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- [00:04]
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Stakeholders are interconnected. They're interdependent. What your strategy is or how you treat customers, or how much value you create for customers is affected and will affect the value you create for employees, for community, for suppliers. And it's the interdependence here that's the most important thing. If you can capture that interdependence, you can build a great company. If you put any of the stakeholders in the center and you say their interests are paramount, you're gonna make trade offs in favor of them versus the others. When you don't need to make trade offs, you need to use your creative imagination to find win win, wins.
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Welcome to the Work for Humans podcast. This is Dart Lindsley. For a long time I've been struggling with questions about ethics at work, and I think many of us do not ethics as rules or compliance, or even what individuals need to do, but ethics as something that shows up in the systems that we design and the outcome that those systems produce. I've spent most of my career working inside very large organizations, and I've seen how easy it is for the most well intentioned people to create systems that still do harm to the world, but also to the people who work inside them. Ed Freeman has been thinking about these questions for decades. He's best known as the originator of stakeholder theory. Many call him the father of stakeholder capitalism. It's a title he might dispute. He challenged the idea that companies exist only to serve shareholders. Instead, Ed argued that businesses are deeply embedded in the relationships around them and that understanding those relationships is essential to both strategy and and ethics. I came to Ed's work as a practitioner, not a philosopher, and his ideas helped me to name problems that I was already running into, especially around the legitimacy of corporations responsibility and what companies are actually for. In this conversation, Ed and I talk about how stakeholder theory emerged, what problems it was trying to solve, and how it connects ethics and strategy in real organizations. We spend a lot of time on employees power and dignity and why it's so hard to act ethically inside complex systems, even when people know the difference between right and wrong. This was a thoughtful and challenging conversation. It's one I've been wanting to have for a long time. As always, please subscribe if you enjoy the show. Reviews also help other people find these conversations. So without further ado, here's my conversation with Ed Freeman. Ed Freeman, welcome to Work for Humans.
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Thanks Dart. Pleasure to be here.
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B
I've known of you as sort of a rumor that I hear when I'M talking to people in the public benefit corporations world. And your work on stakeholder theory for modern companies is often referred to as the seminal work that led to that. And your work is very important to the work that we're doing on work for humans because we've been primarily focused on one stakeholder, which is the employee and more broadly, people who work for organizations and making it up. We've been making it up. I've been making it up. I've been struggling with these questions for my decades as a practitioner. You've been thinking about them deeply since the 80s. And so what I want to do is I want to start from your earlier work, look at your middle work, and understand how it relates to what we are focused on here. So it's interesting you came to your academic career, I would say, with both a philosophy perspective and having worked in business. So just to frame the very beginning, how did business and philosophy come together for you and what did you feel that philosophy could bring to the management discussion?
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I was finishing my PhD in Philosophy and I got very lucky and got a postdoc at Wharton, even though I didn't even know what Wharton was, quite honestly. So I had to learn. I was working with a group that was kind of like a consulting firm called the Wharton Applied Research Center. And I didn't know very much about business at all. I'd grown up poor on a farm in Georgia. So I had to figure out what this was. And it was very lucky, really. There was a faculty staff seminar on what is this stakeholder idea? And I sort of sat in the back and everybody said, well, we can't say anything about this because it's a question of justice. And of course, as social scientists, we can't say anything about that. And I sat there thinking, well, I can say a lot about that because that's all I've studied since I was an undergrad graduate. So I wrote some stuff about what I thought was this stakeholder idea. Same time people from the Bell system came down to us and said, we think the number one thing our officers of the future have to deal with will be how to deal with the external environment. And you guys seem to know something about that, so would you help us? So I spent essentially the next five years working with all the Bell companies and other people in telecom and a few other industries as well in the late 70s, early 80s, trying to just make sense of what businesses were doing. I was not burdened down with a lot of concepts and constructs about how business had to be I was trying to just figure this out for myself. And it seemed to me, and it still seems to me, that every business has always and will always create and sometimes destroy value for customers, suppliers, employees, communities, and people with the money. I've always thought that was complete common sense. When I wrote the book, I didn't even think the stakeholder idea was the most interesting idea in the book. I thought the idea of purpose was, but that got completely left behind by both academics and practitioners. I wrote the book for both. I didn't see it as one versus another. And so that's how I got started. What does philosophy bring to business? Philosophy is just about good reasoning and really good thinking. Let me give you an example. If I say I need red blood cells to live, it doesn't follow that the purpose of my life is to make red blood cells. Yet many business theorists say, because businesses need profits to live, and they do, that the purpose of business is to make profits. That's just bad logic. But it's bad logic that's widely accepted. And quite honestly, I, I was a little bit surprised that much of business theory was built on what I would say were philosophical mistakes. I've never thought about it in any other way. People have asked me, well, you've always taught in a business school. If you had it to do over, would you get a PhD in business? I said, absolutely not. Philosophy taught me how to think, and that's been enormously useful to me.
- [07:36]
B
You've said a couple of times that at the time you thought of yourself as a strategy guy, not an ethics guy. What's the difference?
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A
Hey, I didn't know there was such a huge difference. I didn't know that ethics was somehow separated and taboo in business. And so when I wrote, I wrote the book, I called it Strategic Management A Stakeholder Approach. I didn't know what I would later call the separation fallacy was enforced. In other words, I didn't know that business theorists separated so clearly business from ethics or facts from values are descriptive from prescriptive, because philosophers have killed those distinctions Dead and Elvis in the 1950s. They come from this view in the earlier part of the last century called positivism, where the only thing that's real, that has meaning is are sentences that can't be verified with data. Look, facts and values are always entangled. Data and theory are entangled. And many, many of the best philosophers of the last century spent their careers showing that. And it's completely unknown. Well, not completely unknown, but almost completely unknown in business schools. And it still is. I don't get as angry about it as I used to, but it's still there.
