Purpose of Business and the Role of the Corporation

Adam Smith and other economists of the early nineteenth century believed that the ultimate goal of all economic activity was “happiness.” While the pursuit of wealth was emphasized, it was understood that morals and social responsibilities should take precedent. By the end of the century, however, the precedent had changed to focus on human wants as well as needs. At the turn of the century, economist Vilfredo Pareto made the case that consumers make choices based on preferences, and that those preferences, not social welfare, should be at the center of concern for economists of the day. Severing this tie with “happiness” precipitated development of a new school of thought called neoclassic economics which emphasized maximization of utility and profit as principal objectives.

Assuming a positive correlation between the relevance of a declaration and the number of times it is cited by others in papers relevant to the topic of interest, then there can be no doubt but that Milton Friedman’s claim that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits . . .” is indeed an appropriate statement with which to open a review of thoughts on the purpose of business.

According to Harvard Business School Professor Constance Bagley, “corporate officers and directors are legally required to act in the best interest of the corporation. Contrary to popular belief however, this does not mean maximizing shareholder value without regard for the effect on employees, customers, suppliers, the environment, or the communities in which the corporation does business.

In “The Myth of Shareholder Primacy,” Charles Berger suggests that acting in the best interest of the corporation means more than only the best interest of the stakeholders and incorporates “a web of relationships, contractual and otherwise, among investors, workers, customers, suppliers, communities, and ecosystems.” This view then expands the legal duty of the corporate executive to act “in the collective best interest of all these groups” and holds that it is a basic legal principle that “directors in fulfilling their duty to the company must consider the interests of both present and future shareholders.” This principle requires corporate executives “to balance the short-term and long-term interests of the corporation, and puts to rest any notion that there is a duty to “maximise profits” over any particular period of time.”

It appears clear that whether implicitly or explicitly recognized and/or stated, social responsibility/control is, in fact, an element of corporate organization and governance. The real issue is not whether social responsibility/control exists in the corporation but rather if it is addressed reactively or proactively.

Combining these seemingly disparate thoughts, one might answer the question, “What is the business of business?” with the declaration: “To provide the goods and services that society wants while ensuring the continuity of the corporation.” “Continuity,” could be interpreted to include: maintaining a strong investor base by returning reasonable profits; balancing short-term and long-term interests so as to ensure a healthy future for the corporation; engaging proactively in protecting and enhancing the economic, environmental, and social well-being of the host community.

There are many questions to be asked and answered here, all revolving around the question of, “What is the purpose of business and the role of the corporation in society?” A consensus of opinion among environmental managers on any part of this issue could help better define our role in the organization, the economy and society and help others to understand what to expect from us.

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