based on the sources attached to answer questions about BUSINESS, SOCIETY AND ETHICS.

The Wal-Mart Effect and Business, Ethics, and Society R. Edward Freeman* S ome time around 1980 or so, when the business world was abuzz withIn Search of Excellence,I happened to work on an executive education program with Tom Peters. He told me that I just had to go and visit a Wal-Mart. This crazy guy, Sam Walton, was going to change the landscape of business, and in Peters’ eyes the guy was “bril- liant.” Taking Peters seriously, and as a former K-Mart employee, I sought out a Wal-Mart. I walked in with a “scientific” mindset to see what the fuss was about. The greeter welcomed me with a friendly smile and a “Welcome to Wal-Mart.” I found myself looking to buy something within 5 minutes. A lot of water has gone over the Wal- Mart dam in the last 25 years. And, recently, we have been treated to articles, books, films, and cases on what is now an American icon.

The rise of Wal-Mart has produced a number of effects that many commentators find surprising. I want to argue that our understanding of Wal-Mart illuminates a large gap in our understanding of business organizations. However, I want to suggest that what a recent observer calls “the Wal-Mart effect” (Fishman 2006a; 2006b) can be better de- scribed as “the stakeholder effect.” If we can un- derstand Wal-Mart with a stakeholder context, then we can see what is wrong with our current understanding of business; what went wrong at Wal-Mart; and what the company is currently doing to make things right.

The Wal-Mart Effect I n a recent essay, Charles Fishman has suggested that Wal-Mart is reshaping how we see business (Fishman 2006a). He takes us conceptually in- side Wal-Mart and asks us to make some judg- ments about how the company is managed andwhat its effects really are. What he is really doing is a kind of clinical case study complete with real people. Wal-Mart and its stakeholders are human- ized, not made into qualitative variables that have inter-rater reliability. The stakeholders that Fish- man writes about portray what McVea and Free- man (2005) call “a names and faces approach.” This approach is especially important for re- search in business, ethics, and society. Too much work has already been done in the spirit of making the field legitimate—i.e., conducting studies that are “acceptable” to mainstream management jour- nals. Yet, business, ethics, and society as a field is— or should be—profoundly critical. Scholars in this area should be critical of the research meth- ods— or “methodolatry” as some have suggested (Freeman 2005)—assumptions, conceptual schemes, and requisite apparatus of mainstream scholarship. Fishman shows us one path to accom- plish such a critical perspective. His analysis yields insight and is enormously pragmatic.

Unlike many scholars in business, ethics, and society, Fishman has an open mind about Wal- Mart. Unfortunately, he seems to have missed the fact that a number of scholars simply “know” that Wal-Mart is the cause of much of the misery that goes on in the world, from poverty to outsourcing.

Fishman fails to recognize that what he is really arguing against is the traditional theory of business and capitalism.

This traditional theory, or standard story, or “narrow economic view of business,” holds that we should be able to understand what goes on at Wal-Mart in purely economic terms. The tradi- tional theory says that Wal-Mart, like any busi- ness is trying to maximize returns for shareholders, that it provides benefits to customers and employ- *R. Edward Freeman([email protected]) is the Elis and Signe Olsson Professor of Business Administration & Director, Olsson Center for Applied Ethics at the Darden School of Business of the University of Virginia.

38August Academy of ManagementPerspectives ees which are understandable in purely economic terms. Of course there may be some “knock-on” effects, but for the most part these will be minimal and manageable by government. Wal-Mart is no different from any other business, according to this standard account.

Nothing could be further from today’s business reality. The traditional theory simply can’t ac- count for the growth and development of eco- nomic, political, social, and technological enter- prises like Wal-Mart, Hewlett Packard, Citibank, and others. The impact, which Fishman calls “the Wal-Mart effect,” reaches far beyond economic consequences and motivations. Not only does Wal-Mart affect its customers through offering “everyday low prices,” its employees by their jobs and benefits, and its shareholders through returns, it also impacts communities, suppliers, NGOs, media, governments, critics, and a host of others.

In fact, what Fishman discovers is less about Wal- Mart and more about our common (and flawed) understanding of business and capitalism.

The Stakeholder Effect F ishman claims that the sheer scope and scale of Wal-Mart is what gives rise to these effects. He is correct that the scope and scale of Wal-Mart makes these effects impossible to miss, but they have been present since the opening of the first Wal-Mart and every other business start-up. Any business is a set of relationships among at least customers, suppliers, employees, communities, and financiers (the people with the money). At some particular points along a business’ develop- ment one or some of these stakeholders may be more important than another. Once a business is established, all of these stakeholders become im- portant to the value creation process and the management’s job is to keep these stakeholder interests all moving in the same direction. As companies get even bigger, other groups become stakeholders. In Wal-Mart’s case these include governments, NGOs, critics, academics, media, and others. Let’s call this idea theStakeholder Effectand define it in the following way:

Any business affects or can be affected by the actions of customers, employees, suppliers, communities, fin- anciers, and possibly others. As companies grow anddevelop, some stakeholders become more important than others, and new stakeholders sometimes emerge. If you expect the stakeholder effect to be visible in purely economic terms, you will have ignored most of the actual practice of business during the past century. The stakeholder effect is not new.

