Stakeholder Value: A New Story About Business
2021-02-07 · Guest: Ed Freeman (Professor at the University of Virginia) · 52:18
Evolution of corporate responsibility and stakeholder theory
Bob Zadek interviews Professor R. Edward Freeman about the evolution of corporate responsibility. They debate Milton Friedman’s classic “shareholder primacy” model versus Freeman’s “stakeholder theory,” exploring whether businesses should prioritize only profits or balance the interests of customers, employees, suppliers, communities, and shareholders.
Topics: Stakeholder Theory, Shareholder Value, Milton Friedman, Corporate Social Responsibility, Business Ethics, ESG, The Power of And
Speakers:
- Bob Zadek: Host
- Ed Freeman: Professor at the University of Virginia and author of The Power of And
Milton Friedman and the Purpose of Business [00:18]
Bob Zadek: Good morning, everyone. Welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. Thank you so much for listening this Sunday morning. We are this morning and always the show of ideas, never once the show of attitude.
In 1970, Milton Friedman wrote a piece in the New York Times. His—I believe it was in the Sunday magazine, if I’m not mistaken. The title of the article, somewhat provocative, was “The Social Responsibility of Business is to Increase its Profits.” Kind of seems straightforward to me. It’s so obvious to me, it was in 1970 when I read it, that I said, “Well, who would think otherwise?” I asked myself. Friedman went on to explain—he argued that it was not only immoral but inefficient for a corporation to do anything other than maximize shareholder value, so long as it could do so legally and consistent with cultural norms. Seems pretty straightforward to me.
My question this morning is: Was Milton Friedman wrong? Is Milton Friedman wrong? When one challenges an icon such as Milton Friedman, you tread very lightly and very carefully. To help us answer the question, “Was Milton Friedman wrong?” I’m happy to welcome to the show Ed Freeman. Ed is a professor of business administration at the University of Virginia, its school of business. He’s an author of several books and countless articles. A while ago, he wrote Strategic Management: A Stakeholder Approach. He wrote that in 2010, if I’m not mistaken. More recently, Ed wrote a book that I reviewed, read the review on, listened to Ed discuss the book many times as he was explaining the book to various audiences. The book is called The Power of And. He wrote that with Kirsten Martin and Bidhan Parmar. And in it, Ed seems to take the position that yes, Milton Friedman was wrong, or perhaps kind of wrong, or perhaps may have missed the point a bit. But rather than me explain to you the point of the book, I’m happy to welcome to the show Ed Freeman, one of the co-authors of The Power of And. And in that book, as you will learn, Ed fleshes out to whom a corporation does or should owe duties, owe responsibilities, which are the stakeholders, if you will, that a corporation must be responsive to in carrying out its core function, which is to provide goods and services that others might choose to purchase. So Ed, welcome to the show this morning and let’s start off by my asking you directly: Was Milton Friedman wrong in his position that it is not only immoral but inefficient for a corporation to do anything other than maximize shareholder value? And good morning and welcome to the show, Ed.
Ed Freeman: Thanks, Bob. Thanks for having me on. Look, first of all, Friedman is one of my intellectual heroes for a number of reasons. I would say it’s less a matter of “was he wrong” than a matter of “does his reasoning apply to business today?” Now, I think what Friedman missed, because he’s an economist and he wanted to explain how markets work, what he missed was what really makes a business successful. Any successful business has got to have products and services that customers want, suppliers to make them better, employees who show up and use their minds, be good citizens in the community, and make money for shareholders. Those things go together. And that’s about the business. So I don’t think Friedman was wrong so much as I don’t think he understood as an economist and as an academic economist what really makes a great business tick.
The Interconnectedness of Stakeholders [05:40]
Bob Zadek: Now, a question—you had said a second ago, just one second ago in answer to my question, that Friedman didn’t—wasn’t your exact words—didn’t quite go far enough. And a corporation should or ought to or must pay attention to the needs of other stakeholders, other constituencies other than shareholders. Now, my core question, both that occurred to me in going through your book and in listening to you explain it, here’s a core question, and maybe it’ll be a question which we will build on during the show.
