What is the purpose of business?
Summary
The purpose of business should be clear to everybody, but it’s not. The issue is deliberately confused and we are mislead to ensure business continues to serve wealthy shareholders, at the expense of society and environment.
Article
Questioning the purpose of business has to be the most fundamental and obvious question of all, as it’s only through understanding its purpose that we can implement appropriate measures to ensure it delivers what we expect of it. However, there appears to be considerable confusion as to what its purpose is.
Business is made up of different contributors. Shareholders provide the financial capital, so people often think of them as the “owners”, whose needs take precedence over all others. The reality is a lot different. Shareholders only provide part of what’s needed to make business a success. Other stakeholders contribute in a significant way to the success of business. So, to succeed over the long-term, business needs to reward all contributors fairly.
Others see things differently. Milton Friedman and his “Shareholder Theory,” suggests creating profit for shareholders is its sole purpose. This was quickly embraced by the wealthy, as they are predominantly shareholders. The laissez-faire economic approach of free markets and globalisation which flowed from this idea, now has many questioning its wisdom, as it’s a major contributor towards our dysfunctional economy. Unfortunately, shareholder theory remains the dominant belief, and one reinforced through our universally accepted measurement standard. Some, like myself, refer to it as our “inadequate and inappropriate” measurement standard, as it focuses businesses on creating profit exclusively for shareholder benefit when this is clearly not the purpose of business.
To say profit is business’s sole purpose is clearly wrong. If it were right, we wouldn’t now be facing massive inequality and life-threatening environmental problems. It has to figure in somewhere as profit is the just reward for those who risk their financial capital, but it’s definitely not the sole purpose of business. Jack Welch, a highly respected and successful businessman, stated that “shareholder value is the dumbest idea in the world”, because profit should be the result, not a goal, and profits should go together with long-term value creation.
Peter Drucker, the renowned business consultant, said the purpose of business is to create customers. Again, this is an important issue in sustaining business, but clearly not its primary purpose. Some people have taken these two ideas of shareholder reward and customer satisfaction and combined them, claiming that together they make up the purpose of business. They claim “the Fundamental Business Purpose requires a business to use revenues and capital to produce customer satisfaction to reward capital providers.” Yes - it’s obvious, we need to reward capital providers and customers for business to succeed, but what should be equally obvious is that they are not the only stakeholders in business. Other stakeholders contribute as much if not more. The environment provides the raw materials without which nothing happens. Society provides labour, who without their knowledge, diligence and skills nothing happens either. If we don’t reward all stakeholders, in the long-term, we will have serious problems, which time has proved beyond any question or doubt.
In determining the real purpose of business let’s return to Peter Drucker who said: “the purpose of business lies in society since a business enterprise is an organ of society.” He got that part right. Building on the idea that business is an organ of society, we can conclude that the purpose of business must be to serve the interests of society. For a business to survive it has to reward all constituents or stakeholders - that’s just plain obvious. The rewards, or benefits it must pay each stakeholder varies. Profit for shareholders, wages, job security and satisfaction for staff, protection and nurturing of the environment for the environment, etc. From the perspective of each stakeholder, including shareholders, their rewards may appear to be the purpose of business. It’s certainly the purpose, or reason they entered or became involved in business. In ensuring all stakeholders and shareholders are rewarded according to their contribution, there will be conflicts of interest amongst constituents. To resolve these conflicts, we must turn to the real purpose of business, which is to benefit society. Therefore, decisions should be framed in language similar to this - “what outcome best serves the interests of society, without unduly denying constituents of their just rewards?” This acknowledges the relationship between society and environment; we cannot destroy what sustains us. We need to protect all life and matter on earth. Right now, we frame our decision-making process in a different language - “what best serves shareholder interest?” No wonder we are in such a mess.
Now we understand what the purpose of business truly is, we appreciate what we have to do to correct the massive imbalances in our economy. We need to change our inadequate and inappropriate business measurement standard. We have to measure and manage all stakeholder interests to be able to make informed decisions. Only when we introduce a balanced measurement standard, will we be able to make informed decisions which best serve society, thus achieving the true purpose of business.
What I’ve said here is nothing new or mind-boggling. We’ve known about it for over three decades, but done nothing about it, because it serves the wealthy one per cent’s needs, not those of the majority. They’ve used global resources mainly for their own benefit. We’ve got to a point where it simply cannot continue any longer. Neither society and definitely not the environment can sustain such exploitation any longer.
You want to know why the purpose of business is unclear? It’s not because we don’t know, it’s because the wealthy one per cent wants to mislead us, and confuse the issue. They don’t want to change. They want Milton Friedman’s “half baked” ideas to prevail, not because they are right, but because they serve their narrow interests.
