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Stakeholder Value: A New Story About Business

In 1970, Milton Friedman outlined what is now known as the Friedman Doctrine in a New York Times article titled, The Social Responsibility of Business Is to Increase Its Profits. In it, he argued that it was not only inefficient, but immoral for a corporation to do anything other than maximize shareholder value, staying within the bounds of the law and cultural norms. In essence, Friedman noted that the road to hell is often paved with good intentions, and while this doctrine silenced many of the proponents of so-called “Corporate Social Responsibility,” other related ideas have been ascendant in recent years. Whole Foods CEO John Mackey, for example, promotes “Conscious Capitalism.” Others tout inclusive capitalism, social entrepreneurship, or sustainable development.

It has been several decades since legendary business theorist R. Edward Freeman coined the term “stakeholder capitalism,” which challenges the idea that a company’s first responsibility is to maximize profits. The Darden Business School professor joins me this Sunday to discuss his new book The Power of And(co-authored with Kirsten E. Martin, and Bidhan L. Parmar), defending a broader pursuit of purpose as a long-term strategy.

While Friedman forced his debaters to think in terms of trade-offs, Freeman suggests this can often create false dichotomies. If putting values first and foremost actually enhances the bottom line, perhaps companies should hone their social conscience as part of their fiduciary responsibility.

Do Freeman’s idea pose a challenge to my laissez-faire outlook, or is it an illusion?

Is there a danger in merging the goals of “society” with the business of business, or is Friedman’s doctrine more like tired dogma?

Listen live, Sunday at 8–9am PACIFIC.

Either way, I look forward to discussing his book, and learning about the apparently libertarian roots of his theory.


Bob Zadek: Welcome to The Bob Zadek Show, the longest libertarian talk radio show on all of radio. Thank you so much for listening this Sunday morning. We are this morning– and– always the show of ideas, never once the show of attitude. In 1970, Milton Friedman wrote a piece in The New York Times titled, The Social Responsibility of Business Is to Increase Its Profits.. It’s as obvious to me as it was in 1970.

Friedman argued that it was not only inefficient, but immoral for a corporation to do anything other than maximize shareholder value, so long as it could do so legally and consistent with cultural norms. Seems pretty straightforward to me.

My question this morning is, was Milton Friedman wrong? When one challenges an icon such as Milton Friedman, you tread very lightly and very carefully. To help us answer the question, I’m happy to welcome the show, Ed Freeman. Ed is a professor of Business Administration at the University of Virginia at its school of business. He’s an author of several books and countless articles. He wrote Strategic Management and Stakeholder Approach in 2010.

More recently, Ed, wrote a book that I reviewed called The Power of And. He wrote that with Kristen Martin and Bidhan L. Parmar. Ed seems to take the position that Milton Friedman was wrong, or perhaps kind of wrong, or perhaps may have missed the point a bit. Rather than me explain to you the point of the book, I’m happy to welcome to the show Ed Freeman, one of the co authors of the Power of And. He fleshes out to whom a corporation should owe duties or responsibilities ,and who are the stakeholders that a corporation must be responsive to in carrying out its core function. So, Ed, welcome to the show this morning.

The Purpose of the Corporation: Was Friedman Wrong?

Bob Zadek: Let’s start off by asking you directly. Was Milton Friedman wrong in his position that it is not only immoral, but inefficient for a corporation to do anything other than maximize shareholder value?

Ed Freeman: Thanks for having me on. Friedman is one of my intellectual heroes for a number of reasons. I would say it’s less a matter of whether he was wrong than a matter of whether his reasoning applies to business today? I think what Friedman missed was what really makes a business successful. Any successful business has to have products and services and customers want, suppliers to make them better, employees who show up and use their minds and be good citizens in the community and make money for shareholders. Those things go together. That’s about the business. I don’t think Friedman was wrong so much as I don’t think he understood as an economist what really makes a great business.

Bob Zadek: You had said a second ago in answer to my question that Friedman didn’t quite go far enough. A corporation should pay attention to the needs of other stakeholders and other constituencies other than shareholders. I would never challenge the principle that in maximizing shareholder value, it might be an important consideration that the wealth of the corporation is furthered by having an enlightened employee management HR policy, because if you have employee turnover that increases HR costs. That’s bad for business and it would be important to treat creditors and suppliers fairly, because they’ll stop selling to you or they’ll charge you more.

