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  • Writer's pictureTimothy Henry

Rewind: It’s the stakeholders- stupid!

On this Conscious Capitalists Podcast Rewind we are bringing you a much loved conversation: Listen to the father of stakeholder theory, R. Edward Freeman, discuss why he wrote about this 20 years ago and why it is now more important than ever! Optimising stakeholder relationships is just a better way of doing business. Hear the story from someone who had led this field from the start. (Originally released on November 3, 2020)



Freeman, E. (2020). The Power of And: Responsible Business without Tradeoffs. Columbia Business School Publishing.

"Fishing with Dynamite" documentary on imdb.

Mackey, J., Sisodia, R. (2014). Conscious Capitalism: Liberating the Heroic Spirit of Business. Harvard Business Review Press.

Sisodia, R., Henry, T., Eckschmidt, T. (2018). Conscious Capitalism Field Guide. Harvard Business Review Press.


Episode Transcript:

Timothy: Hello everybody, and welcome to episode 13 to the Conscious Capitalists with myself, Timothy Henry, and my partner in arms and for making the world a better place for business, Raj Sisodia. Hi, Raj.

Raj: Hi Timothy, good to be with you again, and I can’t believe it’s 13th episode already, the lucky 13th.

Timothy: I know. We were trying to wonder should we rename it 14 and skip 13 like some of the elevators do. I don’t know. Well, beyond those dilemmas, today we have a special guest with us, Ed Freeman. We’ll do a more formal introduction in a moment. But, Ed, asides being known as the father of stakeholder theory is also the author of a new book called The Power of And: Responsible Business without Tradeoffs, and that’ll be the core of what we talk about today. So, Raj, maybe start with an introduction of an old friend of ours.

Raj: Yes, this really is a pleasure to have you on, Ed. You’ve been an intellectual and a personal hero for many of us in the Conscious Capitalism movement for a very long time. And I’m going to ask you to share a little bit of your journey with us shortly. But currently, Ed is the Elis and Signe Olsson Professor of Business Administration as well as a University Professor of the Darden School, University of Virginia. Now that’s, for those of you who are not familiar with academia, that is about the top rung. There’s no place, beyond that is heaven, I think. University professor, so I mean he is just one of the most respected and eminent scholars in any discipline in the world, and he has also been a professor of religious ethics at the University of Virginia among many other things.

He has numerous visiting appointments. He’s got numerous honorary doctorates and considered widely the father of stakeholder management as an approach. And that really was dating back to the 70’s when he started writing about the subject at a time when the shareholder dogma was taking root when Milton Friedman, and then you had, of course, Jensen, and Meckling, and others were really formulating all the theories. Around that, Ed was a voice of reason in the wilderness talking about stakeholders, and his groundbreaking book was Strategic Management: A Stakeholder Approach, which was published in 1984.

My introduction to Ed really happened in the early 2000’s when I was working on Firms of Endearment, and my coauthor, David Wolfe kept referring to Ed’s work, and then I started reading into it, and I said, wow, this is what we are talking about. So, and then we, of course, got to meet Ed, and he came to our first Conscious Capitalism conference, so it’s just been a delight. And for those who don’t know Ed at a human level, in addition to being a world-class scholar, and author, and speaker, he is also a gourmet chef. He’s a black belt martial artist. And he’s a highly accomplished musician who has written dozens, if not 100 or more songs in two different genres, and recorded music. He’s got a studio in his home in Charlottesville where we have enjoyed many lovely evenings. So, welcome, Ed, to this podcast, and we really look forward to our chat today.

Ed: Thanks, Raj. And thanks, Timothy. It’s really good to be here with the two of you.

Raj: Yeah. So, if you could start and just tell us about your journey. It’s quite fascinating how we end up where we are, and how you ended up in the world of business schools.

Ed: Well, it was mostly luck, and being at the right place, at the right time. There was no plan. I mean I was getting a Ph.D. in philosophy, and there were, as usual, no jobs in philosophy. And one of the people in my committee says, “What are you going to do next year?” And I said, “I don’t know.” I was maybe 22, maybe 23. I don’t remember quite. And he said, “We used to do postdoc.” And I said, “Postdoc, great.” I knew that paid. I had grown up pretty poor in rural Georgia. And I said, “Where?” And he said, “Well, Wharton, and because you’re interested in this decision-making stuff.” And I had never heard of Wharton. I didn’t know what it was or where it was, and so I said, “Well, what’s Wharton?” And he said, “It’s a business school.” And I went, “Oh. Is it a good one?” And he said, “Well, it’s one of the best.” And I said, “Well, where is it?” And he said, “University of Pennsylvania, Philadelphia.” And I said, “Well, I might be interested because my girlfriend was going to Penn in city planning.”

