In The Friedman Doctrine: The Social Responsibility Of Business Is to Increase Its Profits, Milton Friedman argues that a company’s sole responsibility is to its shareholders—not society. Proposed in 1970, this “Friedman Doctrine” became the norm for business ethics for decades to follow.
According to Friedman, in a free-enterprise system, a corporate executive is an employee of the owners of the business and is beholden to their desires, “which generally will be to make as much money as possible while conforming to the basic rules of the society.”
I couldn’t disagree more.
CEOs aren’t just the acolytes of money-grubbing shareholders, and most shareholders don’t put their stake in a business they don’t see providing some sort of extrinsic value. This mode of thinking is outdated and the prevailing approach to business is changing: the days of corporate overlords and on-the-clock desk jockeys are behind us. But old norms seem to stick even as those outdated ethics erode, and business takes a long time to budge. That’s why we need to look to emerging models that can guide us.
As an entrepreneur and executive, I’ve always been a firm believer in a more conscious way to do business. A big part of that, for me, has been adopting a stakeholder orientation. A stakeholder model emphasizes value creation for everyone connected to the business, not just shareholders: that means employees, customers, partners, vendors, the community.
Edward Freeman wrote the book on Stakeholder Theory back in the 80s and has since been a leading figure in the research and practical development of this theory. This way of thinking not only shifts the primary focus away from profits, but addresses the morals and values involved in running an organization, with natural ties to things like corporate social responsibility, social contract theory, and the rise of Conscious Capitalism.
Times are changing fast, and as people demand more from companies and those who run them, the cracks in traditional models are starting to show. The old ways don’t serve our world, and they don’t serve businesses in the long run: We need to move beyond transactional mindsets to embrace value-creation. But in order for new models to operate at scale, more of us must embrace them, not just in principle, but in practice.
Headspring’s stakeholder model
“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 tradeoffs. Great companies endure because they manage to get stakeholder interests aligned in the same direction.” — R. Edward Freeman
At the heart of the stakeholder model is this idea that your stakeholders are your community, and communities value co-creation. When I started this business, I wanted everyone to be involved in shaping the idea of who we were and how we would operate. In a previous post, I talked about the process of working closely with our founding members to come up with a set of core values that drives us to this very day. That was the foundation of the stakeholder orientation we espouse today. Because we were able to come together and truly codify the ways in which we would create value, for ourselves, each other, and the clients and all constituents we work with.
As a growing technology consultancy, we have a lot of stakeholders to account for: our client base is expanding, our team is growing beyond borders, and we’re connected to so many communities: technical, business, entrepreneurial, and our local communities. I created this diagram to begin to map out our various stakeholder groups and how exactly we can create and disseminate value:
Instead of transactions, we’re focused on relationships and the primary point of interest is the value we deliver to each group. Profit becomes an outcome rather than an end goal. The value we create for one set of stakeholders amplifies the value we can create for another, creating a sort of ripple effect. It becomes a “zero-sum” game versus a “win-win.” That’s become our promise to all stakeholders: to create value for one group without taking away from another.
Stakeholder principles in practice
This can seem all very theoretical, but it’s actually not so difficult to apply in day-to-day business. To illustrate how this plays out with vendors or clients, let’s imagine the very real scenario that the circumstances of a contract change. We’ve always been very open and very flexible about handling those incidents: We want to be as responsible as possible while respecting other points of view. The focus is on preserving the relationship and the value we’re creating for one another rather than playing the enforcer only focused on financial outcomes.
I appreciate the value of this approach because I’ve also seen it play out at my second startup, Workify, which is a vendor of SaaS solutions. We’ve been in positions where we’ve had a client who contracted us for the software, but midway through decided to pivot in another direction. Instead of yanking the rug out from under us, the company decided to respect us as stakeholders and honor the terms of the contract. Conscious actions on the part of all stakeholders help amplify this model because it puts us in a better position to uphold our commitments and stay committed to the same principles.
These are not tough decisions. It’s really centered around doing what’s right and respecting the impact on all stakeholders.
Our employees are at the very heart of our stakeholder community, and they’re a primary focus for the business. Phrases like “your people are your greatest asset” mean well but won’t do much to move the dial on new mindsets because you’re still referring to people as “assets.”
The service-profit chain, covered by the Harvard Business Review in 1994, forged the foundation of relationship-based business practices and putting “hard” value on “soft” measures like satisfaction. Basically, it posits that happy employees lead to happy customers lead to greater profit that can be invested back into the business. While that may not be wrong on its face, it’s also very transaction-based and doesn’t account for the employee as a whole person.
So, instead of connecting people directly to profit goals, we focus on what actually drives value for employees as holistic individuals, not just business enablers. I believe this is so important in today’s climate. COVID has accelerated some emerging work/life shifts: Much of the work world’s gone remote and it’s become a struggle for employees to retain a sense of balance. On the employer side, the war on talent is getting grittier as companies struggle to redefine business models and retain their employees in the face of so much change.
At Headspring, we’ve always invested in employees’ personal growth. One of our not-just-sayings is that we want to “create opportunities for people to learn more here than anywhere else.” Beyond that, we are absolutely committed to respecting employees as whole people and creating a culture that facilitates a sense of balance. We trust people to do their jobs and to know when and how they work best. We’re not asking people to work 80 hours to meet our delivery goals. These high-pressure utilization targets take value away from the employees to create value for the client and the business, and that’s neither mutual nor sustainable.
We create value for employees so they can create value for their clients, their colleagues, their families, and their communities too. This is centered around reciprocity, and it’s important that all stakeholders share a common mindset to make it a true win-win-win.
The importance of reciprocity
The reason I’m writing this now—and writing it for everyone—is that the more people who participate in this model, the better it works. As leaders, we can be stewards and example-setters; we can make changes in the way we act and how we do business, but community members have to be on board too.
Thankfully the “golden rule” sort of comes into play with this model. Treat stakeholders how you want to be treated. Create value and value will be created. Conscious action towards our stakeholders engenders more value-driven action on the part of others.
If we treat vendors with respect, they’ll in turn honor commitments or be open to being more flexible. If we commit to creating value for customers, they’ll be more likely to build the kind of lasting, mutually beneficial relationships that businesses thrive on. If we do good for the communities that we’re part of, those communities will support us.
And when it comes to employees, if we respect their value as full people and give them room to grow, we get better-quality work and mutual respect. In the process of breaking down traditional employer-employee relationships, maybe we change how companies are viewed too. Maybe employees stop thinking of companies as “corporate” or “the man”—some entity that they’re beholden to. By adopting a stakeholder mindset, perhaps employees begin to see the company as a community that they’re part of. Your wins become their wins too (just like we say to our clients!).
A conscious world starts with conscious leaders
Alexander McCobin, CEO of Conscious Capitalism, talked to us recently about why embracing new business models matters—not just for CEOs, but for anyone who can be looked to as a leader by someone else (and that could be almost anyone).
“Conscious leadership is becoming such an important topic not only because it’s the right thing to do—it always has been; it’s the best type of leadership,” he says. “But, more and more, people in the world are recognizing and demanding conscious leadership from anyone who could be considered a leader…whether you think of yourself as one or not.”
Adopting a stakeholder mindset provides the foundation for meaningful change. It gives us a model for enacting some of the key principles of conscious capitalism, namely moving away from the profit-focused mindset in order to generate more value in the world. There may not be a perfect way of doing business, but there is always a better one. And it’s contingent on all of us to work together to make “better” our new reality.