SOLUTION: Arizona State University Business Ethics and Legal Environment Report

The Purpose of the Corporation
Managing for Stakeholders
R. Edward Freeman
T h e p u r p o s e of this essay is to o u t l i n e an
e m e r g i n g view of business t h a t we shall call
” m a n a g i n g for stakeholders”.” This view has
e m e r g e d over the past 30 years from a g r o u p
of scholars in a diverse set of disciplines, from
finance to philosophy.’ T h e basic idea is that
businesses, a n d the executives w h o m a n a g e
them, actually do a n d should create value for
customers, suppliers, employees, c o m m u n i ties, a n d financiers (or s h a r e h o l d e r s ) . And,
that we n e e d to pay careful attention to how
these r e l a t i o n s h i p s are m a n a g e d a n d how
value gets created for these stakeholders. We
contrast this idea with the d o m i n a n t m o d e l of
business activity, namely, that businesses are
to be m a n a g e d solely for the benefit of shareholders. Any o t h e r benefits (or harms) that.
are created are incidental.
Simple ideas create complex questions, a n d
we p r o c e e d as follows. In the next section we
examine why the d o m i n a n t story or m o d e l of
business that is deeply e m b e d d e d in o u r cult u r e is n o l o n g e r workable. It is resistant to
c h a n g e , n o t consistent with the law, a n d for
the most part, simply ignores matters of ethics.
Each of these flaws is fatal in the business world
of the twenty-first century.
Wc t h e n p r o c e e d to define the basic ideas
of ” m a n a g i n g for s t a k e h o l d e r s ” a n d why it
solves some of the problems of the d o m i n a n t
model. In particular we pay attention to how
using “stakeholder” as a basic u n i t of analysis
makes it m o r e difficult to ignore matters of
ethics. We argue that the primary responsibility of the executive is to create as m u c h value
for stakeholders as possible, a n d that n o stakeh o l d e r i n t e r e s t is viable in isolation of t h e
o t h e r stakeholders. We sketch t h r e e primary
a r g u m e n t s from ethical theory for a d o p t i n g
“managing for stakeholders.” We conclude by
outlining a fourth “pragmatist a r g u m e n t ” that
suggests we see m a n a g i n g for stakeholders as
a new narrative a b o u t business that lets us improve t h e way we currently create value for
each other. Capitalism is o n this view a system
of social cooperation a n d collaboration, rather
than primarily a system of competition.
T h e m o d e r n business c o r p o r a t i o n has
e m e r g e d d u r i n g the twentieth century as o n e
of the most i m p o r t a n t innovations in h u m a n
history. Yet the changes that we are now experiencing call for its reinvention. Before we
suggest what this revision, “managing for stakeholders” or “stakeholder capitalism,” is, first
we n e e d to u n d e r s t a n d how t h e d o m i n a n t
story came to b e told.
Somewhere in the past, organizations were
quite simple and “doing business” consisted of
buying raw materials from suppliers, converting
it to products, a n d selling it to customers. For
the most part owner-entrepreneurs f o u n d e d
such simple businesses a n d worked at the business along with members of their families. T h e
d e v e l o p m e n t of new p r o d u c t i o n processes,
such as t h e assembly line, m e a n t t h a t jobs
could be specialized and more work could be
accomplished. New technologies a n d sources
of power became readily available. These and
other social a n d political forces c o m b i n e d to
require larger amounts of capital, well beyond
the scope of most individual owner-manageremployees. Additionally, “workers” or n o n family m e m b e r s began to d o m i n a t e the firm
a n d were the rule rather than the exception.
The Purpose of the Corporation
Ownership of the business became more
dispersed as capital was raised from banks,
stockholders, and other institutions. Indeed,
the management of the firm became separated from the ownership of the firm. And,
in order to be successful, the top managers
of the business had to simultaneously satisfy
the owners, the employees and their unions,
suppliers, and customers. This system of organization of businesses along the lines set
forth here was known as managerial capitalism
or laissez faire capitalism, or more recently,
shareholder capitalism.
As businesses grew, managers developed a
means of control via the divisionalized firm.
Led by Alfred Sloan at General Motors, the
divisionalized firm with a central headquarters staff was widely adapted. 6 The dominant
model for managerial authority was the military and civil service bureaucracy. By creating
rational structures and processes, the orderly
progress of business growth could be wellmanaged.
Thus, managerialism, hierarchy, stability,
and predictability all evolved together, in the
United States and Europe, to form the most
powerful economic system in the history of
humanity. The rise of bureaucracy and managerialism was so strong that the economist
Joseph Schumpeter predicted that it would
wipe out the creative force of capitalism, stifling innovation in its drive for predictability
and stability.
During the last 50 years this “Managerial
Model” has put “shareholders” at the center
of the firm as the most important group for
managers to worry about. This mindset has
dealt with the increasing complexity of the
business world by focusing more intensely on
“shareholders” and “creating value for shareholders.” It has become common wisdom to
“increase shareholder value,” and many companies have instituted complex incentive compensation plans aimed at aligning the interests
of executives with the interests of shareholders.
These incentive plans are often tied to the
price of a company’s stock, which is affected by
many factors not the least of which is the expectations of Wall Street analysts about earnings per share each quarter. Meeting Wall
Street targets and forming a stable and predictable base of quarter over quarter increases
in earnings per share has become the standard for measuring company performance.
Indeed, all of the recent scandals at Enron,
WorldCom, Tyco, and others are in part due to
executives trying to increase shareholder value,
sometimes in opposition to accounting rules
and law. Unfortunately, the world has changed
so that the stability and predictability required
by the shareholder approach can no longer
be assured.
