A company newly listed on a stock exchange may face significant pressures to focus on short-term financial performance. Stockholders' interests can outweigh the interests of other stakeholders, including employees, customers, communities, and suppliers.
An important question for each business leader to consider is "What can we achieve together, beyond profit?" Social entrepreneurs members of the sustainability movement. argue that businesses have a responsibility to protect or improve the condition of all their stakeholders. Others in the tradition of Milton Friedman argue that businesses have no responsibilities beyond obeying existing laws, and generating profit.
Reason Magazine Online offers an eloquent articulation of the merits of acting socially responsible ways, authored by John Mackey, the CEO of Whole Foods. Two responses also appear -- one authored by Milton Friedman himself, and the other by TJ Rodgers, CEO of Cypress Semiconductor. The article is worth a read.
Here are some key excerpts:
- John Mackey: "We [at Whole Foods] have not achieved our tremendous increase in shareholder value by making shareholder value the primary purpose of our business. ... the most successful businesses put the customer first, ahead of the investors. In the profit-centered business, customer happiness is merely a means to an end: maximizing profits. In the customer-centered business, customer happiness is an end in itself, and will be pursued with greater interest, passion, and empathy than the profit-centered business is capable of."
- Milton Friedman: "Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions. To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government.... In each of these cases, there is a strong temptation to rationalize these actions as an exercise of 'social responsibility' ... [but] it would be inconsistent of me to call on corporate executives to refrain from this hypocritical window-dressing because it harms the foundations of a free society.
- RJ Rodgers: "It is also simply good business for a company to cater to its customers, train and retain its employees, build long-term positive relationships with its suppliers, and become a good citizen in its community, including performing some philanthropic activity. When Milton Friedman says a company should stay "within the rules of the game" and operate "without deception or fraud," he means it should deal with all its various constituencies properly in order to maximize long-term shareholder value. He does not mean that a company should put every last nickel on the bottom line every quarter, regardless of the long-term consequences."
- John Mackey: "I do not believe maximizing profits for the investors is the only acceptable justification for all corporate actions. The investors are not the only people who matter. Corporations can exist for purposes other than simply maximizing profits. As for who decides what the purpose of any particular business is, I made an important argument that Friedman doesn't address: "I believe the entrepreneurs, not the current investors in a company's stock, have the right and responsibility to define the purpose of the company." Whole Foods Market was not created solely to maximize profits for its investors, but to create value for all of its stakeholders. I believe there are thousands of other businesses similar to Whole Foods (Medtronic, REI, and Starbucks, for example) that were created by entrepreneurs with goals beyond maximizing profits, and that these goals are neither "hypocritical" nor "cloaking devices" but are intrinsic to the purpose of the business."
There are, of course, other differences between the debaters, that I have not highlighted in the excerpts here. Nevertheless, I think the difference between their points of view about the purposes of business is crucial. I believe that corporations must think beyond what is profitable in the long term, within our current economic system. They have a responsibility to also consider how that system may have undesirable effects on other stakeholders (including their great grandchildren, who will live on the planet Earth that they leave behind) and to take action to minimize their negative effects. Sometimes that will mean giving up significant profit-making opportunities. But the purpose of a business is not to make a profit.
The purpose of a business is to achieve a goal that cannot be achieved by individuals working alone, and to sustain that goal through the reinvestment of profits. In this way, the organization's purpose is key to what makes it an organization, and the profit is just a means for funding the continued achievement of its purpose. Public and nonprofit organizations use different means to fund their continued achievement (through government funding or charitable contributions) but for them as well, defining their purpose -- beyond simple survival -- is what makes them organizations.
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