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Academy of Management Perspectives

August

The Wal-Mart Effect and Business, Ethics, and

Society
R. Edward Freeman*

ome time around 1980 or so, when the business

world was abuzz with In Search of Excellence, I
happened to work on an executive education
program with Tom Peters. He told me that I just
had to go and visit a Wal-Mart. This crazy guy,
Sam Walton, was going to change the landscape
of business, and in Peters eyes the guy was brilliant. Taking Peters seriously, and as a former
K-Mart employee, I sought out a Wal-Mart. I
walked in with a scientific mindset to see what
the fuss was about. The greeter welcomed me with
a friendly smile and a Welcome to Wal-Mart. I
found myself looking to buy something within 5
minutes. A lot of water has gone over the WalMart dam in the last 25 years. And, recently, we
have been treated to articles, books, films, and
cases on what is now an American icon.
The rise of Wal-Mart has produced a number of
effects that many commentators find surprising. I
want to argue that our understanding of Wal-Mart
illuminates a large gap in our understanding of
business organizations. However, I want to suggest
that what a recent observer calls the Wal-Mart
effect (Fishman 2006a; 2006b) can be better described as the stakeholder effect. If we can understand Wal-Mart with a stakeholder context,
then we can see what is wrong with our current
understanding of business; what went wrong at
Wal-Mart; and what the company is currently
doing to make things right.

The Wal-Mart Effect

n a recent essay, Charles Fishman has suggested
that Wal-Mart is reshaping how we see business
(Fishman 2006a). He takes us conceptually inside Wal-Mart and asks us to make some judgments about how the company is managed and

what its effects really are. What he is really doing

is a kind of clinical case study complete with real
people. Wal-Mart and its stakeholders are humanized, not made into qualitative variables that have
inter-rater reliability. The stakeholders that Fishman writes about portray what McVea and Freeman (2005) call a names and faces approach.
This approach is especially important for research in business, ethics, and society. Too much
work has already been done in the spirit of making
the field legitimatei.e., conducting studies that
are acceptable to mainstream management journals. Yet, business, ethics, and society as a field
is or should beprofoundly critical. Scholars in
this area should be critical of the research methods or methodolatry as some have suggested
(Freeman
2005)assumptions,
conceptual
schemes, and requisite apparatus of mainstream
scholarship. Fishman shows us one path to accomplish such a critical perspective. His analysis yields
insight and is enormously pragmatic.
Unlike many scholars in business, ethics, and
society, Fishman has an open mind about WalMart. Unfortunately, he seems to have missed the
fact that a number of scholars simply know that
Wal-Mart is the cause of much of the misery that
goes on in the world, from poverty to outsourcing.
Fishman fails to recognize that what he is really
arguing against is the traditional theory of business
and capitalism.
This traditional theory, or standard story, or
narrow economic view of business, holds that we
should be able to understand what goes on at
Wal-Mart in purely economic terms. The traditional theory says that Wal-Mart, like any business is trying to maximize returns for shareholders,
that it provides benefits to customers and employ-

* R. Edward Freeman (FreemanE@darden.virginia.edu) is the Elis and Signe Olsson Professor of Business Administration & Director,
Olsson Center for Applied Ethics at the Darden School of Business of the University of Virginia.

2006

Freeman

ees which are understandable in purely economic

terms. Of course there may be some knock-on
effects, but for the most part these will be minimal
and manageable by government. Wal-Mart is no
different from any other business, according to
this standard account.
Nothing could be further from todays business
reality. The traditional theory simply cant account for the growth and development of economic, political, social, and technological enterprises like Wal-Mart, Hewlett Packard, Citibank,
and others. The impact, which Fishman calls the
Wal-Mart effect, reaches far beyond economic
consequences and motivations. Not only does
Wal-Mart affect its customers through offering
everyday low prices, its employees by their jobs
and benefits, and its shareholders through returns,
it also impacts communities, suppliers, NGOs,
media, governments, critics, and a host of others.
In fact, what Fishman discovers is less about WalMart and more about our common (and flawed)
understanding of business and capitalism.
The Stakeholder Effect
ishman claims that the sheer scope and scale of
Wal-Mart is what gives rise to these effects. He
is correct that the scope and scale of Wal-Mart
makes these effects impossible to miss, but they
have been present since the opening of the first
Wal-Mart and every other business start-up. Any
business is a set of relationships among at least
customers, suppliers, employees, communities,
and financiers (the people with the money). At
some particular points along a business development one or some of these stakeholders may be
more important than another. Once a business is
established, all of these stakeholders become important to the value creation process and the
managements job is to keep these stakeholder
interests all moving in the same direction. As
companies get even bigger, other groups become
stakeholders. In Wal-Marts case these include
governments, NGOs, critics, academics, media,
and others. Lets call this idea the Stakeholder
Effect and define it in the following way:

Any business affects or can be affected by the actions

of customers, employees, suppliers, communities, financiers, and possibly others. As companies grow and

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develop, some stakeholders become more important

than others, and new stakeholders sometimes emerge.