The Dominant Model Is
Resistant to Change
The Managerial View of business with shareholders at the center is inherently resistant to
change. It puts shareholders’ interests over
and above the interests of customers, suppliers,
employees, and others, as if these interests
must conflict with each other. It understands
a business as an essentially hierarchical organization fastened together with authority to
act in the shareholders’ interests. Executives
often speak in the language of hierarchy as
“working for shareholders,” “shareholders are
the boss,” and “you have to do what the shareholders want.” On this interpretation, change
should occur only when the shareholders are
unhappy, and as long as executives can produce a series of incrementally better financial
results there is no problem. According to this
view the only change that counts is change oriented toward shareholder value. If customers
are unhappy, if accounting rules have been
compromised, if product quality is bad, if environmental disaster looms, even if competitive forces threaten, the only interesting
questions are whether and how these forces
The Purpose of the Corporation
for change affect shareholder value, measured
by the price of the stock every day. Unfortunately in today’s world there is just too much
uncertainty and complexity to rely on such a
single criterion. Business in the twenty-first
century is global and multifaceted, and shareholder value may not capture that dynamism.
Or, if it does, as the theory suggests it must
eventually, it will be too late for executives to
do anything about it. The dominant story may
work for how things turn out in the long run
on Wall Street, but managers have to act with
an eye to Main Street as well, to anticipate
change to try and take advantage of the dynamism of business.’
In actual fact the clarity of putting shareholders’ interests first, above that of customers,
suppliers, employees, and communities, flies
in the face of the reality the law. The law has
evolved to put constraints on the kinds of
trade-offs that can be made. In fact the law of
corporations gives a less clear answer to the
question of in whose interest and for whose
benefit the corporation should be governed.
The law has evolved over the years to give
de facto standing to the claims of groups other
than stockholders. It has, in effect, required
that the claims of customers, suppliers, local
communities, and employees be taken into
For instance, the doctrine of “privity of contract,” as articulated in Winlerbottom v. Wright
in 1842, has been eroded by recent developments in product liability law. Greenman v.
Yuba Power gives the manufacturer strict liability for damage caused by its products, even
though the seller has exercised all possible
care in the preparation and sale of the product and the consumer has not bought the
product from nor entered into any contrac-
tual arrangement with the manufacturer.
Caveat emptor\2& been replaced, in large part,
with caveat venditor. The Consumer Product
Safety Commission has the power to enact
product recalls, essentially leading to an increase in the number of voluntary product recalls by companies seeking to mitigate legal
damage awards. Some industries are required
to provide information to customers about a
product’s ingredients, whether or not the customers want and are willing to pay for this information. Thus, companies must take the
interests of customers into account, by law.
A similar story can be told about the evolution of the law forcing management to take
the interests of employees into account. The
National Labor Relations Act gave employees
the right to unionize and to bargain in good
faith. It set up the National Labor Relations
Board to enforce these rights with management. The Equal Pay Act of 1963 and Tide
VII of the Civil Rights Act of 1964 constrain
management from discrimination in hiring
practices; these have been followed with the
Age Discrimination in Employment Act of
1967, and recent extensions affecting people
with disabilities. The emergence of a body
of administrative case law arising from
labor-management disputes and the historic
settling of discrimination claims with large
employers have caused the emergence of a
body of management practice that is consistent with the legal guarantee of the rights of
The law has also evolved to try and protect
the interests of local communities. The Clean
Water Act of 1977 and the Clean Air Act of
1990, and various amendments to these classic pieces of legislation, have constrained
management from “spoiling the commons.”
In a historic case, Marsh v. Alabama, the
Supreme Court ruled that a company-owned
town was subject to the provisions of the U.S.
Constitution, thereby guaranteeing the rights
of local citizens and negating the “property
The Purpose of the Corporation
r i g h t s ” of t h e firm. C u r r e n t issues c e n t e r
a r o u n d p r o t e c t i n g local businesses, forcing
c o m p a n i e s to pay t h e h e a l t h c a r e costs of
t h e i r e m p l o y e e s , i n c r e a s e s in m i n i m u m
wages, e n v i r o n m e n t a l standards, a n d the effects of business d e v e l o p m e n t o n t h e lives of
local c o m m u n i t y m e m b e r s . T h e s e issues fill
the local political landscapes, a n d executives
a n d t h e i r c o m p a n i e s m u s t take a c c o u n t of
Some may argue that the constraints of the
law, at least in the U.S., have b e c o m e increasingly irrelevant in a world w h e r e business is
global in n a t u r e . However, globalization simply m a k e s this a r g u m e n t stronger. T h e laws
that are relevant to business have evolved differently a r o u n d t h e world, b u t they have
evolved nonetheless to take into account the
interests of groups o t h e r t h a n just shareholders. Each state in India has a different set of
regulations that affect how a c o m p a n y can d o
business. In China the law has evolved to give
business some property rights b u t it is far from
exclusive. A n d , in m o s t of t h e E u r o p e a n
Union, laws a r o u n d “civil society” a n d the role
of “employees” are m u c h m o r e complex than
even U.S. law.
“Laissez-faire capitalism” is simply a myth.
