Businesses should embrace corporate purposes beyond profit maximization.
For many business economists and legal academics, the purpose of any business organization is simply stated: to maximize profits. And it is true that many practical advantages may follow from this statement of purpose. Focusing only on profit-making allows leaders of firms to discount all other moral, social, or environmental claims on a business as irrelevant. Running a business then becomes a question of judging the economic costs and benefits of any proposed course of action. Any other questions are treated as irritating interruptions that are “external” to the internal operations of the firm.
Admitting that one must still conform “to the basic rules of the society, both those embodied in law and those embodied in ethical custom,” the objective of business firms is simply to “make as much money as possible.”
Given that all businesses are situated within normatively oriented societies, however, tough questions about business responsibility regarding foundational ethical principles of behavior, political choices, and environmental damage are not so easily avoided. Even though business laws, including corporate and securities laws, have been heavily influenced in the last several decades by what can fairly be called an ideology of profit maximization, much of the law has in practice withstood efforts to reduce business law’s prescriptions to this single objective.
In the American Law Institute’s Principles of Corporate Governance, for example, the objective of business corporations to act “with a view to enhancing corporate conduct and shareholder gain” recognizes the need to act within “the boundaries set by law” and in line with “ethical considerations.” The ALI’s Principles also recognize that a “reasonable amount” of corporate wealth may be donated or otherwise allocated toward “public welfare, humanitarian, educational, and philanthropic purposes.”
More bluntly, the law allows for some profits to be “sacrificed” for moral or legal reasons under broad standards of managerial discretion, such as the business judgment rule for corporations.
However, this legal reality has not stopped many professors in law and business schools from teaching economic models—often highly stylized in the language of financial mathematics—that take profit maximization as a foundational assumption. Too often, this assumption is taught without any historical or conceptual context of its origins. Profit maximization is often conveyed to students today as a kind of natural law of economics or as a scientific, even pseudo-religious truth.
Profit-making is indeed a sine qua non of business. An orientation toward profit distinguishes a business firm from organizations that pursue other primary objectives, such as charities or religions. However, to set profit-making as a primary business objective is not to make it the only objective. Although it may be useful to model business behavior in economic terms that assume profit-making as an “objective function,” in practice it becomes apparent that business firms serve other purposes too, and they are not all reducible to the bloodless calculations of profit and loss. Or at least they should not be—for moral and legal reasons.
In a recent article, I argue for moving beyond narrow views of profit maximization toward a broader, more richly described theory of plural business purposes. (I use “purposes” as a catch-all category that includes intentions, objectives, and normative imperatives that may govern or constrain them in practice.) I argue not only against a narrow view of the economic objective of profit maximization, but also for objectives that recognize the larger place of business in society.
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