- [08:53]
B
My experience working in large companies has been swimming in the business school mental models and struggling with ethical questions. I could list 52 ethical questions that come up a week when you are working in large systems that potentially change the world and affect so many people. So when you first developed stakeholder theory in 83, 84, what was the problem that you were trying to solve? What wasn't working in how we thought about the firm?
- [09:29]
A
First of all, I didn't invent this stuff, so I want to be clear about that. It was, as near as I can tell, people first started using the idea in the 60s at Stanford Research Institute and a man named Eric Renman in Sweden. I just tried to figure out if you took the idea seriously, what would companies look like? The problem I was trying to solve was the problem that in a sense, I got from the Bellcroft companies. The world's changing. It's becoming more global. You could see that in the 80s with the mantra around Japanese management and for one of the first times, the emergence of global competition, especially from Germany and Japan in the auto industry. That's in part where it started. And it seemed to me that I may not have been able to put it quite this way in those days, but state order theory need to be developed to deal with three problems. How's value creation and trade business? How's value creation and trade possible in a world where there's very little certainty, in which there's a great deal of change? Change that are pressures to the internal way we think about business and to those groups on the outside. Bureaucracy works very well when there's stability and it doesn't work very well when there's not. Yet we're kind of trapped in this hierarchical view of how businesses are organized. That's the real problem, is still a real problem, though much has changed since then. But that question of how's value creation trade possible in a world of very little stability, in a world with high complexity, in a world in which there's bounded irrationality, we don't know everything. The second problem, it seemed to me, was how do we deal with the ethics of capitalism? If you think about business ethics, and you know the joke, it's an oxymoron, people say, I didn't know business had any. If you take that seriously, there's a real problem here because what it says is that the institution of business isn't morally legitimate. And this was very far from what I was encountering with the executives I was working with. They knew they had ethics issues all the time. Then the third was, what should we be teaching? Are we actually teaching people the wrong things? And I thought the answer to that was yes, and we still are. So those were kind of the three questions that were in my mind. I couldn't have articulated it like that in 84, but eventually that became very clear to me that those were the questions that stakeholder theory was developing to answer.
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B
You use a word that I don't completely understand in 83 in the paper with David Read. First of all, I loved chapter two in the book because it went deeply into the history of the idea of stakeholders, and it traced it through all its incarnations and first of all, where it originated. And I just. I don't know exactly what it is about that. I feel like thinkers inside businesses, in particular, a lot of what they do is hidden, and we don't know who they are. And so the fact that you said, look, SRI was doing this, and the fact that you then said, well, then there were a bunch of different disciplines that took the idea of stakeholder management and applied it in different ways, but none of them quite took it to the place that where we needed to be if we're going to solve problems. That chapter was just such a. It's hard for me to explain why it was such a pleasure to read.
- [13:12]
A
It was my favorite chapter to write because again, as a philosopher, when you deal with an idea, you want to know where the idea came from. There had been a paper written on one of our working papers by a friend of mine named Fred Sturtevan who was at Ohio State. And it was a paper in something called California Management Review. And one of the footnotes was, the origins of the stakeholder idea are impossible to determine. And I thought, I don't think that's right. I bet I could do this. And so I set out to do it. I ended up going to Danford Research Institute and interviewing the people there. And it wasn't actually very hard to do. I'll spend a couple of afternoons in the library. But it was something that was going on that was. To me, the scholarship that was going on in business schools was very different than the way I had been trained in philosophy. And so I just tried to do what I would have done if somebody was asking me about Kant's idea of concepts. I would have just tried to trace it down. And it actually wasn't very, very hard. There are people who still think Klaus Schwab at the World Economic Forum, wrote a piece in the Wall Street Journal that he invented stakeholder gate theory. You know, I certainly didn't. I once said I was the only person to ever have written about it who did not claim to have invented it. And I tried to get him to say how that happened. And what he said to me was, well, you know, it was just kind of in the air in the 70s. Well, it was in the air in Wharton as well. And I get that. But again, nobody took the trouble to actually hunt it down. Some people have come along and sort of retraced my steps and done it better than I did. A guy at Berkeley, Robert Strand, and a guy from Cambridge, Giles Slinger. Redid that through of historical analysis and confirm most of what I said, but did it better in more detail.
- [15:12]
B
The word that I don't understand is legitimacy. And you wrote an 83 paper with David Read in which he said, look, understanding how we respond to stakeholders is important to the legitimacy of companies. And then the book is really more. Look, really being able to have a methodology for responding to stakeholder dynamics is critical for survival. And so I don't really understand the word legitimacy. And it's used in different ways in your work.