T h e idea that business is a b o u t “maximizing
value for stockholders regardless of t h e consequences to others” is o n e that has outlived
its usefulness. T h e d o m i n a n t m o d e l simply
does n o t describe h o w business operates. Ano t h e r way to see this is that if executives always have to qualify “maximize s h a r e h o l d e r
value” with exceptions of law, or even g o o d
practice, t h e n the d o m i n a n t story isn’t very
useful a n y m o r e . T h e r e are j u s t too m a n y exceptions. T h e d o m i n a n t story could b e saved
by arguing that it describes a normative view
a b o u t h o w business s h o u l d o p e r a t e , despite
h o w actual businesses have evolved. So, we
n e e d to look m o r e closely at some of the conceptual and normative problems that the
d o m i n a n t m o d e l raises.
T h e Dominant M o d e l Is N o t Consistent
with Basic Ethics
Previously we have a r g u e d that most theories
of business rely o n separating “business” decisions from “ethical” decisions. This is seen
most clearly in the p o p u l a r j o k e a b o u t “business ethics as an oxymoron.” More formally
we m i g h t suggest that we define:
T h e Separation Fallacy
It is useful to believe that sentences like “x is a
business decision” have no ethical content or
any implicit ethical point of view. And, it is useful to believe that sentences like “x is an ethical
decision, the best thing to do all things considered” have no content or implicit view about
value creation and trade (business).
This fallacy u n d e r l i e s m u c h of t h e d o m i n a n t story a b o u t business, as well as in o t h e r
areas in society. T h e r e are two implications of
rejecting the Separation Fallacy. T h e first is
t h a t almost any business decision has s o m e
ethical content. To see that this is true one need
only ask whether the following questions make
sense for virtually any business decision:
T h e O p e n Question A r g u m e n t
1. If this decision is made for whom is value created and destroyed?
2. Who is harmed a n d / o r benefited by this
3. Whose rights are enabled and whose values are
realized by this decision (and whose are not)?
4. What kind of person will I (we) become if we
make this decision?
Since these questions are always o p e n for
most business decisions, it is reasonable to give
u p the Separation Fallacy, which would have us
believe that these questions aren’t relevant for
m a k i n g business decisions, o r that they could
never b e answered. We n e e d a theory a b o u t
business that builds in answers to the ” O p e n
Question Argument” above. O n e such answer
The Purpose of the Corporation
would b e “Only value to shareholders counts,”
b u t such a n answer w o u l d have to b e enm e s h e d in the l a n g u a g e of ethics as well as
business. Milton F r i e d m a n , unlike most of his
expositors, may actually give such a morally
rich answer. H e claims t h a t t h e responsibility
of the executive is to make profits subject to
law a n d ethical custom. D e p e n d i n g o n how
“law a n d ethical custom” is i n t e r p r e t e d , t h e
key difference with the stakeholder a p p r o a c h
may well b e that we disagree a b o u t how the
world works. In o r d e r to create value we believe t h a t it is b e t t e r to focus o n integrating
business a n d ethics within a c o m p l e x set of
stakeholder relationships rather t h a n treating
ethics as a side constraint o n making profits.
In short we n e e d a theory that has as its basis
what we m i g h t call:
T h e Integration Thesis
Most business decisions, or sentences about business have some ethical content, or implicit ethical view. Most ethical decisions, or sentences
about ethics have some business content or im10
plicit view about business
O n e of the most pressing challenges facing
business scholars is to tell compelling narratives t h a t have t h e I n t e g r a t i o n Thesis at its
heart. This is essentially the task that a g r o u p
of scholars, “business ethicists” a n d “stakeh o l d e r theorists,” have b e g u n over the last 30
years. We n e e d to go back to the very basics of
ethics. Ethics is a b o u t t h e rules, principles,
consequences, matters of character, etc., that
we use to live together. These ideas give us a set
of o p e n q u e s t i o n s t h a t we are constantly
searching for better ways to answer in reasonable complete ways.11 O n e might define “ethics”
as a conversation a b o u t how we can reason tog e t h e r a n d solve o u r differences, recognize
where o u r interests are j o i n e d a n d n e e d development, so t h a t we can all flourish without
resorting to coercion a n d violence. Some may
disagree with such a definition, a n d we d o n o t
intend to privilege definitions, b u t such a pragmatist a p p r o a c h to ethics entails that we reason a n d talk together to try a n d create a better
world for all of us.
If o u r critiques of the d o m i n a n t m o d e l are
correct t h e n we n e e d to start over by reconceptualizing the very language that we use to
u n d e r s t a n d how business operates. We want
to suggest that s o m e t h i n g like the following
principle is implicit in most reasonably comprehensive views a b o u t ethics.
T h e Responsibility Principle
Most people, most of the time, want to, actually
do, and should accept responsibility for the effects of their actions on others.
Clearly the Responsibility Principle is incompatible with the Separation Fallacy. If business is s e p a r a t e d f r o m ethics, t h e r e is n o
question of m o r a l responsibility for business
decisions. More clearly still, without something
like the Responsibility Principle it is difficult to
see how ethics gets off the g r o u n d . “Responsibility” may well b e a difficult a n d multifaceted idea. There are surely many different ways
to u n d e r s t a n d it. But, if we are n o t willing to
accept the responsibility for o u r own actions
(as limited as t h a t may b e d u e to complicated
issues of causality a n d the like), t h e n ethics,
u n d e r s t o o d as how we reason together so we
can all flourish, is likely a n exercise in b a d
If we want to give u p the separation fallacy
a n d a d o p t the integration thesis, if the o p e n
question a r g u m e n t makes sense, a n d if something like the responsibility thesis is necessary,
then we n e e d a new m o d e l for business. And,
this new story must be able to explain how value
creation at o n c e deals with e c o n o m i c s a n d
ethics, a n d how it takes account of all of the effects of business action on others. Such a model
exists, a n d has b e e n developing over the last 30
years by m a n a g e m e n t researchers a n d ethics
scholars, a n d t h e r e are many businesses who
The Purpose of the Corporation
have adopted this “stakeholder framework” for
their businesses.
The basic idea of “managing for stakeholders”
is quite simple. Business can be understood as
a set of relationships among groups which have
a stake in the activities that make up the business. Business is about how customers, suppliers, employees, financiers (stockholders,
bondholders, banks, etc.), communities, and
managers interact and create value. To understand a business is to know how these relationships work. And, the executive’s or
entrepreneur’s j o b is to manage and shape
these relationships, hence the title, “managing for stakeholders.”
Figure 1 depicts the idea of “managing for
stakeholders” in a variation of the classic
“wheel and spoke” diagram. 13 However, it is
important to note that the stakeholder idea is
perfectly general. Corporations are not the
Source: R. Edward Freeman, Jeffrey Harrison, and Andrew Wicks, Managing for Stakeholders (New Haven: Yale
University Press, 2007).
The Purpose of the Corporation
center of the universe, and there are many
possible pictures. One might put customers
in the center to signal that a company puts
customers as the key priority. Another might
put employees in the center and link them to
customers and shareholders. We prefer the
generic diagram because it suggests, pictorially, that “managing for stakeholders” is a theory about management and business; hence,
managers and companies are in the center.
But, there is no larger metaphysical claim
Stakeholders and Stakes
Owners or financiers (a better term) clearly
have a financial stake in the business in the
form of stocks, bonds, and so on, and they expect some kind of financial return from them.
Of course, the stakes of financiers will differ by
type of owner, preferences for money, moral
preferences, and so on, as well as by type of
firm. The shareholders of Google may well
want returns as well as be supportive of
Google’s articulated purpose of “Do No Evil.”
To the extent that it makes sense to talk about
the financiers “owning the firm,” they have a
concomitant responsibility for the uses of their
Employees have their jobs and usually
their livelihood at stake; they often have specialized skills for which there is usually no
perfectly elastic market. In return for their
labor, they expect security, wages, benefits,
and meaningful work. Often, employees are
expected to participate in the decision making of the organization, and if the employees
are management or senior executives, we see
them as shouldering a great deal of responsibility for the conduct of the organization
as a whole. And, employees are sometimes
financiers as well, since many companies
have stock ownership plans, and loyal employees who believe in the future of their
companies often voluntarily invest. One way
to think about the employee relationship is
in terms of contracts.
Customers and suppliers exchange resources for the products and services of the
firm and in return receive the benefits of the
products and services. As with financiers and
employees, the customer and supplier relationships are enmeshed in ethics. Companies
make promises to customers via their advertising, and when products or services don’t
deliver on these promises, then management
has a responsibility to rectify the situation. It
is also important to have suppliers who are
committed to making a company better. If
suppliers find a better, faster, and cheaper
way of making critical parts or services, then
both supplier and company can win. Of
course, some suppliers simply compete on
price, but even so, there is a moral element
of fairness and transparency to the supplier
Finally, the local community grants the
firm the right to build facilities, and in turn,
it benefits from the tax base and economic
and social contributions of the firm. Companies have a real impact on communities,
and being located in a welcoming community helps a company create value for its other
stakeholders. In return for the provision of
local services, companies are expected to be
good citizens, as is any individual person. It
should not expose the community to unreasonable hazards in the form of pollution,
toxic waste, etc. It should keep whatever commitments it makes to the community, and operate in a transparent manner as far as
possible. Of course, companies don’t have
perfect knowledge, but when management
discovers some danger or runs afoul of new
competition, it is expected to inform and
work with local communities to mitigate any
negative effects, as far as possible.
While any business must consist of financiers, customers, suppliers, employees,
and communities, it is possible to think about
The Purpose of the Corporation
other stakeholders as well. We can define
“stakeholder” in a number of ways. First of
all, we could define the term fairly narrowly
to capture the idea that any business, large
or small, is about creating value for “those
groups without whose support, the business
would cease to be viable.” The inner circle of
Figure 1 depicts this view. Almost every business is concerned at some level with relationships among financiers, customers,
suppliers, employees, and communities. We
might call these groups “primary” or “definitional.” However, it should be noted that as
a business starts up, sometimes one particular stakeholder is more important than another. In a new business start-up, sometimes
there are no suppliers, and paying lots of attention to one or two key customers, as well
as to the venture capitalist (financier), is the
right approach.
There is also a somewhat broader definition that captures the idea that if a group or
individual can affect a business, then the executives must take that group into consideration in thinking about how to create value. Or,
a stakeholder is any group or individual that
can affect or be affected by the realization of
an organization’s purpose. At a minimum
some groups affect primary stakeholders and
we might see these as stakeholders in the outer
ring of Figure 1 and call them “secondary” or
There are other definitions that have
emerged during the last 30 years, some based
on risks and rewards, some based on mutuality
of interests. And, the debate over finding the
one “true definition” of “stakeholder” is not
likely to end. We prefer a more pragmatic approach of being clear of the purpose of using
any of the proposed definitions. Business is a
fascinating field of study. There are very few
principles and definitions that apply to all businesses all over the world. Furthermore, there
are many different ways to run a successful business, or if you like, many different flavors of
“managing for stakeholders.” We see limited
usefulness in trying to define one model of
business, either based on the shareholder or
stakeholder view, that works for all businesses
everywhere. We see much value to be gained
in examining how the stakes work in the
value creation process, and the role of the
Executives play a special role in the activity of
the business enterprise. On the one hand, they
have a stake like every other employee in terms
of an actual or implied employment contract.
And, that stake is linked to the stakes of financiers, customers, suppliers, communities,
and other employees. In addition, executives
are expected to look after the health of the
overall enterprise, to keep the varied stakes
moving in roughly the same direction, and to
keep them in balance. 14
No stakeholder stands alone in the process
of value creation. The stakes of each stakeholder group are multifaceted, and inherendy
connected to each other. How could a bondholder recognize any returns without management’s paying attention to the stakes of
customers or employees? How could customers get the products and services they need
without employees and suppliers? How could
employees have a decent place to live without
communities? Many thinkers see the dominant problem of “managing for stakeholders”
as how to solve the priority problem, or “which
stakeholders are more important,” or “how do
we make trade-offs among stakeholders.” We
see this as a secondary issue.
First and foremost, we need to see stakeholder interests as joint, as inherently tied together. Seeing stakeholder interests as “joint”
The Purpose of the Corporation
rather t h a n “opposed” is difficult. It is n o t always easy to find a way to a c c o m m o d a t e all
stakeholder interests. It is easier to trade off
o n e versus another. Why n o t delay s p e n d i n g
o n new p r o d u c t s for c u s t o m e r s in o r d e r to
keep earnings a bit higher? Why n o t cut employee medical benefits in o r d e r to invest in a
new inventory control system?
Managing for stakeholders suggests that executives try to reframe the questions. How can
we invest in new p r o d u c t s a n d create h i g h e r
earnings? How can we b e sure o u r employees
are healthy a n d h a p p y a n d are able to work
creatively so that we can capture the benefits
of new information technology such as inventory control systems? In a r e c e n t b o o k reflecting o n his experience as C E O of Medtronic,
Bill G e o r g e s u m m a r i z e d t h e m a n a g i n g for
stakeholders mindset: 1 5
Serving all your stakeholders is the best way to
produce long term results and create a growing,
prosperous company . . . Let me be very clear
about this: there is no conflict between serving
all your stakeholders and providing excellent
returns for shareholders. In the long term it is
impossible to have one without the other. However, serving all these stakeholder groups requires
discipline, vision, and committed leadership.
T h e primary responsibility of the executive
is to create as m u c h value as possible for stakeholders. 1 6 Where stakeholder interests conflict,
the executive must find a way to r e t h i n k the
p r o b l e m s so t h a t t h e s e interests c a n go together, so that even m o r e value can be created
for each. If trade-offs have to b e made, as often
h a p p e n s in the real world, t h e n the executive
m u s t figure o u t h o w to m a k e t h e trade-offs,
a n d immediately begin improving the tradeoffs for all sides. Managing for stakeholders is
about creating as much value as possible for
stakeholders, without resorting to trade-offs.
We believe that this task is m o r e easily accomplished when a business has a sense of purpose. F u r t h e r m o r e , there are few limits o n the
kinds of purpose that can drive a business. WalMart may stand for “everyday low price.” Merck
can stand for “alleviating h u m a n suffering.”
T h e p o i n t is t h a t if a n e n t r e p r e n e u r or a n
executive can find a purpose that speaks to the
hearts a n d minds of key stakeholders, it is more
likely that there will b e sustained success.
Purpose is complex a n d inspirational. T h e
G r a m e e n B a n k wants to e l i m i n a t e poverty.
F a n n i e Mae wants to m a k e h o u s i n g affordable to every i n c o m e level in society. Tastings
(a local restaurant) wants to b r i n g the taste
of really g o o d food a n d wine to lots of people in the community. And, all of these organizations have to generate profits, or else they
c a n n o t p u r s u e t h e i r p u r p o s e s . Capitalism
works b e c a u s e we can p u r s u e o u r p u r p o s e
with others. W h e n we coalesce a r o u n d a big
idea, or a j o i n t p u r p o s e evolves from o u r dayto-day activities with e a c h other, t h e n g r e a t
things can h a p p e n .
To create value for stakeholders, executives
must understand that business is fully situated
in the realm of humanity. Businesses are h u m a n
institutions p o p u l a t e d by real live c o m p l e x
h u m a n beings. Stakeholders have names a n d
faces a n d children. They are n o t m e r e placeh o l d e r s for social roles. As such, matters of
ethics are routine when o n e takes a managing
for stakeholders a p p r o a c h . Of course this
should go without saying, but a part of the dominant story about business is that business people are only in it for their own narrowly defined
self-interest. O n e main assumption of the managerial view with shareholders at the center is
that shareholders only care about returns, a n d
therefore their agents, managers, should only
care a b o u t returns. However, this does n o t fit
either o u r experiences or our aspirations. In
the words of o n e CEO, “The only assets I manage go u p a n d down the elevators everyday.”
Most h u m a n beings are complicated. Most
of us d o w h a t we d o b e c a u s e we a r e selfinterested a n d interested in others. Business
works in p a r t because of o u r u r g e to create
The Purpose of the Corporation
things with others a n d for others. Working o n
a team, or creating a new p r o d u c t or delivery
mechanism that makes customer’s lives better
o r h a p p i e r o r m o r e p l e a s u r a b l e , all can b e
contributing factors to why we go to work each
day. And, this is n o t to deny t h e e c o n o m i c incentive of getting a pay check. T h e assumption of n a r r o w self-interest is e x t r e m e l y
limiting, a n d can be self-reinforcing—people
can begin to act in a n a r r o w self-interested
way if they believe that is what is e x p e c t e d of
t h e m , as some of the scandals such as E n r o n ,
have shown. We n e e d to b e o p e n to a m o r e
c o m p l e x psychology—one any p a r e n t finds
familiar as they have s h e p h e r d e d the growth
a n d d e v e l o p m e n t of their children.
