The Purpose of a Company Is…
Thinking that the purpose of a company is to make a profit is like believing that the purpose of living is to eat.
Now that we’re clear about where I stand, and that this is going to be a bit of a rant, here we go.
The Purpose of Living is Not to Eat
I’m with whomever it was that said the ‘purpose-of-a-company-is-to-make-a-profit’ thing is back-asswards.
But let’s not start at full rant level. Let’s start by actually parsing the word “purpose.”
May I suggest that the statement “the purpose of [whatever] is…” does not actually mean anything unless given a context. And there are many contexts.
A sociologist (structural-functionalist variety) would look at a company and ask, ‘what social role does that kind of entity fulfill?’ Here are just a few answers.
• From the point of view of a state or local government, one role of companies is to fund a tax base and employ local citizens;
• From the point of view of a federal government, a corporation is a vehicle for implementing tax collections, health care policy, and vaccinations;
• From the point of view of the Supreme Court—at least recently—a company is indistinguishable from a human being when it comes to contributing to electoral campaigns and free speech;
• From the point of view of shareholders, it is to provide a return on shareholder investment;
• From the point of view of customers, the purpose of a company is to create customers (this in fact was the view of Peter Drucker).
A religious person might look at a company and say, “The role of a company is to allow man the means to fulfill God’s mission on earth.”
An anthropological historian might say the role of a corporation is to aggregate capital to fund larger-scale economic activities than could be done by individuals working alone.
I don’t know what Milton Friedman meant when he said it; he could perfectly well have meant, “if a company is making a profit, it’s doing all the other things it’s supposed to be doing, no need to inquire further.” But it’s clear that Friedman has since been hijacked by those who have a far narrower, and more corporatist, agenda to pursue.
And so on. Without any context, absolute statements about the purpose of anything reveal either intellectual laziness or a political opinion—usually the latter. But let’s continue.
Corporations Are Not Granted Divine Rights
Often what people mean when they equate corporate purpose and profit is to suggest that the concept is primary, fundamental, or very basic, or a core principle; not quite revealed truth, but not far from it.
So it’s worthwhile remembering the source of legitimacy of a corporation. The first were formed in England in the 17th century, e.g. the Hudson’s Bay Company; they were formed by authority of the government. In the US today, companies are chartered by the States. Again, legitimacy derives from the government. In whatever country we’re talking about, corporations are granted their legitimacy by way of the state.
There is no ‘right’ to profit for a company. There is no Bible that imbues companies with extra-legal status. No tablets were handed down, no assembly of people blessed companies with a ‘purpose’ agreed upon by all.
What about corporate charters that require companies to be responsible to shareholders for earning a return? I’m not a lawyer, but I’m reasonably well-read, and I’m not aware of any shareholder suits that invoke that clause to argue against excessive management compensation. From which I conclude there’s probably a lot of latitude for interpretation.
The Role of Companies
The real role of companies is hardly self-evident; in fact, it’s an excellent subject for public policy debate. The key question is: what do we want the role to be?
A company is a creation of the state, which in turn is beholden to its citizens. The question of the role of a company is on the same footing as the role of any other civic institution; what do we want to be the role of our public schools? Of our prison system? Of our approach to civil rights?
It’s a great question, and very timely. Let’s not shut down the discussion by assuming there’s some pat debate-ending answer.
(For anyone interested in pursuing this line of thinking further, I find the Wikipedia entry on “philosophy of business” to be thorough and thought-provoking.)
Charlie –
I generally take the anthropoligical view that a company is an aggregation of capital. I would also add in a centralization of management.
In the end, a company is just a tool. It’s what you do with it that matters or causes the problems.
Even if you believe in the ‘purpose-of-a-company-is-to-make-a-profit’ approach, you need to balance short-term profit against long-term profit. Which means at some point you end up with the realization that a company need not make a measurable profit at the expense of everything else. Long term profit is largely a guess or a bet on the future.