And so, I took off to Philadelphia, get interviewed for this postdoc position at Wharton, get the position. And I have absolutely no idea what I’m doing, no idea. The girlfriend thing worked out. Maureen and I have been married for 43 years, and so that part of it worked out just well. And I was trying to figure out what is this business thing. Well, even as a kind of poor kid from rural Georgia, we knew you had to deal with the people who affect you, and that you could affect, that seemed to me to be life 101. And in the air, at Wharton, at the time, that this research center run by Russell Ackoff, and Jim Emshoff, and others, the stakeholder idea was there.

It was an idea that Ackhoff had probably written more about than anybody else. And I just tried to say, “Well, what would business be like if we took this idea seriously. And it seemed like complete common sense to me.” So I wrote that book basically in the summer of ’82. And I had no idea anybody would find this interesting. I didn’t think the stakeholder idea was the most interesting idea in the book. I didn’t think anybody would find that anything but completely banal and common sense, certainly not revolutionary, certainly not, and for the most part, no one did because kind of no one read it. This old book has something like 40,000 citations now, and which is a lot for an academic. And people said, “So, what’s it like to have written a business bestseller?” And I tell them, “I don’t really know because they only printed 2,000 copies of the book, and we gave most of them away.”

So, I was just kind of in the right place at the right time. I get way too much credit as you’ve already illustrated. Lots of people like Russel Ackhoff and Ian Mitroff, and my colleague, Jim Imhoff, and lots of other people worked on this idea. They were really the pioneers, etc. I just wrote a book that tried to put a bunch of stuff together as to how you’d run a company if you took this seriously. And about, what did I know about running a company? Not much. So, right place, right time, very lucky.

Timothy: And what caught your attention after that because over the years, you’ve been looked to as the icon in this area. And at what point did it start to become something for you?

Ed: Well, it was something, in part, because in 1977 I started working, and my research group started working with the Telecomm Industry. I know Raj has a history there as well with the Bell Companies. And they had stakeholder problems up the wazoo. They were trying to do rate cases. They were so inefficient that state utilities commission were making them do the efficiencies that they needed without giving them the rate relief. We had put together a seminar for them that brought real life stakeholders in to train their executives to think about that. So for five years, I basically was a consultant to other companies as well, but mostly to companies in telecom, helping them figure out how to deal with stakeholders.

So, I knew this was important. But, like I said, earlier, I’ve been pretty much a one-trick pony. I mean I’ve kind of written the same thing lots of different times and lots of different ways, and lots of different connections. But I still think it’s an incredibly common-sense idea, and it’s hard to see how you could think about it differently. I mean, look, even if all you care about is shareholder value, that’s all you care about, how are you going to do it? You’re going to have great products and services customers want to buy, suppliers want to make you better, employees who are engaged, communities who want you there. If you do all that, and you get kind of lucky, you might make money. So, the world’s come around in the last 43 years, so that lots of people think this is an interesting idea. Now, in 1977, there weren’t that many people who thought this was interesting.

Timothy: Well, what strikes you now about where, there’s now stakeholder capitalism. It’s not just stakeholder practice or theory. It’s, now, stakeholder capitalism. What strikes you about this moment in time that people are, now, sort of, you started with us in Conscious Capitalism, now you got your own kind of capitalism, stakeholder capitalism.

Ed: Well, I don’t think the label matters so much here. We were at a meeting, Raj, I think you were there. I know Kip Tindle was there and Jeff Cherry at the White House that Tom Perez ran about what’s the right brand for this stuff, and all the people who were the thought leaders in this stuff like Raj and Kip and others. They were all there, people from Just Capital, people from Inclusive Capitalism, people who are impact investors, and ESG investors, and there are 40 of these things. And I started to think, look, it doesn’t matter what the final brand is. What matters is that there are four or five critical ideas, that whatever the revision of what we call capitalism, and I just call it business, whatever that revision is, it needs to deal with these four or five ideas like purpose and profits, stakeholders and shareholders, business as a societal institution as well as a market institution.

