accounts this investment has shown

Business Roundtable Institute for Corporate Ethics then there needs to be some interaction In today’s world no one “gets it and some strategic thinking. In our right” all the time. Whatever relatively free and open society, the consequences of not negotiating with a your interactions and strategies broad range of stakeholders is that they are with stakeholders, they can use the political process to “negotiate” indirectly by pressuring government to always be improved. enact a set of rules that is not likely to be optimal to company interests. great dividends in the company’s brand strength, with J&J garnering the top (9) Constantly monitor and redesign ranking in Harris Interactive National processes to make them better serve Corporate Reputation Survey for seven stakeholders. consecutive years.13 In today’s world no one “gets it right” all the time. Whatever your interactions (7) Never trade off the interests and strategies are with stakeholders, they of one stakeholder versus another can always be improved. continuously over time. Penske Truck Leasing owns 216,000 Just as many successful companies trucks in 750 locations. Because think in terms of “how to serve the Penske’s back office processes were not customer” or “how to serve the centralized, customers would receive employees,” it is possible to generalize accounts payable calls from 10 or more this philosophy to “how to serve our different agents and often the calls would stakeholders.” continue well after payment had been Consider the example of a company received. This process was not only highly that trades off the interests of customers inefficient for Penske, it was terribly in order to maintain its stock value annoying for their customers. After the for shareholders. In August of 2000, company outsourced and centralized Firestone recalled millions of their several of its back office processes, tires deemed to be defective. Firestone customers with payments 38 days past managers had been aware of the due receive a single phone call about problems associated with this product for their invoice, delinquent payments have years before they became public, but they been reduced and the staffing for this had chosen “to settle cases confidentially, area has been cut by 30%.15 one at a time, making it difficult for consumer watchdogs or government (10) Act with purpose that fulfills regulators to discern a pattern that commitments to stakeholders. Act could have pointed to a broad public with aspiration towards fulfilling your safety issue.”14 When these settlements dreams and theirs. became public, the Firestone brand was Businesses can have a purpose. essentially destroyed. Purpose is inspirational. The Grameen Bank wants to eliminate poverty. Fannie (8) Negotiate with primary and Mae seeks to make housing affordable secondary stakeholders. to people at every income level. ITT If a group or individual can affect a Industries tries to make products that company or be affected by a company improve people’s lives. All of these

BRIDGE PAPER™: Company Stakeholder Responsibility: A New Approach to CSR organizations have to generate profits, or else they cannot pursue their purposes. And, they cannot generate profits or fulfill their purpose without intense engagement with their stakeholders.

A New CSR—Company Stakeholder Responsibility

Corporate Social Responsibility has outlived its usefulness, because it is flawed in two respects. First, it promotes the “separation thesis,” the idea that business issues and social issues can be dealt with separately. This endorses the destructive idea that the underlying structure of business is either not good or is morally neutral. A stakeholder A stakeholder approach applies approach acknowledges the intertwined nature of economic, political, social, as much to an entrepreneurial and ethical issues. Centered in the start-up and to a mid-sized practice of management, it provides the closely-held firm as it does to manager with a pragmatic framework for action. The second flaw with Corporate a corporation with diffuse Social Responsibility is its focus on ownership. corporations. Social responsibility does not only apply to corporations—it applies to all organizational forms. A stakeholder approach applies as much to an entrepreneurial start-up and to a mid-sized closely-held firm as it does to a corporation with diffuse ownership. Based on a stakeholder approach, a distinct CSR—Company Stakeholder Responsibility—outlines a new capability for organizations to develop.

10 Business Roundtable Institute for Corporate Ethics Ten Principles for Company Stakeholder Responsibility 1. Bring stakeholder interests together over time.

2. recognize that stakeholders are real and complex people with names, faces and values.

3. Seek solutions to issues that satisfy multiple stakeholders simultaneously.

4. engage in intensive communication and dialogue with stakeholders not just those who are “friendly”.

5. Commit to a philosophy of voluntarism—manage stakeholder relationships yourself, rather than leaving it to government.

6. generalize the marketing approach.

7. Never trade off the interests of one stakeholder versus another continuously over time.

8. Negotiate with primary and secondary stakeholders.

9. Constantly monitor and redesign processes to better serve stakeholders.

10. Act with purpose that fulfills commitments to stakeholders. act with aspiration toward your dreams and theirs.

BRIDGE PAPER™: Company Stakeholder Responsibility: A New Approach to CSR 11 A Thought Leader Commentary™ with Charles O. Holliday, Jr., Chairman and Chief Executive Officer, DuPont

Q: How do you identify your stakeholders and balance their interests in today’s rapidly changing environment? How can business leaders best engage stakeholders who may be critics of their firm or industry?