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A
Well, look, there are two senses of it. I've not always been clear, which I was talking about. Just like there are two definitions of who's a stakeholder. One is who are the groups of individuals that can affect or affect you? And that's what's come to be called more of a strategic definition. People say, well, our terrorist stakeholders, well, you got to deal with them, whether you call them stakeholders or not. The other definition is the groups and individuals without whose support you couldn't exist. So you got to have customers, you got to have suppliers, you got to have employees, you got to have communities and investors. You might need more, but you got those for sure. Those are two definitions. So under either one of those, this particular group is a stakeholder. Then there are two kinds of legitimacy. One is a kind of legitimacy of the firm itself. It's sort of licensed to operate, if you like. And my sense is that sort of societal legitimacy and giving firms a license to operate clearly means to me that customers, suppliers, employees, communities, people, the money are stakeholders. But there's another sense of legitimacy, and that is. And this is one I saw very much as I was working with companies, and that is the managerial legitimacy of something. Look, you got to deal with those groups that can affect you. I grew up poor on a farm in Georgia, but we knew we had to deal with those groups, individuals that could affect us. That was just Common Sense 101. And so there's a sort of managerial version of legitimacy. Is it legitimate for managers to deal with these groups? And this is important because if you think about the old story of business, which is still there, it says business about the money. It's about the money. It's about shareholders or about investors or about, I call them financiers. And those are the people that it's legitimate for you to deal with. And anything other than that is a mistake. And I thought that was just wrong. It seemed to me is wrong on two counts. You needed to deal with the groups who could actually affect how much money you made, and those are those five stakeholders. And you needed to deal with groups that can make that whole process either enhanced or come undone. And so I've never tried to sort out who are the stakeholders once and for all, for all times, for all firms, for all situations. That's what most academics want. I think that's a fool's errand. I think it depends on what kind of problem you're trying to solve. If you're trying to solve a problem of kind of, what do you stand for as a company, you better deal with those five without whose support you couldn't exist. If you're trying to solve what happens when subsidies to the Affordable Care act go away, you probably need a much broader sense here of who can affect you here. And that's what I saw executives doing, is they've never had problems knowing who their stakeholders were given the problem they're trying to solve. I really haven't found that if you ask them in the right way, who can affect you regardless of what you want to do?
- [18:58]
B
On Work for Humans, we've been exploring the principles of multi sided management, which is the belief that work is a product that every company designs, builds and delivers to employees. Along the way, people started asking how they could put these ideas into practice. So I founded the work design firm Elevenfold to help your company create the kind of work that makes teams feel alive and engaged instead of dead and dull. So you can reduce turnover and build commitment. We're doing something revolutionary here. Learn more@elevenfold.com, that's 11fold.com. What is the importance of asking as a company, what do you stand for?
- [19:43]
A
The questions in strategy were always, you know, people say, what business are you in? Peter Drucker's famous thing, which is probably apocryphal of meeting with a can company or some company and they're saying, you know, we're in the can business. And he said, no, you're in the container business. Thinking about what business you're in determines where you're going. How do you get there, what do you do tomorrow? How do you know if you're on track? Those are the way people ask the questions in those days. And it seemed to me that that was just missing a question. What do you stand for Will determine what business you're in, or it should. And if you don't know what you stand for, then the likelihood that you're going to find businesses that you're comfortable with or that you can be good at, I think it's much smaller. So I thought that was a question that every company ought to ask. And I think today they are at least asking those questions. That's the whole idea of thinking about purpose, which was something I called in that old book, Enterprise Strategy.
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B
What's an example of a company where what they stand for manifests in what business they're in?
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A
Well, Novo Nordisk stands for, I think, kind of reading the world of diabetes. So what do they do? Well, they're an insulin company and they also do GLP1s and they've done an amazing amount of work all over the world to try and make that work. Whole Foods was started by John Mackey with the idea of trying to bring good food and better health to its customers. That's pretty much what they've done. Most of the big companies, certainly Fortune 100, a lot of global companies, have a sense of purpose. And a sense of purpose is about what you stand for. Now, does that always manifest all the time in everything they do? No, of course not. We might have an individual purpose. One of mine is to inspire my students. Does that happen all the time? No. Sometimes I screw up or the world changes, or my students don't listen, or whatever it turns out to be. So this idea that what you stand for, you know, that you're perfect about that. No, what you stand for is aspirational for the most part. If it never affects anything, that's a different problem. That's called a problem of bad faith and self deception. But purpose turns out to be incredibly important. And it's not to be traded off with profits. It's purpose and profits both. Those things have to go together.
- [22:24]
B
I want to organize the next part of the discussion around a two by two that you introduced in the book. And the two by two on one axis is relative competitive threat and one is relative cooperative potential. And each quadrant Has a different response. It implies a different response. Now, am I right in thinking that relative competitive threat is something that Porter might have talked about, but relative cooperative potential is something new to me?
- [22:59]
A
Anyway, what's important to understand about both those ideas is that the key idea is that with your stakeholder, there's some actual or observed behavior. So the first thing to do is to figure out what's that stakeholder actually doing. And that's what I call actual behavior or observed behavior. And then how could that behavior change to help you? That's cooperative potential. How could that behavior change to hurt you? That's competitive threat. And so let's say a group has a very high cooperative potential. What does that mean? It means they're probably killing you as it goes. It means their actual behavior probably pretty negative. Or a group that has a relatively high competitive threat. Usually those are groups that are supporting you. Employees are often in that place. They're being pretty supportive. But if that were to change, it would really harm you. Critics are usually in the position of saying, well, they're being very critical, and if I just get them to go away, that would help me a lot. And so it's important to see that cooperative potential and competitive threat are both relative to what a group's current behavior is. Now, it's not just, are they hurting us or are they going to help us? It's how could their current behavior change? I focus on behavior because what I found was many executives wanted. When you start to talk about this and say, well, how can they help you? Well, they could be supportive or they could take their support away. And I said, look, I'm not interested in that. I want to know what you want them to do. Because we don't often think about what do I actually want this group to do? And then to dive deeper and to think about, well, how did that come about? So it seemed to me that focusing on just the competitive part, and that's essentially what Porter did. I mean, in five forces, he turns out to think that relative power of customers and suppliers and the existence of new entrants and new technologies, et cetera, were all things that could lower profitability if they were high. And he didn't think about what would happen. Well, suppose you found more cooperative behavior from customers. Well, profits might be higher. Yeah, they might. But again, it's not helpful until you get down to the behavioral part. That's what I tried to do, because I was trying to help people actually figure out how to do stuff, not figure out some macroeconomic theory. Et cetera.