The purpose of business should be clear to everybody, but it’s not. The issue is deliberately confused and we are mislead to ensure business continues to serve wealthy shareholders, at the expense of society and environment.
Article
Questioning the purpose of business has to be the most fundamental and obvious question of all, as it’s only through understanding its purpose that we can implement appropriate measures to ensure it delivers what we expect of it. However, there appears to be considerable confusion as to what its purpose is.
Business is made up of different contributors. Shareholders provide the financial capital, so people often think of them as the “owners”, whose needs take precedence over all others. The reality is a lot different. Shareholders only provide part of what’s needed to make business a success. Other stakeholders contribute in a significant way to the success of business. So, to succeed over the long-term, business needs to reward all contributors fairly.
Others see things differently. Milton Friedman and his “Shareholder Theory,” suggests creating profit for shareholders is its sole purpose. This was quickly embraced by the wealthy, as they are predominantly shareholders. The laissez-faire economic approach of free markets and globalisation which flowed from this idea, now has many questioning its wisdom, as it’s a major contributor towards our dysfunctional economy. Unfortunately, shareholder theory remains the dominant belief, and one reinforced through our universally accepted measurement standard. Some, like myself, refer to it as our “inadequate and inappropriate” measurement standard, as it focuses businesses on creating profit exclusively for shareholder benefit when this is clearly not the purpose of business.
To say profit is business’s sole purpose is clearly wrong. If it were right, we wouldn’t now be facing massive inequality and life-threatening environmental problems. It has to figure in somewhere as profit is the just reward for those who risk their financial capital, but it’s definitely not the sole purpose of business. Jack Welch, a highly respected and successful businessman, stated that “shareholder value is the dumbest idea in the world”, because profit should be the result, not a goal, and profits should go together with long-term value creation.
Peter Drucker, the renowned business consultant, said the purpose of business is to create customers. Again, this is an important issue in sustaining business, but clearly not its primary purpose. Some people have taken these two ideas of shareholder reward and customer satisfaction and combined them, claiming that together they make up the purpose of business. They claim “the Fundamental Business Purpose requires a business to use revenues and capital to produce customer satisfaction to reward capital providers.” Yes - it’s obvious, we need to reward capital providers and customers for business to succeed, but what should be equally obvious is that they are not the only stakeholders in business. Other stakeholders contribute as much if not more. The environment provides the raw materials without which nothing happens. Society provides labour, who without their knowledge, diligence and skills nothing happens either. If we don’t reward all stakeholders, in the long-term, we will have serious problems, which time has proved beyond any question or doubt.
In determining the real purpose of business let’s return to Peter Drucker who said: “the purpose of business lies in society since a business enterprise is an organ of society.” He got that part right. Building on the idea that business is an organ of society, we can conclude that the purpose of business must be to serve the interests of society. For a business to survive it has to reward all constituents or stakeholders - that’s just plain obvious. The rewards, or benefits it must pay each stakeholder varies. Profit for shareholders, wages, job security and satisfaction for staff, protection and nurturing of the environment for the environment, etc. From the perspective of each stakeholder, including shareholders, their rewards may appear to be the purpose of business. It’s certainly the purpose, or reason they entered or became involved in business. In ensuring all stakeholders and shareholders are rewarded according to their contribution, there will be conflicts of interest amongst constituents. To resolve these conflicts, we must turn to the real purpose of business, which is to benefit society. Therefore, decisions should be framed in language similar to this - “what outcome best serves the interests of society, without unduly denying constituents of their just rewards?” This acknowledges the relationship between society and environment; we cannot destroy what sustains us. We need to protect all life and matter on earth. Right now, we frame our decision-making process in a different language - “what best serves shareholder interest?” No wonder we are in such a mess.
Now we understand what the purpose of business truly is, we appreciate what we have to do to correct the massive imbalances in our economy. We need to change our inadequate and inappropriate business measurement standard. We have to measure and manage all stakeholder interests to be able to make informed decisions. Only when we introduce a balanced measurement standard, will we be able to make informed decisions which best serve society, thus achieving the true purpose of business.
What I’ve said here is nothing new or mind-boggling. We’ve known about it for over three decades, but done nothing about it, because it serves the wealthy one per cent’s needs, not those of the majority. They’ve used global resources mainly for their own benefit. We’ve got to a point where it simply cannot continue any longer. Neither society and definitely not the environment can sustain such exploitation any longer.
You want to know why the purpose of business is unclear? It’s not because we don’t know, it’s because the wealthy one per cent wants to mislead us, and confuse the issue. They don’t want to change. They want Milton Friedman’s “half baked” ideas to prevail, not because they are right, but because they serve their narrow interests.
Copyright © Adrian Mark Dore 2019.
adrian.dore@growingvalue.net
adrian.dore@growingvalue.net