Profits to a company as food is to a human is a great analogy. If either goes without, it will die; therefore, each is necessary. However, as Charlie pointed out, that doesn’t mean that profits and food are their purpose. Businesses are created to meet a need.
The business world seems to fluctuate between the two extremes, exist for the purpose of serving only itself versus exist for the purpose of helping others at the expense of oneself (okay, we have probably never gotten to this extreme). Wall Street is definitely much closer to the first extreme and that is exactly why we need to continue to pontificate about the many benefits that corporations can bring to society that are not solely self-serving.
Charlie — this is right on the mark.
Milton Friedman’s statement that "the purpose of a company is to create shareholder value" is one more way Wall Street highjacked thought-leadership about money and business.
Ages ago when we were in business school we learned that the purpose of business was to "provide goods and services competitively at a profit" and the purpose of an an investor was "to make money."
This pull and tug between business and investment is as old as capitalism, and the cause of each of the depressions and panics over the last 300 years. (see http://www.warrenco.com/2__Collaborative_Commerce__RPL__V3.12_Dec_12-08.pdf )
Real value in a business is not created by manipulating markets and money, but by the hard work and innovative ideas of people — the entire work team, including all the stakeholder. I know of no employee who was ever motivated to come to work just so he or she could create monetary value for some unknown stockholder.
Robert Porter Lynch
Excellent article…here are some thoughts for consideration:
Stockholder vs. Stakeholder
The stockholder theory states that there is only one social responsibility of business: to use its resources to engage in activities designed to increase its profits so long as it operates without deception or fraud. This theory was introduced by Milton Friedman, a prominent economist and Nobel Prize winner, who believed that the corporations’ only responsibility was to its stockholders and that the latter are interested in profi t maximization. Therefore, leaders should act as agents for stockholders and focus on their interests.
Another extreme is the stakeholder theory by R. Edward Freeman, which focuses on who is being affected. In Freeman’s “A Stakeholder Theory of the Modern Corporation,” he suggests that leaders are obligated to all stakeholders: customers, suppliers, management, owners, employees, and the local community—those that are vital to the survival and success of the corporation. We all have a moral obligation toward other human beings. Corporations that make profits should be held socially responsible for contributing to the improvement of society financially and in other ways, e.g. recycling of products and contributing to worthy causes regularly and frequently, rather than waiting for a disaster to occur and then contributing with a view to favorable publicity.
Immanuel Kant analyzed Friedman’s stockholder theory and Freeman’s stakeholder theory, also known as Kantian capitalism and added that when corporations follow the stockholder theory, they fail to recognize and respect the needs of those who contribute to their existence and place themselves in a position to self-destruct through negligence and selfishness. Therefore, the stakeholder theory is superior to the stockholder theory.
When faced with severe hardship, some companies lay off people, in line with the stockholder theory. Other companies have more concern for employees’ needs and try to reach some form of compromise and in so doing, demonstrate their concern for the families of their employees. The result is usually favorable to both the corporation and its employees.
When Frederick Winslow Taylor’s views on scientific management were being put into practice by business organizations, owners were the only stakeholders. Leaders were obliged to focus on profit maximization, and employees had to work hard for unsatisfactory wages. Environmental issues were not a concern, and customers bought what was offered in the market. Today, firms have to deal with the bargaining power of employees, trade unions, customers, suppliers, etc. and there are environmental concerns, government regulations, etc. Unfortunately, many firms still focus (mainly) on profits and pay attention to stakeholder needs only when pressured to do so.
Ethics
Ethics is concerned with "doing the right thing" but moral standards differ between individuals depending upon their upbringing, traditions, religion, social and economic situations, and so on. Hence, the existence of grey areas. Therefore, state the “moral” problem in a simple manner and review feedback so that an acceptable decision can be made with minimal overall harm/loss—i.e., we are concerned with “Pareto optimality,” which is related to the net balance of benefits over harm for society as a whole.