People as fully human, as well as economic, and putting ethics in business together, and so I’m a big fan of Conscious Capitalism. I’m a big fan of Inclusive Capitalism. Jake Holmes, Imperative 21, Just Capital, Impact Investing, I’m a fan of all those things, and I think it will have impact if we don’t get into the "my version of doing this is better than your version of doing this".

Timothy: Yeah. Absolutely

Ed: Some of that is inevitable, but I like to think of this as a big tent. If you want to call it Conscious Capitalism, great. If you want to call it stakeholder capitalism, great. You want to call it something else, I don’t really care. It is interesting to know that the so-called father of capitalism, Adam Smith, never used the word. Where did we get the word capitalism? Well, it came from Marx. And that’s a lot like letting the enemy name your favorite football team.

Timothy: The Washington Football Team equivalent

Ed: Well, that’s what it’s going to turn out to be. So, I like to think about capitalism has a lot of baggage to it, and you can spend endless arguments trying to sort out what it really is. I’m really interested in how business works. And I think it works best when there’s, in a free society, where there’s property rights and voluntary exchange, and people take responsibility for what they do. Adam Smith thought the same thing.

Timothy: I love that, and in your new book, The Power of And, you go into great detail on those five. You’ve got a chapter on each one. You set it up and you frame it really well, and then each one has a chapter where you go into a little more detail with examples and explaining it in more depth. And as you think about those five, and I know this is difficult because sometimes we all have children, which is your favorite child, but if you were going to advise somebody who’s beginning on this journey, of the five different areas that you spoke about about purpose, about stakeholders, about business and society, about the humanness of people, and business, and then the fifth about the ethics and values that are important. Where do you sort of begin that discussion with someone who’s coming to you and say, Ed, help me. Where do I start?

Ed: Well, I mean I don’t there’s one magical place. I mean the fool’s errand that most academics make is to find the one and only one way of doing things for all businesses at all times in all situations under any circumstances. Business is what we philosophers would call a family resemblance idea. We kind of know what they are, but we couldn’t define something that’s conscious of all of them, that’s true of all of them. So, business has an incredible amount of variation. A lot of companies, if they’ve lost their sense of purpose, they’ll start with that, a lot of entrepreneurs have a sense of purpose, but they labor under this whole story that it’s all about the money. So, in that case, you’d probably start with the, if it’s a small business as well, you’d start with getting them to understand who their stakeholders are, and how those stakeholders are interdependent, and how you can escape this idea that economists just love that there’s always a tradeoff. And so, it really depends.

I tend to favor, because there’s so many misconceptions about purpose. People think they have it if they can write it down. But, purpose lives in the systems in the processes. It doesn’t live on the mouse pads, and the cross-stitch statement on the wall. And you really have to take apart, especially if you’re a big company. You have to take apart those systems and processes that were probably aimed at making as much money as you possibly can. And again, look at the effects of those processes, etc., on what you’re trying to do with stakeholders.

The other place to start is sort of within those, by trying to get people to understand that you have relationships with stakeholders. It’s not a set of transactions, and many companies still see, well, there’s this transaction and then tomorrow they’ll be another one, and the next day there’ll be another one, and seeing the world in transactional terms is very different than seeing it in relational terms. The example I love is if I were to go next door now where my wife, Maureen, is working, and I said, “You know, baby, I’ve been thinking about these last 43 years and I think you’re up 3. I think you owe me 3.” I’m pretty sure I know what the outcome of that would be, and it wouldn’t be pretty. She’s a second-degree black belt in Tae Kwon Do, and that wouldn’t be good for me.

But, in relationships, there’s a presumption it’s going to continue, and you don’t keep score. Sometimes you have to step back and say, wait a minute, this isn’t working. We need to renegotiate the terms, or in the relationship, of course, that happens. But you don’t keep score every day. And if you have to keep score every day, that’s not really a very good relationship. We know this in our personal lives. It seems eminently true in business as well.

Timothy: I love that, Ed. And what I like about that is that relational element brings up an interesting angle as well which is at the core of many relationships is trust, including our personal relationships.

Timothy: In particular, our business relationships, I trust that you’re going to watch out for my interest. I trust that if I compromise today, you’ll compromise tomorrow, and at some point, this will feel equal and/or at least balanced in some kind of way. And I’m curious, that idea of trust and relationships, how do you think that applies to this idea?