Charles O. Holliday, Jr.: We have traditionally identified four stakeholder groups important to DuPont— shareholders, customers, employees and society. We fully understand the shareholders are the owners. Their best interest is served by the other three. At different times in our history, emphasis Charles O. Holliday, Jr. has shifted among those stakeholders. approach the same issues from different But that set provides us with an enduring points of view. So while we rely to a great template for identifying and engaging the extent on information that we gather, people and groups who are vital to the there is really no substitute for some first- continued success of our enterprise. We hand interaction with leaders in other balance their various interests by listening sectors, whether friends or critics. and through dialog. We regularly poll our employees to find out how they see the Q: How else does the company embed company and how they feel about their the Company Stakeholder Responsibility ability to contribute to its growth. Our mindset, discussed in this Bridge Paper, public affairs and issue scans enable us to across the enterprise in its overall value maintain a good sense of the trends and proposition? developments important to stakeholder Holliday: First, DuPont is a leader groups. in terms of Company Stakeholder I personally participate in conferences Responsibility through safety. For more and other events where I am able to than 200 years, DuPont has placed a state our company’s position relative to concern for safety above all others. We public issues and to talk with others who have the most stringent and effective safety policies in our industry, which our trading partners, suppliers, and even There is really no substitute for competitors use as a benchmark. In 2000, some first-hand interaction we created a safety consulting business with leaders in other sectors, now worth over $100 million annually to provide training, certification and whether friends or critics. development around safety issues.

12 Business Roundtable Institute for Corporate Ethics Second, the shift of DuPont’s core value performance – and in those products from a chemical basis to rare few instances when I didn’t, I heard a biological basis has allowed our about it! Our core values work for us. products to have a substantially They make us a more desirable company smaller footprint on the environment. to do business with or have operating Having a diversity of disciplines as the in your back yard. They give us a set of foundation of our science allows us to standards that make good and capable invent and manufacture products that people want to work for DuPont. They are both innovative and socially and give real backbone to interaction with environmentally responsible. Our regard our stakeholders. for the environment is what will allow For us, core values are central to our DuPont to thrive and survive in our third identity of who we are as DuPont, and century. they are the link through the generations of DuPont employees over our 204 Q: DuPont has an over-200 year-old year history. For companies that don’t legacy supporting its core values of safety have a set of values that can help them and health, environmental stewardship, accomplish that, I would recommend ethics, and respect for people. In particular, DuPont is well-known for its “safety moments” that are deeply As we moved through a engrained in all DuPont employees. How would you advise corporate leaders whose historic transformation of companies don’t have such a long legacy the company in the past eight and want to build similar lasting core years, we indicated that values? everything was open to Holliday: Because our core values have change except our core values. been part of our company’s culture for so long, it’s hard for us to imagine operating without being able to consistently refer that they take the time to understand back to the values that drive us. As we and identify what values inform their moved through a historic transformation behaviors and underlie their operating of the company in the past eight years, principles and the way they do business. we indicated that everything was open Once those values have been identified to change except our core values. What’s you have to drive them everyday in what more we measure and gauge our progress you say and what you do. You have to act opposite those values with a lively set in a way that proves beyond a doubt that of metrics that employees have access they are true non-negotiables. You have to. For example, any employee can see to measure your performance against our statistics on year-to-date safety them, and where you don’t measure up, and environmental performance every your stakeholders have to see you make day by clicking on a link accessible the necessary adjustments to get on track through our daily electronic newsletter. and stay there. In every written letter or video message Q: You have been at DuPont for 36 to employees I make some mention of years. During that career progression,