Economic theory is concerned with the efficient utilization of resources to satisfy consumer wants and to maximize profit and satisfaction. Pareto optimality exists at the point where it is impossible to make any given individual better off without harming another given individual. Although most businessmen believe that profits and cash flow are very important, there has been a move toward the recognition of social responsibility.
The blind pursuit of profit has resulted in bribes, environmental problems, injured workers, unsafe products, closed plants, and so on—this is unethical. Many business schools emphasize the philosophical, rather than the practical aspect of ethics.
Ethical leadership calls for morals, fairness, caring, sharing, no false promises or unreasonable demands on others, etc. Is “ethical leadership” an oxymoron?
I have a policy of distributing free abridged versions of my books on leadership, ethics, teamwork, motivation, women, bullying and sexual harassment, trade unions, etc., to anyone who sends a request to [email protected].
Maxwell Pinto, Business Author
http://www.strategicbookpublishing.com/Management-TidbitsForTheNewMillenium.html
Perhaps a note on Freedoms To vs. Freedoms From
Thanks all for constructive thoughts.
Maxwell, one small correction and one thought.
The correction is that of course Kant himself never analyzed either Friedman or Freeman, having been dead several hundred years.
More substantively, part of what I want to say is that this whole of phrasing things–"Theory X is superior to Theory Y"–is bogus. There is no "is" when it comes to theories like this. There is no objective standard of reality, there is no final arbiter to say capitalism "is" stakeholder, or shareholder. The verb "to be" is an ontological mistake when applied to this.
The only way to decently talk about this is to call these "theories" what they are–ideologies, belief systems, habits, cultures, values.
Someone’s belief system about the ‘purpose’ of companies is just that–a belief system. There is no right or wrong. What you can say is that one works better, or describes more, or is ascribed to by more or fewer people, or promotes more social justice, or distributes welfare better, or better optimizes something.
But let’s not get confused about the phrase "the purpose of…" having any more meaning than the declariation that "I like Obama" or "I’m a Republican."
If we’re to have any kind of sensible dialogue, it’s going to start by identifying not two, but dozens, of roles that a corporation plays in society. I tried to list at least a few; every one of them could qualify as a "purpose" for someone who’s so inclined to focus on it.
Charles – I totally agree with your point of view that organizations are about much more than profit. It’s my hope that there’s sufficient yearning, sufficient passion, sufficient drive and sufficient purpose amongst all leaders out there that we can reclaim the workplace and reshape it to a place where there’s room for profits and principles and people, all equally valued.
Thanks for a thoughtful article!
And it goes to the heart of the matter just what it is to form a corporation and run a business.
In a world of companies that are global in nature and an internet that gives us all access to a world wide market we need to think about just what it is we do and why we do it.
And as we watch companies like Google who’s famous “DO NO EVIL” is seen in the light of a company that no longer follows that creed we need to take a moment and think.
Is all there is to business and running a corporation about making money and having power?
Do we as people have a much larger role in our community, our country, and even our world than just taking, controlling, and doing as we like?
It certainly gives me pause to think as I’m one who is in the business of helping setup, advise, and manage companies. As such I also need to think what about what I do and what it means to do it right.
The purpose of a company is to create a customer – Ansett ( not sure if it Reg or his son Bob)
Greg,
Thanks for the comment. I’m not familiar with Ansett, but Peter Drucker is also known for having suggested that “the purpose of a business is to create a customer.”
A note on my own: anytime someone starts a sentence with, “the purpose of X is….” they are making an ontological statement. There can be no proof or disproof of such statements; their truth is entirely contextual. So they tend to be useful as statements of a point of view, or a world-view. Which can be quite useful on occasion, this one being a good example, IMHO.
Great piece, Greg. Thanks for the Wiki link. I asked myself this ver question in October 2012 while vacationing in Bali. I am attempting to finish my piece and would like to quote you, if I may? Will send through the final article.
Neville,
Certainly. Delighted it resonated.
Charlie