What is the business of business?

Companies have, in one form or another, been around for centuries, but their purpose is changing. And it’s a change we need.

john HeadshotsTRY sq John Berry 4 minute read

OPINION: Companies have, in one form or another, been around for centuries, but their purpose is changing. And it’s a change we need.

The history of companies is often traced back to 1600 when the East India Company was established.  It became immensely powerful through trade and its interests in the Indian sub-continent. Remarkably, it also had its own large private army.

What we regard as the modern limited liability company has its roots in the nineteenth century.  Over decades, fortunes were made with the rise of large corporations in industries like railroads, oil and steel.

With minimal labour laws, working conditions were often poor.  But this period also gave rise to businesses that did care about living conditions and workplace safety.  Port Sunlight in England was created as a village to house workers for a manufacturing business which later became Lever Brothers and then Unilever.  Bournville (also England) was a village for Cadbury workers. Providing green space and improved living conditions differentiated these businesses from many large industrial corporations of the time.

Fast forward to later in the twentieth century and we find the current philosophical framework for companies was cast by the work of economist Milton Friedman.  In 1970 he argued that the single purpose of companies is to make money for their shareholders.  They must operate within the framework of the law, but their mission is profit maximisation.  There is no room for a social purpose.

In short, he described it as “the business of business is business”.  Make as much money as possible and pay dividends to shareholders. They, in turn, can use those dividends for charitable purposes (or maybe they won’t). Friedman’s point is that shareholders can have a social purpose if they choose to, but companies should not.

This philosophy has largely dominated how companies have been viewed and run, but is no longer fit for purpose.  Many shareholders, and companies, increasingly question whether this model is broken and does not deliver the outcomes we want as a society.

Over recent decades the world has become increasingly interconnected. Global trade has grown exponentially, and the human population has nearly reached 8 billion.  Our planet’s climate is changing, in fact, everything is changing.

In 2018 and 2019 Larry Fink, the CEO of Blackrock (the world’s largest asset manager) laid out his expectations of global corporations in this changed world.  Companies must serve a social purpose, which means considering the interests of not only shareholders but also staff, customers, communities and suppliers.

All sound a bit ‘touchy-feely’?  No. While it is the ‘right thing’ to do it also makes financial sense.  Companies that look after their staff will have a more engaged and productive workforce, which means a more profitable company.  Companies that value their relationship with a supplier will be cut some slack when they are struggling with a payment or need some stock when supply is limited.  Companies that value their relationship with customers will build a stronger brand.

Last year America’s Business Roundtable addressed this very issue.  The Chief Executives of 181 large corporations including Apple, Amazon, BP, DuPont and Microsoft signed a letter accepting the need to redefine the purpose of the corporation. The idea of serving the interests of more than just the shareholders was very clear – “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.”

Is this talk of change from global corporate leaders greenwashing mumbo-jumbo or a deeply held belief?  We’ll find out in time.

Either way, now is the time to re-think how we do business and find a way that’s good for our planet and people, as well as profit.  It’s no coincidence that this re-think also delivers better long-term value for shareholders, because according to Fink, profit and purpose are inextricably linked. The business of business is not just business.

John Berry is chief executive at Pathfinder Asset Management, and KiwiSaver provider CareSaver. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product.

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