The global financial crisis and the five years that have followed it have prompted much soul searching about the true purpose of companies. This is a result of the economic suffering that has been inflicted on the world by a number of reckless banks along with the extreme tax planning practices of some well-known multinationals.
Taxpayer bailouts of financial institutions have served to emphasise the close relationship that exists between business and society. And while most businesses do not have the luxury of being able to count on the state as a safety net if they fail to manage themselves properly, they still rely on taxpayer-funded governments to maintain the peace, prosperity and infrastructure of the countries in which they are based. They are also taxpayers themselves in most cases.
Hence the idea that a business can just go about its business, minding its own business, as it were, has become rather out-dated. As has the notion that companies only exist to make profits from selling goods and services. Nowadays, companies are expected to contribute to the communities in which they belong – not only financially through paying rates and taxes, but environmentally and socially as well. And this isn’t just the contention of left-wing pressure groups and green campaigners; a paper published by the ICAEW in April boldly argued that: “generating profits and shareholder value is not in itself a sufficient business purpose for a company”.
This, of course, begs the question as to what exactly would be considered “a sufficient business purpose” and it’s not one that the ICAEW paper really answers. The reality is that virtually all businesses have started with someone somewhere either having a very good idea and deciding to pursue it or – less romantically, but probably more common – being left with no choice but to start up their own enterprise or see their house repossessed. Most companies begin life with a simple objective: to be a source of income for their proprietors. That is their raison d’être. Of course, that doesn’t mean to say that as they grow and as their base of shareholders expands, they don’t acquire other responsibilities. But their basic purpose remains the same: to make money.
So how far can we impose what are essentially moral obligations on a legal structure that exists to make financial returns? I would hazard that for most organisations, the lofty principles espoused in their annual reports are patchily applied in practice – particularly if they come in to conflict with profit making. The swathes of redundancies that have taken place over the past few years are an example of this. Surely the greatest social act that a company can perform is to employ people? And while some companies have had to drastically reduce their cost bases to survive, others have used the recession as a convenient excuse to get their employees to do more with less, thus increasing their profitability at the expense of society. Do their shareholders complain about this? Not if they’re getting generous dividends.
When a company has a hoard of hungry shareholders to satisfy (us, in other words), it is extremely difficult for it to be anything other than the consummate selfish beast. So although it may flounce around in corporate social responsibility clothing from time to time, it is difficult to see whether the economic downturn can really have the effect of permanently changing that company’s culture. Perhaps it is not the true purpose of companies that we should be questioning in any case, but the real objectives of shareholders. Do we think that companies exist to generate profits and shareholder value or do they have a wider role to play as the bedrock of our economy and society? Ultimately, if boards believe that financial returns are all that matter to us, then we will get the companies – and the world – that we deserve.