O n c e you say stakeholders are persons t h e n
the ideas of ethics are automatically applicable.
However you i n t e r p r e t t h e i d e a of “stakeholders,” you must pay attention to the effects
of your actions o n others. And, something like
the Responsibility Principle suggests that this
is a cornerstone of any adequate ethical theory.
T h e r e are at least t h r e e m a i n a r g u m e n t s for
a d o p t i n g a m a n a g i n g for s t a k e h o l d e r s app r o a c h . P h i l o s o p h e r s will see these as connected to the three main approaches to ethical
t h e o r y t h a t have d e v e l o p e d historically. We
shall briefly set forth sketches of these arguments, a n d t h e n suggest that t h e r e is a m o r e
powerful fourth argument. 17
T h e Argument f r o m C o n s e q u e n c e s
A n u m b e r of theorists have a r g u e d that the
main reason that the d o m i n a n t m o d e l of managing for shareholders is a good idea is that it
leads to the best consequences for all. Typically
these arguments invoke Adam Smith’s idea of
the invisible hand, whereby each business actor
pursues h e r own self-interest a n d the greatest
good of all actually emerges. T h e problem with
this argument is that we now know with m o d e r n
general equilibrium economics that the argum e n t only works u n d e r very specialized conditions that seldom describe the real world. And
further, we know that if the economic conditions get very close to those n e e d e d to produce
the greatest good, there is n o guarantee that
the greatest good will actually result.
Managing for stakeholders may actually produce better consequences for all stakeholders
because it recognizes that stakeholder interests
are joint. If o n e stakeholder pursues its interests at the expense of all the others, t h e n the
others will either withdraw their support, or look
to create another network of stakeholder value
creation. This is n o t to say that there are n o t
times when one stakeholder will benefit at the
expense of others, but if this happens continuously over time, then in a relatively free society,
stakeholders will either (1) exit to form a new
stakeholder network that satisfies their needs;
(2) use the political process to constrain the offending stakeholder; or (3) invent some other
form of activity to satisfy their particular needs. 1 8
Alternatively, if we think a b o u t stakeholders e n g a g e d in a series of b a r g a i n s a m o n g
themselves, t h e n we would expect that as individual stakeholders recognized their j o i n t
interests, a n d m a d e good decisions based o n
these interests, better consequences would result t h a n if they each narrowly p u r s u e d their
individual self-interests. 19
Now it may b e objected t h a t such a n approach ignores “social consequences” or “consequences to society” and, hence, that we need
a c o n c e p t of “corporate social responsibility”
to mitigate these effects. This objection is a
vestigial limb of the d o m i n a n t m o d e l . Since
t h e only effects, o n that view, were e c o n o m i c
effects, t h e n we n e e d to think a b o u t “social
consequences” or “corporate social responsibility.” However, if stakeholder relationships
The Purpose of the Corporation
a r e u n d e r s t o o d to b e fully e m b e d d e d i n
morality, t h e n t h e r e is n o n e e d for a n idea
like corporate social responsibility. We can replace it with “corporate stakeholder responsibility,” which is a d o m i n a n t f e a t u r e of
m a n a g i n g for stakeholders.
T h e Argument from Rights
T h e dominant story gives property rights in the
corporation exclusively to shareholders, a n d
the natural question arises about the rights of
other stakeholders who are affected. O n e way
to understand managing for stakeholders is that
it takes this question of rights seriously. If you
believe that rights make sense, and further that
if o n e person has a right to X t h e n all persons
have a right to X, it is j u s t m u c h easier to think
a b o u t these issues using a s t a k e h o l d e r approach. For instance, while shareholders may
well have property rights, these rights are not absolute, a n d should n o t be seen as such. Shareholders may n o t use their property to abridge
the rights of others. For instance, shareholders
a n d their agents, managers, may n o t use corp o r a t e property to violate the right to life of
others. O n e way to u n d e r s t a n d managing for
stakeholders is that it assumes that stakeholders
have some rights. Now, it is notoriously difficult
to parse the idea of “rights.” But, if executives
take managing for stakeholders seriously, they
will automatically think about what is owed to
customers, suppliers, employees, financiers, and
communities, in virtue of their stake, a n d in
virtue of their basic humanity.
T h e Argument f r o m Character
O n e of the strongest arguments for managing
for stakeholders is that it asks executives a n d
entrepreneurs to consider the question of what
kind of company they want to create and build.
T h e answer to this question will b e in large
p a r t a n issue of character. Aspiration matters.
T h e business virtues of efficiency, fairness,
respect, integrity, keeping c o m m i t m e n t s , a n d
others are all critical in b e i n g successful at creating value for stakeholders. These virtues are
simply absent when we think only a b o u t the
d o m i n a n t model a n d its sole reliance o n a narrow e c o n o m i c logic.
If we frame t h e central q u e s t i o n of m a n a g e m e n t as “how d o we create value for shareholders,” t h e n the only virtue t h a t emerges is
o n e of loyalty to the interests of shareholders.
