Businesses are best off thinking in terms of fairness, ethics and incentives beyond the merely financial, says Dr Simone de Colle

STAKEHOLDER THEORY, a subject dear to the heart of Italian academic Dr Simone de Colle, is replete with simple and obvious propositions that query the mindset of the archetypal business manager – if there is such a person.

Here are a few:

Almost every decision of any note affects others so there is always an ethical element. It is a fallacy to believe you can separate a business decision from ethical responsibilities.

There is no law of the market. The market is socially constructed.

People are relentlessly interested in fairness. There is a point where people will reject personal gain if the transaction involves too much unfairness.

The idea that there is a direct correlation between financial incentives and performance is wrong. Other factors, including ethical and personal fulfilment considerations, play a key role.

What’s interesting about what de Colle has to say is his view that managers and businesses who do not take these sort of ideas to heart are less successful than those that do.

“It is a critique of capitalism but not a rejection,” says de Colle, who has just joined the staff of Dublin City University.

“What you might think is too idealistic is in fact the best way to maximise profits. Stakeholders include customers, the community, competitors, but also shareholders.”

De Colle gives a few examples to illustrate the sort of ideas he wants to promote. Nike used child labour in Indonesia and when people in the West found out their products were being produced by children earning just a dollar a day, they cared. Sales were hit and the company lost value.

In the 1970s the UK decided to pay people who donated blood. The result was a huge fall-off in donations. “The model of the economic man is not true. This is not how people in the real world behave.”

De Colle says there have been lots of studies that have confirmed the potential of financial incentive schemes to have unexpected detrimental effects. He calls it “crowding out”.

Creating financial incentives can have the second-round effect of training people to think they should only be motivated by personal financial reward. In this way the motivation of the persons concerned becomes limited.

Financial incentives can be good but it is important that the system is such that it accommodates and promotes an overall ethical framework.

“Most people are decent and honest. That is a criticism of the model of the rational economic man, the idea that you exploit every opportunity. Yet that is what is in all the economics books.”

Contemporary business schools, he argues, put too much emphasis on financial incentive. This is wrong, says De Colle, because it is based on an instrumental view of human nature that is not true.

And, “studies have found that the most successful companies are those that have a culture, a sense of purpose, that have employees who are there because they want to achieve something.”

De Colle continually mixes philosophical ideas with the concerns of business management. American pragmatism, he says, has led to the idea of the rational economic man, pursuing financial incentives and operating according to the law of the market.

“It is just a bad narrative about how business works,” says de Colle.

For him, the effects of this sort of thinking is turning people against capitalism. “Some people are calling for revolution. There is a danger that the baby will be thrown out with the bathwater. Capitalism is the best system we have found for creating value, but we need reform.”

Reform, he is quick to add, does not just mean new rules and new regulations. He notes the Irish inclination to follow the US model of ethics codes that are motivated by risk-management concerns and legal advice.

What is needed is a consensus within an organisation as to what is fair.

As well as conducting research and teaching business ethics at DCU’s Institute of Ethics, de Colle also intends to work with companies on improving their ability to deal with their stakeholders.

A political science graduate from Bologna, he has taught in universities in Europe and the US, and has worked as a professional consultant at KPMG Sustainability Advisory Services in London. He studied for his PhD in the Darden School of Business, University of Virginia, where he worked with Prof Edward Freeman, who first proposed the stakeholder theory in the mid-1980s.

De Colle wants to work with Irish companies to help them devise their own solutions to the problems they have. He has worked with British Airways, a pharmaceutical company and an alcohol company. “We facilitate an internal process of change,” he says.

He says an overemphasis on obedience can be one of the causes of “good people making bad decisions”.

In the 1960s a technical fault was noted by a company producing air brakes for aircraft but people were so afraid to point to the error they put pilots’ lives at risk and also risked the existence of the business.

In London, he said, people are being paid to act as Shakespearean fools, crazy people who are allowed say the things that others fear to say. The idea is “to inspire people to get away from their mental model”.

Good people, he says, get trapped in bad behaviour for all sorts of different reasons.