Following a short conversation on Linkedin, we came to realize that the definition of the purpose of business is still very much open for debate. Let’s review some of the most remarkable statements made in recent years on the matter and reach a verdict on a definition.
In an earlier post, we outlined that the renowned management consultant Peter Drucker had stated that ‘the purpose of business was to create (and keep) a customer.’
Obviously, Drucker was right: without customers, there is no business, and customers (early ones even more so) need to be rewarded for putting their skin in the game.
However, in another post, we mentioned the highly-respected economist Milton Friedman, who, in his letter to the New York Times in 1970, had stated that the only social responsibility of business was to increase shareholder value. If individuals felt the need to compensate other stakeholders, that was their social responsibility, not that of the business, Friedman argued.
Obviously, Friedman was right: without capital, there is no business, and shareholders need to be compensated for putting their skin in the game.
Contrary to Friedman’s shareholder-centric theory, in 1984, economist R. Edward Freeman defined what is commonly known as the stakeholder theory. The theory is “a view of capitalism that stresses the interconnected relationships between a business and its customers, suppliers, employees, investors, communities and others who have a stake in the organization. The theory argues that a firm should create value for all stakeholders, not just shareholders.”
Obviously, Freeman was right: all stakeholders have skin in the game and deserve their share of value, however, as argued by Friedman, how can we determine their appropriate share?
Although the Business Roundtable, an association of chief executive officers of America’s leading companies, had long committed itself to Friedman’s shareholder-first doctrine, in 2019, following a barrage of public finger-pointing speeches, directed at extremely well-paid CEOs and their shareholders, by Senators Elizabeth Warren and Bernie Sanders, the association came with a new perspective on the purpose of business.
They stated the following: “While each of our companies serves its corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to delivering value to our customers, investing in our employees, dealing fairly and ethically with our suppliers, supporting the communities in which we work, and generating long-term value for shareholders.”
Obviously, the association was right: businesses need to provide value to each of their stakeholders, however, it was open to the associated members to determine how value is distributed amongst stakeholders.
While the statements above seem to contradict, each one holds merit. Surely, they can’t all be true? Well, some things are not as black-and-white.
We believe it’s a matter of EQuitability and companies should determine for themselves what’s fair to everyone and anyone. In other words, we believe that:
The primary purpose of business is to create and keep a customer, through a process of value creation and delivery, from which to capture value, to fulfill its secondary purpose, which is to create an equitable share of value for each of its stakeholders.
To explain the diverse positions, we’ve created the following scheme: