Why does a company exist? (Part 1)

It is very easy to go down a philosophical and moral path while trying to answer this question. Hence, I have broken this down into a three-part series, with questions that we ask each other being paraphrased here in a Q&A format. So, let's dive into it.

Q1) Why does a company exist? To serve the profitability interests of shareholders, or is there more to the purpose here? And does this larger purpose change over time?

A1) In the 19th century, work righters for those living in abysmal conditions was the most important. In the 20th century and a post-World War ravaged society, building the nation ground up gained even more traction. (O'Toole, 2019), (Magnuson, For Profit: A history of corporations, 2023). In the 21st century, with us facing so many challenges concerning climate change, intervention in science-based climate change gains even more traction. Adam Smith’s sayings that profits are a means to an end, and not an end in itself, clearly shows how the ends can as well keep getting modified basis the needs of the time. The concept of a corporation has evolved over the centuries, and so should the perceived role they should play in society today.

Q2) Is the purpose of a business making a profit to re-invest part of it into social or environmental causes to offset an externality? Or is it to internalize that externality, and put one’s house in order, at any cost?

A2) Profitable strategies can be harmful to society and the environment. Responsible behaviour can often result in losses and low returns. So, the aim is not to take one moral side. But to ensure that well-functioning corporate machinery generates profit in a sustainable manner by subsequently re-investing profits not just into shareholder value but also into stakeholder value for those in its value chain.

Q3)?What about Milton Friedman’s statement about the only social responsibility of business being to increase its profits? So, would the society benefit more by companies maximizing their profits instead, and simply legitimately paying their proper share of taxes?

A3)?Virtuous organisations survive, only if profitability at their base also is maintained?(O'Toole, 2019). And Milton Friedman’s argument, that the social responsibility of business is to increase its profits, is much more nuanced than commonly portrayed. When the business maximises profits, shareholders can decide what social causes to invest into. There are three critical assumptions here which are open to question, and weakens the case for the stand that Milton Friedman had taken?(Edmans, Chapter 2 - Growing the pie doesn't aim to maximise profits - but often does, 2022).

a) It assumes that company has no comparative advantage in solving social problems. This could be true for quid-pro-quo or charitable donation cases, but it is not true for intervention areas in its domain of expertise and influence - especially innovation and supply-chain interventions on climate action (more on that in a later post)

b) Public choice theory clearly tells us how the politicians’ always have their self-interest and to be “in power’ as their top priority. So, they don’t always reflect citizens preferences in their actions. Regulation, often is ineffective in addressing outcome issues, due to the political process itself being slow and often even state capacity being debilitating.

c) Friedman also assumes that leaders can forecast how an investment in stakeholders will affect profits – which is often very difficult to do in a world of VUCA – Volatile, Uncertain, Complex and Ambiguous.

So, it is not a black & white answer to just "generating profits", as being the primary responsibility or duty of an organization.

Q4)?Is philanthropy a waste of corporate money? Should corporates stop spending money on philanthropy and instead just focus it on their own areas of comparative advantage and scalability possibilities?

A4)?The four indispensable project funders are governments, companies, banks and philanthropists. Many philanthropic donors shift away from climate because they believe that the government or the markets would solve this problem. But, philanthropic giving in particular becomes even more relevant for domains like arts & culture, policy and research expertise, climate action – where immediate results cannot be derived – and the VC’s and private funding dries out in those cases (Doerr, Chapter 10 - Invest, 2021).

There has been corporate/ private individual led examples in the private sector, the most impactful of which has been the “Breakthrough Energy Ventures”, which was started by Bill Gates to ensure a clean-tech energy future. This venture now has participation from Jeff Bezos, Michael Bloomberg, Mukesh Ambani, Vinod Khosla, Masayoshi Son and many others. And the commitment in this has been $2 billion – all just between 2015 to 2020. This has ultimately led to more than 200 partners joining their journey?(Doerr, Chapter 9 – Innovate, 2021).

In 2020, Jeff Bezos pledged $10 billion for the Bezos Earth Fund. But, unlike Gates’ Breakthrough Energy Venture, Bezos took a philanthropy approach. Its first list of grantees included the likes of World Wildlife Fund, The Nature Conservancy, the Environmental Defense Fund, Hive Fund for Climate etc. These non-profits continue to have a focused mission in making our planet a better place to live in, and thrive in. In Bezos’ words, “Philanthropy can get things started and prove out solutions. Then governments and markets can scale those things up” (Doerr, Chapter 10 - Invest, 2021). In this particular, I must agree with Mr. Bezos.

In the next post, I will answer the single question which often leads to a lot of executive management debates, on “Does good social performance lead to good financial performance, or is reverse causality also at play here? And is there a framework for understanding the inter-linkage between financial performance and social/sustainability performance of an organisation?”, and in the third and final post to this I will dive a bit deeper into the role that the state in plays in this process of corporate responsibility.

Bibliography

Doerr, J. (2021). Chapter 10 - Invest. In J. Doerr, Speed & Scale (pp. 261-302). Penguin Random House UK.

Doerr, J. (2021). Chapter 9 – Innovate. In J. Doerr, Speed & Scale (pp. 231-260). Penguin Random House UK.

Edmans, A. (2022). Chapter 2 - Growing the pie doesn't aim to maximise profits - but often does. In A. Edmans, Growing the Pie: How great companies deliver both purpose and profit (pp. 49-76). New York: Cambridge University Press.

Magnuson, W. (2023). For Profit: A history of corporations. London: Basic Books UK.

O'Toole, J. (2019). Enlightened Capitalists: Cautionary tales of business pioneers who tried to do well by doing good. New York: Harper Collins.

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