Perhaps at the turn of the twentieth century it might have been called the “Carnegie effect” or later the “DuPont effect.” In some industries we may have called it the “Medicare effect” or “oil shock effect.” From the old adage about “What’s good for General Motors is good for the USA,” to the current public policy about oil prices, global warming, and environmental policy, business has never been “just about the economics.” Until very recently we had little systematic way to account for and understand these stakeholder effects. However, for the past 40 years a group of scholars, working primarily in the area of manage- ment known as “Business, Ethics, and Society” have developed a way of advancing our conversa- tion about the stakeholder effects of business.

They have employed a variety of concepts such as stakeholder theory, corporate social responsibility, the triple bottom line, social contracts, and oth- ers. The point here is not that one or more of these are correct, but that there is a body of work that validates exactly what Fishman is telling us.

Wal-Mart and the Stakeholder Effect T hrough this lens, we can see what has really gone wrong at Wal-Mart. By focusing its busi- ness strategy within the context of the tradi- tional theory, Wal-Mart executives could come to see their fanatical emphasis on “Always low prices.Always.” as clearly acceptable. In fact, we should not be surprised to find that they are in fact surprised when their critics take them to task for being “good businesspersons.” Fishman tells us as much. The Wal-Mart executives would naturally see themselves as acting within the accepted bounds of our common understanding of capital- ism. Competition is supposed to lower prices. Cus- tomers are supposed to win. Businesses are ex- pected to continually build better mousetraps to stay ahead of the competition. And, Wal-Mart has been a continuous source of innovation that 200639 Freeman has affected all stakeholders that it touches. And, all is expected to be right with the world if this is done.

Business is just more complex. In today’s world the first and most important question for a busi- ness executive to ask is: “What is our purpose, and how does it make each of our stakeholders better off?” At a minimum a business should be able to articulate a clear and agreeable answer for custom- ers, employees, suppliers, financiers, and commu- nities. If there is no answer, then in a relatively free and open society, these groups or their repre- sentatives (some self-appointed) will use the po- litical process to try and find redress.

And, that is the current mess in which Wal- Mart finds itself. It can’t do much right, simply because it is trying to tell its story in the narrow economic mode. Wal-Mart’s response to critics who say it is ruinous of communities should be, according to the standard theory: “Well, mom and pop shops have been ripping you off for years, and people vote for us by shopping at Wal-Mart, even those who don’t like us.” Unfortunately, this re- sponse is beside the point. It couches the new “stakeholder reality” in the old economic story.

Fortunately, there is a clear and compelling path for Wal-Mart, one on which they have al- ready embarked. They must adopt a philosophy of “stakeholder engagement” and apply the same level of passion and engagement to making the rest of their stakeholders better off, in addition to customers. There is little reason to believe that Wal-Mart cannot do this, if they see the need.Already, they have undertaken to work on the community issue by addressing the environmental impacts of their stores and goods, as well as their impact on existing businesses in new communities in which they want to locate. They have begun a process to repair the relationship with their asso- ciates, and I’m sure there are other initiatives of which I am unaware.

Is it too late? Only if Wal-Mart’s executives and critics alike fail to see that the stakeholder effect is in fact the reality of twenty-first century business. Executives ignore stakeholders at the peril of the survival of their companies. Critics need to see companies as better able to engage their concerns directly, rather than through the coercive power of government. All of us need to come to see capitalism and business for what it really is: a system of voluntary social cooperation through which we create value for each other.

The old story about Wal-Mart is long dead. Long live the new Wal-Mart. References Fishman, C. 2006a. Wal-Mart and the decent society: Who knew shopping was so important?Academy of Manage- ment Perspectives, 21(3).

Fishman, C. 2006b.The Wal-Mart effect. New York: Penguin Press.

Freeman, R. E. 2004. The relevance of Richard Rorty to management research.Academy of Management Review, 29: 127–130.

McVea, J. F. & Freeman, R. E. 2005. A names-and-faces approach to stakeholder management: How focusing on stakeholders as individuals can bring ethics and entre- preneurial strategy together.Journal of Management In- quiry, 14: 57– 69. 40August Academy of ManagementPerspectives