Professor says businesses can do the right thing and still prosper

The good news is that there is a “normative framework” that can guide businesses to grow and profit while doing “the right thing” and stick to a valuable purpose, he said.

“There is no tradeoff between ethical behavior and being a successful business,” Fjeld said.

He explains why in this Q&A.

Milton Friedman famously said that profits are the social responsibility of business. Why do you believe that shouldn’t be the case?

You can interpret that as a normative statement — firms should do that — or as a factual statement — firms actually do that. I think that the latter is clearly not the case, because we have a lot of examples of founders, CEOs who have an objective that is not profits. As a normative statement, I think it's wrong. I think the world is a better place if firms state and pursue a goal — curing cancer, for example. Let’s say we're creating a society from scratch, and wondering whether we should allow people to organize into firms and give those entities special rights. Well, we would say, ‘are they going to pursue socially beneficial goals?’ In this case, we'd say it’s a good idea. But if they were going to exploit people and rob and steal, we would say no, bad idea. I think profits can work as a decision criterion — given two alternatives, you can calculate which one maximizes profits. But before you have any alternatives, you want to chart a path. Profits don't give you any guidance. Profitability can provide a decision criterion in specific situations But it is the goal that provides direction. Even for a hedge fund, the purpose is to increase the wealth of their investors, not the firm’s profits.

What are the psychological and organizational factors that may lead a company or an entrepreneur away from doing the right thing?

We step out of line a little bit for a variety of reasons, and then we continue down that path. But how did we get there in the first place? In the famous Milgram’s experiment, participants were brought in and instructed to turn up a dial that administered an electric shock any time another participant in another room was giving the wrong answer to a question. The other person is screaming in agony, begging you to stop, but your instructor is telling you that you have to complete the experiment and turn up the dial any time they get it wrong. Obviously, it was an actor who was pretending to be in agony, but the subjects didn't know that. The point of the experiment was to show that ordinary people, in the face of authority, will do egregious things. We have a tendency to obey authority. In the context of the workplace, we tend to say, ‘it's not my job’ to care about certain things. For example, I am not personally responsible for polluting the river, or whatever. So we have these mechanisms that allow us to sort of avoid responsibility.

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On the organization side, it's possible to design an organization that is so complex that nobody actually knows what the ultimate outcome is. You have a lot of cogs in the machine that are all operating to produce a bad result, but everybody is so far removed from that outcome that they're just sort of turning their own crank. Further, it’s possible to distract people from the real organizational goals. Doug Hirsch was a founder of a company called GoodRX. After they had gone public, he realized that because they were starting to make quarterly financial objectives the focus of employees and the focus of review meetings, people were getting distracted from the purpose of the company — to allow people to get drugs easier and more cheaply. So he said, we need to stop doing that and restart thinking that our goal is actually to increase access to affordable medication for patients, and we need to reformulate the shorter-term objectives to make sure they're leading toward that outcome, as opposed to being distracted by short term financial goals.

In your talk, you said that Uber is an example of a company that could have chosen a different path. What do you mean?

Uber’s stated objective was to break the institutions that controlled transportation, so they got into fights against a lot of jurisdictions and cities. Was that necessary? Does Uber provide a useful service that could have been introduced in ways that weren't antagonistic, confrontational? It strikes me that the model was so powerful, because it provides a service that so many people want. They could have gone to the cities and said, ‘here's the value for your citizens. Let's work together on the best way to introduce this service,’ and not ruin the lives of taxi drivers or disregard safety codes, etc. I think most jurisdictions would have said, ‘Okay, that's reasonable. Let's work out a path that works for us.’ I think this wouldn't have significantly slowed the expansion of Uber, nor would it have cost more than going there and irritating everybody.

What are the tools leaders and companies could use to make sure their actions align with their values?

The premise of my talk is that the entrepreneur actually wants to do this. So what's getting in the way? You need to know what the key questions are, and you need to have a structure that helps you build the organization within that structure. Number one, simply awareness. Then you need a discipline of decision making that brings different perspectives and considers the consequences of major decisions more thoroughly. If you don't do that, then the decision making is somewhat random, and people will sometimes do the right thing, sometimes won’t. There are no guardrails. There are no structures within the organization that act as checks on decision making. When I went to management school at IBM in 1985, one of the three key values of IBM was respect for the individual. All new managers spent a week learning how to put respect for the individual into practice as a manager. They would put you in situations where you had to figure out what to do, and think about how this principle would be applied in a variety of scenarios. Now, most startups don't have the ability to embed this education process, but as you build a management team you can always think about specific situations, and how our values should play out in those situations. The two parts of the framework that I laid out are, number one, given your goal, you have a structure to use in decision making—the normative framework. Second, you have the psychological and organizational issues that can arise, that can get in the way. I didn't give people a recipe for how to apply this framework, but it is a structure that you can use and think about how it applies to your startup.

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Why do you think having a worthwhile purpose is good for business?

First, having a clear worthwhile purpose should give you the confidence that you're trying to achieve good in the world, as opposed to the reverse. And also, it is a very valuable recruiting tool that will help you find other people who care about the same thing you do. If you have a company that doesn't have a purpose, you can still hire people because people are looking for work, but you're not going to build a team that has a consistent commitment to a purpose. Having a team with a commitment to a single purpose and shared values — and at the same time having diversity of perspectives and opinions — is kind of a magic formula for building a high performing team that will actually achieve something worth achieving.