What would a fair business world look like?

Two children and one piece of cake can lead to tears and hard feelings. There is a very wise maxim, known to parents and grandparents, about how to get children to cooperate: “One divides the cake and the other chooses.” Knowing that the other person will get to choose, the divider is more likely to produce a fair outcome. Apparently this strategy has a long history, first appearing in the Old Testament Book of Genesis, Chapter 13.

In his 1950 doctoral dissertation Non-Cooperative Games, the Nobel Laureate John Nash generalized this folk wisdom via a mathematical model: “Each player’s mixed strategy maximizes his payoff if the strategies of the other are held fixed. Thus, each player’s strategy is optimal against those of the others.” My dividing is optimal given that you will do the choosing, and visa versa.

Twenty-one years later, John Rawls published his landmark book, A Theory of Justice. Twenty times longer than Nash’s dissertation but just as elegant, Rawls’ theory was a nuanced set of principles. The first chapter, “Justice as Fairness”, laid out his core arguments, which bore some resemblance to the divide-and-choose approach. The divide part was a hypothetical division of social benefits:

Thus we are to imagine that those who to engage in social cooperation choose together, in one joint act, the principles that are to assign basic rights and duties and to determine the division of social benefits. Men are to decide in advance how they are to regulate their claims against one another and what is to be the foundation charter of their society.

The choose part is done behind a “veil of ignorance”, not by actual choice:

Among the essential features of this situation is that no one knows his place in society, his class position or social status, nor does anyone know his fortune in the distribution of natural assets and abilities, his intelligence, strength and the like … This ensures that no one is advantaged or disadvantaged in the choice of principles by the outcome of natural chance or the contingency of social circumstances.

In Rawls’ hypothetical conception, we choose a set of rules that divide social benefits, and then somehow we are allocated to our roles.

What does any of this have to do with business? There are substantial challenges levelled against the sector, especially in the wake of recent scandals. In business schools, we legitimately ask: “What is fair?” And I, as a Dean at Oxford’s Saïd Business School, find myself struggling to determine what we should teach on this topic. Cakes, Nash and Rawls might provide a way into a fruitful discussion about fairness.

To apply these concepts to business, suppose that we follow the two-step approach that parents and scholars have proposed. In the first step, we establish the schedule of costs and benefits, defined broadly, available to customers, employees, investors, lenders, suppliers, and “others” in society who might be indirectly affected by our enterprise (such as those affected by our pollution of water). In this hypothetical first step, we lay out what each would pay and receive. We might agree that this schedule could provide more benefits for some than others, for example as a result of hard work, creativity, risk taking, etc.

However, in a Rawlsian framework, we would carry out this allocation behind a veil of ignorance: when we set up the rules of the game, we wouldn’t know our ultimate status, whether as an investor, an employee or a customer. Nor would we know our skills, talents, or risk preferences. While this sounds far-fetched, it is not so implausible, as we all play multiple roles in society. All of us consume, most of us work, all of us are “the other,” and some invest.

What would a “just” business world look like under these circumstances? Almost surely it would not maximize the benefits of one group (i.e. shareholders) over all others. It would probably give consideration to a broad set of stakeholders, including those who are inadvertently wound up in our enterprises, through what economists sometimes call externalities. We would probably end up with a blend of a contractual view of business (e.g. commercial suppliers’ rights can be determined by the contracts they choose to sign) alongside a set of non-contractual responsibilities (e.g. perhaps that those inadvertently affected by our businesses be no worse off than if the business did not exist). Like Rawls’ theory, it would be subject to extensive debate and criticism, but nonetheless might help us to advance a meaningful discussion of justice applied to business.

A tongue-in-cheek intellectual equivalent to “divide and choose” is one where one person poses a question and others answer it. I propose that cakes, Nash and Rawls might help us to formulate a discussion about the rights and responsibilities of business. As a first step, we need to have a serious discussion about how we divide the cake, without knowing which piece we – or our children – might get.

Two new scholarships for the Oxford MBA, announced earlier this year by Saïd Business School and The Global Shapers Community, have been awarded to Global Shapers Tana Jambaldorj from the Ulaanbaatar Hub in Mongolia and Frank Fredericks from the New York City Hub in the United States. 

Author: Peter Tufano is a Dean at the University of Oxford Saïd Business School.

Image: Environmental protesters share a cake as they are watched by Police officers during a ‘Protest picnic’ at Manchester Airport, in Manchester, northern England, January 12, 2009. REUTERS/Phil Noble