However if we frame the central question more
broadly as “how d o we create a n d sustain the
creation of value for stakeholders” or “how do
we get stakeholder interests all g o i n g in t h e
same direction,” then it is easy to see how many
of the other virtues are relevant. Taking a stakeholder approach helps people decide how
companies can contribute to their well-being
a n d t h e kinds of lives they w a n t to lead. By
making ethics explicit a n d building it into the
basic way we think about business, we avoid a
situation of b a d faith a n d self-deception.
T h e Pragmatist’s Argument
T h e previous t h r e e a r g u m e n t s p o i n t o u t imp o r t a n t r e a s o n s for a d o p t i n g a n e w story
about business. Pragmatists want to know how
we can live better, h o w we can create b o t h
ourselves a n d o u r communities in ways where
values such as freedom a n d solidarity are prese n t in o u r everyday lives to the maximal ext e n t . W h i l e it is s o m e t i m e s useful to t h i n k
a b o u t consequences, rights, a n d character in
isolation, in reality o u r lives are r i c h e r if we
can have a conversation a b o u t how to live tog e t h e r b e t t e r . T h e r e is a l o n g t r a d i t i o n of
pragmatist ethics dating to philosophers such
as William J a m e s a n d J o h n Dewey. M o r e
recently p h i l o s o p h e r R i c h a r d Rorty has expressed t h e pragmatist ideal: 2 0
pragmatists . . . hope instead that human beings
will come to enjoy more money, more free time,
The Purpose of the Corporation
and greater social equality, and also that they
will develop more empathy, more ability to put
themselves in the shoes of others. We hope that
human beings will behave more decently toward
one another as their standard of living improves.
By building into the very conceptual framework we use to think about business a concern
with freedom, equality, consequences, decency,
shared purpose, and paying attention to all of
the effects of howwe create value for each other,
we can make business a h u m a n institution, a n d
perhaps remake it in a way that sustains us.
For the pragmatist, business ( a n d capitalism) has evolved as a social practice, an imp o r t a n t o n e that we use to create value a n d
t r a d e with each other. O n this view, first a n d
foremost, business is a b o u t collaboration. Of
course, in a free society, stakeholders are free
to form c o m p e t i n g networks. But the fuel for
capitalism is o u r desire to create s o m e t h i n g
of value, a n d to create it for ourselves a n d
others. T h e spirit of capitalism is the spirit of
i n d i v i d u a l a c h i e v e m e n t t o g e t h e r with t h e
spirit of accomplishing great tasks in collabo r a t i o n with o t h e r s . M a n a g i n g for stakeh o l d e r s makes this plain so t h a t we can get
a b o u t the business of c r e a t i n g b e t t e r selves
and better communities.
1. The ideas in this paper have had a long development time. The ideas here have been reworked from: R. Edward Freeman, Strategic
Management: A Stakeholder Approach (Boston:
Pitman, 1984); R. Edward Freeman, “A Stakeholder Theory of the Modern Corporation,” in
T. Beauchamp and N. Bowie (eds.) Ethical Theory and Business (Englewood Cliffs: Prentice
Hall, 7th edition, 2005), also in earlier editions
coauthored with William Evan; Andrew Wicks,
R. Edward Freeman, Patricia Werhane, Kirsten
Martin, Business Ethics: A Managerial Approach
(Englewood Cliffs: Prentice Hall, forthcoming
in 2008); and R. Edward Freeman, Jeffrey Harrison, and Andrew Wicks, Managing for Stakeholders (New Haven: Yale University Press, 2007).
I am grateful to editors and coauthors for permission to rework these ideas here.
It has been called a variety of things: “stakeholder
management,” “stakeholder capitalism,” “a stakeholder theory of the modern corporation,” and
so on. Our reasons for choosing “managing for
stakeholders” will become clearer as we proceed.
Many others have worked on these ideas, and
should not be held accountable for the rather
idiosyncratic view oudined here.
For a stylized history of the idea see R. Edward
Freeman, “The Development of Stakeholder
Theory: An Idiosyncratic Approach” in K. Smith
and M. Hitt (eds.), Great Minds in Management
(Oxford: Oxford University Press, 2005).
One doesn’t manage “for” these benefits (and
The difference between managerial and shareholder capitalism is large. However, the existence of agency theory lets us treat the two
identically for our purposes here. Both agree
on the view that the modern firm is characterized by the separation of decision making
and residual risk bearing. The resulting agency
problem is the subject of a vast literature.
6. Alfred Chandler’s brilliant book Strategy and
Structure (Boston: MIT Press, 1970) chronicles
the rise of the divisionalized corporation. For a
not-so-flattering account of General Motors during the same time period see Peter Drucker’s
classic work The Concept of the Corporation (New
York: Transaction Publishers, reprint ed., 1993).
7. Executives can take little comfort in the nostrum that in the long run things work out and
the most efficient companies survive. Some market dieorists suggest that finance theory acts like
“universal acid” cutting through every possible
management decision, whether or not, actual
managers are aware of it. Perhaps the real difference between the dominant model and the
“managing for stakeholders” model proposed
here is that they are simply “about” different
things. The dominant model is about the strict
and narrow economic logic of markets, and the
“managing for stakeholders” model is about
how human beings create value for each other.
8. Often the flavor of the response of finance theorists sounds like this. The world would be better off if, despite all of the imperfections,
executives tried to maximize shareholder value.
