The Role of Ethical Values in Economic Value Creation

By S. Ramakrishna Velamuri and William Harvey

Values integration in businesses keeps the highly competitive world humane. In this article, the authors elaborate not only the benefits of having a values based business approach but also how skillful utilisation of values can boost business and economic success.

 

Ever since Edward Freeman published his path-breaking book “Strategic Management: A Stakeholder Approach”,1 a vast body of research, both conceptual and empirical, has examined how managers should identify and engage with stakeholders to further the objectives of their organisations.2 Effective identification and engagement with stakeholders enable managers to create and capture value through a number of mechanisms such as innovativeness, risk management and reputation building. One stream of the stakeholder literature underscores the importance of ethical values in dealing with stakeholders, i.e. treating them as ends in themselves and not merely as means to the organisation’s ends.

We have studied, in contexts such as Egypt, India and Zimbabwe, how ethical behaviours lead to the creation of economic value.3 We find that for such behaviours to translate into economic value creation, a deep and nuanced understanding of the stakeholder landscape is a critical first step for organisations. Second, it is important to engage with like-minded stakeholders, who themselves are committed to values, and who would be favourably disposed to supporting the organisation by providing resources (financial, human, material and social). Third, once stakeholders commit resources, the organisation needs to go beyond purely ethical values and sustain their support by providing economic value to them.

 

Values and Economic Value Creation

The Cambridge Online Dictionary defines values as “the beliefs people have about what is right and wrong and what is most important in life, which control their behaviour.” Schwartz defined values as “desirable, trans-situational goals, varying in importance, that serve as guiding principles in people’s lives.”4

Economic value is created when parties willingly enter into mutually beneficial transactions. For example, when a customer pays a shop owner one dollar for a pen, value is being created for both parties to the transaction: the shop owner is getting one dollar for something that has (presumably) cost him less, and the customer is getting a product that is of greater value to her than the one dollar she paid for it. Mutually beneficial transactions that create value are the building blocks of the free market system. A large number of transactions in a market economy is conducted on the spot, such as the purchase of a pen. In most such transactions, it is not necessary for the parties to know about each other’s values, since the product or service transacted is standardised, its value is small, and neither party has the expectation of interacting continuously with the other in the future. However, there are other high stakes transactions, such as the recruitment of a senior manager or the formulation of a strategic alliance, where values can solve important information problems, because the interaction between the parties is continuous and over the long term, close collaboration between the parties is required, and the magnitude of the outcomes can be in the millions of dollars.

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Values – the beliefs of an individual that influence her behaviour – can contribute to economic value creation in two possible ways:

1. Values make possible transactions that in their absence would not have taken place. We shall refer to this facet of values as the transaction enabling At times, values make possible transactions through a sacrifice made by one party in favour of another. This type of altruistic behaviour happens, for example, when customers do not mind incurring a cost because they think that a particular organisation espousing certain values deserves to be supported, or when investors support an ethical organisation knowing fully well that the return they can make on their investment will be lower than what they could make elsewhere.

2. Values lead to greater productivity in transactions than would otherwise be the case. If you know that your business partner is totally trustworthy, then you can reduce the monitoring costs in your relationship, leading to better communication and coordination. Values thus lead to greater confidence in the interactions between organisational members, and between the organisation and its external stakeholders. This greater confidence leads to greater productivity. We shall refer to this facet of values as the productivity enhancing

 

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Values thus lead to greater confidence in the interactions between organisational members, and between the organisation and its external stakeholders. This greater confidence leads to greater productivity.

For values to enable transactions or to enhance productivity, it is critical for one party to have information about the other’s values. In many cases, firms pro-actively communicate their values to their current and potential stakeholders. For example, they include information about their corporate social responsibility (CSR) programmes in their annual reports, on their websites and in other documents. However, values are not always actively transmitted; often, one party will attribute values to the other simply from the latter’s characteristics and behaviours. Sometimes there can be a disconnect between the projected values of an organisation and the perceptions of those values on the part of its external stakeholders. This dissonance requires an organisation to respond either by changing or better communicating its values to its stakeholders.

We have studied five organisations in three countries (Egypt, India and Zimbabwe) that made a deep commitment to values at the time of their founding. In this article, we rely on evidence from two of these companies, one Indian and the other Zimbabwean, to convey some key findings from our research. We start by providing a brief description of the two organisations.

