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.)