Ed: Well, look, it’s complicated. As a society, we have not much trust in business. Now if you ask people, as an institution, yet if you ask people do you trust the businesses that you know very well, that you do business with, trust is higher. And so, it’s a curious thing that we have this idea of business as this sort of drunk uncle relative that pretty much immoral most of the time that we talk about in kind of hush tones. And we wish we didn’t have to, teaching business ethics, which I do, must be a short course, oxymoron, contradiction. I didn’t know business had any theoretical subject. I’ve heard most of them. So, there’s low trust in business, low trust in big business, higher trust in smaller business, but it’s really a one at a time, one stakeholder at a time idea.

My take on the companies that Raj and his co-authors talked about in Firms of Endearment is these were companies that built trust with pretty much every interaction with their stakeholders. I’ll never forget Jim Burk, who was the CEO of Johnson & Johnson, when the Extra-Strength Tylenol poisoning happened and eight people were killed through no fault of Johnson & Johnson, Burk took Tylenol off the market, $500 million off the bottom line. And when he was able to reintroduce it, he talked about he got a lot of credit, but the real heroes here were the everyday people at J&J who built trust with customers, and suppliers, and others every day in what they did. And I think that’s something that you don’t hear much about from people who argue that we need to pay more attention to shareholders.

Raj: So, Ed, this idea of shareholder value maximization, which I think is, I say it’s probably one of the most harmful and dangerous ideas, damaging ideas that we’ve ever had because it is hurt pretty much everybody. It has hurt employees, definitely, if you look at worker pay, we’ll, they’re just a cost to be minimized. I think it has hurt customers because we are trying to maximize sales and do whatever we need to do to convert them into customers and keep them as customers. It has hurt the environment. It has hurt communities, which have been abandoned in the pursuit of higher shareholder values. So, it’s hurt everybody including shareholders, so there’s lots of data at the aggregate level that since the 1970’s overall performance has actually gone down.

And I think it has been the single factor, biggest factor in damaging capitalism itself because that language doesn’t inspire anybody, that language actually puts you in the category of somebody who’s greedy and exploitative, and so forth, so I think, and I do remember distinctly a few years ago, we were at Fordham University at some conference, and Michael Jensen was there. And you and he both spoke back to back, and he basically stood up and apologized for his life’s work. He said agency theory has done more harm, the idea that managers should act as agents on behalf of shareholders, that idea has done more harm than any other idea that we’ve come up with. So, I think this whole debate, we can frame it as this is proactively good for all of our stakeholders, of course, but on the other side, that other idea, has been so harmful, and has hurt everybody connected with business.

Ed: Well, I think that’s mostly right, Raj. I don’t think it’s hurt everybody because there’s some companies that haven’t managed to pull off maximizing shareholder value and tradeoffs. But, for the most part, I think you’re right. I’ve become friends with Mike Jensen over the years. And of course, he has devoted the rest of his to thinking about integrity. Now, he has a particular stylized way to think about that, but he, I think what he would say now is that if you do agency theory without a sense of integrity, you’re going to do harm. He’s also written about the importance of listening to stakeholders and people who want to talk about that. My colleague, Bobby Parmar has done a film with documentarian, Paul Wagner. You know. You’re in the film. And they spent a long time with Michael Jensen, and he says, like at that Fordham conference, he says, “Look, people make mistakes. Bill and I did.” And that’s a fairly resounding admission from, he says that stop thinking that you got to maximize the stock price.

Well, the problem, after the global financial crisis, many finance professors said, well, wait. Wait. Wait. We didn’t mean maximize short-term share price. We meant maximize long-term shareholder value. And my response to that is, “Wait a minute. I’m not a positivist. I don’t believe in this idea that the empirical analysis of the world is always real.” I said, “But, most of you are.” And the only thing that’s observable is short-term shareholder price. I mean the problem here, actually, is this distinction between short-term and long-term. There are so many years, and I know you two have heard the same thing, people have said, Ed, the stakeholder stuff makes sense in the long-term, doesn’t make sense in the short-term. But, Ed, this ethic stuff makes sense in the long-term, not in the short-term. Well, now, wait a minute, let’s apply some logic here. Short-term doesn’t make sense. Long-term, it does. Well, the long-term moves. The long-term moves. It never gets to the long-term because, of course, we live life in the short-term. Life exists in the short-term, in the now. And so, we often use the short-term, long-term distinction as a way of really saying I don’t think this stuff works.

What I want people to do is figure out how to create value for stakeholders now, and then keep it up. I mean that’s what you have to do. I mean it might take some time to figure it out the right way, but you’re trying to figure out how to do this in the short-term. I think it’s because I’m just older that I just trust this distinction. What do you want to be in 10 years? My answer to that is very simple – alive and breathing. So, I’m really distrustful of this idea of long-term value because it’s hard to make sense of what that really is.