I would—I would never challenge the principle that in maximizing shareholder value, it might be an important tool, it might be an important consideration that the wealth of the corporation, the shareholder value, is furthered by being—having an enlightened employee management HR policy because if you have employee turnover, that increases HR costs and that’s bad for business. It would be important to treat creditors and suppliers fairly because they’ll stop selling to you or they’ll charge you more, and again, it’ll affect profits. So rather than list all the employees and the community and your vendors and government as stakeholders, aren’t they all—treating them nicely—nicely is a kind of a platitude—isn’t that simply a means to the most important end, which is increasing shareholder value? So is it appropriate to carry those other constituencies on the same line as paying attention to them is as important as paying attention to shareholder value, or are they simply—is it important to pay attention to them to increase shareholder value?
Ed Freeman: Well, Bob, many people have something at stake by saying it’s shareholders that are really most important or it’s customers that are really most important. And I really don’t. I think the wisdom I get from the businesses that I see are that you have to get these interests going in the same direction over time. If you don’t, for instance, in a free society, what those interests will do is go to government to get their interests taken care of, as we see with regulations like the Wagner Act, the Fair Labor Practices Act, all the environmental regulation, a lot of the Uniform Commercial Code. So I see these interests as going together, as thriving together. And when you start to say one’s more important than the other, you tend to start making mistakes. You tend to start systematically denying the importance of one, and that’s what leads to, again, I think, this impossible tangle of politicization of business and the regulatory state.
Bob Zadek: Now, I understand that, but what I found myself worrying about is that paying attention to other stakeholders, lest—and you took government—paying attention to, let’s say, environmental concerns. You clearly suggested that if the profit-making—I’ll say corporation even though that’s only a question of form, it could be an LLC, it could be a partnership, but I’ll say corporation as the for-profit organization in whatever form it is. So the corporation, which I’m using broadly, pays attention to the environment not because it feels a moral responsibility to do so, although it might, but it does so so that if it doesn’t, government will come down and do so with a heavy hand, thereby increasing the cost to the corporation more than the cost which the corporation imposes upon itself by devoting some dollars to the environment. So there the corporation isn’t some free-standing concern about externalities, the environment, but rather it’s doing so to keep government away, which is the greater of two evils. Am I—is that an unfair—am I missing the point somehow in that analysis?
Ed Freeman: Well, Bob, you can frame it like that, and look, there are lots of reasons for paying attention to the environment. One reason is oftentimes what companies have found is if they pay attention to the environment, they can find out how to do things better, faster, cheaper. A second reason is sometimes their employees care about that. A third reason is sometimes they think that maybe, just maybe, companies shouldn’t spoil the environment that they’re a part of. Trying to reduce all that to kind of one story about profitability—well, you can do that. I just don’t—I’m not an ideologue. I don’t see the need to do that. Business is this wonderful institution. There are lots of reasons for businesses to be started and to exist. And I think it’s not worthy of us to say to reduce it all to a drive for profitability and competition.
Look, Friedman was worried about something that I worry about. Friedman was worried about a movement in the ’60s of corporate social responsibility, which was essentially businesses doing stuff to kind of chill out the unrest in society and to do stuff that they really didn’t know much about—donating to good causes, those kinds of things. What I’m worried about is—and I still think he was kind of right about that. I’m not much in favor of corporate social responsibility. I’m in favor of business being responsible to its stakeholders, of being responsible for the effects of its actions. I think any good libertarian, which I’m probably not, you know, has to believe that with freedom comes responsibility. And that’s what you need to get stakeholder thinking, at least my version of it, off the ground. I have never written in opposition to Friedman. I have thought that, you know, I’m interested in how to run a great business. He was interested in trying to explain how markets work. And those are just two different things.
Cisco Systems and Mission Creep [08:55]
Bob Zadek: Now, look, we can boil this down, and in thinking about the show and your book, I can drill down and I can pose a very simple hypothetical and a question, which I think will help us focus on the principle or principles of your book. I remember studying corporations in law school. In fact, Ed, if I can boast to my audience, it was the only A I ever got in law school. I don’t know why I didn’t think of myself that way, but I just liked it. And in thinking about it, I remember one of my earliest conclusions was as a very young lawyer and a young man, that I said it’s probably per se bad management of a corporation—and I always think in terms of very stark blacks and whites, I don’t do well in grays. So I said to myself then, and this will be my question to help us focus on the issue we’re discussing this morning, I felt it was almost indefensible for a corporation to make a charitable contribution, to give any money away to charity.