If you expect the stakeholder effect to be visible

in purely economic terms, you will have ignored
most of the actual practice of business during the
past century. The stakeholder effect is not new.
Perhaps at the turn of the twentieth century it
might have been called the Carnegie effect or
later the DuPont effect. In some industries we
may have called it the Medicare effect or oil
shock effect. From the old adage about Whats
good for General Motors is good for the USA, to
the current public policy about oil prices, global
warming, and environmental policy, business has
never been just about the economics.
Until very recently we had little systematic way
to account for and understand these stakeholder
effects. However, for the past 40 years a group of
scholars, working primarily in the area of management known as Business, Ethics, and Society
have developed a way of advancing our conversation about the stakeholder effects of business.
They have employed a variety of concepts such as
stakeholder theory, corporate social responsibility,
the triple bottom line, social contracts, and others. The point here is not that one or more of
these are correct, but that there is a body of work
that validates exactly what Fishman is telling us.
Wal-Mart and the Stakeholder Effect
hrough this lens, we can see what has really
gone wrong at Wal-Mart. By focusing its business strategy within the context of the traditional theory, Wal-Mart executives could come to
see their fanatical emphasis on Always low
prices. Always. as clearly acceptable. In fact, we
should not be surprised to find that they are in fact
surprised when their critics take them to task for
being good businesspersons. Fishman tells us as
much. The Wal-Mart executives would naturally
see themselves as acting within the accepted
bounds of our common understanding of capitalism. Competition is supposed to lower prices. Customers are supposed to win. Businesses are expected to continually build better mousetraps to
stay ahead of the competition. And, Wal-Mart
has been a continuous source of innovation that

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Academy of Management Perspectives

has affected all stakeholders that it touches. And,

all is expected to be right with the world if this is
done.
Business is just more complex. In todays world
the first and most important question for a business executive to ask is: What is our purpose, and
how does it make each of our stakeholders better
off? At a minimum a business should be able to
articulate a clear and agreeable answer for customers, employees, suppliers, financiers, and communities. If there is no answer, then in a relatively
free and open society, these groups or their representatives (some self-appointed) will use the political process to try and find redress.
And, that is the current mess in which WalMart finds itself. It cant do much right, simply
because it is trying to tell its story in the narrow
economic mode. Wal-Marts response to critics
who say it is ruinous of communities should be,
according to the standard theory: Well, mom and
pop shops have been ripping you off for years, and
people vote for us by shopping at Wal-Mart, even
those who dont like us. Unfortunately, this response is beside the point. It couches the new
stakeholder reality in the old economic story.
Fortunately, there is a clear and compelling
path for Wal-Mart, one on which they have already embarked. They must adopt a philosophy of
stakeholder engagement and apply the same
level of passion and engagement to making the
rest of their stakeholders better off, in addition to
customers. There is little reason to believe that
Wal-Mart cannot do this, if they see the need.

August

Already, they have undertaken to work on the

community issue by addressing the environmental
impacts of their stores and goods, as well as their
impact on existing businesses in new communities
in which they want to locate. They have begun a
process to repair the relationship with their associates, and Im sure there are other initiatives of
which I am unaware.
Is it too late? Only if Wal-Marts executives
and critics alike fail to see that the stakeholder
effect is in fact the reality of twenty-first century
business. Executives ignore stakeholders at the
peril of the survival of their companies. Critics
need to see companies as better able to engage
their concerns directly, rather than through the
coercive power of government. All of us need to
come to see capitalism and business for what it
really is: a system of voluntary social cooperation
through which we create value for each other.
The old story about Wal-Mart is long dead. Long
live the new Wal-Mart.
References
Fishman, C. 2006a. Wal-Mart and the decent society: Who
knew shopping was so important? Academy of Management Perspectives, 21(3).
Fishman, C. 2006b. The Wal-Mart effect. New York: Penguin
Press.
Freeman, R. E. 2004. The relevance of Richard Rorty to
management research. Academy of Management Review,
29: 127130.
McVea, J. F. & Freeman, R. E. 2005. A names-and-faces
approach to stakeholder management: How focusing on
stakeholders as individuals can bring ethics and entrepreneurial strategy together. Journal of Management Inquiry, 14: 57 69.