Managing for Stakeholders and the Purpose of Business

10 Pages Posted: 29 Sep 2017 Last revised: 12 Jan 2018

See all articles by R. Edward Freeman

R. Edward Freeman

University of Virginia - Darden School of Business

Bidhan L. Parmar

University of Virginia - Darden School of Business

Abstract

The benefits or harms achieved by a business is determined in part by the choices that business leaders make. One important driver of these choices is a leader's view of the purpose of business. This note: (1) outlines the history of debates about corporate purpose, (2) calls out some myths that persist in the way that people think about corporate purpose, and (3) introduces a view of business called “managing for stakeholders” that has become increasingly influential.

Excerpt

UVA-E-0415

Rev. Jan. 9, 2018

Managing for Stakeholders and the Purpose of Business

Introduction

Business has the potential to benefit many groups such as customers with new products and services, employees with meaningful work and wages, communities as engines of growth and employment, and shareholders through investment opportunities that provide a reasonable return and fit their values. Business also has the potential to harm these same groups through faulty products, accounting fraud, environmental damage, and increased social inequality. The balance of the benefits or harms achieved by a business is determined in part by the choices that business leaders make. One important driver of these choices is a leader's view of the purpose of business. This note: (1) outlines the history of debates about corporate purpose, (2) calls out some myths that persist in the way that people think about corporate purpose, and (3) introduces a view of business called “managing for stakeholders” that has become increasingly influential.

The basic idea of managing for stakeholders is that businesses and the executives who manage them, actually do—and should—create value for customers, suppliers, employees, communities, and financiers. To manage sustainable businesses, leaders need to pay careful attention to how stakeholder relationships are managed and how value gets created to ensure that all core stakeholders are receiving value for their efforts and choose to continue to support the firm. Value here is understood as things that stakeholders value, which includes financial value as well as other forms of value (e.g., upholding values, treating people fairly, and improving the world). This view is contrasted with the shareholder-centric model of business activity; namely, that businesses are to be managed solely for the benefit of shareholders, and the only value that matters is financial value. According to this view, any other benefits (or harms) that are created for other groups are incidental.

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Keywords: role of leaders, value creation, company focus, stakeholder or shareholder view

Suggested Citation

Freeman, R. Edward and Parmar, Bidhan L., Managing for Stakeholders and the Purpose of Business. Darden Case No. UVA-E-0415. Available at SSRN: https://ssrn.com/abstract=3042721

R. Edward Freeman (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Bidhan L. Parmar

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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