Again, it’ll affect profits. Rather than list all the employees and the community and your vendors and government as stakeholders, isn’t that simply a means to the most important end, which is increasing shareholder value? So is it appropriate to carry those other constituencies on the same line, or is it important to pay attention to them to increase shareholder value?

Ed Freeman: Many people have something at stake by saying its shareholders that are really most important or its customers that are really most important. And I really don’t. The wisdom I get from the businesses that I see are that you have to get these interests going in the same direction. If you don’t live in a free society, those interests will go to the government to get their interests taken care of as we see with regulations like the Wagner Act and the Fair Labor Practices Act, and all the environmental regulation.

I see these interests as going together and as thriving together. When you start to say one is more important than the other, you tend to start making mistakes. You tend to start systematically denying the importance of one and that’s what leads to this impossible tangle of politicization of business and the regulatory state.

Bob Zadek: I understand that but what I found myself worrying about is that the corporation paying attention to other stakeholders like environmental concerns does so, not because it feels a moral responsibility to do so, but because if it doesn’t, government will come down on them with a heavy hand, thereby increasing the cost to the corporation more than the cost which the corporation imposes upon itself by devoting some dollars to the environment. So the corporation does not have some free standing concern about externalities, the environment, but rather, it’s doing so to keep the government away, which is the greater of two evils.

Am I missing the point somehow?

Ed Freeman: You can frame it like that. There are lots of reasons for paying attention to the environment. One reason is that if they pay attention to the environment, they can do things better, faster, and cheaper. The second reason is, sometimes their employees care about that.

The third reason is sometimes they think that maybe just maybe companies shouldn’t spoil the environment that they are a part of.

Trying to reduce all that to one story about profitability is not necessary.

Businesses are a wonderful institution. There are lots of reasons for businesses to be started and to exist. I think it’s not worthy of us to reduce it all to a drive for profitability and competition.

Friedman was worried about something that I worry about, a movement in the 60s of corporate social responsibility, which was essentially businesses doing stuff to kind of kill out the unrest in society. They were doing things they didn’t know much about.

I’m not much in favor of corporate social responsibility. I’m in favor of business being responsible to its stakeholders, but being responsible for the effects of its actions. I think any good libertarian — which I’m probably not — has to believe that with freedom comes responsibility. That’s what you need to get stakeholder thinking off the ground. I’ve never written in opposition to Friedman. I’m interested in how to run a good business and he was more interested in how markets work.

Bob Zadek: I remember studying corporations in law school. In fact, it was the only A I ever got in law school. One of my earliest conclusions as a young man was that it is probably per se bad management for a corporation to make a charitable contribution. Why? Because stakeholders invested money in a corporation for one purpose — not to accomplish a social good — shareholders would give their money to a charity if they wanted to accomplish a social good, but they gave the money to a corporation for the sole purpose of getting a return. That’s why one makes investments.

If a corporation cannot use every penny that I as a shareholder gave to the corporation towards that end, then they should give it back to me, and I’ll give it to another entity. If a corporation is giving away my money to a charity, then they are forcing me to support a charity which I may not want to support. Where do we differ in that analysis?

Ed Freeman: I think of several places. First of all, markets work when people have only strictly economic preferences. The markets don’t capture what my moral preferences are. So I might buy stock, because I want it to stop doing something and I want to vote on that. The markets don’t capture that. Maybe the governance mechanisms do a little bit.

In this business of “it’s your money” — actually, you haven’t given a penny to the core of a corporation. All you’ve done is buy a piece of paper that somebody else sold. You have this idea that you own it like I own this pencil I’m writing with. That’s really misleading. Owning a corporation is different from that. There’s something to the idea that you don’t want companies doing stuff they don’t know anything about, but communities turn out to be important.

Communities are places where employees live, where there are suppliers, and living in a thriving community is something that certainly is in the interest of the corporation. So I don’t buy this narrative that it is about owning property.

