Business success can be more than just making profit
WHEN Phil the pie man claimed that ‘there is more to running a business than making profits’ on last Thursday’s ‘Apprentice’ final, we all knew it was over.
Lord Sugar replied ‘Let’s cut the crap. We are in business to make money or at least I am, anyway.’
Lord Sugar is not alone. As I point out to business students every year, the most cited article in business ethics was written by the free-market economist Milton Friedman in 1970. Its title: ‘The Social Responsibility of Business is to increase profits.’
On his view, profitability measures the value a business creates the more profitable the more good it has created and hence the more ethical it is.
Ayn Rand, the most throughgoing market advocate who ever lived, argued that the business that makes no profit is immoral because of the resources it wastes.
Moreover, willingly avoiding the profit motive is worse than immoral, it is the desire to be immoral. Let’s cut the crap indeed. Compared to Rand, Friedman was a moderate, but his arguments are better known. So what are they?
First, markets are more efficient than other forms of distribution because of price signals. If companies don’t exploit opportunities to raise prices and lower costs in response to changes in demand and supply, resources will be less efficiently distributed than if they followed market signals.
Second, no-one but the owner can legitimately determine the purpose of the business. Managers have no more right to change a business’s purpose than a visitor has to rearrange your furniture.
Third, the price mechanism shows managers what to do. Like a footballer in front of goal, it provides a simple target. If managers serve multiple masters, their orientation is diffracted and they end up accountable to nobody and for no particular outcome.
Friedman did allow for one exception, however. Company sponsorship of philanthropic causes or environmental action can enhance reputation and thereby attract customers, providing a commercial rationale for such generosity. Rand would have baulked at even this.
But although such views have guided the assumptions of economic theory from Adam Smith onwards, they are far from shared across contemporary business.
Whether they call it ESG (Environment, Social, Governance) or CSR (Corporate Social Responsibility), companies are increasingly likely to claim that they do service multiple purposes.
Whilst his name occasionally confuses students, this view was first systemised by W. Edward Freeman (not Friedman), in the 1980s as stakeholder theory.
Freeman argued that companies should serve customers, employees, suppliers and local communities as well as owners as they all had a legitimate stake in the business. Freeman was a strategist; he thought stake-holding made good business sense. Others have emphasized the ethics of stake-holding, that it is morally right for businesses to serve others and on some contemporary accounts, companies simply are the nexus of contracts between stakeholders.
Such ideas can animate a company’s legal status in the form of CICs (Community Interest Companies), of which there are just under 30,000 in the UK and B.Corps, of which there are 2,000. Both commit companies to serving multiple purposes and protect them from takeover.
Over the past decade, Northumbria University has hosted the Responsible Business Seminar Series in which business leaders, researchers, think tanks and others come to talk about their work. As you might expect many either are or are becoming B-Corps or CICs.
The seminars follow Chatham House rules and so I won’t name our speakers but many, who are highly successful financially, agree with Phil the pie man that their purpose is not just to make money.
Some make the same argument that Aristotle used over 300 years before the birth of Christ, that money is only a means and cannot be an end in itself. It is simply not the sort of thing that can provide a genuine purpose.
Others argue that profit is to business what air is to human beings, the enabler of agency. It allows a business to take its own decisions rather than their bank manager or other investors. It is a precondition, not a purpose.
Still others have provided personal accounts of making money in the first half of their lives and working out why in the second half.
The truth is that the purpose of business differs between businesses. To contribute to our conversations or attend seminars, email me at ron. beadle@northumbria.ac.uk