Quaker business principles of fairness and trust are now being shown to be more profitable and less distressing.
I’m sitting in my room at the Quakers and Business Group Conference in Woodbrooke, Birmingham. Quakers have always had an interest in business. Back in the 1600s Quakers faced enormous persecution, and were effectively barred from holding public and professional positions and so many had no option but to turn to business as a way of making a living. They soon evolved some implicit standards for themselves on how to conduct their dealings and two of these were trust and fairness. In those days manufacturers didn’t display ‘recommended retail prices’ and so a lot depended on the trader and how they assessed the gullability of their customer.
There are stories of Quaker traders in the US, to whom parents could send their children with cash to buy something, knowing that they would return having paid the same price as everyone else in the town. It was a reputation like this that led to the growth of the enormous Quaker businesses of the 1800s, including Fry’s, Cadbury, Rowntree and so on.
At a corporate level, suppliers to these large manufacturers knew that they would be treated fairly, would receive a fair price paid in a timely fashion.
Fairness is a word that gets bandied around a lot these days. Most of us will have bought a product recently that carries a Fair Trade (FT) logo.
FT is a major political and social movement that advocates paying a fair price as well as insisting on social and environmental standards in the production of a wide variety of exported goods, mainly from developing countries and especially food produce such as coffee, cocoa, sugar, tea, bananas, honey, wine, and fresh fruit.
FT aims to work deliberately with marginalized producers and workers to help them become secure and economically self-sufficient. It is big business. In 2007, FT certified sales amounted to approximately €2.3 billion worldwide and it was estimated that over 7.5 million disadvantaged producers and their families benefitted from fair trade funded infrastructure, technical assistance and community developments.
There are critics of Fair Trade, who say that it fails, in the same way as other agricultural subsidies, when supply and demand become unbalanced. By setting a minimum price for producers in these countries, existing farmers are encouraged to produce more and new farmers come on stream. As supply grows, if the market doesn’t keep apace, then non-FT producers can drop their prices and take substantial market share leaving the FT producers stranded.
This highlights the need for supplier and consumer to each have a sense of fairness in a deal and to trust the other.
Despite the evidence of these long-term success stories, other organisations have proved less keen to adopt the trust and fairness model.
For a long time, behavioural psychologists have known that most people prefer a sense of fairness to an approach that maximises profit at the expense of another. In countless experiments individuals and groups will move towards an agreement that gives both parties in a ‘deal’ an equitable share (often nearing a 50/50 split). Recent research into brain behaviour adds weight to this argument. Using magnetic resonance imaging (MRI) scans of brains when people are negotiating it has been shown that the same part of the brain associated with detecting bad smells (the anterior insula) is activated when someone is offered a bad deal! We literally SMELL a rat!
Despite this, economic theory says that the best arrangement is when one party has the upper hand and they can call the shots. Playing to this model, the holder of the upper hand (usually the manufacturer) offers only a small margin of profit to the supplier, who nontheless accepts as they are still just a little better off than they would be without a deal. For the economic theory approach to work the manufacturer needs to know (or deduce) the costs that the supplier has incurred. These days this information is usually easy to come by and so many markets have gone towards this extreme of low pricing. We frequently hear farmers complaining that they receive next to nothing for their milk, meat, or any other produce.
For the fairness approach to work, both parties need to trust one another to offer and demand a fair price. Once the manufacturer accepts that they will give this to the supplier, they in turn have to set a fair price for the consumer and so on.
This works all the way along a supply chain. Generally, the public will accept a price that they consider is fair even if it is slightly more than they might pay – they are prepared to accept a higher price for a fair trade.
Fairness in trade depends on a transparency of costs and profits. Modern technology, and the vast amounts of data available on markets, makes this a practical proposition.
Now this is all fine when we have a social conscience at play and are trying to support the most desperate economies, but until now it has been hard to justify in the main markets and for regular goods. However, some research published in the Management Science journal* last year shows that fairness pays.
Essentially, the authors were able to prove that when a manufacturer agrees a simple fair price with their supplier, because of the trust and transparency involved, they do not need to resort to complex contractual terms for pricing. Once the process begins to operate, ironically the overall profitability is actually higher and as both parties prefer to use this model so the amount of material traded in this way also increases. It becomes a classic win-win.
Now, of course, we shouldn’t delude ourselves that fairness is easy to achieve. It is an ethic that is constantly attacked by the media and conventional business thinking. We live in a world where competition and beating others is seen as heroic. We glue ourselves to the TV when programmes like The Apprentice, Weak Link, Big Brother, I’m a Celebrity and so on are shown and we get pleasure from seeing people abused, manipulated and deceived.
Fairness needs to pervade an entire organisation’s culture; otherwise it will not work, but allowed to do so, we can see that the results are better and we feel better too.
* Cui, Raju, and Zhang (2007) Fairness and Channel Coordination. Management Science, v53(8) pp 1303-1314.