A False Dichotomy

In a famous New York Times essay titled “The Social Responsibility of a Business Is to Increase Its Profits,” economist Milton Friedman asserted in 1970 that a company’s only real responsibility was to its shareholders. But that perspective separates human actors into two categories: means and ends. In this way of thinking, the well-being of shareholders is the end, and all other participants in the system are the means to that end. Such a mindset leads many companies to undervalue and underserve their employees, customers, suppliers, and other stakeholders.

Conscious businesses recognize that all stakeholders are means as well as ends. Each stakeholder contributes to overall value creation, and each needs to flourish for the business to achieve its purpose and its potential. Shareholders are important too, of course, but by reframing or zooming out to see that they are part of a greater whole, we can create more value for all.

As described earlier in the book, Ed Freeman frames the stakeholder approach thus: “Every business creates, and sometimes destroys, value for customers, suppliers, employees, communities and financiers. The idea that business is about maximizing profits for shareholders is outdated and doesn’t work very well, as the recent global financial crisis has taught us. The 21st Century is one of ‘Managing for Stakeholders.’ The task of executives is to create as much value as possible for stakeholders without resorting to trade-offs. Great companies endure because they manage to get stakeholder interests aligned in the same direction.”¹

Executives do not merely serve the interest of shareholders; they have a direct impact on the well-being of other stakeholders. Business leaders are accountable to shareholders for returns, but are also accountable to employees, customers, and other stakeholders for different actions and results.² A shareholder-centric business consistently resolves most trade-offs in favor of shareholders, viewing them as the ultimate stakeholders. A stakeholder-oriented business keeps searching for creative options until it finds a way to simultaneously benefit both stakeholders and shareholders. POSCO, a highly admired South Korean steelmaker, has inscribed above the entrance to its steelworks in Pohang a message that summarizes this approach: “Resources are limited. Creativity is unlimited.”

Stakeholder orientation is typically one of the hardest diagnostics to score well on. Unless you have already introduced the concept and begun to bring it to life in the organization, you’ll probably not score well here. You may have discovered in your organization some areas where you do this integration well, but others that need work.