Timothy: Well, that’s a really important distinction that you’re making there, Ed. And I agree with you on one level and on another level I’m curious. And the curious part of me is coming at this from the point of view of let’s say today you’re an organization that does have a short-term focus. And you are focused on that short-term shareholder maximization.

Ed: Well, but hang on. It’s not that you’re focused on the short‑term that’s the problem. It’s that you’re focused on the wrong thing in the short-term, and that’s a thing most people don’t get. Look, you could be as short-term as you wanted. I love all my kids, and I try to show them today. I try to focus on the right things in the short-term. And when you focus on the wrong things in the short-term, which many businesses have done, then it’s going to be hard to change.

Timothy: Yeah. Yeah. And so, pull that out a little bit more. I mean, so you’re an organization, and you have been on the wrong side of that ledger. You’ve been on the share price focus in the short-term. It’s not like you press a switch, and you suddenly are on the other side of like I’ve got this brand new set of metrics that we’re going to put out, and we’re going to suddenly be more focused on stakeholders and de facto change our perspective on what this business is about. So, I’m curious, where do businesses start that journey from the, okay, I don’t want to be short-term focused anymore. But, I’m a CEO, and oh by the way, I’m only in this role for three or four years.

Ed: Well, again, that’s why I would say you do want to be short-term focused. You just want to focus on the right things in the short-term. So, rather than focusing on stock price, you might focus on what leads to higher stock prices that’s sustainable. Look, the way to have a great long-term is have a great short‑term and keep it up, right. That’s it. So, ultimately, that’s why I think the short-term, long-term distinction is not very useful here. I think we misuse it, especially when we say, okay, well, let’s switch to a long-term orientation. A lot of people see that as an excuse for inefficiency.

Timothy: Yeah. Yeah. I get that. And I guess, in a part, comes to the board. So, I want to go to the board level now, and sort of say you do make a great case in your book about the history of what’s happened over the last 40 years and where boards have gone. And that frankly, from a legal point of view, they don’t have to focus on the shareholder in that financial fiduciary responsibility. In fact, Leo Stern, who’s just stepped down from being the Chief Justice of Delaware Court, himself have written a number of articles in the Harvard Law Review series that they’ve put out on this that he thinks that’s a dumb idea and they don’t have to do that. They really do need to be focused on a different set of things. And yet, we’ve got that thinking. How do we change it? And why did we get into that place where that became the excuse the boards used for not doing anything?

Ed: Yeah. I don’t really know how we got into that. It’s a long history back to Burley and Dodd in the 20’s and 30’s. Milton Friedman wrote this famous paper that’s now the 50th anniversary of this month that the only obligation is to maximize profits for shareholders. Lynn Stout, the late Lynn Stout, law professor at Cornell, I think, kind of undid that logic, in which he said, look, that’s not the law. And she goes through it case by case. The cases used to look at that, Revlon in the 80’s, Ford v. Dodge back a long time ago. That’s not what those cases are about, and they don’t have any precedent here. And directors take things like the Revlon duties, which is if you’re company’s up for sale and going through a change of control from public to private, that’s what the Revlon case is, you have to give it to the highest bidder. But, those are very rare cases where that’s there.

I think it’s just, it’s the weight that we give to, it’s the old story, it’s the idea that business is about the money. And that’s what’s doing the damage here. It’s doing damage to directors. Directors have a duty of care to take care of the interest of the corporation, and to manage the affairs of the corporation, and the corporation is usually defined in a charter whose field of activities, in most charters, it says to be engaged in any legal business. And courts have held again and again and again that taking stakeholder interest into account is okay. There’s some states in which you have to do that. There’s some jurisdictions in the world in which the companies act in the U.K. is one, and another similar thing in Denmark, and across joint governance in Germany, etc. There are lots of ways to do this to take stakeholder interest into account at the board level.

Ultimately, what the board does matters. But what matters more is how people in the company actually manage the relationships that you’re enmeshed in. And the board’s job is not to screw that up. I just did a short essay, which I hope is coming out on directors and boards on why Friedman’s not appropriate anymore. Look, the world’s just too complicated. And it’s impossible to deny today the effects of a business on a community as Raj said, or the effects of a business on its employees, or its suppliers, or its other stakeholders, including the shareholders. And so, because that technology makes the news cycle 24/7, 365, because there’s nowhere to hide, your effects on the rest of the stakeholders and your business is absolutely, you’re in a fishbowl. It’s absolutely there in public view. So, stakeholder capitalism, if you like Bell’s phrase, or Conscious Capitalism is the result. We’re racing towards trying to do that, complete with the mistakes that we’ll make, etc.

