What is the Purpose of a Business Today?

In recent days, a major statement was released by the Business Roundtable, a private organization which represents more than 180 very influential US corporations, employers of 15 million people who pay 296 million dollars in shareholder dividends. The CEOs have announced that the purpose of their businesses will be to “promote an economy which serves all Americans” and “exercises a leadership which benefits all relevant stakeholders: consumers, employees, suppliers and shareholders.”

Such a declaration may be explained in two key ways. The first is political and is connected to the presidential election which will take place in the US in 2020. This election will be unprecedented in that the Democratic Party may elect a presidential candidate from the left, such as Elizabeth Warren or Bernie Sanders, both fierce critics of the large corporations which they blame for their contribution towards the corruption of the American political system. In this context, the Business Roundtable’s statement may be interpreted as a message for electors that corporations have as their purpose not only to serve the needs of shareholders, but the whole of society.

The second reason is more profound and has its roots in what we can call the rise of a new vision of capitalism. The Roundtable’s statement looks to express a fairer and more democratic vision of capitalism. It also represents a defence of the idea that it is possible for capitalism to work for all of society, not just a small minority. 

In the last decades, an intellectual battle has emerged between two opposing corporate philosophies in terms of what the overall purpose of a business should be. The first, known as Shareholder Theory, supports the idea that businesses should have as their fundamental purpose, the generation of the largest possible profits for their shareholders. This philosophy was driven by the distinguished University of Chicago economist Milton Friedman. An alternative philosophy known as Stakeholder Theory promoted by Edward Freeman of the University of Virginia, supports the idea that the purpose of a business should be wider, that it should serves all parties who contribute towards value generation: clients, employees, suppliers, the communities in which they operate and of course the shareholders. From this theory emerged the school of thought known as Corporate Social Responsibility.

For decades, Milton Friedman was winning the battle, as the thinker with most influence over the business media and academics. Things began to change at the beginning of this century when numerous corporate scandals came to light such as those led by businesses such as Enron, Tyco, WorldCom and many more, in the US and abroad. Recently, equally damaging cases such as that of that of the bank Wells Fargo have been revealed, where for years, the bank faked the opening of bank accounts and the issuing of credit cards to give the impression that it was in aggressive growth. Another example, no less serious is that of Volkswagen (VW), which released diesel vehicles onto the market which were non-compliant with emissions standards but which could pass emissions testing, thanks to the installation of a device capable of outsmarting the testing system. The prime motivation for this fraudulent action was to increase the market penetration of VW in the US where, without the device, it would have been impossible to pass emissions control testing.

In the mid 1990s, cases of human rights violations came to light committed by companies subcontracted by large multinational corporations in Asia, Africa and Latin America. At first, the multinationals were reluctant to assume any responsibility, but with time their policy changed. Codes of Ethics were introduced with which all of their suppliers were obliged to conform in order to remain in the supply chain.

Other disturbing cases which came to light were those of companies which occasionally caused severe environmental damage. The most recent of these was the oil spillage into the Gulf of Mexico from a BP platform. Studies carried out by experts concluded that the principal cause of this accident was the decision of the company to not make the security investments required in order that the company’s financial results not be impacted. 

These examples have forced a critical examination of the Shareholder Model. The main criticism has been that a large proportion of the companies who doggedly pursue the satisfying of shareholder earning expectations are prone to engage in illegal and ethically inacceptable business practices. Almost all businesses which have tried to placate their shareholders with false strong financial results, or with strong results which have been achieved in an illegal or unethical manner, have severely damaged their reputation. Furthermore, those involved–employees, clients, communities and without doubt, their shareholders-have experienced significant losses. 

Following the Great Recession of 2008, another disturbing chapter of recent corporate history, one is justifiably obliged to ask once again what the purpose of a business should be. In the light of current history, it can be established that it is legitimate that companies look to deliver good financial results to their shareholders, but not at any price and even less at the expense of all the stakeholders who contribute to the value generation of a business. In this respect credit must be given to CEOs of the Business Roundtable whom, on recognising that the mission of their businesses should include all stakeholders and not only shareholders, have made an important step in the right direction.