In the law, corporations own themselves. That is absolutely clear. This idea that shareholders own the corporation is just a myth. Now, it might be a good idea to treat it like that. Then what you’d have to say is that companies that treat it like that do better than companies that don’t. They can, but they don’t have to. It’s a lot more complicated than the economic textbooks would have us believe. So I don’t have any real problem with that, except that I don’t think it’s a very useful way to think about it.

Corporate Social Responsibility: A Problem of Mission Creep?

Bob Zadek: To discuss this in very tangible terms, in your book, you share with us a little anecdote about Cisco Systems where Cisco, which operates in Silicon Valley, gave $50 million to Santa Clara County to fight chronic homelessness and then donated another $10 million to invest in a local community development institution.

Is that a good example of what you have in mind in inviting heads of corporations to have responsibility to a larger group than stakeholders. Is that a good example for us to talk about for a few minutes?

Ed Freeman: Companies understand they need partners and that they don’t know how to do these projects with communities. They’ve discovered that if they can partner with NGO in these stakeholder partnerships, they can be more effective. That is what Cisco did.

Bob Zadek: Cisco, which has earned a return for shareholders because of its expertise in making chips and the like, they have followed its core expertise to make a lot of money for shareholders. In doing so they benefit society, they create a product that makes business more efficient, which means economic activity grows, and everybody benefits from the profits Cisco makes, so long as it makes them lawfully and treats all of its counterparties fairly and honestly and in a way that makes management proud.

I say to myself, here’s Cisco spending $50 million to counteract homelessness. Now, I ask myself in reading your anecdote — Homelessness, what a complicated problem. Homelessness is caused by lots of factors, one of which is government mismanaging the problem.

The primary actor in counteracting homelessness is government or private charities, they are the primary actors. Cisco, in throwing $50 million might be rewarding the government which caused the problem. In other words, Cisco doesn’t offer itself to its investors and creditors as one which is knowledgeable in curing homelessness. I don’t suspect they have a homelessness department in their company. What I worry about is it is kind of a mission creep. Just like a government does a bad job earning a return on any investment it makes.

Government is not so good at making a profit. But they might be good at protecting and running a court system and protecting our personal property, because that’s their core mission. Are you making core missions fuzzier, so that corporations are urged to take on some of the responsibilities of government or of charities, and once you have this mission creep, it is hard to measure performance. So speak, if you will, about specialization and mission creep.

Ed Freeman: Corporations should do what they do best. What they do best is they create value for customers, suppliers, employees, communities, and the people with the money. That’s what they do best. That’s what they’ve always done best even if we haven’t always recognized that.

When companies recognize that they’ve always been creating value for the stakeholders, now I can do it better. Not everything they do you’re going to agree with. I don’t think that the purpose of a company is to make as much money as possible. Businesses have to make profits.

People on the left who think profits are evil are just stupid. The people on the right who think that profits are the be all and end all are in the same place.

I need to read blood cells to live, but the purpose of my life is not to make red blood cells. Sometimes I have to focus on making red blood cells. But it is still not the purpose of my life. Businesses have to have profits to live. And let’s assume that’s what our finance colleagues tell us, we have to have profits at least the weighted average cost of capital, what the finance people call the whack. It is still not the purpose of a business. Entrepreneurs don’t start a business just to make money and if they do, they’ve got a problem.

Starting a business is hard — you have to have some sense of passion and some sense of purpose as to why to do it. There’s nothing wrong with making a lot of money. I don’t object to that at all. I understand the stakeholder idea gives you a much better and more nuanced understanding of how that process works. You can’t have a business without customers, or without suppliers or without employees or without communities. Certainly not without investors. Those interests are interconnected. It’s seeing the interconnections that’s important.

You can say the end is profits, or the end is paying attention to stakeholders. Those don’t come to the same thing. It doesn’t really matter to me. I don’t have a horse in the race to say, “It’s just the stakeholders minus the shareholders or it’s just the shareholders.” We need to see how they’re connected. And that’s what The Power of And tries to do — it tries to show how purpose and profits, stakeholders and shareholders, are connected to together.

Friedman saw the connection. He just didn’t go far enough. He said, “you can’t violate any ethical custom.” He gets lambasted all the time for saying business ethics don’t exist, but that is not actually his view.

