What is the true purpose of corporations?
Illustration: Susan MacDonald
What’s the purpose of a corporation? Or, somewhat more abstractly, what’s the purpose of corporations in general?
That question is the topic of a big academic literature, but the question itself is far from academic. In fact, it has enormous practical importance. Take, for instance, the recent news that Target is leaving Canada, news that puts a rather fine point on the question.
Surely for the top executives (and presumably the Board) at Target, the decision to pull out of Canada was a tough one. But one suspects it was also entirely a ‘business’ decision — that is, one driven entirely by bottom-line considerations. CEO Brian Cornell pointed out, as part of the rationale for pulling out of Canada, that projections indicated that, if the company stayed in Canada, Target Canada would not expect to be profitable until 2021. Presumably shareholders were simply not going to put up with that. And from a fairly standard view about the purpose of the corporation, the wishes of shareholders matter a great deal. After all, or so the story goes, the entire purpose of a corporation is to make money for shareholders.
But of course, shareholders aren’t the only interested parties in this story. Consumers, too, have a stake. And despite the fact that many Canadians were sorely disappointed in Target’s initial efforts, many held out hope that Target Canada would eventually live up to the standards of their US counterparts, stores that are in fact a favourite cross-border shopping destination.
But among various stakeholder groups, the move is perhaps felt most acutely by Target Canada’s employees. Pulling out of Canada means Target is closing 133 stores and eliminating 17,600 jobs. For employees, the company was a source of jobs — jobs ranging from cashier to admin assistant to fairly senior executive posts. To the holders of those jobs, Target was a valued employer — a way to feed a family and pay the bills and maybe save for a vacation.
So now ask, again, what’s the purpose of a corporation? We’ve mentioned already the shareholder-wealth-building view. A more modern, critical view is to say that the purpose of a corporation is something more than the pursuit of shareholder wealth. Corporations, on this view, have a higher purpose as part of a community. The corporation has a social role, and that role goes far beyond attending to the interests of shareholders. Adherents of this view are indeed typically indignant at the very thought that anyone could think that corporations have so lowly a purpose as to merely make money.
And those critics are right, at least in part. It really is foolish to think that the purpose of a corporation is to make money. But that’s only because it’s foolish to think that corporations have purposes at all. That is, it’s foolish to think of a large, multifaceted organization as having a single, unitary “purpose” in the universe, rather than thinking of it as serving many purposes for many interested parties. Arguing over what a corporation is “really for” — building shareholder value? making products to make people happy? providing jobs? etc. — is a fool’s errand.
There are of course exceptions. If an individual or small group files the paperwork to form a corporation to serve some single, stated purpose, then it’s probably fair to say that that is what the corporation’s purpose is. But that’s seldom what’s at stake, at least as far as this debate goes. When you’re talking about a widely-held, multibillion dollar corporation like Target, talk of the organization’s “real purpose” just sounds silly.
But the fact that the corporation is many things to many people doesn’t mean that everyone is bound to consider all of those purposes, all of the time.
To see what I mean, consider a different, parallel question. What is the purpose of a job? Say, your job. If we think of your job as an abstract thing — a position in the marketplace that happens to be filled by you — what is its purpose? Does that question even make sense? You’ve got the job, and it (hopefully) helps you achieve your goals. How you should behave yourself in the course of that job, in pursuit of those goals, is a question of ethics. And that question is much more enlightening than some grand question about purposes.
The Business Ethics Blog 
Back when I was starting out in computer programming, I read a book on systems analysis that said the first thing to identify about a business was the specific good that it brought to the community. A bakery provides bread . A bank provides a safe place to save money and a way to borrow money to start new business or build a home.
The rest of the business is organized around providing that service. And the analyst would document that organization and how it works before suggesting system changes to improve its effectiveness and efficiency. (Note: this was back when most businesses were first considering computer automation).
If you bought stock in a single function business, it was because you wanted to be part of that business, to share in its good work as well as to share in its profits.
The distinction is not between the individual and the corporation. The distinction you’re looking for is between a single function business or corporation versus a multi-functional conglomerate, where functions are added if profit making or deleted if profit consuming. The latter is more likely interested more in producing profit than in producing good.
When profit is the goal, rather than doing good, then the probability of actually doing good is reduced.
I take the view that a clear purpose is necessary for a corporation to align its efforts (and the purpose is not, at its core to make profits – that is an outcome). Then it’s possible to question whether the purpose has sufficient societal and consumer value (relative to its cost) to make a profit.
I think any corporation that doesn’t have a clear articulation of purpose at the Board and exec level isn’t likely to be sustainable (it may be profitable for a while, but the underlying strategy is unlikely to be strong without this clarity).
I like both of the answers above. However, could the general answer to the purpose of a corporation be as simple as to provide a social good or goods, profitably. Its clear that there are some social goods to a corporation (i.e, jobs, innovation, etc..) However, that social good would not be sustainable if the corporation does not remain profitable. Its the greed associated with profit seeking that gives the corporation vice. If “Target” tried everything to make its business model profitable in Canada and did so without success, then they should pull out for the greater good. Otherwise, they risk not only the jobs in Canada, but jobs in other parts of the world as well. On the other hand, politics or some hidden agenda or conflict of interest is not off the table. If that be the case, the profit motive or lack thereof is the scapegoat.
[…] MacDonald proposes that it really is foolish to think that the purpose of a corporation is to make money. But that’s only because it’s foolish to think that corporations have purposes […]
I was an hourly factory worker at Kellogg’s Battle Creek, MI. I recall in the mid 1990’s Kellogg’s was making a transition in it’s business philosophy. Over the history of the Kellogg Company Battle Creek there was a beautiful park on the property. There had been millions of visitors touring the plant over the decades; which meant the place was spotless inside and out. I remember telling people that I would eat off the floor anywhere in the plant–including the restrooms–it was that clean. Kellogg’s was one of the highest paying employers in town as well as the largest; when I stated in 1968 there were 3400 hourly employees and many more salaried employees. I attended meetings with members of Kellogg Corporate in the mid 90’s. At those meeting the company representatives said distinctly, ‘We are no longer a community welfare organization, a keeper of parks, and many other things we were in the past; starting now anything that does not reflect positively on shareholders profit will be eliminated.’ And, that’s exactly what happened. I seems to me there was a large shift in what the purpose of a corporation was before that period and what it was after.
Milton Freidman wrote a famous article titled, “The Social Responsibility of Business Is to Increase Its Profits” (Rae, Wong, 2012). I tend to hold to this view. In the end, the goal of a company must be to its shareholders, without this premise the company will most likely not be successful.
In the case of Target closing their Canada stores, it will affect many people. In the end, the shareholders (the owners) of the company have the right to make the decision to close stores that are losing them money. This is just common sense. Are there consequences? Yes, but this is the price of free enterprise. Another organization will fill the void that Target leaves and will be able to do it more efficiently. Employees will find new jobs, and competition will grow to fill the void. This is how the free market functions. It is not a corporation’s end goal to provide a job to the employee, it is to make money for the owners. Along with this, successful corporations will balance the needs of the owners, customers, and employees. Only when these three entities are pleased will a company truly flourish.