- [25:45]
B
Now, each of these quadrants has a different name. So high relative competitive threat and high relative cooperative potential, Those are the swing stakeholders. These are ones that if we played it right, they could really help us. And if we play it wrong, they could really hurt us.
- [26:02]
A
Well, remember, that's change in their actual behavior because they have a lot of power. And so typically regulators fit that a lot. And so typically what you want to try to do is to change the rules, try to figure out how you can get more stability so that it's not just with one whim. I can do away with you or make your business very difficult. You see, part of the regulatory strategies now seem to be to keep that, that I can decide that you're not worthy of being in business with some executive action here. And so I don't think that position long term, you have to build a different sort of relationship with that stakeholder. Back in the day, when I was thinking about this, as many telecom companies did with their regulators, there was a case, and I think it was the Illinois Public Service Commission who said to Illinois Bell in those days doesn't exist anymore. Well, we're not going to give you your rate case. You asked for it, you deserve it and we know you deserve it. But you're so good at what you do, we know you'll figure out a way around that. In a way, they sort of had that high cooperative potential, high competitive threat, sort of regardless of what the company was going to do.
- [27:26]
B
And you list in here, governments, unions are a good example. Activists can be another swing opportunity. And then the two diagonal quadrants that are adjacent to that are offensive and defensive, which is high relative cooperative potential. So could really help us. And low threat. So these are groups like loyal customers, happy employees, trade associations.
- [27:58]
A
Wait, wait, wait, wait. High cooperative potential and low competitive threat is mostly activist groups that are killing you. And low cooperative potential, high competitive threat are groups that are already pretty supportive.
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B
Already pretty supportive. And so you can amplify them. You can amplify the ones who are already pretty supportive and then you play defense against the ones that are.
- [28:22]
A
There's a two by two in there that's probably a little better than that one in which I talk about what kind of strategy you have for each of those. High cooperative potential, high competitive threat, change the rules. Low cooperative potential, high competitive threat. These are your friends. If you like, you preach to the choir, you kind of do what you're doing. And if you have low competitive threat, high cooperative potential, you change something. I once said to A tobacco executive. I said, look, take off your clothes and walk down the street naked in the middle of Main street in your city. What are they going to do? Sue you for $420 billion? They've already done that. What that says is your strategy is not working if there's very little more they could do to hurt you, but a lot they could do to help you. You need to just do something different. And then if it's low cooperative potential and low competitive threat, again, you just hold, you monitor that, you monitor that.
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B
Population to make sure that they're not drifting into one or the others.
- [29:27]
A
Well, you got to monitor their actual behavior. This is why behavior is important. If I think they're supportive, well, but wait, what are they doing? And then the next step, why would they do that? What are their interests? And I was just trying to find some logical processes to actually figure this out.
- [29:47]
B
The reason I wanted to lay this out is because I wanted to ask questions using the framework. So one of the questions is I misunderstood it a little bit. I will say I thought that the two dimensions were more different from each other than they are in a way. But it opens up the possibility of dark patterns in response to the stakeholder environment. Things like regulatory capture, fighting for anti transparency, to blind regulators, weakening government potentially. Some of these patterns I actually make a lot of sense to me. I mean, I know, for instance, working in business that we would sometimes want to weaken suppliers. And what I mean by that is even if there were two suppliers that we could turn to and one was clearly better, we would give business to both suppliers because we didn't want one to establish monopoly power. And so that was the sort of thing where we wanted a diversity of suppliers. And even if one was clearly better, we didn't want to give complete control of our business to that supplier. And that made a lot of sense. But there's nothing yet that I see in this book that later on, I think in your work it's clear that the darker patterns are probably prohibited.
- [31:04]
A
But that just says you're not paying any attention to what you stand for.
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B
Uh huh.
- [31:09]
A
I'm not sure I understood at the time how important that was because again, I was trying to figure out how to help these executives who had these problems with external groups. How could they understand them? How could they figure out how to do something that would help them? I didn't have the idea that executives were greedy little bastards out trying to do each other in. That's kind of what the old story of business says, you know, it's just about the money and that's all that matters. That was not my experience with the people I was dealing with and it never has been, really. Yeah, there's a few people like that, there's no question about it. But the people I was dealing with were pretty much ordinary folks trying to do the right thing most of the time. That was hard to do in business sometimes because of the pressures and stuff that you faced. But I didn't have this story in mind, which I've later called the business sucks story. You know, that business is sort of morally degenerate, that profits are bad and that sort of stuff. That wasn't my experience. So I didn't pay much attention to that, quite honestly.
- [32:22]
B
That hasn't been my experience either, by the way.
- [32:23]
A
Yeah, of course.
- [32:24]
B
Very, very deep conversations about ethical outcomes in the companies I've worked for.
- [32:30]
A
To be honest with you. The reason I didn't say more about the ethics stuff in that book, because the next book I wrote, which you probably never found because nobody did, called Corporate Strategy and the Search for Ethics, was because when I was writing the stakeholder book, I didn't know that people separated the ethics stuff out. I assumed that was kind of built in to things. And then when I figured out that oh yeah, this is a big problem, I wrote what I thought was the follow up book called Corporate Strategy and the Search for Ethics in which I looked at very different corporate strategy models and said, here's sort of some principles about ethics and how are these either built in or violated by this way of thinking about strategy? But that it was a book that, well, like the stakeholder book, no one's read that either. So that's just the way those things go.
