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.
Posts in Purpose of Business and the Role of the Corporation:
March 6, 2008 by
John Morelli | Filed under: Purpose of Business and the Role of the Corporation | No Comments »
In 1970 Milton Friedman, the future Nobel laureate in economics, declared that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits . . .” 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 Friedman must have indeed “hit the nail on the head,” so to speak, in correctly reflecting the interests of the private sector regarding social responsibility. But not all agree with Friedman and challenges abound, ranging from approaches like, “good corporate behavior yields a good return on investment” to “doing well and doing good are not mutually exclusive objectives,” to “corporate citizens need to behave like citizens and need to be about more than just making money.” It may depend upon how you define corporate social responsibility, but it seems apparent that all corporations are involved in it, if only to the extent that they obey the law. Legal requirements are nothing less than mandated corporate social responsibilities. Questions that may need to be answered include: “What, if anything, is appropriate Corporate Social Responsibility?” “Given the rights of “personhood,” should corporations be expected to act with the same level of social responsibility as a person and, if so, to what extent?” and from our perspective, “What is or should be the role of the environmental manager with respect to CSR?”
January 15, 2008 by
John Morelli and
Brian Butler | Filed under: Overview,Purpose of Business and the Role of the Corporation | No Comments »
Welcome to the discussion!
Researchers working on this important subtopic include:
Sandy Rothenberg
Fabiana Kotoriy
Nicholas Hernandez
Listed below are the various postings from the research team. Some will be abstracts of and links to relevant literature. Others will be original work posted here for comments, criticisms, suggestions, questions, etc. from professional environmental managers who visit this site.
If you are interested in participating on this professional research team, or learning more about it, please contact us by clicking here.
January 13, 2008 by
Brian Butler ,
John Morelli | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
The article discusses the concept of assigning a corporate identity from a moral perspective. In it the authors suggest that there are moral complications when assigning an identity, positive or negative, to a corporation because the actions and decisions of a corporation come from the individuals that comprise the corporation. The authors argue that there is a philosophical problem in assigning a moral characteristic to a corporate entity, which is an abstraction. The article continues to consider practical and ethical issues in the areas of safety and health, organizational commitment, and social responsibility. Ultimately, the authors contend that from a practical standpoint, the value of the corporate identity will be judged, allowing the potential for it to be used for morally disingenuous purposes.
January 13, 2008 by
Brian Butler ,
John Morelli | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
The paper was written in a first person point of view from an employee or someone involved in the company (Dupont) expressing and describing company direction, past, present and future of not only Dupont, but also the industry. Subjects such as Corporate Environmentalism, Business Integration, Sustainable Growth and Social Responsibility are discussed from a Dupont perspective. The discussion of the paper evolves around the concept of when a company globalizes, it (the company) must place more emphasis on supply chain management in order to become sustainable and socially responsible. Companies who become globalized will tend to externalize supply chain management and production activities, moving away from sustainability and social responsibility. Dupont, as discussed in the paper, has placed incentives within its framework of business in order to work towards sustainability in the environment, increase business development and address social responsibilities. Of course, this cannot happen unless a set of strategies is incorporated to bring greater profits to shareholders, without it, sustainability will never be reached. In respects to social responsibility, Dupont has addressed social responsibility in several ways. The author states that (we, at Dupont)..are “also committed to operating with the highest standards of business ethics wherever we do business in the world”. In order to police that statement, Dupont has incorporated a senior level corporate compliance committee. The author states Dupont recognizes and support employee volunteer efforts in their communities and how Dupont has sponsored some of those efforts. Dupont has also funded many community based sustainability projects. The article continues about all the good things Dupont is doing and believes “the ultimate social responsibility role we (Dupont) have as a global business is to provide products and services that improve the standard and quality of life for people around the world.
January 13, 2008 by
Brian Butler ,
John Morelli | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
The authors of this paper explore the relationships made between sustainable development (SD) and stakeholder relationship management (SRM) using corporate, stakeholder and conceptual perspectives. The dimensions incorporated when exploring these relationships include economic, social and environmental. The authors provide a model in the context of the paper to help visualize their perspective and/or argument on the interrelations of these concepts. The core of the model is essentially the core of the business where management systems are first and foremost. The next ring around the “corporate core” indicates the management approach and corporate social responsibility. Corporate concept and the idea of corporate sustainability is the third ring, and the last, is societal concepts and sustainable development. This visual example portrays the authors’ presentation/interpretations on the relationships of business in society and the importance/ease to managers in implementing programs. The authors present the case that the programs such as SD and SRM help access the “corporate core”. “Win – win opportunities do not simply exist, but that they are created and defined in a societal context”. The article itself is very technical where a lot of principles and concepts are introduced within parameters and is hard to follow/understand if not educated in the field. The authors explain that sustainable development, corporate social responsibility and sustainable development have converged to very similar concepts in recent years.
December 19, 2007 by
Brian Butler ,
John Morelli | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
There are two main roles of business according to Ian Davis. One is Milton Friedman’s idea of the “business of business is business”. He believes the only real purpose of business is to make a profit for the shareholders. The second view is that business has a role in society to be socially responsible. This is a growing movement and businesses are unsure how to deal with some of the conflicting views. Eventually, businesses will need to be able to combine the two contrasting views in order to become leaders in the industry since now the communities and society expect, and need, companies to be socially responsible. A mixture of these two views will lead to shareholder value, market share as well as good public relations while benefiting all.
