Stakeholder theorist Ed Freeman contends that major shifts in soceity's values are dictating how we shape new business models

by Lara Ryan

Is the point of business simply to make profits? Ed Freeman argues that this traditional idea is outdated. Not only that, but in a rapidly changing global economy, it’s unsustainable. Smart companies today are coming to understand that they have responsibilities to many stakeholders, not just to investors and customers.

A professor of business ethics at the Darden School of Business at the University of Virginia, Freeman has written extensively on ethics, environmental management, and strategic management. His latest book, Managing for Stakeholders: Survival, Reputation, and Success, published last year by Yale University Press, attempts to shift the corporate mindset away from managing only for shareholders.

I chatted with Freeman when he was in Halifax recently to address the Administrative Sciences Association of Canada. “Creating value for stakeholders,” he says, “starts with a business leader asking, ‘What do we stand for? And how do we make each of our stakeholders better off?’ How do we create value for all—our customers, suppliers, employees, communities, and shareholders? What do we want to be? What’s our aspiration? When business can execute on that vision, then you can make a real difference.”

Major changes in society, he believes, are making business more complex and uncertain. These changes include the liberalization of markets, the liberalization of political institutions, the emergence of environmentalism and other social values, and the explosion of information technology, especially social media. The relationship between businesses and their customers, suppliers, employees, investors, and communities are all being profoundly affected.

Governments, consumer advocates, competitors, environmentalists, special-interest groups, and the media are also affecting business more directly than before. The best possible outcome is authentic stakeholder engagement and a shift in managing in a way that creates value for all stakeholders, not just the shareholders who are the focus of the current western management model.

The recent Supreme Court of Canada ruling in favour of the sale of BCE shows that a new business model, one that marries shareholder value and stakeholder responsibility, is closer than we think. Even though the ruling favoured shareholders over bondholders, a broader discussion took place. Can a real paradigm shift be far off?

David Wheeler, the dean of the faculty of management at Dalhousie University in Halifax, was a member of the U.K. Company Law review during the late 1990s, which explored the question of shareholder versus stakeholder in some detail. “The Supreme Court decision is in many ways an inevitable result of the law’s ambiguity on what rights should be afforded to owners of shares in a company,” he says, “rather than people who have other important stakes in a corporation, such as workers, customers, or, in the case of BCE, holders of debt.”

While legal processes often deliver implistic and unsatisfactory answers, the main lesson for bondholders, says Wheeler, may be to protect their investments a little better before buying debt. Other stakeholders recognize that they have choices about which companies they invest in. If BCE loses good people or experiences a downturn in service in the coming months, the company will be worth less in future, regardless of what it’s worth today.

“The Ontario Teachers’ Pension Plan may yet discover this uncomfortable truth,” says Wheeler. “Shareholders need to understand that the reliability of human and other ‘soft assets’ now make up most of the market value of firms, so regardless of who gets the upper hand in a sale, it is the broader group of stakeholders whose loyalty matters most from a value-creation perspective.”

We can expect to see more and more challenges to the corporate status quo in the coming years, for the reasons stated by Wheeler and Freeman. We will see more pressure for business to consider the environment; employees and customers will increasingly demand it. At the core of CSR is a consideration of values and diverse points of view that impact a business or organization. Employees, suppliers, customers, communities, and shareholders all become important voices when decision-making. Organizations such as the UN are creating guidelines around human rights and corporate responsibility. The new ISO 26000 social responsibility guideline is almost ready for rollout. In Atlantic Canada, such social issues as an aging population, literacy, and poverty must be considered as we strive to create prosperity for our region.

Critics and those who manage only for shareholders will say that it’s impossible to manage for all stakeholders and create value equally among them. More and more thinkers argue that although stakeholders may from time to time appear to have conflicting needs, a model of ethical leadership and values-based management is required for the long-term success of any business.

Lara Ryan is a business consultant specializing in CSR. She can be reached at lara@lararyanconsulting.ca.