Timothy: Well, I’m fascinated by your mentioning of the company act over in the U.K. So, I’m based in London these days. And I’m part of a not-for-profit sort of think tank called Regenerate. And our purpose is to make the U.K. the best place in the world for purpose-driven businesses. And it’s been fascinating because part of our preliminary research that the think tank part has been doing has said that despite the company act, there’s very few companies that are actually behaving that way. So, the option is there from a legal point of view. And yet, they’re not stepping into actually doing that.

Ed: Okay. So, the other thing I would say about that is you’ve got to be careful because we’re in the grip of the old story. We’re in the grip of the old story in which we want to see what goes on. I mean, look, we engage in this kind of thinking that we call in the book saints and sinners thinking. Most businesses are sinners. They’re really kind of morally questionable. They only care about the money. There are a few saints. And when these saints lift their head up, and then they do something wrong, or they say something controversial, like some of our well-known friends in Conscious Capitalism often do, then they become sinners. People go, oh, they’re really just in it for the money. I don’t know any saints, sorry. I just don’t. And I don’t know many people who are complete sinners all the time aside from some politicians, and that’s a non-partisan statement from me, but we got to stop this. And people who do what we do, teach in business schools and teach about this stuff, are the worst at it. We find our favorite companies. We canonize them, and we find our favorite sort of wiping boys. And we beat up on them. Oscar Wilde said it better, every saint's got a past, every sinner's got a future. We need to see business in completely human terms.

If I were to say to you, Timothy, Raj, I know this company, and they have a real ethics issue. Now, you might be exceptions, but I’ll bet absolutely no one listening to the podcast thinks, oh, they’ve invented something really cool that makes our lives better. Generally, we see ethics as something bad has happened, or somebody’s been harmed. But, if business is going to get credit for the bad stuff, and it deserves that, it ought to get credit for the good stuff as well. Saints and sinners thinking kind of prevents that sort of common-sense view.

This is how we raise our children. We don’t raise our children to be saints or sinners. If we raise them to be saints, we’re going to be incredibly disappointed. And if we raise them to be sinners, well, we’re a little messed up. So, applying some good old-fashioned common-sense humanity, I think matters here.

Raj: I think the phrase I like is bad ideas are much more powerful than bad people. And we have been enthralled to a lot of bad ideas I think in business and capitalism, and in society, generally. And I think all of us are engaged in this quest to bring about better ideas, and you call it a new story for business. I think that is really the framing. What about the language, Ed, that I’ve seen, for example, HEB, the biggest grocery chain in Texas, a really wonderful company started by the grandmother of the current CEO. And their mantra is the CEO tells all the people. We need to pay our people as much as possible, speaking about employees, right. And they actually have far better wages and benefits than Walmart, even though their prices are lower than Walmart, right. So, this language of doing as much as possible for each of our stakeholders without getting into the maximization because maximization now means you’re going to tradeoff others, right.

Ed: You can only maximize one at a time. You can’t …

Raj: Right.

Ed: … maximize over five.

Raj: Right. So, we say we’re going to do as much as possible for our employees, as much as possible for our customers, right. And break those tradeoffs, and then look for those synergies wherever we can find them.

Ed: Yeah. I would rewrite the Milton Friedman piece which I offered to do, but The Times didn’t manage to want that. And that’s a little tricky because I think people on the left need business as a whipping boy. And people on the right need business to stay seen as immoral, as questionable, and about the money. And so, I think both sides of the political debate are at fault here. My rewrite of Friedman is as follows; the only responsibility of the executive is to create as much value for stakeholders as possible without resorting to tradeoffs.

Raj: So, everybody matters, and everybody needs to win. If anybody is losing in our stakeholder system than we’re not there, right, we haven’t found.

Ed: Well, I’ve always said I think the right way to understand bad companies, supposedly, like tobacco is, look, until you give me the pleasure of smoking without the health risk, you have a lousy product because lousy products are what kills people, and so fix your lousy product.