December 19, 2007 by
Brian Butler ,
John Morelli | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
The author highlights that companies can no longer focus on maximizing profits (neoclassical style) in order to survive. Those who have, are either no longer around or are in threat of being “eaten” as the author uses the comparison to survival of the fittest. Either eat or be eaten is the hidden message of the author. In today’s society, corporations have to express concern and address societal issues in communities in which they conduct business in order to survive. Corporations need to re address old style profit making and refocus investments into long-term investments such as social responsibility efforts and sustainability. This will not only help with company image, but also bottom dollar. Without hesitation the author dives into the concept of how corporations are hesitant to invest into the future because of its unpredictability. However, in order to build that competitive advantage, the author stresses a long-term commitment is needed to survive. The author recognizes that a balance of short term and long-term returns is needed to accomplish this task. Examples of companies used by the author include Arthur Anderson, Enron and a company in Australia named James Hardie, which dealt with asbestos removal. These companies were not financially irresponsible, but rather socially irresponsible, causing reputational damage and loss of shareholder value. The author uses one statement that I really liked “Reputation takes years to build but only seconds to destroy”. This phrase expresses the importance of social responsibility within a community and how a long-term investment into socially responsible programs can help a company grow.
December 19, 2007 by
Brian Butler ,
John Morelli | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
The article published on-line at the MSN Money home page describes, or rather, asks the question if Wal-Mart has indeed reached the ceiling of growth. The article gives specific examples of how, or maybe I should phrase it, why Wal-Mart is loosing its client base. I chose this article to include in my research to highlight the fact that business, no matter what their size, does have a propensity to fail, if it doesn’t meet or exceed customer standards. Social responsibility to the stakeholder also extends to the way a company presents its merchandise to the community and for how convenient it is for the customer to purchase those items. The article gives examples of people using on line services and smaller, more convenient stores, to make purchases in order to avoid the expected “crowded and not so convenient atmosphere found at most Wal-Marts. Wal-Mart is known for its bottom dollar commitment on goods and services. The commitment is becoming increasing difficult to sustain because of competition providing better quality products and services at or near the same price that of Wal-Mart’s. The article uses companies like PepsiCo, Whole Foods Market and Proctor and Gamble as such companies who have shifted focus away from Wal-Mart, forging distribution deals with other companies in an effort not become strictly reliant on their number one retailer, Wal-Mart. Social responsibility in global markets has had mixed success for Wal-Mart. The article uses the example of Wal-Mart exiting South Korea and Germany after “failing to adapt to local tastes and achieve economies of scale”. Japan was also used. In Japan, low price often refers to low quality so Wal-Mart’s low price strategy within the community did not work. Quantitative data is also provided, comparing Wal-Mart with its next closest competitors on a monetary scale. The article also gets into GNP with countries and how Wal-Mart has surpassed national GNP’s as a corporation.
December 19, 2007 by
John Morelli ,
amathew ,
Brian Butler and
| Filed under: Literature Review,Purpose of Business and the Role of the Corporation | 3 Comments »
Wilson, Ian. “The agenda for redefining corporate purpose: five key executive actions”. Strategy & Leadership. Chicago: 2004. Vol. 32, #1.
The author states five executive actions are necessary to help redefine corporations and the future outlook in regards to social responsibilities. The author believes that social responsibilities cannot be over looked and have to be addressed in order for a corporation to survive. The key executive actions referred to are: 1) Develop consensus on a revised statement of corporate purposes and values; 2) Clarify the role of profit in the business equation; 3) Articulate and communicate the distinctions between the old purpose, values and behaviors and the new; 4) Set a strong personal example; and 5) Revise the management measurement and reward system.
In these sets of actions, the author describes his ideas to incorporate social responsibilities into corporations and make them seem profitable and in the best interest for the corporation. The author keeps in mind that this can be accomplished to please not only stakeholders, but shareholders as well. Earning a profit and being socially responsible are not incompatible according to the author.
Overall, the article is very useful, giving direction, ideas, concepts and insight to the development of a socially responsible program within a corporation and the importance of establishing such. Examples are given, obstacles are addressed, and benefits are highlighted.
December 19, 2007 by
John Morelli ,
amathew and
Brian Butler | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
Friedman, Milton. “Social accountability more than just being responsible”. WorldSources Online.
A relatively short article (1010 words) but had some different perspectives on social responsibility. The author believes the term social responsibility refers to corporations performing based on voluntary actions where as corporate accountability would deal “with the control of exercise of power”. The author believes CSR is a vague term, where corporate accountability would fit the definition on what a corporation “has” to do. The author believes the accountability term would not only address corporations social programs but also address the democratic issue and terms for its (the corporations) accountability. The author does concur that the neoclassical theory to business, putting profits above all, is the root problem to social irresponsibility’s. The author compares business with government stating, because of a corporation’s power they, the corporation, often feel as if they share power with the governenment. Social responsibility comes into play when the author is quoted as saying “ Today corporations stand next to, rather than under, democratic governments. Their leaders believe they have a legitimate role, as partners with government, in governing society. Meanwhile, the government is believed to have a less legitimate role in governing corporations”. Social “accountability”, as the author refers to it, would play a larger role in corporations and also a necessary one as well.Government has always placed safeguards to protect citizens from exploitation and neglect from corporations and the market. Now, that these safeguards have been deregulated, corporations are now able to govern society and become a strong institution that can influence, undermine, corrupt and change societal patterns to maximize profits. Social accountability, not social responsibility is the way to address these concerns. The author does not give any examples on how to address these concerns.