Why? Because stakeholders invested money in a corporation for one purpose: not to accomplish a social good. Shareholders would give their money to a charity if they wanted to accomplish a social good, but they gave the money to the corporation for the sole purpose of getting a return. That’s why one makes investments. And if a corporation cannot use every penny I as a shareholder gave to the corporation towards that end, then they should give it back to me and I’ll give it to another entity. And if a corporation is giving away my money, if you will, to a charity, then they are forcing me to support a charity which I may not want to support. So I like in my world of blacks and whites, I say I’ll give money to a charity directly to accomplish a social good, and I give money to a corporation to accomplish specifically an economic good, at least for me. Now, where do you and I, if we do at all, where do we differ in that analysis?
Ed Freeman: Well, I think several places, Bob. First of all, markets work when people have only strictly economic preferences. The market doesn’t capture what my moral preferences are. So I might buy stock because I want it to stop doing something and I want to vote on that. Markets don’t capture that. Maybe the governance mechanisms do a little bit. On this business of, you know, “it’s your money,” actually, you haven’t given a penny to the corporation. All you’ve done is buy a piece of paper that somebody else sold. So you have this idea that you own it in the sense of like I own this pencil I’m writing with. That’s really misleading, I think. Owning a corporation is different from that. It’s not resolvable into, you know, you get to get some of the machinery if it goes bust.
Now, there’s something to, I think, the idea that you don’t want companies doing stuff they don’t know anything about. But communities turn out to be important. Communities are places where employees live, where their suppliers—and living in a thriving community is something that and being known as a community builder is something that certainly is in the interest of the corporation. So I don’t buy this narrative that it’s about owning property. I mean, corporations, first of all, in the law, corporations own themselves. That’s absolutely clear. And so this idea that shareholders own the corporation, legally, my understanding is that’s just a myth. Now, it might be a good idea to treat it like that, but then what you’d have to say was that, well, companies that treat it like that do better than companies that don’t. And they can, but they don’t have to. So I think there’s a lot of—you said, well, it simplifies in black and white. Yeah, it’s hard to do that in business because, you know, it’s a lot more complicated than the economic textbooks would have us believe.
Bob Zadek: To discuss this in very tangible terms, in your book, you share with us a little anecdote about Cisco Systems. And where Cisco, which operates of course in Silicon Valley, it’s always been there, its head office. And it made a—you tell the story that it gave, I think, $50 million to Santa Clara County to fight chronic homelessness. And it did so in the form of a public-private partnership. All of that is mechanical, who cares. And then they donated another $10 million to invest in a local community development institute. Does that—is that a good example? You certainly cited it in your book of what you have in mind in inviting heads of corporations to have responsibility to a larger group than stakeholders. Is that a good example for us to talk about for a few minutes?
Ed Freeman: Well, again, I don’t know more than we said in the book. I think what’s happened is companies understand they need partners that they don’t know how to do, you know, some of these projects with communities. And they’ve discovered that if they can partner with NGOs in these stakeholder partnerships, they can be more effective. That’s what I take it Cisco has done.
Bob Zadek: And Cisco, which has earned a return for its shareholders because of its expertise in manufacturing chips and the like—I can’t use technical terms because it’s not what I do for a living—but they have followed its core expertise to make a lot of money for shareholders. And in doing so, they benefit society. They create a product that makes business more efficient, which means economic activity grows. Everybody benefits from the profits Cisco makes, so long as it makes them lawfully and treats all of its counterparts fairly and honestly and in a way that makes management proud.
Cisco, to take this only as an example, and like you, Ed, I know not much more than the story you have told in your book. But I say to myself, in reading your anecdote, Ed, homelessness—man, what a complicated problem. Homelessness is caused by lots of factors, one of which clearly is, in my opinion, government mismanaging the problem. The primary actor in counteracting homelessness is government or is private charities. They are the primary actors. And Cisco, in throwing $50 million, might be, if you will, rewarding the government which caused the problem. In other words, Cisco doesn’t offer itself to its investors and creditors as one which is knowledgeable in curing homelessness. And I don’t suspect they have a homelessness department in their company. What I worry about is, Ed, it’s kind of a mission creep. Just like a government does a bad job at earning a return on any investment it makes—Solyndra, of course, is the classic example—government is not so good at making a profit. But they might be good at running a court system and protecting our person and property because that’s their core mission. Are you fuzzing—are you making core missions fuzzier so that corporations are urged to take on some of the responsibilities of government or of charities? And once you have this mission creep, it’s hard to measure performance. So speak, if you will, about specialization and mission creep. Corporations should be doing what they do best, governments doing what they do best, and nonprofits and charities doing what they do best. Specialization.
Ed Freeman: Well, I think corporations, Bob, should do what they do best. And what they do best is they create value for customers, suppliers, employees, communities, and the people with the money. That’s what they do best. That’s what they’ve always done best, even if we haven’t always recognized that. It’s a bit like the Molière character who understands, “Oh, I’m speaking prose.” When companies recognize that they’ve always been creating value for these stakeholders, now I can do it better. Not everything they do you’re going to agree with, or I’m going to agree with. But I don’t think that the purpose of a company is to make as much money as possible. That’s like—look, businesses have to make profits. People on the left who think profits are evil, that’s just stupid, okay? But the people on the right who think that profits are the be-all and end-all are in the same place. Look, it’s like I need red blood cells to live, but the purpose of my life is not to make red blood cells. Sometimes I have to focus on making red blood cells, but it’s still not the purpose of my life. Businesses have to have profits to live. And let’s assume that’s what our finance colleagues tell us—they’ve got to have profits at at least the weighted average cost of capital, what the finance people call the WACC. Still not the purpose of a business. Entrepreneurs don’t start a business just to make money. If they do, they’ve got a—I know what I tell my students, you know, if you want to start a business to get rich, you better get a job because it’s a hell of a lot easier to get rich working your way up through a career than it is to start something that makes a difference. Starting a business is hard. You’ve got to have some sense of passion, some sense of purpose as to why to do it. And look, there’s nothing wrong with making a lot of money. I don’t object to that at all. I just think I understand the stakeholder idea gives you a much better, more nuanced understanding of how that process works. You can’t have a business without customers or without suppliers or without employees or without communities, and certainly not without investors. Those interests are interconnected. And it’s seeing the interconnection that’s important. You can say, well, so the end is profits, or the end is paying attention to stakeholders. Sometimes those ought to come to the same thing. It doesn’t really matter to me. I don’t have a horse in the race to say it’s just the stakeholders minus the shareholders, people believe, or it’s just the shareholders. I think juxtaposing those two is what’s led to, you know, a little bit of the impasse that’s there. We need to see how they’re connected. And that’s what The Power of And tries to do. It tries to show how purpose and profit, stakeholders and shareholders, ethics and business, how those things are connected together. Friedman saw the connection. He just didn’t go far enough with the connection because he says, remember, not just as you quoted him, you can’t violate any cultural norms. He actually said you can’t violate any, I think his word was, ethical custom. He gets lambasted all the time as saying business ethics doesn’t exist, but that’s not—that’s actually not his view.
The Hypothetical $50 Million Donation [15:53]
Bob Zadek: Now, we both have—let’s start with the obvious premise that you and I will spend every minute of every day thinking about how to—and I’m going to use a platitude, but I really mean it in a non-platitudinous sense—we want to make the world a better place. Let’s start with that premise. Now, and you present to us that, well, a means to that end is if corporations—and remember, I mean all types of profit-making business, whatever form—if corporations or you urge or encourage corporate leadership to pay attention to the needs of workers, creditors, the community, the environment, and even government in a way—pay attention to that, consider that.
Ed Freeman: Certainly customers, suppliers, employees, communities, and the people with the money. Those are the five groups that I talk about. I just want to be clear about that.
Bob Zadek: Okay, good. I always love it, and I mean this with utter sincerity, I love when my guest corrects me because that means you just taught me something. So thank you, and feel free, correct the heck out of me because I love it.