Timothy: I’m going to go out on a limb here because Phillip Morris, bad boy that it has been seen in the press has state that their purpose is to lead to a tobacco-free, a smoke-free world. And they’ve now invested heavily in moving exactly into that with nicotine products that don’t burn, so there’s no smoke. And the notion being that the carcinogens come from the smoke, not necessarily from nicotine.

Ed: They do.

Timothy: And they’re now at a place where 19% of their revenue last year came from these smokeless products. And they’ve been really good about saying, here’s our purpose. Here’s how we’re going to measure it. Here’s how we’re going to interact with the stakeholders around this, the health officials, the smokers, the regulators. And as much as we’ve beaten up on tobacco companies, they’re a really interesting example.

Ed: I think they deserve to be beaten up on when we did, and they, like I said, they deserve a chance to show us they mean to change. And I think they’re legitimately trying to do that.

Timothy: So, tell me a little bit about, there’s this whole push right now for ESG. And what lens do you look at, the ESG movement through given your history and background?

Ed: Well, there’s impact investing, and ESG, and that sort of stuff. And what is it, the principles for responsible investing, which say you got to pay attention to ESG, and banks have something like, the last number I saw, Raj, you might know better, $9 trillion dollars under management, that have signed these principles. Great, let a thousand flowers bloom here. It’s a little bit like. I mean it’s a little, I find a little bit ironic. A lot of the finance and accounting people, which have been very much in the grip of the shareholder value story are now, they’re the biggest cheerleaders for ESG, etc. And they act a little bit like, I mean this is part of the academic world. They act a little bit like this is their new toy. Look, people have worked on how you understand other than economic value, since at least the 1950’s. And so, what I find new here is that a bunch of people who are pretty hostile to the idea have discovered it, just like people and strategy sort of discovered the stakeholder idea sometime in the late 90’s. And there’s like, yeah, okay. Great. We’ve been talking about this for a long time.

Timothy: Yeah. Yeah. No, I think it’s really interesting. I mean ESG right now. Obviously, one of the big critiques of it is that there’s no clear set of standards, and the numbers are moving all over the place. But, I’m curious in particular because around the S one of the things that people are pushing is stakeholders, and …

Ed: Look, I don’t buy this argument that we can’t measure the stuff. And one of the reasons is, hey, we put a person on the moon and brought him back. That was a hard problem. Measuring what value, you create for a community kind of pales beside bringing somebody back from the moon, to me. Plus, there are lots of ways to measure how you’re creating value for stakeholders. Every company does it. Every company measures, Raj, you’re the marketing guy, you know this, measures how it creates value for customers. Many of them with sophisticated supply chains measure this across the supply chain. What we don’t have is one set of measurements that works for all companies at all times in all circumstances throughout the galaxy. And once again, I think that’s a fool’s errand.

What we could have, I’ve proposed this, and no one’s taken me up on it, probably thank goodness. We can have stake options. So, we figure out how to measure the value that we’re creating for customers, suppliers, employees, communities, people with money, some of those measures might be perceptual measures. By the way, that’s what stock price is, it’s a perceptual measure of the analyst and the traders. And then, you could trade, you could do some math, and then you could trade these stake options. And I’m going to sell you short. I’m going to sell your 90’s, your stake 90 short because I don’t think you’re going to meet your community satisfaction number.

Now, I know that people in Las Vegas will trade these things. My son was a professional poker player for a while. And folks there would bet on anything. And if you think about it, if this really is how you think companies ought to be run in the interest of its stakeholders, so says the business roundtable and others, stake options, right away, solve executive compensation issues. You pay people based on stake options. The other thing stake options do is it gives you feedback from an options market as to how you’re doing, and what the future looks like. And that’s extremely valuable for you because if you wait for the stock price, you wait for the stock price to get feedback, in the words of my martial arts instructor when watching me punch or kick – too late, right, it’s too late. You want this feedback as early as possible, and that’s what option markets give you, except that the current ones don’t give you very good data on things. So, I …

Timothy: But doesn’t that create, doesn’t that create the problem that, in fact, profit’s a lagging indicator. What you’re talking about is what are those leading indicators that are going to be telling us that we are creating that profit are moving in the right direction?

Ed: Yeah. Look, profits and outcome. It’s an outcome of how you deal with your other stake holders. You don’t get a penny of profits from shareholders. You get profits because of how you manage customers, suppliers, employees, and communities, via their regulation, etc., etc., reputation, etc. It’s like happiness. Happiness, if you try to maximize happiness, you’ll be one of most miserable people on the face of the earth, right, happiness is a function of who you love, of the relationships that you have. It’s a function of what you’re doing with your life. It’s not something you can just try to do and have it work. Aristotle knew this. He wrote about this. Getting straight what are things that are outcomes, and then if I want to do something about it, I do something about the things that lead to the outcomes. And again, that’s one of the reasons the stakeholder idea has always seemed imminently common sense to me.