Bob Zadek: We want to make the world a better place. Let’s start with that premise. For you, a means to that end is if corporations pay attention to the needs of workers, creditors, the community, the environment, and even the government in a way.

Ed Freeman: Consumers, suppliers, employees, communities, and the people with the money. Those are the five groups that I’ve talked about.

Bob Zadek: Okay, good. I always love it when my guests correct me, because that means you just taught me something. So thank you. Feel free to correct the heck out of me, because I love it.

In my purely libertarian view, to get to that holy grail of making the world a better place, corporations have a very, very specific function. To create wealth and create value. To behave with greed. When they create value, they put money in my pocket. What will I do with that money? One would hope and indeed, I expect, that shareholders will take the wealth that they have earned and use it towards that common goal of making the world a better place.

Shareholders will do it in the way that they think is best. Supporting a university, supporting a church, supporting medical research, whatever. Shareholders will do that. The wealth is created and then filters down into society en masse so that society will use the newly created wealth to make the world a better place.

By doing so, the same dollars found its way ultimately, to the same needy recipients but everybody is behaving with freedom. I get to dispose of my money to the charities that I support. Same result, the world is a better place. But if corporations devote too much of what otherwise would be profits to nonprofit activities, and start paying attention to the world at large, the money finds its way to the world at large, but I was forced to support that involuntarily. That’s a pure libertarian reaction.

Ed Freeman: That’s one pure libertarian reaction, it is not the only one. Your assumption that if Cisco invests something in the community, that that has a negative relationship on profits, is not clear. The more you pay attention to your stakeholders, the more profits you make. What people want to know often is that if I manage my company this way, am I guaranteed to make more money? Businesses don’t come with that guarantee. If you try to maximize shareholder value, are you guaranteed to do that? No. Is it possible that you make more money? What many people would say in today’s world is that this way of managing is going to be table stakes.

They’re going to win if you have the support of customers, suppliers, employees and communities and shareholders. You can keep reducing it to an or, but I’ll keep reframing it as an end. If you have the support of all of those groups, you will do better over a longer period of time.

I don’t accept the way of framing the problem that lots of people who were really far too enamored with economic theory are. If I look for a trade-off between shareholders and customers, what I’m going to find is trade-offs. If I look for a way to satisfy both, I might not find it but I’m not going to find it if I don’t look for it.

Capitalism works because we can use our imagination to figure out how to do stuff that has never been done. We invent vocabularies to solve our problems. It’s the greatest system of social cooperation ever. But it’s about how we cooperate together. How do we get customers, suppliers, employees, communities, and people with money going in the same direction? Over time, great companies figure out how to get those going in the same direction.

Freeman Discusses the Twin Aims of Freedom and Responsibility

Bob Zadek: I thought of a hypothetical or question that will help us really connect up or see where we did where we agree. Let us assume that because of life experiences of the senior manager of a corporation, the senior manager has a fondness for some art. Let’s say he causes the corporation to make a $50 million dollar negotiation to the New York City Metropolitan Museum of Art.

No one could argue in general with contributing to a cultural institution that accomplishes a public good. That contribution is made. Let us assume the study commissioned by a big four accounting firm by the corporation is that this $50 million contribution to the Metropolitan Museum of Art will produce no direct economic benefit to the corporation. Is that act praiseworthy, under your standards, or not? Clearly it is money that is deprived from profit making activity but pays attention to some other stakeholder in the community.

Ed Freeman: Well, it’s a corporation headquartered in New York and $50 million doesn’t produce any benefit — and there are lots of benefits that are not just economic benefits — then you are right.

As I said earlier, Friedman was worried about that kind of donation. As I said earlier, so am I. I think it is $50 million, that could best be spent figuring out how to create more value for its customers, suppliers, employees, communities, and shareholders.

Bob Zadek: If the benefit does not find its way to economic benefits to the corporation, the manager should be in prison because his job is to maximize value. One of the tools of maximizing value is to be a good citizen, to get publicity, to get more people to buy the products because they feel good about buying the product. Whole Foods has really promoted Whole Foods as an enterprise which pays attention to all of its stakeholders. I think Whole Foods is probably one of the poster children for a way of corporate governance that you embrace.

