What is the Purpose of a Company

Company, firm, corporation, partnership – there are just a few synonyms to name a certain kind of organization, each member of which is doing the same business. However, what is the main purpose of such an organization – to maximize its own profits, to serve its customers and the society, or everything taken together? Moreover, should the corporation be socially responsible? This paper is going to analyze these questions on the examples of the arguments of Milton Friedman, Christopher Stone, R. Edward Freeman, and Kenneth Arrow, and will try to find the most effective one.

In “The Social Responsibility of Business is to Increase Its Profits,” Friedman argues that a company cannot have responsibilities because it is not a person, and “only people can have responsibilities” (p. 218). In some way, he is right because a corporation cannot exist without people. There are owners, shareholders, employees, suppliers, and all of them have definite responsibilities. The owners are responsible for their staff and stable income; shareholders – for their dues; employees – for their job; suppliers – for a good feedstock. Nevertheless, who should be socially responsible and what does “social responsibility of business” mean?

To be socially responsible means to have some obligations to one’s employees, shareholders, local society, and environment. Thereafter, each company, according to Friedman, must have one or several individuals, who will “conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom” (p. 219). His argument is wrong, because one or two persons cannot take all responsibility for the whole business. Business is a collective interaction, and each member of it is responsible for its prosperity. For example, if a director wants to earn as much money as possible, and he forces his employees to work harder for small wages, eventually they will strike, and the whole business will suffer. On the other hand, there is one more example: the employees are satisfied with their work, they get appropriate salary and produce good output, but the consumers do not like the advertising of that firm and do not buy its products. Who is to blame? Probably, the advertising agency, but the business will suffer again.

Freeman in his work “A Stakeholder Theory of the Modern Corporation,” shows a model, according to which the corporation consists of “stakes”, and “each can affect the other in terms of harms and benefits as well as rights and duties” (p.235). This model is perfect because, as stated above, each member and each constituent of the company are of great consequence to its business. Due to this model, a company should benefit everyone, from consumers to suppliers. If the employees are satisfied, they will work better and make more products. If the suppliers are pleased, they will provide the company with products of high quality. When the consumers get quality goods, and they are completely satisfied, then they will buy these products repeatedly, and the company will benefit thereby.

Stone in “Why Shouldn’t Corporations Be Socially Responsible?” gives four positions, which are opposed to corporate social responsibility: the promissory argument, the agency argument, the role argument, and the “polestar” argument. He argues that all these points of view are debatable. For example, a statement that the corporation has obligations to its shareholders is wrong. When the company promises to maximize the profits of its shareholders, it does not mean that it will really happen. Stone argues, “even if management had made an express promise to its shareholders to “maximize your profits”, (a) I am not persuaded that the ordinary person would interpret it to mean “maximize in every way you can possibly get away with, even if that means polluting the environment, ignoring or breaking the law”; and (b) I am not persuaded that, even if it were interpreted as so blanket a promise, most people would not suppose it ought – morally – to be broken in some cases” (Stone, 1975). This thought is ambiguous. On one hand, people will blame the company for the unfair actions in achieving the goal, and, on the other hand, they will blame the company for the broken promise. In any event, the corporation will be condemned.

The agency argument and the role argument are closely related to the promissory argument. The first argues how should the agents of the company behave, and the second proposes the considerations about the role. The polestar argument says the following, “if the managers act in such fashion as to maximize profits – if they act as though they have promised the shareholders they would do so – then it will be best for all of us” (Stone, 1975). This argument is mistaken because when the managers say one thing and do another, even if it is good for all, it will be unethical in respect of the shareholders. Moreover, managers cannot decide themselves what to do with business of their leaders, they should seek counsel from the owners and shareholders. Otherwise, their actions will be regarded as the breach of social obligation.

In addition to the abovementioned, one more argument occurs, namely if the company should not be socially responsible? In any case, there are some people who blame, and others, who are not satisfied. Maybe, the corporation should pay more attention to its own profits and less to the environment and the pollution. Nevertheless, if it really happens, in several years people will live in the society with dirty streets and foul air. Thus, it is not a way out of the situation. However, nowadays a lot of companies do not think about their neighbourhood, because it does not maximize their profits. Arrow in his work “Social Responsibility and Economic Efficiency” argues that “a firm may need to be told what is right and what is wrong when in fact it is polluting, or which safety requirements are reasonable and which are too extreme or too costly to be worth consideration” (p. 240). This argument is right, because the firms exist in the society where people live, and it will be useful to have some institution to remind them of their social responsibilities. In such case, every company will be equally responsible. But what is good for one, is not always good for another. And if paying some social dues for a major corporation makes no losses, a minor company may be under a disadvantage.

What should be done in such a situation? Probably, the rules must be different for the large corporations and the small companies. But then it will be unfair in regard to the big firms. One can conclude that there is no way out. In some way, it is really so. However, there is no doubt that some minimal ethical and moral principles should exist for every corporation. In addition, there should be some social responsibility to the consumers, the shareholders and the local community.

The consumer should know what he buys; he needs to be able to read or hear all the necessary information about the product he chooses. Arrow writes, “It can be argued that under some circumstances setting minimum safety standards and simply not putting out products that do not meet them would be desirable and should be felt by the businessman to be an obligation” (p. 242). The shareholders should be informed about all the risks in their business. Then they will have a choice whether to invest money or to purchase the stock or not, as well as the consumers will choose whether to buy the product or not. One can argue that the firm will incur losses when it shows all the information, but in such case, it should revise its standards to have nothing to fear. And those companies which do not follow this requirement will face the difficulties. However, it will be just and responsible.

Concerning the purpose of the company the following conclusion can be made. A company is a system; the “stakeholder model” is the best example of it. According to this model, each part of the company (management, owners, suppliers, employees, customers, and local community) is in close cooperation. Therefore, the company should exist to benefit everyone, from the owners to the local community, because when one fails, the others fail consequently. At the same time, business of the corporation should be led in accordance with ethical and moral norms, and each member of it should be socially responsible. In such case, the company will prosper, and the society will benefit from its prosperity. In other words, there will be a balance between the company and its neighbourhood. Summarizing all the arguments above, one can conclude that the argument of Freeman about the stakeholder theory is the most effective one in the “corporate business”.

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