Ed Freeman: No problem. I get misinterpreted a lot, so I’m a little sensitive to it. Sorry.
Bob Zadek: It’s welcome. Now, so I say in my view, my purely libertarian view, as to get to that holy grail of making the world a better place, is corporations have a very, very specific function: create wealth, create value, behave, if you will, with greed—we’ll come back to that because I love talking about greed. And when they create value, they put money in my—if I’m a shareholder—my pocket. What will I do with that money? One would hope, and indeed I expect, that shareholders will to some degree take the wealth that they have earned and use it towards that common goal of, if you will, making the world a better place. Shareholders will do it in the way that they think is best—supporting a university, supporting a church, supporting a medical research, whatever. Shareholders will do that. So the wealth created by this highly specialized activity called making money—wealth is created and then filters down into society en masse so that society will use the newly created wealth to make the world, as I started with, a better place. And by doing so, the same dollars find its way ultimately to the same needy recipients, but everybody is behaving with freedom. I get to dispose of my money to the charities that I support. Same result: the world is a better place. But if corporations devote too much of what otherwise would be profits to non-profit activities, paying attention to the world at large, the money finds its way to the world at large, but I was forced to support that involuntarily. So just—that’s a pure libertarian reaction, and just speak to that if you would.
Ed Freeman: Well, I think that’s one pure libertarian reaction. It’s not the only one. Your assumption that if I do, let’s say, what Cisco did and invest something in the community, that that has no or a negative relationship on profits—the evidence for that is not clear. The evidence is the more you pay attention to your stakeholders, the more profits you make. Now, what people want to know often is, if I manage my company this way that I’ve been saying, am I guaranteed to make more money? And you know, my answer to that is you want a guarantee, buy a refrigerator. Businesses don’t come with that. If you try to maximize shareholder value, are you guaranteed to do that? The answer of course is no. Is it possible that you make more money? Sure. What many people would say in today’s world, Bob, is that, look, this way of managing is going to be table stakes. You’re going to win when you have the support of customers, suppliers, employees, and communities, and shareholders. And you’ve got to have that. It’s an “and” here. You can keep reducing it to an “or,” but I’ll keep reframing it as an “and,” you know? If you have the support of all of those groups, you will do better over a longer period of time. You’ll be better today, and you’ll do better over a longer period of time. So I don’t accept the way of framing the problem that lots of people who are far too enamored with economic theory—more enamored with it than I am—of saying stakeholders represent a trade-off rather than their ways to avoid or dissolve what those trade-offs are. If I look for a trade-off between shareholders and customers, what I’m going to find is trade-offs. If I look for a way to satisfy both, I might not find it. Human beings have to be, you know, we’ve got to be modest about our abilities. But I’m not going to find it if I don’t look for it. Capitalism works because we can use our imagination to figure out how to do stuff that’s never been done. We invent vocabularies to solve our problems. I mean, it’s really—it’s the greatest system of social cooperation ever. But it’s about how we cooperate together, how we get customers, suppliers, employees, communities, and people with the money going in the same direction roughly over time. Sometimes you’ve got to make trade-offs because you can’t figure it out. But over time, great companies figure out how to get those going in the same direction. Some companies get broken. They get broken because of—yeah.
Bob Zadek: Here’s a question. I’ve thought of a hypothetical or question that will help us really connect up or see where we agree. Let us assume that because of life experiences of the senior manager of a corporation, the senior manager has a fondness for some art, some form of art. And the senior manager causes the corporation to make a $50 million—I just picked that number because it was in your Cisco anecdote, that’s the only reason—makes a $50 million negotiation to the New York City Metropolitan Museum of Art. Now, no one could argue in general with contributing to a cultural institution that accomplishes a public good, and so that contribution is made. And let us assume that there is absolutely—I’m making it easy—assume the study commissioned by a Big Four accounting firm by the corporation is that this $50 million contribution to the Metropolitan Museum of Art will produce no benefit, no direct economic benefit to the corporation. Is that act praiseworthy under your standards or not? Where it’s clearly money that is deprived from profit-making activity to—and I’m telling you, I’m stipulating to make it easy—to a activity which produces no benefit to the corporation whatever, but pays attention to a stakeholder, in this case a museum, and let’s say the corporation is headquartered in New York, so it’s a museum in its hometown.
