There are many reasons for the ascendency of stakeholder-thinking in business. Some have even argued that “stakeholder capitalism” is the new narrative that better describes how businesses can be successful. While there has also been a great deal of skepticism around this proposed change in narrative, it is worth a more careful look at why the ideas of Milton Friedman seem to fall short in today's world, on this occasion of the 50th anniversary of his essay “The Social Responsibility of Business is to Increase Its Profits,” published in The New York Times Magazine in 1970.
Business today is more global than in 1970, and its effects are much clearer and more well known. In fact, with today's 24/7/365 news cycle there is simply no place to hide. When a company does environmental damage, has a scandal or invents something that improves people's lives, it is news all over the world. We are treated to daily reports of problems such as a lack of health care, poverty and severe weather from around the globe. There is simply no denying that business has effects on the communities in which it operates. Those communities have a stake in business and how it is managed.
| Read more “Two Views”…
Shareholders vs. Stakeholders: The Role of Corporate Directors |
New technologies enable this process. Social media gives voice to all sides of the political spectrum and we stand on the edge of a technological world in which artificial intelligence is poised to become a 500-pound gorilla, disrupting industry after industry all over the globe. Winner-take-all technologies have exacerbated economic inequality, even as these same technologies have made life better for many people. Think about the effects of clean energy on communities, from those suffering from air and traffic pollution to those dependent on fossil fuels for economic livelihood.
Technology has also given us incredible advances in supply chain management, led by Walmart and others. We now can see the interdependence of customers, suppliers and employees all along the chain,and many companies have taken gargantuan steps to take advantage of these interdependencies. Along the way, NGOs have emerged on a global basis to argue for issues such as fair trade, global warming and social justice. Business today consists of relationships with at least customers, suppliers, employees and communities/societies, as well as shareholders. And, most importantly, these stakeholders are connected and interdependent. Any business model worth its salt has to recognize these facts.
Since the global financial crisis in 2008 and beyond, a perfect storm has emerged. Many blame that crisis on the mindless pursuit of short-term profits (in addition to a number of unwise government policies). The calls for reform (begun in the early 1980s) began to echo across a number of industries. Add a growing concern with global warming, racial justice and now the COVID pandemic, and it comes to the fore that societal issues play a crucial role in a company's value creation activities. Many CEOs have told me that they don't really know how to think about all of these issues and how to factor them into their business models. Friedman's “shareholder only” story is singularly unhelpful in today's world where there is a great deal of subjectivity, complexity and uncertainty.
As a result, the public expectations of business have changed, as have the expectations of business executives and directors. Most know that business cannot experience sustainable returns in an unstable political environments, an unstable or toxic natural environment, where there are unjust policies with regard to labor or immigration, where there is gender inequity that impacts the labor force or where stakeholder relationships aren't prioritized.
Businesses know that they have to take part in the solution to those problems in order to sustain their healthy operations. A recent study by JUST Capital found that, in the United States, the majority of the public surveyed expect business today to benefit all of its stakeholders. Another way to say this is that business is a powerful societal institution and can be an important source of creating a better world by bringing people out of poverty, increasing the well-being of people all over the globe and contributing innovation after innovation to making our lives better. It is a critical institution if we have any hope of conquering inequality, racial injustice, global warming and the pandemic that is sweeping the world. Instead, there is a large contingent that think business is only about money and profits, only subject to market forces instead of both societal and market forces. Friedman's ideas unfortunately played into this “business sucks” story. It's way past time for a change.
It's really simple. Businesses have always created (and sometimes destroyed) value for their customers, suppliers, employees, communities and financiers (the people with the money). It is high time to recognize that the stakeholder story is just a better story that leads to better companies and, ultimately, to better profits. Many want to know whether you are guaranteed profits if you pay attention to stakeholders. This is a bad question. In business, as in life, there are very few guarantees. However, is it possible to be very profitable and pay attention to stakeholders? That is a better question and we know the answer. It has been demonstrated again and again, and backed up by research, that the answer is a resounding “yes!”
As someone who has argued for a stakeholder approach for over 40 years, let me be the first to say that choosing between shareholder primacy and stakeholder capitalism is simply a false choice. Businesses must have profits to live, just as you and I must have red blood cells to live. Just as living a good life is an outcome of our relationships, our values, our aspirations, etc., so too are profits an outcome of a business's relationships with key stakeholders, its values, its purpose, etc.
Directors need to understand their business models in terms of the stakeholder relationships that are important. We need “business model” to denote more than how profits are generated. It is our purpose, our values and our stakeholder relationships, and how these factors are interconnected to produce results, one of which has to be profitability. We are truly in a post-Friedman world. We need to be the generation that saves capitalism from itself and makes it better.
R. Edward Freeman is University and Olsson Professor of Business Administration at the Darden School, University of Virginia. He has written more than 100 articles and 25 books on stakeholder theory, business ethics, and strategy since 1980. His latest book with Kirsten Martin and Bidhan Parmar is The Power of And: Responsible Business Without Tradeoffs, published by Columbia University Press.