 

Infosys Technologies

Infosys Technologies was founded by a team of seven professionals, all first generation entrepreneurs, in 1981 with a share capital of a little over US$ 1,200. By 2007, it had grown to over US$ 10.2 billion in revenues (CAGR since 1994 of approximately 35.2%), profit after tax of US$ 2.1 billion (CAGR 33.1%), market capitalisation (as of March 31, 2017) of US$ 34 billion, cash reserves of nearly US$ 3.5 billion, zero debt, and a workforce exceeding 200,000 employees. Its performance over its 36-year history was based not only on financial parameters, but also on reputational ones. For example, a survey conducted by PwC and the Financial Times placed Infosys 62nd in the top 100 most respected companies in the world (Infosys was the only Indian company in the top 100). The Institute of Chartered Accountants of India gave Infosys the Best Annual Report award ten years in a row. The Business Today-Mercer-TNS survey rated Infosys the best employer in India in 2006.

There were several instances in which Infosys’s refusal to bribe imposed higher costs on the company in the short term, but by their willingness to absorb these costs, and by their insistence that the means were as important as the ends, the founders were successful in building a positive and enduring reputation for the company in the eyes of its major stakeholder groups such as investors, employees and customers.

 

Econet Wireless Zimbabwe

Econet was founded by Strive Masiyiwa in Zimbabwe, and its history can be traced to 1993, when he first approached the Zimbabwean Post and Telecommunications Corporation (PTC) for a mobile telecommunications license. After his request was rejected, Masiyiwa fought a five-year legal battle, first against the PTC and then against the Zimbabwean government, for a license that was issued to his company only in July 1998, five years after his first request and nearly two years after PTC launched its own mobile service and cornered the corporate market. In spite of this two-year disadvantage, it took Econet only a few months to achieve market leadership, and to achieve the remarkable feat for a telecommunications company of turning a profit in its very first year of operations.

There were a number of occasions during Masiyiwa’s five-year battle in which he could have obtained the license if only he had “accommodated” a few individuals in positions of power, but he steadfastly refused to do so and preferred to get the license the proper way. One press article reported that a middleman for three government ministers had stated outright to Masiyiwa – “The price for a license is $400,000 US.” He then reportedly consulted with the ministers, who were in an adjoining room, and returned to say – “OK. You can pay in instalments.”5

Masiyiwa’s story was covered extensively in the Zimbabwean and international media, including The Economist, Newsweek, Christian Science Monitor, The Vancouver Sun, and others. In 2002, he was also selected by CNN/Time as one of the most globally influential leaders. Econet’s market share in Zimbabwe in 2016 was 71%. As of 2017, the Econet Group was a privately held conglomerate comprising 27 subsidiaries, with a further 6 companies in which it had an ownership stake.

 

Key Messages

There are several points to note in the relationship between values and economic value creation. First, it is meaningless for individuals or organisations to claim that they are values driven, as many of them do, if they are not willing to absorb short term costs in defence of these values. If certain conditions are met, these short term costs can become investments in reputational capital which can have major positive returns among a wide group of stakeholders, as was the case with Infosys and Econet. However, they can also undermine the viability of organisations. For this reason, multinational companies from industrialised countries and large domestically owned corporations that operate in emerging markets with high corruption ought to lead the way by showing a strong commitment to values, because their ability to withstand the resultant short term costs is much higher.

Multinational companies and large domestically owned corporations that operate in emerging markets with high corruption ought to lead the way by showing a strong commitment to values, because their ability to withstand the resultant short term costs is much higher.

Second, values cannot substitute for competence. For this reason, organisations would do well to apply the values filter after they have applied the competence filter. As Masiyiwa pointed out, he first ensured that potential employees are competent to do the job before exploring whether their values fit with those of Econet. Similarly, Infosys is inflexible in applying its main criterion for employment – learnability – which it measures through a rigorous written test and subsequent interview. This determination to hire the best talent with the right skills to provide the highest quality service, coupled with a very strong ethical value system, came out strongly in both organisations.

