Investment Week speaks to Ed Freeman, an academic at the University of Virginia, about the relevance of the stakeholder concept, 25 years after he first coined it
Academic Ed Freeman coined the much-misused “stakeholder” concept 25 years ago and believes the endless spectacle of scapegoating and witch hunts against ‘financial miscreants’ like Morgan Stanley or Goldman Sachs are doomed to failure.
He believes the ‘demonising’ is ultimately only addressing the symptoms and not the cause so the ‘let the traditional markets rip’ philosophy fails to have any meaningful ethical component.
He says the business-as-usual pursuit of increased revenues and profit has undesirable outcomes – ethically, environmentally, socially – and ignores key stakeholders.
This ultimately fails to provide either stability, gain public trust or to maximise profits, according to Freeman.
Ed Freeman re-explains the stakeholder concept
Governments and businesses need to embrace the logic of stakeholder theories and ask a different question, which should be “how do I create value for my customers and how does this value creation affect the public trust?”
Freeman says: “If business-as-usual continues to mean companies endure legal punishment but still continue hiding things and misleading people then we are not learning any lessons and continuing to misunderstand what value stakeholders together can really create.”
Investment Week spoke to Freeman, an academic at the University of Virginia, about the relevance of the stakeholder concept 25 years after he first coined it.
Why do you think the original definition of stakeholder, which you devised 25 years ago has been diluted or is misused so often these days? It is used constantly by governments, corporations and other official organisations but they appear to be paying lip-service to their stakeholders, would you agree?
‘Stakeholder’ has been a tough idea to define. I have always thought that for any business, at least customers, suppliers, employees, communities and financiers (the people with the money) are stakeholders. It is just common sense that you need to create value for these groups if you want to have a successful business. However, there are many uses of the idea to include any interest group, or anyone making a demand or claim on an organisation. I do not think it is important to get the definition right, once and for all, but to be clear about who is a stakeholder and who is not. I believe the best use of the term is as a way to talk about ‘value creation’. If we focus on who we are creating value for, then it will be tough to just pay lip service. This is true for businesses, but I hope it could be true for governments as well.
Do we need to redefine what ‘value’ is and how it needs to be proportionate to everyone in the value chain from corporate through to the individual?
We do not need to redefine value, we just need to see it as a broader concept than ‘economic value’. There is economic, social, political, spiritual and other kinds of value. And, we are social creatures. Much of the value we derive from economics is of a joint nature, that is, I get value when you get value, and vice versa.
I do not think ‘value’ is a problematic idea.When it is interpreted too narrowly to mean only economic, or monetary value, that is when the trouble starts. The same is true for corporations and individuals. The fact we say each of us is the final judge of the values we live by, is the hallmark of Western democracy. But, we cannot ignore the fact we live together in an increasingly global world. Individual value and community value have to become two sides of the same coin.
By its nature, isn’t capitalism and the market economy always likely to fundamentally ignore the basis of a genuine stakeholder mentality? And who can change this? Is it government or does it have to come from individuals and corporations?
I believe the stakeholder approach is the best hope for capitalism. After all, it says companies and individuals need to be responsible to those groups and individuals they can affect or be affected by. This is common sense. Such a principle of responsible action is the hallmark of a free society. It makes individual and corporate freedom possible.
The old idea of capitalism as an anything goes approach does not make sense to me. We need to be the generation that changes our idea of capitalism to something I have been calling ‘responsible capitalism’. Business needs to be responsible to its stakeholders (this is different from most ideas of corporate social responsibility). Individuals need to be responsible for the effects of their actions on others. And, governments need to be responsible in encouraging value creation along the lines of responsible capitalism. I am incredibly optimistic that we are in the middle of a conceptual revolution, based on the stakeholder idea, that will greatly improve our ideas about capitalism and business.
Biography: Ed Freeman
- Ed Freeman is academic director of the Business Roundtable Institute for Corporate Ethics and a senior fellow of the Olsson Center for Applied Ethics at the University of Virginia Darden School of Business.
- Before joining the Darden School, Freeman taught at the University of Minnesota and the Wharton School. His book, Managing for Stakeholders: Survival, Reputation and Success was published in 2007.
- His most recent book is Stakeholder Theory: The State of the Art, published in early 2010.
- He is the author/editor of more than 20 volumes in the areas of stakeholder management, business strategy and business ethics as well as more than 100 articles in a wide variety of publications.
- Freeman is perhaps best known for his book Strategic Management: A Stakeholder Approach, in which he suggests businesses build their strategy around their relationships with key stakeholders.
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