Timothy: So, Ed, you mentioned compensation and the compensation question gets complicated pretty quick. I love in your book you pointed out the for example the CEO pay versus the median payment of an employee has gotten way out of control over the last 30 years. And a lot of that comp system has been based on an easy measure, stock price. So, where do we go, I mean you talk about the stake options, but I’m wondering if I’m on a comp committee of a board, what do we do in the short-term to: 1) either address the ethical issue of that discrepancy, and then 2) reorient the comp system, so that it’s focused on the means of production rather than the outcome.

Ed: Well, one of the first things we do is we stop listing to consultants whose job it is to run up CEO pay. There are a number of those. It’s a great gig if you can get it. But they’ve done a lot of harm. The second thing we need to do is to be sure we’re in touch with the people, somehow, who are making $7 an hour, or $12 an hour, or whatever that is that we haven’t sort of forgotten about them. One of our friends in Conscious Capitalism, you both know, Tom Gartner at the Motley Fool often says look, raise the salary of the lowest 10% in your company, you’d be amazed at how much good you will do, how much good will you’ll create, etc.

Another one of our friends in Conscious Capitalism, Kip Tindle, would say, look, we pay twice the retail average we did at the Container Store. That’s how you get great people, and so you have to think about that. If you contrast the business models of a Starbucks who would pay people to help people with their college, and until recently, that was not something that McDonald’s did. Their business model was very different, and they had to figure out how to change it because you’re having a hard time getting people to work there. And so, I think that makes a lot of sense to have the board ask the question are we paying people as well as we could. If they’re not engaged in the work, it’s not going to hurt anything to pay them more. You might get some engagement. But we know people don’t engage for the money. They engage because they believe in some cause. They believe in the purpose, etc. But, up to a certain point, and some people would argue that’s about $70,000. You’ve got to be able to take care of your family and stuff.

Timothy: So, Ed, I was also curious about COVID and these unusual times that we’re in right now where some people are arguing more than ever, we need to be focused on stakeholders, and we need to be shifting. And others are saying forget that. We just need to get back to normal. What do you think the effect is going to be of this strange period of the virus that we’re going through?

Ed: Well, I’m distrustful of people saying we’re going to get back to normal. You mean the normal world in which many people don’t have any hope, or do you mean some other normal world. Look, I, if you think about COVID, and you think about global warming, and you think about how people are unengaged in the business, and you think about inequality, and you think about the implicit and explicit racism that exists in the world, we are not going to solve those problems by refocusing on shareholder value. It’s just not going to happen. If we make progress in making the world a better place due to those challenges, it’ll because business plays a part in figuring out how to create product services and institutions that make us better. So, that’s what I’m, I’m very optimistic of that, about that. I think we’re already seeing it if you go to the Just Capital website and look at how Just Capital is tracking what companies are doing, these are established companies to deal with the COVID crisis, it’s pretty amazing. It’s not shareholder value stuff.

Raj: Well, Ed, you’re one of the most widely read and thoughtful people we know, and so, are there any books you would recommend or what’s on your mind nowadays, what are you thinking about for our listeners?

Ed: Well, I’ve been spending a lot of my time trying to promote this movie that we’re both in, Fishing with Dynamite, and the people in the movie, people like Arthur Brooks who comes from a kind of right point of view, and Bob Rice who comes from kind of a lefty point of view, agreeing about these issues. And I’ve been doing a podcast of my own called the Stakeholder Podcast with my son, Ben. And we’re trying to do a sort of his, we need to get this stakeholder thinking to a much broader audience, and we’re trying to do it, so it’s not old business school hands like me, but with two generations. He’s in his early 30’s, and we’re trying to have guests. You’ve been on one, Raj, and we’re having lots of people on for that. So, I’ve been doing that a lot trying to write two or three books as usual.

Timothy: Love it. Well, Ed, thank you so much for your generosity of time and thought today. We really appreciate it. Thank you so much.

Ed: Thanks, nice to be with both of you again.

Raj: Thank you, Ed. Thank you. Really great being with you. Thank you.

Ed: Good. Take care.

Timothy: And thank you, all, to our listeners.


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