Freeman: Business Is About Creating Value Together

June 10, 2010 — A new book by Ed Freeman, a professor in the University of Virginia's Darden School of Business, contends that business is at core a form of social cooperation.

"Business is about people working together to create value that no one of us could create on our own," Freeman said. "Too often, the dominant stories about business tend to over-emphasize competition and profit-making, forgetting that these are secondary characteristics that arise when people are creating value within a free society." 

"Stakeholder Theory: The State of the Art"  was co-authored by Darden professor Andrew Wicks and lecturer Bidhan Parmar, along with Jeffrey Harrison and Simone de Colle.

According to Freeman, we need to tell a new story about business that puts value creation – creating value for stakeholders – at the center. "When people forget that value creation is the core purpose of business, this leads to the mistaken notion that we can somehow separate 'business' from 'ethics' or 'society.'"

Freeman's book assesses the value of 'stakeholder theory' research, which argues that every business has stakeholders – groups and individuals who can affect or are affected by business. Stakeholders are customers, suppliers, communities, employees and shareholders, and the key to the success and sustainability for any business is to create value for all of these stakeholders. 

The book pushes both managers and academics to think more deeply about why businesses exist and in whose interest they should be run. "We argue for an understanding of business and capitalism that puts creating value for all stakeholders in the center," Freeman said.

A stakeholder approach acknowledges the intertwined nature of economic, political, social and ethical issues. Centered in the practice of management, it provides the manager with a pragmatic framework for action.

Using the example of British Airways' ongoing cabin crew strike, Freeman said the company does not need to do more charitable works in society. "It needs to figure out how to manage its business so that it creates value with its employees in a cooperative manner," he said.

Likewise, he maintained that the best way for Lehman Brothers to have created more social value was to determine how to serve its customers and its employees in a responsible way.

Freeman said that the stakeholder approach is the best hope for capitalism because it asserts that companies and individuals need to be responsible to those groups and individuals that they can affect or be affected by. "Such a principle of responsible action is the hallmark of a free society. It makes individual and corporate freedom possible," he said. "We need to be the generation that changes our idea of capitalism to something I call 'responsible capitalism'."

"Business needs to be responsible to its stakeholders – which is very different from corporate social responsibility. Individuals need to be responsible for the effects of their actions on others. And governments need to be responsible in encouraging value creation in the manner of responsible capitalism. I am incredibly optimistic that we are in the middle of a conceptual revolution, based on the stakeholder idea, which will greatly improve our impressions about capitalism and business."

"Stakeholder Theory: The State of the Art" is the first book to chronicle the complete history of the stakeholder revolution – mapping how the landscape of business has changed and providing insight into what lies ahead.