Has the purpose of corporations changed?
Religion & Liberty Online

Has the purpose of corporations changed?

In his influential 1962 book Capitalism and Freedom economist Milton Friedman promoted the position of shareholder primacy by declaring that a corporation has no real “social responsibility” to the public, since its only concern is to increase profits for the shareholders. Social responsibility would be the responsibility (or not) of the shareholders. Since then this “shareholder theory” has became the dominant view of the purpose of the corporation.

But in 1984 the philosopher and business professor R. Edward Freeman wrote Strategic Management: A Stakeholder Approach in which he proposed the “stakeholder theory.” Under this view shareholders are merely one of many stakeholders in a company who must be considered when making decisions. A company’s stakeholders include just about anyone affected by the company and its workings, so the company’s success depends on satisfying most, if not all, of its stakeholders.

The stakeholder theory received a huge boost today as the Business Roundtable, one of the most powerful pro-business lobbying groups in the United States, issued a statement that moves away from shareholder primacy and redefines the purpose of a corporation to promote “an economy that serves all Americans.”

As the statement notes, Business Roundtable has periodically issued Principles of Corporate Governance since 1978 and each version since 1997 has endorsed principles of shareholder primacy–that corporations exist principally to serve shareholders. This new statement supersedes previous statements and outlines a modern standard for corporate responsibility.

The statement on the purpose of the corporation says:

Statement on the Purpose of a Corporation

Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.

Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

    • Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
    • Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
    • Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
    • Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
    • Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.

While the devil is in the details, this view of the stakeholder theory appears to be more consistent with Christian social ethics than the morally neutral shareholder theory. Should we encourage this perspective to become the dominant purpose of corporations?

Image source: Pixabay

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Joe Carter

Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).