Professor Ed Freeman on Crowd Wisdom, Consumer Education and Transparency

PART 2 OF AN EXCLUSIVE JUSTMEANS INTERVIEW

In the world of organizational management, stakeholder theory addresses the ethics behind running a business.

The concept was originally described by R. Edward Freeman, a professor of business administration at the Darden School of Business at the University of Virginia, in his 1984 book Strategic Management: A Stakeholder Approach.

In the second part of this exclusive interview, I asked Professor Freeman about crowd wisdom, consumer education and transparency.

Reynard Loki: I'd like to ask you about communities that become or can become a business almost in spite of themselves. For example, Craigslist -- it still doesn't have any ads, and someone like Rupert Murdoch might love to be able to monetize that opportunity. His acquisition of Myspace has been a failure -- zero growth in unique visitors and ad revenue. But is this a new sort of potential business model? Let's get a bunch of people together with a common interest or a common goal, doesn't matter where the money flow is coming from, but maybe it will just work itself out at some point?

Ed Freeman: Yeah, I think you're seeing a lot of experiments in that vein, and it's hard to figure out where they're going. I'm pretty much an optimist most of the time, and you see lots of smart people trying to figure out how to create value using this technology. I think that's terrific. Now, not all of it will work, not all of it will be good, but for the most part, people will invent a bunch of cool ways to relate to each other and to find new ways to be in community with each other. And I think that's a pretty good thing.

RL: So do you believe in the wisdom of the crowd?

EF: Well, there's some things in which crowds are smarter and some things in which they're not. Crowds at racetracks, for example, often screw up the odds. They ignore the history of the horses. And they're not always smart. But crowdsourcing, where a lot of people have better ideas and improve the ideas that are there, is pretty interesting. These kinds of experimental technologies and ideas are part of what make being alive today so interesting.

RL: The retail company SYMS has a well-known tagline, "An educated consumer is our best customer." Do you agree?

EF: Well, usually yeah. I think the idea, especially today, of trying to pull the wool over the customer's eyes just doesn't work, or doesn't work for long. Information is too cheap, too readily available. And it doesn't look like that's going away anytime soon. So I think that transparency, openness and trying to educate consumers turns out to be a smart business strategy.

RL: So you would agree with the Progressive Insurance strategy of showing potential customers their competitors' prices, even if they are lower?

EF: That's one piece of their strategy. It depends on if they can do that and be credible to people. I don't know if people find that credible. Ideally, you want people to know what the alternatives are. That makes you better. If I know someone can give the same product or service for less than I can do it, I don't really have a good business model unless I can do that better. And so the more that customers know that, the more likely you are to know that and you can figure out how to get better, faster and cheaper. I think in general that works.

RL: Is transparency a main capitalist lever?

EF: We've known since Adam Smith that capitalism works because people tell the truth and keep their promises. That's what makes it work. It's very cumbersome when that's not true. It's very cumbersome to have a system where you can't really believe what people are telling you, you have to put safeguards into effect, you don't know prices really represent value. It's very hard for commerce -- value creation for each other -- it's very hard for that to grab hold when that sort of fundamental ethic isn't there. Adam Smith realized this. He wrote a book called Theory of Moral Sentiments and people forget about that. It's clear that markets won't work without what Smith would call people with a sense of justice. By that, he meant, in 18th-century terms, that you basically represented things the way you thought they were.

RL: And isn't that exactly what didn't happen before the financial crisis, with the so-called "dark markets" of credit default swaps and other complicated and unregulated derivatives?

EF: Take Michael Lewis's book The Big Short: Inside the Doomsday Machine. Some people did understand this stuff and other people didn't understand it. Now, it looks like the people who understood it did a tremendous amount of work going through prospectuses and all those kinds of things. And I think there were undoubtedly some skipped steps among a lot of people, shall we say. The idea that transparency was good was not winning the day.

Read the first part of my interview with Professor Freeman, in which I asked him about globalization and his paper, "Enhancing Stakeholder Practice: A Particularized Exploration of Community." -- R.L.

ABOUT R. EDWARD FREEMAN

Elis and Signe Olsson Professor R. Edward Freeman teaches business ethics at the Darden School of Business at the University of Virginia. He is also the academic director of the Business Roundtable Institute for Corporate Ethics. From 1987 to 2009 he was Director of Darden's Olsson Center for Applied Ethics, one of the world's leading academic centers for the study of ethics. Freeman is perhaps best known for his award-winning book Strategic Management: A Stakeholder Approach, originally published in 1984 and reprinted 2010 by Cambridge University Press, in which he suggests that businesses build their strategy around their relationships with key stakeholders. In 2001, he was honored by the World Resources Institute and the Aspen Institute with a Pioneer Award for Lifetime Achievement.