Ed Freeman: Well, if the corporation’s headquartered in New York and $50 million doesn’t produce any benefit—and there are lots of benefits that are not just economic benefits—then you’re right. As I said earlier, Friedman was worried about that kind of donation, and as I said earlier, so am I. I think it’s $50 million that could best be spent figuring out how to create more value for its customers, suppliers, employees, communities, and the shareholders.
ESG and the Business Roundtable [38:07]
Bob Zadek: And so what I’ve done is—what I’ve just accomplished is—I’ve found a way for you to hug—you and I to hug, sing Kumbaya, and say, “Man, do we agree.” Because we agree that if something does not produce any economic benefit to the corporation but is otherwise—
Ed Freeman: I said no benefits. I’m not reducing all benefits to economic benefits to shareholders. That’s your reduction, not mine.
Bob Zadek: And I say if the benefit does not find its way to economic benefit ultimately—it may not directly—but if it does not produce any economic benefit to the corporation, the manager should be in prison. Because his job is to maximize value, and one of the tools of maximizing value is maybe to be a good citizen and to get publicity and more people will buy the product because they feel good about buying the product because this corporation, Whole Foods, John Mackey, who has really promoted Whole Foods as an enterprise which pays attention to all of its stakeholders. I think Whole Foods is probably one of the poster children, isn’t it, Ed, for a way of corporate governance that you embrace? So I picked John Mackey not by random, but because I think he embodies what you have in mind. Is that a fair assumption?
Ed Freeman: I think that’s right. John sometimes self-identifies as a libertarian. Look, as do I, except that it’s hard to know in today’s world what a libertarian is because there are too many nut jobs on both the left and the right. I’m always going to say that, there’s no question about that. So it’s just hard to know. You know, I think what I would say—I wouldn’t speak for John—what I would say is that one of the most important principles here is that you need to be responsible for the effects of your action. Look, I grew up poor on a dirt farm in Georgia, and we knew that you had to deal with those groups and individuals that you could affect or that could affect you. That’s just Life 101. And it seems to me the incredible freedoms that we have come also with the responsibility to be sure, you know, you’re responsible for what you sow in the world. Responsibility’s complicated, but it’s those twin ideas of freedom and responsibility, I think, that are absolutely critical to a good society. Oftentimes the people who want to talk about responsibility forget about freedom, and the people who want to talk about freedom forget about responsibility. I see those things as going together, and they really have been the foundation—I’ve been writing about this not since 2010, but since 1977 when I wrote one of the first papers on this—and I’ve always thought that freedom and responsibility go together as a sort of hallmark of principles. There are lots of ways to spell that out—in liberal ways and conservative ways and libertarian ways—but both of those things have to go together, I think.
Bob Zadek: Taking your approach that you explain so clearly in your book, The Power of And, that of course is part of a much bigger, perhaps I’ll use the expression, movement. In preparing for the show, I came across something which I wasn’t aware of—you probably are—something called the United Nations Principles of Responsible Investing, which seems to be, in its UN collectivist way, a lot of the approaches and investment orientation that you advocate in your book. Are you familiar with that phrase, and is that similar to what you recommend in your book at the UN level?
Ed Freeman: Well, the Principle of Responsible Investment—I mean, you can tar it with the sort of whatever you think of the UN. That’s fine. That’s not really a very—I mean, that’s just appeal to authority somehow. My take on that is if you look at Wall Street, there are now roughly $10 trillion worth of investment in what’s called ESG—environment, society, and governance. One of the ways of doing that is the Principle for Responsible Investment. But every investment bank I know is trying to figure out how to sort this out. Now, one other reason—and here I think I’ve got some good news for you, Bob—one of the reasons for this is there’s strong evidence that companies who pay attention to again what’s called ESG—you could substitute my stakeholder thing in there if you want—they actually do better. By “do better,” I mean in the narrow sense: they make more money. And so, you know, again, I don’t have an ideological horse in this. I’m just interested in how business works. And I think business works better when you actually pay attention to customers, suppliers, employees, communities, and the people with the money, and how those things go together. It’s not one way to do it for every business.
Bob Zadek: What caught my attention in learning about, for me for the first time, the United Nations Principles of Responsible Investing was a statement as part of those principles that says as institutional investors, we—which is society—have a duty to act in the best long-term interest of our beneficiaries. I focused on “duty.” I don’t use the word “duty” so lightly. Duty—this Principle of Responsible Investing, which includes managing shareholder wealth as you’re in a corporation—what can you tell us about the source of the duty? Is it something that you would hope managers do have because they’re good people with a strong moral compass, or is the duty—a word that I don’t use that I use very cautiously—is the duty somehow more direct, and what is that duty and to whom is it owed?
Ed Freeman: Well, I thought—again, I don’t know these principles like the back of my hand. If it says “duty to beneficiary,” I assume the beneficiary is who’s the beneficiary of the investment in institutional investors—that’s whoever holds the paper is my understanding.
Bob Zadek: Well, the UN says that the duty is to environmental, social—ESG, in effect, as you had explained earlier. The duty is to—for a corporation, it owes a direct duty to manage the environment and society, or to use their dollars paying attention to harm to or benefit to society. And this kind of reminds me, Ed, and maybe you can speak to this, there was, as I recall, about 18 months ago, the Business Roundtable, which is the membership association of the largest businesses in America, they all signed off on again a statement of policy which is exactly what you advocate. So—and that scared the heck out of me when I read about it. I feared the mission creep in the extreme, so it became—it would become, I feared, and I often go to extremes, I feared that this would make it impossible to invest because if I would invest and entrust my investment dollars to a profit-making business, they’d be using my money which I gave them for a very specific purpose—increase wealth—they’d be using it for their own version of the public good, but it might not be my version. And I feared that the market would become grossly inefficient. Put my mind at rest. That would be a massive service to me and to my listeners.
Ed Freeman: Well, first of all, Bob, there’s a Wall Street rule: you don’t like what a company’s doing, you sell the stock. Second of all, I would remind you that you didn’t actually give your money to a company unless it was in an IPO. What you did was you bought some stock that somebody else wanted to sell, and you exchanged pieces of paper. And what you have the right to is the right to sell that piece of paper to somebody else. And so that story that you’ve told now several times, you know, it’s a nice story, but to me, it’s not actually how it works. Now, I’ll try to put your mind at ease by saying if companies really follow what the Roundtable said it was going to do—and there is a group called Just Capital that’s sort of holding their feet to the fire, you know, trying to see are they really doing this stuff. They’re doing that with respect to—you can go to Just Capital’s website and see what those 180 companies are doing with respect to racial inequality or with respect to COVID even. I would put your mind at ease by saying the more these companies try to pay attention to their stakeholders, the better they’re going to do. All the evidence is pointing in that direction. And it’s not that Friedman was wrong; it was just that the world’s more complicated. We don’t know everything. The world’s more global. There’s a lot more uncertainty. And so we have to drop back from trying to maximize shareholder value and try to look at the factors that lead to that. How you deal with customers, how you deal with suppliers and employees and communities result in shareholder value. So you have to see shareholder value as a result of how you manage those stakeholder relationships. So the Roundtable’s embracing of that is a really good thing, and your money’s going to be safer.
Bob Zadek: Well, I am so relieved when we end the show by your saying it—and the magic words are “result in increase in shareholder value.” I now can do another email to my broker saying, “Cancel all those sells,” because Ed tells me things are going to be okay. So Ed, I like to end my shows on a high note, and you have inadvertently but beautifully ended on a high note. I don’t have to short everything in sight. So this is Bob Zadek thanking Ed Freeman for spending an hour with us this morning and for writing his book, The Power of And. He wrote it with Kirsten Martin and Bidhan Parmar. It is a wonderful read, as you can tell from this show. It really—it forces you to think about business in a way that perhaps you have not done so before. So Ed, you have performed a wonderful public service by exposing us to a point of view we otherwise would not be exposed to. So thank you so much for the book. Thanks so much for spending an hour with us this morning. And thank you to my friends out there for sharing an hour of your time this Sunday morning. Bob Zadek saying so long for now. I’ll be back again next Sunday. Thanks so much, and go somebody or other in the Super Bowl, whoever you’re rooting for.