Third, values may play a role in bringing together two parties in a business relationship. However, the sustenance of the relationship depends as much on each party meeting its business expectations as it does on the values. This is because values solve an important information problem in bringing the two parties together, but this information problem is largely resolved once the two parties start to work with each other. For example, in some instances, the inability of Econet and Infosys to satisfy the business expectations of their stakeholders on an ongoing basis led to some attrition in these relationships. During 2000-2001, Zimbabwe had one of the fastest shrinking economies in the world, with real GDP declines of 4.2% in 2000 and 7.3% in 2001. Inflation in the two years ran at 55% and 75% respectively. The official exchange rate of the Zimbabwean dollar to the US$ was 55, but the parallel market rate was 200. In this tough macroeconomic climate, Econet lost roughly 30% of its skilled workforce of technicians and IT specialists. On the one hand, the company was unable to sufficiently compensate its employees for the inflation in Zimbabwe; on the other hand, new cellular networks that had come up in other African countries and beyond prized the experience of the Econet employees, and offered them salaries denominated in hard currencies. Masiyiwa and his team, in an attempt to keep their skilled personnel, had to institute new policies whereby skilled Zimbabwean technicians would be posted on short and long term assignments in the group’s operations in Nigeria, Botswana, Lesotho, and London, and have the opportunity of earning expatriate packages denominated in hard currencies.

Even Infosys faced a minor human resources crisis in 2002-2003. Its attrition rate went up from 6% to 16%, and it dropped in terms of overall employee satisfaction to 16th rank, from 13th in 2001-2002, and from 7th in 2000-2001. Employees expressed disenchantment with training, salaries, appraisal systems, among other criteria. The company acted quickly and made adjustments to its human resource policies, which enabled it to reverse this negative trend.

Irrespective of whether they are considered appropriate or inappropriate, values based decision making has an impact (positive or negative) on organisational performance.

Fourth, values have a higher reputational payoff in those environments where they are scarce. This is because an ethical reputation is rare and therefore stands out more and is easier to communicate to stakeholder groups. For example, a company that does not practice bribery in low corruption environments such as Finland and Denmark would hardly attract any media attention because this is common practice. This has a very important implication for businesses operating in environments where corruption is widespread because notwithstanding short-term costs and risks, these environments present wonderful opportunities to build reputational capital with a wide group of stakeholders, which can have positive long-term financial outcomes.

Finally, values exclude as much as they include. When a company attracts certain types of stakeholders who share its values, it is at the same time excluding others whose values do not fit with its own. If these values are universal, then values driven organisations can foster diversity in their ranks with all the attendant benefits, such as higher quality and diversity of decision making and greater innovativeness. However, if they are not universal, then they could lead to groupthink. Whether specific values are appropriate or not as transaction enablers or productivity enhancers is therefore a subjective call. For example, a number of family businesses reserve senior management positions for family members in the belief that these individuals add value to the business as a result of having imbibed family values such as a long term focus, continuity of the business, humility, austerity, etc. Non-family members might view this policy as nepotistic and lacking meritocracy. Irrespective of whether they are considered appropriate or inappropriate, values based decision making has an impact (positive or negative) on organisational performance.

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About the Authors

Ramakrishna Velamuri is Professor of Entrepreneurship at the China Europe International Business School (CEIBS). He has a research interest in Business Models, and of late has been studying how business models innovations can achieve both social equity and economic efficiency.

William S. Harvey is Professor of Management and Co-Director of the Centre for Leadership Studies at the University of Exeter Business School. His research focusses on Leadership, Reputation and Talent Management.

 

References

1. Freeman, R. E. (2010). Strategic Management: A Stakeholder Approach. Cambridge University press.
2. For example, Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20(1), 65-91; Mitchell, R. K., Agle, B. R., & Wood, D. J. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22(4), 853-886; Harrison, J. S., & Freeman, R. E. (1999). Stakeholders, social responsibility, and performance: Empirical evidence and theoretical perspectives. Academy of Management Journal, 42(5), 479-485.
3. Ramakrishna Velamuri, S., Venkataraman, S., & Harvey, W. S. (2017). Seizing the Ethical High Ground: Ethical Reputation Building in Corrupt Environments. Journal of Management Studies, 54(5), 647-675.
4. Schwartz, S. H. 1992. “Universals in the content and structure of values: Theoretical advances and empirical tests in 20 countries.” In M. Zanna (Ed), Advances in Experimental Social Psychology, 25: 1-65. New York: Academic Press.
5. The Christian Science Monitor, March 1, 2000: “How one entrepreneur beat corruption”.

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