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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December 19, 2007 by
Brian Butler | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
In modern times, organizations are under increased pressure from stakeholders to embrace Corporate Social Responsibility (CSR) as a business practice. While the benefits of CSR are well documented, opening a business up to new commitments carries may well expose that business to new risks. To study those potential risks, the authors conducted a study of multiple individuals covering a broad range of business functions and organizational types to identify and ascertain their perceptions of the potential risks associated with CSR. The potential risks identified during the study were non-productive spending, stretching the organizational coalition, bad strategy implementation, legitimacy destruction, issue ownership, and poor risk communication. In the end, the authors suggest strategies for managing those risks.
December 19, 2007 by
Brian Butler | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
Sawhney discussed many authors’ views and specifically challenges his own views on the purpose of business. He speaks of the leader of Merck, and finds the he focuses on helping people that need medications and in turn the profit will follow. By not focusing on profit his company is able to become a better part of society. Sawhney thinks of corporations as beings; organizations need to be nurtured in all the same ways a human being needs nurturing for the mental, emotional and spiritual needs. Companies need to evolve into high level of consciousness in order to survive. Overall, Sawhney states that values should drive business not value.
December 19, 2007 by
Brian Butler ,
John Morelli | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
John Browne speaks about the two views of business. He determines that one perspective is making money and delivers something called shareholder value and the other is to do that but in a balance of what we take out of society we should promote the society through socially responsible programs. He believes that businesses that usually create the appearance of being socially responsible without the follow thorough. Browne believes that investment in the future is the key to success for any business. The people, products, ideas and markets are part of the long-term business. The future oriented businesses are the ones that are profitable over the long term and are environmentally and socially responsible. “A good successful business is part of society and exists to meet society’s needs; that is the purpose of bus at the highest level.” He understands that there is a responsibility too “money to reward those who’ve trusted us with investment,” we also need to behave responsibility in the activities businesses currently have rather than creating additional activities to be socially responsible companies. A good business fulfills its purpose “by supplying goods and services at a price people can afford in a manner which makes the activity sustainable.”
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, Assadourian, wrote the article expressing the role stakeholders have on corporations. Specifically, the author addresses the strategies of the stakeholders when “encouraging” corporations to participate in “green” practices. The author uses the idea of a snowball effect when stakeholders took action against the timber and mining industries. The stakeholders, RAN or Rainforest Action Network, did not target the timber and mining industries exploiting the area, rather, the financial institutions that provides their funding. It is the financial institutions who are more in the “spotlight” who would be more impacted by negative publicity. Citigroup finally changed its lending practices by not supporting unsustainable industries. At the same time, Citigroup profited with the image and advertising of going “green”. From this other lenders followed suite…the snowball got larger. The three largest banks who capitalized on the “green” card currently hold $4 trillion in assets. Another example RAN had over industries was in the Do – It – Yourself home improvement stores like Home Depot. Home Depot was confronted with its wood buying practices and quickly changed strategies. A month later, Lowes followed suite and within nine months, eight of the ten largest DIY stores developed the same practices. Socially Responsible Investing (SRI) was highlighted in the article as a way to make corporations improve their records and compete for capital from lending institutions.
December 19, 2007 by
Brian Butler ,
John Morelli | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
Burress addresses the issue of corporations and their obligation on addressing global emission regulations. The paper defines two sets of corporations and how they relate to societal views. For the purpose of the paper, a corporation is defined as obligations at stake that rest jointly on the institution and its leaders. The first corporation is stated as a neoclassical corporation where corporations have only a hardnosed responsibility to make a profit. The other corporation is defined as the stakeholder corporation where share holders imply a much broader ethical framework. The stakeholder corporation follows rules of behavior that would benefit a social welfare function or in other words pursues a “common good” for its stakeholders. These two corporations are compared with each other against time frames for regulation to include short, medium and long term runs. The author explains why and how the two above mentioned corporations either would support or push away regulations within those time frames. Theories are explained, empirical versus normative theory of corporation, strict neoclassical theory, semi-strict neoclassical theory and stakeholder theory. The author also explains responsibilities for each corporation and there obligation or conceived action(s) for such. These responsibilities include legal, contractual and ethical. Other frameworks are provided for modeling the “two” corporations and what, if any, obligations they should support when it comes to global emissions. The author describes the neoclassical thesis as this…”social welfare can be maximized if production is performed by profit maximizing firms that are constrained by competition and by appropriate government regulation”. The author’s findings conclude that even though profit maximizing corporations will simply set goals to maximize profits, such a goal will not maximize welfare (welfare described as everyone’s benefit), making the ethical premise of the neoclassical theory void. If profit maximizing corporations make their own rules in regards to making profits it would generally imply, for example, no controls on emissions. No controls on emissions does not benefit welfare.
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 gives a different kind of perspective on corporations. A perspective that is common when it comes to corporations and their influence amongst community, business and government, but explained and compared to one of a “host” within a body, similar, for example, to a parasite invading and destroying its surroundings. The article explores the metaphor the author refers to and takes a look into the evolution of the corporation and its destructiveness. The article gives a good foundation and history of the birth of corporations starting back to the European Middle Ages and progresses through until modern day (2005). The author writes about the corporation (the parasite) and how it negatively influences society and calls for corporations to become more mutualistic with its environment. The author also provides quantitative data on the just how powerful and influential these corporations can be just by the sheer amount of capital they (corporations) generate. The author uses Wal-Mart as an example and some of their “exploitations”. Corporations have achieved considerable freedoms since their birth and continue to grow unchecked. In order to turn the current trend around, the author, has suggested some areas that need to be addressed. Some of these suggested ideas are from within the corporation and some from a societal perspective. Policymakers and activists are fighting to strengthen labor legislation and reform campaign finance laws. Shareholders becoming a force of change, activists groups pressuring corporations to re evaluate their commitment to the community and address societal needs. And, for the most part, corporations need to appear “socially responsible” if they want long-term stability and to conduct business ethically.
December 19, 2007 by
Brian Butler | Filed under: Literature Review,Purpose of Business and the Role of the Corporation | No Comments »
Social risk is a growing area of concern for corporations, especially for those corporations going global. The paper explores and gives a framework for companies on social risks as they become global. Uncertainties in corporate decision making contribute to hidden vulnerabilities that business can and now face. According to the authors, some of the reasons why vulnerabilities exist include 1) Large extended enterprises made up of independent organizations but with tremendous pressures to grow and perform as a unit. 2) Rapid rates of change in technology, connections and information flows as a result of globalization. And 3) Problems in managing scale using methods rooted in controlling all decisions across the entire extended enterprise.
An answer to the issue on how a corporation can avoid the social risks associated with corporations, the authors look at company perspectives on social issues becoming a competitive necessity and fully involved in corporate strategy in order to manage those risks. Corporate social responsibility programs are seen, according to the authors, as a way to understand the dynamics of operating globally and to manage those risks efficiently. The authors present the argument of the way to address social risks is to balance those risks against business decisions, then determining the quality of engagement with the stakeholders and their associated issues. The authors explain two ways of doing this. 1) Identify the empowered stakeholders and their key issues and 2) determining the highest level of engagement and information sharing necessary to address their concerns and reap the mutual benefits from improved accountability and better relations with stakeholders. An example produced by the authors was the fall out of the Nike Corporation after the published article in the New York Times, accusing the company using sweatshops to increase profits. A snow ball effect started to where Nike addressed the “risk” and developed a department for managing its supply chain departments. Nike ultimately recognized that it can only become more profitable and sustainable if it was corporately responsible.
Source: http://www.ksg.harvard.edu/m-rcbg/CSRI/
