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business,” he says, especially in the aftermath of the global financial crisis, in which the old model of business — profit maximization — contributed to the meltdown. Stakeholder Theory argues that stakeholders come first — whether it’s shareholders, employees, customers or the community. His seminal book Strategic Management: A Stakeholder Approach, originally published in 1984, identifies those stakeholders and how to include them. In 2010, Freeman and his colleagues published Stakeholder Theory: The State of the Art, which summarizes the accumulated body of research and makes the case that business is about creating value for the stakeholder. Freeman challenges businesses to look beyond profits. “The old way of business presupposes the purpose of business is to make profits,” says Freeman. “This is akin to believing that making red blood cells or breathing is the purpose of life. Yes, we must have red blood cells, just as businesses must make profits. But the purpose of business is usually determined by a passionate entrepreneur chasing a dream to change the world.” One of those people chasing a dream is John Mackey, co-CEO of Whole Foods Market. Freeman cites him as an example of the new order, of those great business leaders who practice conscious capitalism. In an interview with Freeman, Mackey said that entrepreneurs — though they want to make money — start businesses out of passion. Mackey went on to say that physicians make money, but their mission is to heal; teachers make money, but their desire is to educate; and architects make money, but they yearn to build. The question, Mackey noted, is: Why the myth that businessmen only want to make money? Other examples of passionate people chasing a dream? The Motley Fool’s main mission, says its CEO Tom Gardner, is to help people become better investors. Kip Tindell, CEO of The Container Store, explains that taking good care of their 6,000 employees leads those employees to take very good care of customers and other stakeholders. The result is profit. “Shareholder value is the outcome,” says Freeman.
Putting Purpose Back Into Capitalism Capitalism has always had its share of critics, who claim it leaves scandal, pollution and poverty in its wake. “Capitalism may not be perfect,” says Freeman. “Yet it is the greatest system of social cooperation
THE PURPOSE OF BUSINESS IS USUALLY DETERMINED BY A PASSIONATE ENTREPRENEUR CHASING A DREAM TO CHANGE THE WORLD. created thus far. Capitalism works because entrepreneurs and managers figure out how customers, employees, suppliers, communities and people with the money all can cooperate to mutual benefit. Competition is important, but it is a second-order property that gives people more choice in a free society.” Business is a deeply human institution, says Freeman, and its purpose is not to make as much money as possible. “The purpose is something else. We need to put purpose back into capitalism.” In fact, Freeman says business is “primarily about purpose — money and profits follow. Any business creates (or sometimes destroys) value for shareholders, as well as customers, employees, suppliers and communities. Building and leading a business involves getting these interests going in the same direction.” Business and ethics go hand in hand, says Freeman. “Sometimes we act for selfish reasons and sometimes for other-regarding interests. Incentives are important, but so are values. Most people tell the truth and keep their promises and act responsibly most of the time. And we need to encourage that behavior. When these expectations are not met, it is not just bad ethics, it is also bad business. Business and ethics go together.” And while there are real benefits to the standard story about business — it has lifted billions out of poverty — it can be made better by applying one of its basic principles, says Freeman. “Critique by creating something better. If you think that too many executives just focus on profits and money, then start a business that focuses on a purpose more than profits and relies on the passion of its employees.”
R. Edward Freeman, Elis and Signe Olsson Professor of Business Administration at Darden, is the author of Strategic Management: A Stakeholder Approach (Cambridge University Press, 2010); Managing for Stakeholders: Survival, Reputation and Success (co-authored with Jeffrey S. Harrison and Darden Professor Andrew C. Wicks, Yale University Press, 2007); and Stakeholder Theory: The State of the Art (co-authored with Jeffrey S. Harrison, Darden Professors Andrew C. Wicks and Bidhan L. Parmar, and Simone de Colle, Cambridge University Press, 2010).
SPRING 2014