Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

Anant Jain

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) analyzes the article “The Social Responsibility of Business Is to Create Value for Stakeholders” written by Edward Freeman and Heather Elms in 2018.

Edward Freeman is a strategy, ethics, and entrepreneurship professor at the University of Virginia’s Darden School of Business. Heather Elms is an associate professor of international business at American University’s Kogod School of Business in Washington, D.C.

Summary

In the article “The Social Responsibility of Business Is to Create Value for Stakeholders”, Freeman and Elms (2018) argue against the statement made by Milton Friedman in a famous article published in The New York Times in 1970 that “The Social Responsibility of Business Is to Increase Its Profits”. Friedman’s view corresponds to the traditional “Shareholder Approach”. Freeman and Elms state that businesses need to create value for all stakeholders (not only shareholders but also employees, customers, suppliers, communities, governments, etc.) if they want to be successful in the 21st century. This leads to the introduction of a new story: the “Stakeholder Approach”.

Reasons For A New Approach

Freeman and Elms explain the reasons for the need of a new story which are as follows:

  • They state that the Great Recession of the late 2000s made it abundantly clear the shareholder approach is no longer appropriate or applicable in today’s world. They explain it using the examples of companies (the investment bank Lehman Brothers and the automotive company General Motor) that got bankrupt/shutdown because they did not realize the need to switch from the shareholder approach to another approach.
  • They further refer to the former CEO of General Electric, Jack Welch, who stated in the Financial Times in 2009 that “Shareholder value is a result, not a strategy. Your main constituencies are your employees, your customers, and your products”.

Therefore, this new story, the Stakeholder Approach, spotlights stakeholders and not only shareholders.

  • In other words, stakeholders are interrelated and therefore interdependent on each other. Hence, the agenda for a business should be to create as much value as possible for all the stakeholders, which also includes creating profits for shareholders but is not limited to them.
  • Freeman and Elms state that “the winning business models of the 21st century figure out how to get these interests going in the same direction, with as few trade-offs as possible”. In other words, they mean that it is impossible to trade a stakeholders’ interest for another’s because someone else will figure out a way to do the same business without that trade-off. For example, Amazon, Genentech, Apple, and Google are all “high purpose stakeholder-oriented companies” i.e., they are focused on value creation for multiple stakeholders without compromising on any stakeholder.
  • Freeman and Elms state that worldwide, there are legal flexibility provided to companies to balance their stakeholders (including shareholders) in the interest of the business. In another sense, management’s role is to define, create and balance relationships with various stakeholders.

Freeman and Elms mention that businesses are driven to increase their demand (from customers).

  • However, “there are some activities in which business should not engage” to drive their demand. They explain the same using the example of business providing products at cheaper prices to the customers to drive their demand but at the cost of deprivation of value for their employees. In other words, the trade-off between stakeholders should not be opted for.
  • As a result, business will lead to the demand for new technological innovation. In a similar way, “business drives demand for responsible capitalism by offering responsible options for all its stakeholders”.
  • In addition to this, Freeman and Elms also mention that responsible capitalism is based on responsible behavior from stakeholders as well and not just the business. For example, customers should purchase responsible products, employees should choose to work for responsible employers, etc.

Freeman and Elms state that “business can be a part of solution to societal problems, rather than the cause”.

    • They use the example of Tesla, Renewable Energy, IBM and smart cities, and start-ups like Milk Stork (that provide an option for mothers who travel for business to get breast milk home to the children).
    • Freeman and Elms use this to explain to us the stakeholder approach and how the future of business and capitalism is related. They state that “capitalism is the greatest system of social cooperation that we have yet invented”. This is because it enables free people to cooperate and collaborate together and create value for one another in a way that no individual can do on their own.

To conclude, in their article, Freeman and Elms state and mention repetitively the need for existing and new companies (and their managers) to aspire to be a kind of business that creates value for all stakeholders without compromising on the value of one stakeholder to make some other stakeholders better off, to corporate and create value for one another.

Why Should I Be Interested In This Post?

This article should be read by management students or students from any other field to understand the importance of different stakeholders and how each stakeholder may be linked to one another. It will help them in the future when choosing an organization, either creating one from scratch or working as an employee for an organization, to align with the values of the organization and any stakeholder which may be important to them as well. This article can also we read by people currently employed or self-employed. It will help them to refresh their memories about the stakeholder approach and recheck if the current organization they are a part of align with their personal values or not. In general, this article will be helpful for anyone to briefly understand the stakeholder approach and how the importance of the stakeholder approach diverted from the shareholder approach and how useful and impactful it can be in today’s world.

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Useful Resources

Freeman E., H. Elms, 2018, The Social Responsibility of Business Is to Create Value for Stakeholders, MIT Sloan Management Review, 17/12/2020.

Jack Welch (2009) Welch condemns share price focus Financial Times.

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).