BRIDGE PAPER™: Company Stakeholder Responsibility: A New Approach to CSR 13 what are some defining moments that Q: You are the Chairman of Business have contributed to both your own Roundtable’s Environment, Technology and DuPont’s current approach to and the Economy Task Force, you have sustainability? served on other leadership groups like President Bush’s National Infrastructure Holliday: As a company, we have learned Advisory Council, and you have co- from scientific insights into the safety authored the book Walking the Talk, of our products and from changes which outlines the business case for in environmental laws. In the 1970s, sustainability—what drives you to lead DuPont was the world’s largest producer change in this broader arena outside of of CFCs. As CFCs became more closely your own company? linked to environmental change, we started the process of eliminating CFCs Holliday: DuPont’s long history has from our product offerings. demonstrated to us that no company, As a global leader in sustainable however strong and competitive, can business practices, DuPont now works go it alone. Involvement in outside to direct the chemical industry toward organizations and endeavors is a way developing more environmentally and of learning and leading. Working with socially friendly products. We influence other companies, we can learn from the chemical industry most by constantly the rich variety of experiences that setting the bar higher on what is they share. I never walk away from a expected of a chemical company, by Business Roundtable meeting without creating more biology-based products, a new insight that affirms something and by considering the needs of the we’re doing or challenges me to think communities our business affects. For in a very different way. The S.E.E. example, DuPont is the world’s leading Change initiative we kicked off a year producer of soy protein, which is now ago was aimed at precisely that—dozens being used in various products that were of companies visibly doing creative traditionally chemically-based, such as things to work more sustainably so their printers ink. successes might trigger equally good but Personally, I have learned more from different ideas among their peers. The interacting with our many talented whole idea of sustainability as a realistic employees – engineers, scientists, manag- goal for industry came about because ers, front-line plant workers, and others organizations like the World Business – based in over seventy countries. Inter- Council for Sustainable Development action with leaders of other companies kept hammering away at it and offering and with U.S. and international govern- up real life examples. ment leaders has also taught me a great We can lead in those areas where our deal. There are various trade and develop- experience positions us to effect positive ment organizations DuPont is part of. change. Ultimately, all this is good for our Recently, I represented DuPont at meet- company and makes a lasting impression ings of the World Business Council for on our stakeholders. Sustainable Development and the World Economic Forum. Q: This paper argues that business leadership involves setting industry

14 Business Roundtable Institute for Corporate Ethics standards, not just following them. Why is it important for firms to manage Industry has to be imaginative stakeholder relationships themselves and proactive and show that rather than leaving it to regulatory agencies? How can government and we can accomplish the things business work together most effectively our stakeholders expect of us, to set standards that create value for multiple stakeholders? especially those things that go beyond the letter of the law. Holliday: The complexities and opportunities of modern business and industry are too great to assume that of the most exciting things we’re doing regulation alone can get us where we at DuPont in sustainability is the have to go. Regulation, as we have seen construction of a plant for a bio-based historically, is not a precision tool for route to a key ingredient for our Sorona® change. But it can overcome inertia polymer. It will be on stream this year. and gets things going. The landmark To be sure, work we did in bio-refinery environmental legislation of the 1970s development funded by the Department and 1980s set in motion the kind of of Energy helped us understand the change that in the U.S. has led to cleaner potential of such processes. But no one air and water. No one doubts that. But told us we had to do it. We worked how would you go about regulating with a business partner to make this sustainability? We can expect that happen because we think this is the way government will identify some pressure profitable businesses will operate in the points where regulatory instruments can future. Our stakeholders understand this advance the cause. But real progress in and they expect it of DuPont. sustainability will come from what we build into products and services, in the way we design and operate our plants and distribution networks, in the way we think about the ultimate disposition of the things we make, even – and especially – in the way we direct our research and development. It’s hard to imagine regulatory protocols that can encompass all of that. Industry has to be imaginative and proactive and show that we can accomplish the things our stakeholders expect of us, especially those things that go beyond the letter of the law. We reduced our greenhouse gas emissions by 72 percent since 1990 because our stakeholders expected us to be proactive and lead in this area. Right now one

BRIDGE PAPER™: Company Stakeholder Responsibility: A New Approach to CSR 15 ABOUT THE AUTHORS

