In the wake of an enlightening exchange on LinkedIn, it became evident that the purpose of business remains a fertile ground for discussion. We are beckoned to delve into the profound insights and remarkable assertions made in recent years regarding this subject. Our quest is to distill these perspectives into a coherent verdict, defining the true essence of business purpose.
In 1954, Peter Drucker, a pioneering figure in modern management theory, posited a fundamental principle that has since shaped the understanding of business purpose:
‘The purpose of business is to create a customer.”
This statement underscores the idea that businesses exist not merely to make profits or sell products but to fulfill the needs and desires of customers. Drucker’s insight shifted the focus towards the value businesses must provide, placing the customer at the heart of business strategy and operations and emphasizing the importance of understanding and serving the market effectively.
In 1970, Milton Friedman articulated a perspective that would become a cornerstone of corporate ideology in a letter to The New York Times, asserting that the sole social responsibility of a business is to increase its profits, thus enhancing shareholder value:
“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
This viewpoint championed the notion that businesses operating within the bounds of the law should focus primarily on maximizing financial returns for their shareholders.
Friedman’s stance sparked widespread debate, emphasizing a profit-centric approach to business operations and questioning the role of corporations in addressing broader societal issues. This perspective has influenced generations of business leaders and policymakers, framing discussions on the balance between profit motives and social responsibilities.
In 1984, R. Edward Freeman introduced a pivotal concept that would challenge the prevailing shareholder-centric view of corporate responsibility. His stakeholder theory posited a more inclusive view of capitalism, recognizing the interconnected relationships between a business and its diverse stakeholders, including customers, suppliers, employees, investors, communities, and more.
Freeman argued that businesses should aim to create value for all these stakeholders, not just shareholders. This approach underscored the idea that all stakeholders are vested in the organization’s operations and outcomes, thereby meriting a fair share of the value generated.
While Freeman’s theory expanded the scope of whom businesses should consider in their operations, it also raised complex questions, echoing Milton Friedman’s concerns:
“How do we fairly distribute the value created among the various stakeholders?”
This question continues to provoke discussion, seeking a balance between ethical considerations and practical business operations.
In a significant departure from its long-standing endorsement of Milton Friedman’s shareholder-first doctrine, the Business Roundtable, composed of CEOs from America’s most influential companies, embraced a broader vision for corporate responsibility in 2019. This shift was partly a response to critiques from public figures like Senators Elizabeth Warren and Bernie Sanders, who had pointedly criticized the disparities in compensation between top executives and average workers, as well as the prioritization of shareholder interests above all else.
The Roundtable’s new statement marked a remarkable pivot in corporate philosophy:
“While each of our companies serves its corporate purpose, we share a fundamental commitment to all 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.”
This redefined approach acknowledges the importance of catering to a broad set of stakeholders — not just shareholders but also employees, customers, suppliers, and communities.
While this declaration was a step toward a more inclusive understanding of the purpose of business, it also left the determination of how value is distributed among these stakeholders to the individual companies. This flexibility allows for tailored approaches to stakeholder engagement and raises questions about accountability and equitable value distribution. The Business Roundtable’s shift reflects a growing recognition of businesses’ societal roles and the need for a more holistic approach to value creation, balancing profit with purpose and equity.
The discourse on the purpose of business is nuanced, with seemingly contradictory viewpoints each offering valuable insights. The truth is that the essence of business purpose is not strictly black-and-white. In the contemporary landscape, companies often define what they consider fair for all involved parties, subjecting their decisions to the scrutiny of public opinion. This approach leads to varied outcomes, with some organizations making more commendable decisions than others.
This is how Edwin Korver sees the purpose of business:
The Purpose of Business based on the Principles of RoundMap®
“Business thrives on a cyclical pact of honor: to harvest value with purpose, distribute it with equity, and reinvest it with wisdom. In this perpetual cycle, value is not merely exchanged but elevated, ensuring the enterprise’s journey is feasible, viable, and profoundly sustainable. This is the essence of business: a relentless pursuit of betterment, where every act of value creation and distribution is a step towards a more equitable, sustainable future for all.
Breaking down this statement into its key components, we get the following parts:
- Cyclical Pact of Honor:
- Harvest Value with Purpose: This emphasizes that businesses should seek to create value through meaningful endeavors, aiming not just for profit but for purposeful impact.
- Distribute it with Equity: This part stresses the importance of fair and equitable distribution of the value generated, ensuring that all stakeholders, including employees, customers, and the community, benefit from the business’s success.
- Reinvest it with Wisdom: Here, the focus is on the wise reinvestment of the value created back into the business or the community to foster growth, innovation, and sustainability.
- Perpetual Cycle of Value Elevation:
- Not Merely Exchanged but Elevated: This suggests that in each transaction or interaction, the aim should be to enhance the value, not just transfer it. It speaks to the quality and improvement of products, services, and relationships.
- Ensuring Feasibility, Viability, and Profound Sustainability: This underscores the importance of maintaining business practices that are practical and economically sound and deeply rooted in sustainable principles that ensure long-term success and minimal environmental impact.
- Essence of Business:
- Relentless Pursuit of Betterment: This highlights the continuous effort to improve, innovate, and make positive changes within the business and its broader impact.
- Every Act of Value Creation and Distribution as a Step Towards a More Equitable, Sustainable Future for All: This final part captures the holistic goal of the business’s operations—to contribute to a future where equity and sustainability are prioritized, benefiting not just the business but society as a whole.
Each statement component is interlinked, reflecting the interconnectedness of purpose, equity, wisdom, sustainability, and betterment in defining the modern enterprise’s mission.
Multiple Points of View
To explain the various positions, including ours, we’ve created the following scheme: