One More Time: What is the Purpose of Business?
The question came up during the closing session of the 1995 annual conference of the Strategic Management Society in Mexico City. (The Strategic Management Society is a U.S.-based scholarly association of some 3,000 members interested in strategic management of organizations; members are largely business school professors and doctoral students). The closing session of the conference featured business school deans at the conference answering participants’ questions. Everything was going well until a young lady stunned the scholarly gathering with a most unexpected question: “What is the purpose of business?” she asked. She was clearly perplexed that the business world — unlike the legal profession, whose purpose is justice for all, or the medical profession, which is dedicated to the health and wellbeing of all — offered no clear objectives.
There was a sudden quiet in the conference hall and none of the deans could offer a ready answer, except the dean of the host school who answered, “to create employment.” This was perhaps the first time such a question had been raised anywhere, least of all in a gathering of business scholars. It was 1995 and matters such as this were not uppermost in people’s minds. Today, of course, the purpose of business is a leading concern to many people and organizations, including, not just business schools, but also corporate boards and others.
Milton Friedman, the Nobel Laureate in Economic Sciences, used to be quoted in business schools for his famous words, “the one and only responsibility of business is to increase its profits.” And, for the legendary management thinker Peter Drucker, “the purpose of business is to create a customer.”
Much has been written about the purpose of business since then — especially in the last decade or so. The stakeholder theory, developed in 1984, argues that a business should create value for all its stakeholders, not just the shareholders; it did not quite gain currency until the 2000s. The originator of the stakeholder theory, R. Edward Freeman, himself suggested that “the 21st Century is one of “managing for stakeholders.”
More recently, in August 2019, the Business Roundtable, an association of the CEOs of leading U.S. corporations, completely redefined the purpose of the corporation. The 300-word BRT statement, signed by 184 CEOs, declared that a corporation had a fundamental responsibility toward all stakeholders, and specified commitments to employees, suppliers, communities, and shareholders. The statement superseded its 1997 statement that “the paramount duty of management and of boards of directors is to the corporation’s stockholders.”
So, how far have we come in meeting the corporate purpose specified by the Business Roundtable two years ago? Do you see corporations making an effort to meet such goals? Or, is it mere talk and no action? Your comments are welcome!