When Wharton announced the creation of majors in “environment, social, and governance” (ESG) and “diversity, equity, and inclusion” (DEI) in the summer of 2022, it represented the
fruit of seeds planted decades earlier on its hallowed grounds.Traditionally, it was understood that the purpose of a business was to maximize value for shareholders. But in recent decades, some academics began to question that premise. Among the pioneering contrarian business ethicists was Professor R. Edward Freeman.
As a postdoctoral student and then faculty member at Wharton in the late 1970s and early 1980s, Freeman developed a management theory that stressed the imperative for business managers to create value not just for owners, but numerous parties with which they interact, resulting in a 1984 book seen as foundational to the stakeholder theory titled “Strategic Management: A Stakeholder Approach.” Freeman’s theory would come to prevail over corporate America.
By 2019, following the tumult of the financial crisis, amid what some cast as America’s “Great Awokening,” and a revolt of American elites against President Donald Trump (a Wharton graduate himself—much to the
chagrin of some affiliated with the school), the powerful and prominent Business Roundtable redefined a corporation’s purpose. One hundred eighty-one CEOs of the world’s largest businesses signed a letter committing to lead their companies not solely for shareholders, but “all stakeholders,” including “customers, employees, suppliers, [and] communities”—that is, for all manner of parties that they might impact up to and including society itself. What’s more, the executives pledged to pursue a broader social mission aimed at promoting environmental sustainability, demographic diversity, and “dignity and respect.”
In practice, major corporations’ stakeholder focus would manifest itself in a surge of progressive activism both in terms of internal training, hiring, and operating practices, and in their support for public policies on matters from
guns and abortion to election integrity, consistent with this new broader vision of corporate responsibility.Today most large U.S. companies devote regulatory space in their filings to demonstrating their ESG commitment. And just as trillions of dollars have flown into ESG-related funds in financial markets, consulting firms such as
PwC have pledged to dramatically ramp up their ESG-related hires, a signal that would seem to corroborate reports of demand for ESG talent outstripping supply within corporations aiming to meet goals such as decarbonizing their supply chains and preparing ESG-related reports.Stakeholder theory, in short, enabled and fueled ESG’s rise.
Freeman
says people ought to “look at a business as a societal institution”—a view that has clearly taken hold in the business world, and which resonates at Penn’s business school.