It is difficult to see how any rational being
could accept such a view in the face of the
T h e Purpose of the C o r p o r a t i o n
r e c e n t scandals, w h e r e it could be a r g u e d dtat
the worst offenders were the most ideologically
p u r e , a n d t h e result was the actual destruction
of shareholder value (see Breaking the Short Term
Cycle, Charlottesville, VA: Business Roundtable
Institute for C o r p o r a t e Ethics/CFA C e n t e r for
Financial Market Integrity, 2006). Perhaps we
have a version of Aristotle’s i d e a t h a t h a p p i ness is n o t a result of trying to be happy, o r
Mill’s idea t h a t it does n o t maximize utility to
try a n d m a x i m i z e utility. Collins a n d Porras
have suggested that even if executives want to
maximize shareholder value, they should focus
o n p u r p o s e instead, t h a t trying to maximize
s h a r e h o l d e r value does n o t lead to m a x i m u m
value, see J. Collins a n d J. Porras, Built To Last
(NewYork: H a r p e r Collins, 2002).
9. See R. Edward Freeman, “The Politics of Stakeholder Theory: Some Future Directions,”
Business Ethics Quarterly 4:409-22.
1 0. T h e second part of the integration thesis is left
for a n o t h e r occasion. Philosophers who r e a d
this essay may n o t e the radical d e p a r t u r e from
s t a n d a r d a c c o u n t s of p o l i t i c a l p h i l o s o p h y .
S u p p o s e we b e g a n t h e inquiry into political
philosophy with the question, How is value creation a n d trade sustainable over time? a n d suppose that the traditional b e g i n n i n g question,
How is the state justified? was a subsidiary o n e .
We m i g h t discover or create s o m e very differe n t answers from t h e s t a n d a r d a c c o u n t s of
most political theory. See R. Edward F r e e m a n
a n d R o b e r t Phillips, “Stakeholder Theory: A
Libertarian Defense,” Business Ethics Quarterly
12, n o . 3 (2002): 33Iff.
11. Here we roughly follow the logic ofJ o h n Rawls
in Political Liberalism (New York: Columbia University Press, 1995).
12. T h e r e a r e m a n y statements of this principle.
O u r a r g u m e n t is that whatever t h e particular
c o n c e p t i o n of responsibility t h e r e is s o m e underlying c o n c e p t that is c a p t u r e d like o u r willingness or o u r n e e d to justify o u r lives to
others. Note the answer that the d o m i n a n t view
of business m u s t give to q u e s t i o n s a b o u t responsibility. “Executives are responsible only
for t h e effects of their actions o n shareholders, o r only insofar as their actions create o r
destroy s h a r e h o l d e r value.”
13. T h e spirit of this d i a g r a m is from R. Phillips,
Stakeholder Theory and Organizational Ethics (San
Francisco: Berret-Koehler Publishers, 2003).
14. In earlier versions of this essay in this volume
we suggested that the notion of a fiduciary duty
to stockholders be e x t e n d e d to “fiduciary duty
to stakeholders.” We believe that such a move
c a n n o t be d e f e n d e d without d o i n g d a m a g e to
t h e n o t i o n of “fiduciary.” T h e idea of having a
special duty to either o n e o r a few stakeholders is n o t helpful.
15. Bill G e o r g e , Authentic leadership
cisco: Jossey Bass, 2004).
(San Fran-
16. This is at least as clear as t h e directive given by
the d o m i n a n t m o d e l : create as m u c h value as
possible for shareholders.
17. S o m e p h i l o s o p h e r s have a r g u e d t h a t t h e
s t a k e h o l d e r a p p r o a c h is in n e e d of a “normative justification.” To t h e e x t e n t t h a t this
p h r a s e has any m e a n i n g , we lake it as a call
to c o n n e c t t h e logic of m a n a g i n g for stakeh o l d e r s with m o r e traditional ethical theory.
As pragmatists we eschew t h e “descriptive vs.
n o r m a t i v e vs. i n s t r u m e n t a l ” distinction t h a t
so m a n y business t h i n k e r s ( a n d s t a k e h o l d e r
theorists) have a d o p t e d . M a n a g i n g for stakeh o l d e r s is i n h e r e n t l y a narrative o r story t h a t
is at o n c e descriptive of how s o m e businesses
d o act; aspirational a n d normative a b o u t how
t h e y c o u l d a n d s h o u l d act; instrumental
t e r m s of w h a t m e a n s lead to what e n d s ; a n d
managerial in t h a t it m u s t b e c o h e r e n t o n all
of t h e s e d i m e n s i o n s a n d actually g u i d e executive action.
18. See S. Venkataraman, “Stakeholder Value Equilibration and the Entrepreneurial Process,” Ethics
andEntrepreneursiiip, T h e Ruffin Series, 3 (2002):
45-57; S. R. Velamuri, “Entrepreneurship, Altruism, and the Good Society,” Ethics and Entrepreneurship, T h e Ruffin Series 3 (2002): 125-43;
and, T. Harting, S. Harmeling, and S. Venkataraman, “Innovative Stakeholder Relations: W h e n
“Ethics Pays” (and W h e n it Doesn’t)” Business
Ethics Quarterly 16 (2006): 43-68.
19. Sometimes t h e r e are trade-offs a n d situations
t h a t e c o n o m i s t s w o u l d call ” p r i s o n e r ‘ s dil e m m a ” b u t these a r e n o t t h e p a r a d i g m a t i c
cases, o r if they are, we s e e m to solve t h e m
routinely, as Russell H a r d i n has suggested in
Morality Within the Limits of Reason (Chicago:
University of Chicago Press, 1998).
20. E. M e n d i e t a ( e d . ) , Take Care of Freedom and
Truth Will Take Care of Itself: Intervieios with
Richard Rorly (Stanford: Stanford University
Press, 2006), 68.
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