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What is the Role of Business?

Any business is a risky endeavor with an uncertain life expectancy. It has been, and should remain, a driver of innovation, a creator of wealth, a harbinger of economic freedom. The core mission of a profit-driven enterprise is not to fulfill some philanthropic duty. But neither is it solely to maximize short-term shareholder value.

The fundamental role of business has remained relatively constant: providing the goods and services that people need or want. What has changed dramatically over time are the expectations placed on businesses. Boards of directors, management and investors of large corporations are now expected to address an array of social, economic and ecological challenges.

Business derives its social legitimacy and right to operate from the economic value it creates for society at large, from its performance for both investors and a wider network of constituencies, its partnership with governments and other agents in solving social problems, and the trust its leadership inspires in employees and society as a whole.

Yet, all indicators show a sharp drop in the trust bestowed on most institutions over the last 20 years. The most recent Edelman Trust Barometer, while noting some improvement over the past year, still paints a sorry picture: overall trust in business and government stand at 50 percent and 41 percent respectively worldwide. That is a disturbing statistic but even worse is the level of trust in the leadership of business and government, which stands at a dismal 18 percent and 13 percent respectively. When respondents are asked to identify the reasons for trusting business less, some 50 percent point to “corruption/fraud” and “wrong incentives driving business decisions”; when asked the same question for government, 50 percent indicate “corruption/fraud” and “poor performance/incompetence”.

For a period of time, say until 1980, most large business corporations did abide by the belief that “making money for shareholders” was not the be-all and end-all of business. In fact, the notion that business has a higher purpose than generating profits is rooted in some of the earliest business endeavors. It is manifest in a famous exchange between Henry Ford and the lawyer for the Dodge brothers who were suing Ford for slashing prices of the Model T:

“What”, he [Dodge’s lawyer] asked Ford, “is the purpose of the [Ford] company?”

“To do as much possible for everybody concerned”, responded Ford, “to make money and use it, give employment, and send out the car where the people can use it … and incidentally to make money …Business is a service not a bonanza.”

“Incidentally make money?” queried the attorney.

“Yes, sir.”

“But your controlling feature … is to employ a great army of men at high wages, to reduce the selling price of your car, so that a lot of people can buy it at a cheap price, and give everybody a car that wants one.”

“If you give all that,” replied Ford, “the money will fall into your hands; you can’t get out of it.”  (Quoted in The Economics of Higher Purpose)

Yet, over the last three decades, this stakeholder model of the corporation was, in many instances, discarded and replaced by a shareholder-centric view. The drivers of this shift are multiple, very dynamic and difficult to contain. An ideology of market efficiency certainly played a role but so have changes in compensation models throughout the economic system.

The dominant discourse claimed that free and global markets for capital, goods, services and people were the wave of the future, that “shareholder value-creation” was the essential, sometimes the only, goal of stock-market listed corporations.

The result, overall, has not been very good: too much greed infecting economic activities; recurring financial crises and business fiascos eroding trust in organizations, in public institutions and in their leadership; rising inequality; reduced social mobility; short-term profit maximization in every nook and cranny of the economic system; benign neglect of social problems; the pauperization of workers in developed economies. Indeed, the US Bureau of Labor Statistics informs us of the dismal fact that average weekly earnings and average hourly earnings in constant dollars in 2010 were significantly lower than in 1975.

A healthy society, and an effective organization for that matter, must find ways to balance and reconcile in its bosom the “humanist” and the “economist” who live in every one of us. The stakeholder model of the corporation did strike a delicate balance between the economic and humanist imperatives. Can it be reinstated as a business model for the future?

The case for a renewed commitment to the stakeholders that bestow legitimacy on businesses is a compelling one, even to many who benefit mightily from the current state of affairs.

The issue, and the formidable challenge, resides in the means to bring about this transformation of financially driven businesses into “purpose-driven” corporations.

To do so, we need a shift in the ideological underpinning of our economic system – a widespread epiphany about what will be our collective fate and that of future generations if we continue on our present course.

Yvan Allaire is executive chair of the board of directors at the Institute for Governance of Public and Private Organizations (IGOPP). He also chairs the Global Agenda Council on the Role of Business. This piece first appeared on the blog of the World Economic Forum.

What is the Role of Business? was originally published on Ideas Lab

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