- [33:25]
B
I wish I'd found it 20 years ago.
- [33:27]
A
It was hard to find. I mean, I didn't have a copy for a while. I was hanging out. I was hanging out with a guy then doing some talks called Tom Peters, who had written In Search of Excellence. I once said to Tom, I said, tom, how do we get it so effed up so that you come along and tell people to treat employees and customers with dignity and respect and you sell 25 million copies of that book? And he said, yeah, I don't know, I don't know how we got that so screwed up, et cetera. So, you know, I thought it was pretty much built in. And then from Tom and others I learned that, yeah, that's not the way people that write about management think about this stuff. They think about ethics as something over here. That cost you all the time as opposed to. Well, I heard Mark Cuban say it on a Shark Tank episode. Cuban says, I think trying to do the right thing almost always pays and is the way you should run your business. And I was pretty naive to think that that was believed because I saw business people who believed it, but I didn't see academics who thought that was the way business worked.
- [34:39]
B
It's interesting, I'm starting to think of we try to solve complex things by applying lenses that flatten reality. And one of those is flow of money. And it results in something that's not the whole organism. I have a question about the quadrant that's low. Low. And it's about hold, which is sometimes neglect is harm can be, yeah, sure. And so there's a quadrant down that quadrant which happens to be in my version lower right, that says hold. And is there a moral obligation to. Again, I guess it goes back to what your company stands for. Does your company stand for harming the weak or neglecting the weak to the point of harm?
- [35:29]
A
Well, again, remember this cooperative potential competitive threat are based on observed actual behavior. Now it may turn out that there's a deeper way to think about this. People write a lot these days about marginalized stakeholders. Usually they mean by that they're kind of poor and not well off. Of course, that's not what being marginalized is. Being marginalized means. I just don't pay attention to you. And many companies have gone to hell because they marginalized their customers. So it doesn't always mean poor and downtrodden. On the other hand, what I would say is where people may not have taken what I've said seriously enough. You have moral obligations to every stakeholder, but to the fact that they have a stake is that. But also they're human beings and we have moral obligations to each other. And it's wrong to create harm to groups who are not as well off as you. And it doesn't matter if you're a podcaster or a CEO of a company. That's why companies have special obligations that. Well, they have special obligations to communities. I think I really believe if what companies tried to do was they just thought about raising the level of the least well off stakeholder. So if you think about your community, how can you do something that raises the level of the least well off people in your community? Does that mean try to educate them? Try to be sure they have housing? Does it mean try to be sure they have food? I think those are things that make communities better. If you make communities Better. You're going to be better off because people say, well, you can't solve everything. And again, this is one of those logic mistakes. I can't solve world hunger, but I can give you a piece of bread if you're hungry. So many people, especially in business, the logic is drawn. I can't solve that problem. No, you can't. But you can do something. And trying to figure out what's the something that you're going to do turns out to be important. A lot of people think that thinking about stakeholders, about being woke, has absolutely nothing to do with that. Yes, you need to deal with some societal issues, but not all of them. You got to deal with ones that affect your business model. That's what you know something about. When I put hold on that, I think I also said because the example at the time was a project in Tennessee, the Tellico Dam. And the Tellico Dam got delayed and much more expensive because there was this little critter called the snail darter. And I think I said something in the book, I don't really remember, I haven't read it in a long time, called the snail darter fallacy. Be careful of ignoring anybody because if you do that often motivates people, the fact that they're ignored.
- [38:22]
B
You do mention the snail darter. So the one thing that the word stakeholder implies to me is that a group of stakeholders are uniform. Is that true or is that sort of an accident?
- [38:38]
A
No, it's not true. And in fact, I was surprised that no one's really criticized stakeholder theory along those lines. So I've tried to. I said, look, first of all, you can do what I think that's called a generalize the marketing approach, but you can segment. And so I think I showed in the book sometimes how to segment stakeholders into. I mean, we do this with customers all the time, but we could certainly do it with governments, we could do it with suppliers, we can do it with employees. Now, what the right segmentation principle is that's going to vary by stakeholder. The other issue is that there's something, I think I called it in those days, it's not a great word, the stakeholder role set. What do you do? How do you treat customers who are also investors, who are also employees? Now, the way we do this in business schools, marketing deals with customers, finance deals with investors, operations deals with suppliers, HR deals with employees. Nobody deals with community usually. And maybe that comes together in the strategy course, but the sort of field of strategy who used to see itself as how we Put these things together at the enterprise level went way off the track, frankly, due to the obsession with being essentially legitimate to economists that started with Porter but didn't end there. So this idea of how do you deal with the stakeholders who have these three roles, customer, investor and employee, I don't think you deal with them the same way you deal with customers. They probably have a little more loyalty to their employees and they're probably going to be a little more critical. So I think we haven't begun to think about that. A colleague and I wrote a paper, I don't remember when, sometime in the early 2000s, called the names and faces approach here, which said, look, we probably have the technology now, and we certainly do now to think about stakeholders in terms of what people call mass customization. And that this idea of functional groups where you treat everybody the same, probably not as useful as it could be if you took advantage of some of the technology that we have and we've seen people do that.
- [41:01]
B
So you've really walked right into my parlor here. So I'm going to tell you some of the framing that we have around employees as customers is that first of all, our research has shown that no employees want the same thing. When you get right down to what each individual wants from work, there are some things that most people share in common. They want pay and benefits and things like that. But then beyond that, there's this wide range of things that are quite different. And we argue for mass customization. So right on point there. The second thing we argue is that employees are not inside. We have this weird idea of who's inside the company and who's outside the company. Well, our definition of when we say that employees are customers, our definition is not that far from stakeholder, which is that customers are people who exchange value with your enterprise. And so it's bidirectional value and are free not to. That's our definition of customer. And so we ultimately argue that all companies therefore need a different business model, which is that all companies are now multi sided. And so there may be multiple stakeholders, but we have as a subset of stakeholder, I guess, the idea that customers are a special case of stakeholder. So what you said about mass customization really played to where we're taking this now. In 88 you wrote a paper, a Stakeholder Theory of the Modern Corporation Kantian Capitalism with William Evans. So what did that add to the conversation?
- [42:42]
A
Well, I think in retrospect, not nearly as much as we thought. I think many of the ideas in that don't make a lot of sense. Bill was a very distinguished sociologist at Penn and he wanted to really figure out how to democratize the corporation to turn it into a much more kind of Jeffersonian in his view. So we started a book about this. I kind of gave up on that partway through. I thought Kant's principle of never treat anyone as a mere means. I still believe that you don't treat people as a means to your end. We need to treat each other as ends in themselves. So your projects are important not because they're important to my projects. Your projects are important because they're important to you. That's what it means to treat you as an end. To treat you as a means treats you as your project is important to mine. That's okay. But I got to have your permission to treat somebody as a mere means. Just means treating them instrumentally. I still think that's right. I just think there are better ways to say that other than to get caught up in a bunch of Kantian jargon that most people are not going to understand. Around the same time, I was rereading people like John Dewey, sort of a modern Dewey, and Richard Rorty, who was a colleague of mine here at uva and I thought, thinking about really the philosophical underpinnings of state holder theory were more in line with American pragmatism. One of my friends, Norman Bowie, who was teaching at University of Minnesota at the time, took up my Kantian capitalism idea and wrote a book about it. And it's a very fine book. It's called Business Ethics of Kantian Approach. I think because Norm dug down into not just the generalities of Kant, but into some of those moral problems that managers have every day and showed how Kant would help them to solve them. Meanwhile, I'm off reading Dewey and thinking about what pragmatism is, et cetera. In the paper we talk about democratic processes, stakeholder assemblies and all this kind of stuff. And that just wouldn't work. That was way too far removed. It came from at the time also the takeover statutes that were around, those kind of anti takeover statutes. I was asked to testify on some of those where you had a stakeholder statute in a state that would give boards a defense against a takeover, they would just say, well, this is not in the stakeholders interest. And Bill Evan actually testified for some of those. I know he did in Pennsylvania. And I refused to because I thought you didn't need a special statute, that managing for stakeholders was just about good management. Shareholders don't own corporations. Corporations own Themselves, directors have a duty of care, not to shareholders, but to the corporation, to manage the affairs of the corporation. And I thought that that was the way we should think about it. I also would say, as you said in the beginning of this, I wasn't sure we needed B corps and those kinds of things because again, I thought even in Delaware you can take stakeholder interest into account as part of the affairs of corporation. But the problem with that is that there are some ways that we handle capital markets that probably, given the strength of the old story of business, we could probably change so that you can't just have computers, trade up a position and then put a company in play and have it go from there. So I'm not sure about how the governance thing could be revised today, but I do think we need a kind of rethinking of some of those things to make good practice, which I think is paying attention to your stakeholders and creating value with them, to make that consistent with the law. In the cases like change of control, where it's not consistent with that.
- [47:01]
B
It's interesting, my third episode, this is maybe the 180th episode of this, but my third episode of the podcast was with Barry Schwartz and what he said is basically you can't legislate being a mensch, that trying to legislate good behavior, it always creates essentially mere compliance and escapers.
- [47:24]
A
I mean, I understand where that's coming from and I agree with the spirit of that. In fact, law is built on morality, always has been. So it's not that you can legislate being a good person, but you can legislate what happens if you're not.
- [47:41]
B
You wrote a paper, it was essentially striving to absorb the work of Milton Friedman, Michael Jensen, Michael Porter, Oliver Williamson into and saying, you know, really, they all believe in stakeholder.
- [47:59]
A
Well, it's not that they really believe it, it's that their work is consistent, consistent with it. It's just not helpful.
- [48:05]
B
And I thought that was very even handed of you because I want to talk about Milton Friedman in particular and his premise of shareholder behavior. And every time I read that, I get a little more outraged. And somebody called it, what did they call it? Somebody called Milton Freeman's essay pernicious nonsense. I call it poisonous drivel. I think it's just bad. And yet I tried to challenge that assumption of my own. And this is something that people who work in companies face all the time, which is what are the ethics of being an individual in a large system where the outcome of the system that you're supporting are emergent. Okay, so there's two dimensions to this, by the way, things I make up while I'm taking a walk are things that people like you have thought about and have names for and stuff like that. So recognize I'm coming to this as a naive. But the first question is, when is locally unethical behavior globally ethical? And I guess that's a pragmatist question, which is, when I first got out of college, I was a criminal defense investigator. And if I just looked at my local behavior, I was in some cases, advocating for people who had probably committed crimes, and I was advocating for them not to be punished. And so locally, that felt unethical. Globally, though, in the courts, where it's an adversarial process and there's an adversary across from you who's going to balance out your argument. It was globally ethical. And so the best argument I could come up with for Friedman was locally unethical behavior might be globally ethical in the sense that capitalism raises all boats sort of thing, but it's the best I could do.
- [50:06]
A
Yeah, I have a pretty different view of Friedman. First of all, one of the things we try to teach our students is to make the most charitable interpretation of things that you can, that your critique is much more powerful if you've interpreted them in a generous way. I think the difference between Friedman and me is that one, Friedman is interested in telling us how markets could work. I'm interested in figuring out what it is to build a great company. So we're just interested in different things. Friedman was worried, as I am, and I think he was right to be worried about part of the stuff on corporate responsibility, because on corporate social responsibility, because people were doing a lot of things that they didn't know anything about. Businesses were. And those things can have really harmful consequences. Now, Friedman gets hammered a lot because he says, ethics is not important. It's just about profits. But that's actually not what he says. He says the obligation is to maximize profit, subject to ethical custom and law. Now, again, we would differ what ethical custom, if you like, requires or what law might require. But that's right there in Friedman. He says his view is you have a moral obligation to investors. And I think you do have a moral obligation to investors. You also have one to your customers and suppliers and employees and communities as well. This was set out pretty clearly. There was a set of essays in Reason magazine some time ago, and it was John Mackey, my friend, had started Whole Foods, Milton Friedman, and a guy named Rogers, whose essay I thought was kind of cranky. And Mackey says, look, Whole Foods has been stakeholder oriented its entire existence. And we're doing that because that's what the business is. We don't see the difference between when we put farmers markets in parking lots, that's good for our business and Friedman. You say that if stuff is good for your business, then it's okay. Friedman's response was he just couldn't accept that. I think he just couldn't accept that somehow profits was the objective function here. I think what he didn't understand, and this is why I think Mackie knows more about business than Friedman. I'm certain of that, that you can write how much money you're going to make as a function of how you treat your customers and your suppliers and your employees and your communities. What most people miss, and I think what your view of treating employees as customers might miss is, is stakeholders are interconnected. They're interdependent. What your strategy is or how you treat customers or how much value you create for customers is affected and will affect the value you create for employees, for community, for suppliers. And it's the interdependence here that's the most important thing. If you can capture that interdependence, you, you can build a great company. If you put any of the stakeholders in the center and you say their interests are paramount, you're going to have the same problem. You're going to make trade offs in favor of them versus the others. When you don't need to make trade offs, you need to use your creative imagination to find win, win, wins. And that's why putting anybody in the center doesn't matter whether it's employees or whether it's. I mean, the world might be a better place if we put employees in the center, but you're going to have the same problem. It's the interdependence here that took me a long time to figure out. People thought, well, the stakeholder idea, the contribution is there's more than shareholders. Yes, that's true. But the real contribution is the fact that stakeholders are interdependent. That's the thing that I think is the most misunderstood part of this in today's world.
- [54:18]
B
I'm going to really have to think about that. It's right, right. Which is that certainly employees are dependent, get value from a healthy community. And it's certainly true that a community gets benefit from healthy employees. I can see that. And okay, I'm going to have to think about that. There's a lot to think about there.
- [54:39]
A
I would say you can write in a mathematical way, you can write the value created for any stakeholder as a function of the value created for the others. Put shareholders there first. How much money you made is a function of how you have the value you create for the others. I mean, I think profit's a lag variable, so you only find out too.
- [55:03]
B
Late because partially you know the good that you're doing to the other stakeholders are reservoirs that are mature more slowly than this quarter's revenue target numbers. Are there any other problems that you see when I say employees are customers? I'm not negating anything that you just said. I'm saying that customer implies a depth of the exchange of value. That's a little different. And part of it is that if you take a scale from do no harm to do good for a lot of what we've done with the workforce is let's not do harm. Especially if you look at IO psychology, which is whereas there's a whole range of doing good that's missed often. So any other concerns with. When I say employees are customers, I.
- [55:54]
A
Think what I hear you saying, look, employees are as important as customers. You can start wherever you want. I've heard people say, well, if you had to say who's most important, which I think is not the right question because they're interconnected, you could start with shareholders, you could start with customers, you could start with employees and work from there. But you still have to keep that inner connection. I think employees and customers are different. Most employees want to be a part of something bigger than themselves, most of them. And that's not something that's typically associate with customers. Most employees want some sense of meaning and the fact that they matter. Most employees want. I'll go with what Dan Pink says, mastery, autonomy and purpose. And that doesn't apply as much to thinking about the customer relationship. So I think employees and customers are both human beings and they deserve to be treated like human beings. Their particular roles as customer employee are, I think, different. There are certainly similarities and they certainly both deserve to be treated as moral beings.
- [57:07]
B
Yeah, I don't disagree with that. I think first of all, not arguing for employee primacy, arguing for employee balance as stakeholders.
- [57:17]
A
Let me say one thing about balance.
- [57:19]
B
Because I optimized, I guess, because I.
- [57:23]
A
Use that metaphor a lot. And then I thought it's not quite right because balance assumes you might need to trade off one with the other.
- [57:31]
B
Many are not trade offs.
- [57:32]
A
And so what I've tried to say Is no, you need to harmonize their interests because harmony and music, the notes sound good together, though they're different, beautiful.
- [57:43]
B
I'm going to use harmonize from now on. That's a great word. We sometimes say orchestrate. And the only thing I would add there is that when we talk about some of what I felt you said about employees and customers being different because they want. They're buying a different product, so they want different things because the product that they're buying is different. And I'm going to ask a product question. In fact, these are my closing questions. My closing questions. I use marketing questions to ask people about their work. And so what job do you hire your work to do for you?
- [58:17]
A
I don't think about it that way and I never have. I try to inspire my students, whether they're executives or MBAs or whatever. I've just tried to figure out what this thing called business is and how to make it better. Because I think I teach business students and I want to teach them how to make business better. If we're not trying to do that, I don't know why we deserve these pretty privileged positions that we have.
- [58:43]
B
Has your work at universities been a good platform for that?
- [58:48]
A
Yeah, I mean, it's worked for me. I mean, good. I don't know. I mean, I don't pay a lot of attention to awards and citations and all that sort of stuff. I'm just trying to help my students figure out how to live rich, fruitful lives and have great careers in business, whether they're PhD students or whether they're MBAs or executives.
- [59:12]
B
You went beyond the work you did at the university and started a record label?
- [59:18]
A
Yeah, yeah.
- [59:19]
B
What did starting a record label do for you that was above and beyond what your work did?
- [59:27]
A
Well, the most important thing I think about the sort of skills that people need is they need to enhance their creative imagination. That's the way you find win, win, wins. And you don't look for trade offs. If you look for trade offs, that's all you're gonna find. So I think creative imagination is one of the most important things. I have a colleague who calls it moral imagination, and she thinks most of the business ethics horror stories are failures of imagination. For me, I've always played music all my life. My son is a musician. He went to the Berklee College of Music, and we thought we needed to rekindle the magic of Motown and Stax. So we started Red Goat Records with the idea that we could do that. We had a couple of great artists we had a kick ass house band, but we're trying to do it on the Internet. And what we found was that we couldn't get the artists who had families and, you know, kids and stuff and careers. We couldn't get them in the studio enough. Because to really start a label that way, you had to have a kind of steady stream of things that were coming out, much like the podcast, you know, you had to have that, and we just couldn't do that. So we got a bunch of really great songs and eventually we'll record the library, et cetera. But doing something creative every day changes your brain. And we know that. People say to me, well, do you have a hobby? And I went, no. I teach and I write and I travel and talk to people all over the world and I work out a lot and I play music and I write music and I don't have time to have a hobby. So that for me made sense. I've never tried to think about partitioning these things off. I've tried to think about how they're integrated. For instance, we've had a faculty student staff band at Darden for 20 years that I started. We think about work, life, balance. It doesn't work for me. There's too much going on. I like to think about work, life, integration. How do we find ways to integrate what most people would see as our work into that part that we see as our life? I think finding moments of integration is much better for me and music provides that. I play in a band with some of my students, some of my colleagues, some of my staff, and it's terrific.
- [61:55]
B
What do you play?
- [61:57]
A
Well, I played guitar for 50 years, but I was the fifth best guitar player in this band. And no band needs five guitar players, so I play keyboards. I played piano since I was maybe six and basically keyboards and piano and organ.
- [62:14]
B
I started listening to Red Goat and cuts and Witcher's great and very Motown.
- [62:20]
A
He's incredible.
- [62:20]
B
Very Motown.
- [62:21]
A
Yeah, yeah, he's incredible.
- [62:22]
B
My wife's gonna love him. My wife is a big Motown.
- [62:24]
A
Tim is terrific. He has this sort of Marvin Gaye, Bill Withers voice. If you listen to one of the first cuts on his EP that we put out, there's a four part harmony on it and he's doing all the parts. He's a monster in the studio and a terrific guy. He was one of the original band members of the band at Darden.
- [62:47]
B
What has your work cost you?
- [62:50]
A
Oh, I don't know. I mean, I used to think I wanted to get a Job teaching philosophy. But it turns out that went away pretty fast. I mean, that wasn't much of a cross that I cared about. I don't know what it's cost me. I've had an incredibly lucky run here, being at the right place at the right time. And even though people didn't take these ideas seriously for a long time, eventually enough people did. So I think it's far, far more benefits than whatever cost there might be. I mean, I get kind of hammered sometimes for being naive or being an apologist for business or, you know, I pissed off the people on the left because they think I've sold out the business and people on the right think I'm a communist. But I don't really care about that, quite honestly.
- [63:40]
B
It's a win. I mean, honestly. But it is funny because you really are driving right down the center.
- [63:47]
A
Well, but the problem is, what's the center these days in the US it's putting together the worst ideas of the left and the right. I would look at it as, I don't really have a political tribe. There are good ideas on the left, there are good ideas on the right. And what we ought to do is have conversations about the ideas, not about whether they're on the left or the right. And that's what I've pretty much tried to do, is to focus on the ideas and look again, I get way too much credit. There's thousands of people around the world now actually doing research on state owned theory. They're contributing far more than I ever have or could have.
- [64:25]
B
Well, that's just to say it would be impossible for it to be otherwise. It doesn't diminish your original work at all to say that there are thousands of people diving deeper into today. It's a natural consequence. It's the downstream consequence of something. And academic descendants as well, of which you have many. Where can people learn more about you?
- [64:47]
A
You can go to the Darden website. I have a web website, it's redwardfreeman.com we're about to launch a channel on YouTube called the Stakeholder Channel and we do a podcast. I think, in fact, I've got to go do an episode in about half an hour called the Stakeholder Podcast. I think We've done about 260 episodes of that so far, interviewing CEOs of small and big companies, students, people doing research in stakeholder theory, and just people I think are interesting. So I can't hide, given the Internet these days.
- [65:28]
B
Well, thank you very much for taking the time to be a guest on the show.
- [65:32]
A
Thank you Doc. It's been my pleasure.
- [65:37]
B
Thanks for joining me for another episode of Work for Humans. If you enjoyed this episode, please give us a five star rating. Wherever you listen to the podcasts and share the show with one person you think would get value from it, believe it or not, this really helps us grow the show and reach more people who want to build the kind of work that people really want. As always, thank you to my producer Jason Ames at 9th Path Audio for his insights into content and his high standard for quality. Final note, the opinions shared here are my own and not the views of Google or Cisco Systems. Thanks again for listening. See you next time.