Ed Freeman: I think that’s right. John sometimes self-identifies as a libertarian, as do I, accept that it’s hard to know, in today’s world, what a libertarian is because there are too many nutjobs on both the left and the right.

I would say that one of the most important principles here is that you need to be responsible for the effects of your actions. I grew up poor on a dirt farm in Georgia and we knew that you had to deal with those groups of individuals that you could affect, or that could affect you. That’s just life 101.

It seems to me the incredible freedoms that we have come also with the responsibility for what you sow in the world. responsibilities complicated. It’s those twin ideas of freedom and responsibility that are absolutely critical to a good society. Oftentimes, the people who want to talk about responsibility, forget about freedom.

The people who want to talk about freedom, forget about responsibility. I see those things as going together. They really have been the foundation that I’ve been writing about since 1977. I wrote one of the first papers on this. I’ve always thought that freedom and responsibility go together as a sort of Hallmark of principles. There are lots of ways to spell that out, there are liberal ways and conservative ways and libertarian ways. But both of those things have to go together.

The United Nations Principles of Responsible Investing

Bob Zadek: The approach you take is part of a larger movement. There is something called the United Nations Principles of Responsible Investing, which seems to be in its UN-collectivist way similar to what you advocate in your book. Are you familiar with that phrase and is that similar to what you recommend in your book?

Ed Freeman: My take on that is if you look at Wall Street, there are now roughly $10 trillion worth of investment in what’s called ESG — Environment, society and governance. One of the ways of doing that is the principle of responsible investment. But every investment bank I know is trying to figure out how this works. One of the reasons for this is there is strong evidence that companies who pay attention to ESG do better. By doing better I mean that they make more money.

I don’t have an ideological horse for this. I’m just interested in how business works. I think business works better when you actually pay attention to customer supply suppliers, employees, communities, and the people with money, and how those things go together.

Bob Zadek: What caught my attention in learning about this United Nations Principles of Responsible Investing, was a statement that says “as institutional investors, we have a duty to act in the best long term interests of our beneficiaries.” I focused on the word duty. I don’t use the word duty so lightly. What can you tell us about the source of the duty? Is it something that you would hope managers have? Or is the duty somehow more direct? To whom is it owed?

Ed Freeman: I assume the beneficiary is who’s the beneficiary of the investment in hope for institutional investors.

Bob Zadek: The UN says that the duty is to ESG, in effect. The corporation owes a direct duty to manage the environment and society and to use their dollars paying attention to harm to or benefit to society.

This kind of reminds me of the Business Roundtable signed off on a statement of policy, which is exactly what you advocate. That scared the heck out of me when I read about it. I feared that the mission would creep in the extreme. I fear that this would make it impossible to invest, because if I would invest and entrust my investment dollars to a profit making business, they’d be using my money for their own version of the public good, but it might not be my version, and I feared that the market would become grossly inefficient. Put my mind at rest.

Ed Freeman: There is a Wall Street rule. You don’t like what somebody is doing, you sell a stock. Second of all, I would remind you that you didn’t actually give your money to a company, unless it was in an IPO. What you did was you bought some stock that somebody else wanted to sell, and you exchanged pieces of paper. What you have the right to is the right to sell that piece of paper to somebody else. So that story that you’ve told is a nice story, but to me, it’s not actually how it works.

I’ll try to put your mind at ease by saying that if companies really follow what the roundtable said it was going to do, the more these companies try to pay attention to their stakeholders, the better they’re going to do. All the evidence is pointing in that direction.

It’s not that Friedman was wrong. It was just that the world’s more complicated. There’s a lot more uncertainty.

So we have to drop back from trying to maximize shareholder value and try to deal with factors that lead to that. You have to see shareholder value as a result of how you manage those stakeholder relationships. So the Roundtable’s embracing of that is a really good thing, and your money’s going to be safer.

Bob Zadek: Well, I am so relieved when we end the show by your saying that. The magic words result in an increase in shareholder value. I like to end my shows on a high note like this. Thank you Ed Freeman for spending an hour with us this morning, and for writing his book, The Power of And. The book forces you to think about business in a way that perhaps you have not done so before.

Originally published at on February 7, 2021.



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