Ed Freeman: Meet the ‘Father of Stakeholder Capitalism’

Professor Ed Freeman

BiGS Actionable Intelligence:

Each semester at Harvard Business School, the Institute for the Study of Business in Global Society (BiGS) invites scholars and practitioners to campus to share with faculty their ideas about how business can address today’s most pressing societal problems and, later, sit down for an interview. The BiGS Fix is here to share their insights exclusively with you. Today’s piece by writer Glen Justice wonderfully highlights my conversation with Edward Freeman, who as a young academic, called for more responsible capitalism in the 1980s. The world has only caught up to him now.

-Barbara DeLollis
Editor-in-Chief, The BiGS Fix

BOSTON—Consider America in 1984. Ronald Reagan was president. Apple launched the MacIntosh personal computer. The Dow Jones was in a decade-long climb. In a few short years, filmmaker Oliver Stone would introduce the world to Gordon Gekko, the fictional Wall Street bad boy.

Against that backdrop, the young academic R. Edward Freeman wrote a book, Strategic Management: A Stakeholder Approach, which argued that companies should focus on employees, customers, communities, and other “stakeholders,” rather than merely on shareholders. Building on the work of scholars before him, Freeman laid the foundation for what is now commonly called “stakeholder capitalism.”

It was not a popular idea. As Freeman put it, “no one cared.”

That context has changed. In the 40 years since Freeman’s book was published, companies have come under increasing pressure to address social problems, from racial and gender equality to environmental responsibility. The result: the world has caught up with Freeman’s thinking and his ideas are getting fresh attention. His book was re-released in 2010.

“He really is the father of stakeholder capitalism,” Kip Tindell, former CEO of The Container Store, told The BiGS Fix. “There's nobody I would rather talk to about this topic than him. I have spent a zillion hours talking to him about it, but there's still something refreshing and new every time.”

Now a professor at the University of Virginia, Freeman continues to champion the idea that companies can work with consumers, lenders, environmentalists, regulators, governments, and others to practice what he has called “responsible capitalism.”

“Business is a societal institution,” Freeman told The BiGS Fix. “If we're going to address and solve some of these problems … we've got to have business be a part of that solution. Business is about profits, sure, but it's also about purpose.”

A Change in Business Thinking

It’s undeniable that the corporate mandate in the United States has expanded in recent years to include action on societal issues. One major example is the Business Roundtable‘s decision to redefine the mission of a corporation.

For roughly 40 years, the business advocacy group of 200 chief executives from major corporations endorsed the idea of shareholder primacy, which holds that companies exist primarily to serve shareholders. It was an idea famously put forward by economist Milton Friedman in a 1970 New York Times essay, and widely accepted as dogma for decades in the corporate world.

In an historic turn in 2019, 181 Business Roundtable CEOs signed a letter agreeing to provide value to customers, invest in employees, deal fairly with suppliers, support communities, protect the environment, and generate long-term value for shareholders.

“Each of our stakeholders is essential,” said the statement, signed by CEOs of companies such as Johnson & Johnson, Vanguard and JP Morgan Chase. “We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.”

While there is disagreement over how the companies that signed the letter are incorporating stakeholders into their decision making, the letter marked an acknowledgement that the purpose of a corporation is expanding. At the same time, public trust in corporations is high. The Edelman Trust Barometer, which has measured trust globally for two decades, shows that 62% trust businesses to do what is right, a number that grows to 78% when people consider their own employer. That’s far more than the 50% who trust government or media.

“The whole story of business, that business is just about the money, doesn't really work anymore,” Freeman said. “If it ever did, it certainly doesn't work today. Nobody is arguing that what we really need to do to address these societal issues is bear down on shareholder value.”

Freeman: ‘Figure out what your purpose is’

Instead, executives must create what Freeman calls “a new story about business,” and that story requires cultivating core values that extend beyond profitability.

“Entrepreneurs don’t start businesses to maximize profits,” Freeman said in a 2013 TEDx talk. “They start businesses because they’re on fire about something. They’re on fire about an idea.”

That fire—and the idea—are central to companies that want to adopt a stakeholder approach, said Freeman, who studied mathematics and philosophy.

“The best way to start is to figure out what your purpose is,” Freeman told The BiGS Fix. “Focusing on who you are, who you're doing it for, who your stakeholders are—those are the things that can tell you which societal issues really resonate with the company and its business model.”

Freeman has always acknowledged that companies need to increase revenue and build shareholder value, but he argues that the best companies take a more holistic approach. “The interest of shareholders is dependent on how well you deal with customers and suppliers and employees and communities,” he said. “I'd even venture to say the amount of money you can make is a function of how you deal with those other stakeholders.”

‘Turn People Loose’

A stakeholder approach requires creative solutions, Freeman says, and that poses an interesting question: How do you get modern executives to think more creatively? Perhaps not surprisingly, Freeman has a creative answer.

“It’s going to sound weird, but the best way to foster creativity is to help people be creative … to get involved in the creative arts,” Freeman said. “If you spent 15 minutes a day practicing a musical instrument, guess what? It changes your brain.”

Freeman, who has played guitar and other instruments for decades and practices martial arts, has experimented with the idea for years. He has taught business school classes in which MBA students write, direct and perform an original work of theater. He has done similar classes with music and creative writing.

“Many CEOs want quarter-over-quarter organic growth, but to get that you have to really turn people loose a little bit,” he said. “You have to turn them loose to see differently.”

In successful stakeholder-oriented companies, that creativity also extends to hiring and inclusion, Freeman says. Diverse teams can produce better results, often as the result of creative friction between colleagues.

“We have to learn how to … have conversations with people who are different from us,” he said. “How are you going to sell your product in Morocco if you don't have any idea what Moroccans are like? The best way to do that is, of course, to hire some.”

‘Pure Collaboration’

The ability to listen is important, Freeman says, because it can identify new opportunities, whether for product innovation and new business or better corporate citizenship. It can be especially helpful outside the company, when dealing with suppliers, communities, customers—even critics.

“Behind every critic, there's a new business idea,” Freeman said. “That may not be a new idea that you can take advantage of, but people are telling you you're not doing everything you could do or should do.” That, he said, is almost always worth hearing.

The approach works well internally, too. “That's a good place to start as CEO, when you start to think about how to be a stakeholder capitalist: the employees you’ve already got,” Freeman said. “It's kind of pure collaboration, much like theater. What I tell the theater students is that all you guys align ideas when you’re on stage, so it's pure collaboration. And I think we'd be better off if we saw relationships … as pure collaboration—trying to find those win-win-wins.”

HOW TO ENGAGE WITH HBS BiGS

Actionable insights in your inbox

Get the latest from BiGS