Developing Ethical Leadership for more than 30 years. He started R. EDWARD FREEMAN is the at DuPont in the summer of 1970 Academic Director of the Business at DuPont’s Old Hickory site Roundtable Institute for Corporate after receiving a B.S. in Industrial Ethics. He is the Elis and Signe Olsson Engineering from the University of Professor of Business Administration Tennessee. He is a licensed Professional at The University of Virginia Darden Engineer. Graduate School of Business In 2004, he was elected a Administration and co-Chair of member of the National Academy of Darden’s Olsson Center for Applied Engineering. He became chairman Ethics, one of the world’s leading of Business Roundtable’s Task Force academic centers for the study of ethics. for Environment, Technology and Economy the same year. Holliday S. RAMAKRISHNA VELAMURI is also past chairman of the World is an Assistant Professor of Business Council for Sustainable Entrepreneurship at the IESE Development (WBCSD), The Business Business School. He has a PhD in Council and the Society of Chemical Entrepreneurship, Business Ethics, Industry – American Section. While and Strategy from the Darden School chairman of the WBCSD, he co- of Business and an MBA from IESE authored a book Walking the Talk Business School, Spain. Professor which details the business case for Velamuri is also a visiting professor at sustainable development and corporate the University of Saarland in Germany, responsibility. Nile University in Egypt, and the Holliday also serves on the board University of Piura in Peru. He has of directors of HCA and is Chair of previously taught at the University of the Board of Directors of Catalyst. In Virginia, Boston University and the addition, he is chairman of the U.S. Ecole Nationale des Ponts et Chaussees. Council on Competitiveness and is a BRIAN MORIARTY is Associate founding member of the International Director for Communications at the Business Council. Business Roundtable Institute for Under Holliday’s direction, DuPont Corporate Ethics. established the mission to achieve sustainable growth – increasing Thought Leadership Commentary shareholder and societal value while decreasing the company’s environmental CHARLES O. HOLLIDAY, JR. is footprint. the chairman of the board and chief executive officer of DuPont. Holliday is the 18th executive to lead the company in more than 200 years of DuPont history. He became CEO on February 1, 1998 and Chairman on January 1, 1999. Holliday has been with DuPont

16 Business Roundtable Institute for Corporate Ethics NOTES 1 Milton Friedman, “The Social Responsibility of Business is to Increase its Profits,” The New York Times Magazine, September 13, 1970. 2 US Census Bureau, County Business Patterns 2003, (Washington: DC, 2005), p.3. 3 The ideas in this paper have been developed with a number of co-authors over the years in several places. In particular see Wicks, Freeman and Parmar (2005); Freeman and McVea (2001); Freeman et al (2004); and Freeman et al (2005). We are grateful to a number of people for helpful conversations, in particular Professors Gianfranco Rusconi, Dr. Lorenzo Saccone, Dr. Valeria Fazio, Dr. Mette Morsing, doctoral students at the Copenhagen Business School doctoral consortium on Corporate Responsibility, numerous participants in the EABIS conference in Gent, Professors Jeff Harrison, Robert Phillips, and Andrew Wicks. 4 Here “ethics” is used its broadest sense to encompass obligations to employees, and other stakeholders. This is sometimes referred to as an “American” usage, whereby the “European” usage is much narrower. 5 The first three levels of commitment are explored in greater detail in Wicks, Freeman, and Parmar (2005). The origins of these ideas can be found in part in Freeman (1984) in the idea of “enterprise strategy.” 6 Haaland-Matlary, J. 2005. Kjernekar: Ethical Integrity in a Chaotic World. IESE Business School Alumni Magazine, 96(Jan-March): 12-15. 7 Damon, W. 2002. The Moral Advantage.Optimize . Available on the Internet at: http:// www.optimizemag.com/issue/003/ethics.htm. 8 From the Merck Web site: http://www.merck.com/about/mission.html. 9 Michael Waldholz, “Merck, in Unusual Gesture, Will Donate Drug to Fight Leading Cause of Blindness,” Wall Street Journal, Oct 22, 1987, pg. 1 10 “Sun Microsystems Sustainable Growth Initiative” in S.E.E. Change: Examples of How Business Roundtable Companies Are Embracing Strategies That Promote Social Responsibility, Improve the Environment and Grow the Economy, Business Roundtable, 2005. This document is available on Business Roundtables Web site at: http://www. businessroundtable.org/pdf/SEEChange/SEEChangeCompanyPrograms.pdf 11 “Nike Issues FY04 Corporate Responsibility Report Highlighting Multi-Stakeholder Engagement and New Levels of Transparency, April 13, 2005. This news release is available from Nike’s Web site at: http://www.nike.com/nikebiz/nikebiz.jhtml?page=29 12 “US SEC’s Cox details executive pay disclosure plan,” Reuters, Jan 10, 2006. “Pros: Coke and Others Step Up to the Challenge,” American Management Association, http:// amanet.org//editorial/coca_cola_pros.htm. 13 Ronald J. Alsop, The 18 Immutable Laws of Corporate Reputation: Creating, Protecting and Repairing Your Most Valuable Asset, Wall Street Journal Books, 2004, pp. 28-29; 52-58. 14 Penni Crabtree, “Court Orders Often Keep Companies’ Darkest Secrets Hidden,” The San Diego Union-Tribune, September 8, 2002. 15 Pete Engardio, “Penske’s Offshore Partner in India: The Truck-Leasing Outfit Works with Genpact in India and Mexico to Improve Efficiency and Customer Service,” BusinessWeek Special Report: Outsourcing/Online Extra, January 30, 2006.

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