What are companies for?

Or perhaps a better question would be, ‘Who are companies for?’

This question was going through my mind when I read Neil Morrison’s stirring call to arms last week, urging companies to create jobs.

We all know the state of the economy. We all know that unemployment is at the highest level for the best part of two decades. We know that youth unemployment is a social tragedy. And we know that the Government is ill-equipped and ill prepared to deal with it.

So who is going to make the difference?

Well the answer is that business is partly responsible for getting us into this mess, and we are the only people who can get us out of it. And we aren’t going to do that by focussing on cost cutting, rationalisation, downsizing and offshoring. Nor are we going to, in the long run, add value to our business by doing so.

I know that I run the risk of being called naïve here. But is chasing short-term share holder return really less naïve than building long-term structural value in your business? I think not.

There are many who would say, as Milton Friedman did, that corporations have no social responsibility except to is shareholders and that just because some businesses caused the financial crisis it doesn’t mean that other businesses should be held responsible. In general, even post-crash, this is still the prevailing view in western economies. Creating jobs, therefore, is all well and good and it might help society in the long run but what good is it to my shareholders?

Philosophically, historically and legally, companies and their activities rest on the concept of property rights. Ownership is the basis for the buying and selling of assets and for a company’s authority over its employees. Those who own the company can therefore buy and sell part or all of it and, at least in theory, tell its employees what to do.

The trouble is, nowadays, the owners of the business often have less of an interest in its long-term survival and prosperity than other stakeholders like employees and suppliers. This has led to a strange paradox whereby, in some situations, the owners might demand a course of action that will eventually destroy the value of the company, while the employees resist it in the name of the company’s long-term future. In corporate debates you often hear people talk about ‘the interests of the organisation as a whole’. It always amuses me because I’ve never worked out who ‘the organisation as a whole’ is. As I’ve said before, most companies are primordial soups of competing interests.

Shareholders want returns; some want them quickly, others are in for a longer haul. Directors want bonuses, and a bit of power and status too. Employees want good wages and job security. Customers want good products for as little as possible. Suppliers want a steady flow of orders. Politicians want prosperity and plenty of tax revenue. And We the People, want jobs and not too much damage to the environment.

In this country, largely because of our assumptions about property rights, governments have proved reluctant to tell companies what to do. In other parts of the world, governments have fewer inhibitions. The Korean government, for example, nudged LG Group to invest in electronics rather than textiles and Hyundai to set up a shipbuilding company. Both were deemed to be in the national interest and both turned out to be good calls. In western countries, and especially Anglophone ones, intervention on such a scale has been limited to wartime and even then has often met with some resistance. Governments are reluctant to invoke the ‘national interest’ in peacetime, especially when dealing with large corporations.

In Britain, the Friedmanite view of  corporations prevails. Politicians and journalists can exhort and cajole companies to be socially responsible but it is the shareholders who have the power. If anything, the zeitgeist seems to be moving towards increasing that power.

Job creation, investment and all those other good things will only come if and when shareholders think they will enhance their returns or the value of their shares. And some shareholders are not prepared to wait as long as others for the proof.

To answer the question, then, companies in the UK are primarily for shareholders. It may  look absurd when many shareholders seem to have less of a stake in the company’s future than its employees or its surrounding community but that is the way the law and the prevailing political climate would have it. This is not the same everywhere. Some countries have very different ideas about what, or who, companies are for. In Britain, we still haven’t worked out how to make companies about much more than shareholder value. What is good for XYZ plc’s shareholders might not necessarily be good for Britain or even XYZ’s employees but that is no-one else’s, and least of all the government’s, business.

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3 Responses to What are companies for?

  1. Pingback: What are companies for? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. needs2cash says:

    “Companies exist to create more successful customers. They need employees to work together in designing goods and services to do this. They need employees to work together in designing processes that result in goods and services that do this.

    Customers reward companies by paying them what they agreed the goods and services are worth to them. Companies invest part of these rewards in improvement (the future). Companies share other parts of these rewards with owners and employees (may be the same) so they can look after their families. their communities and themselves.

    The more value they add through their work the more the employees receive and the more the company has to invest in its ability to create even more successful companies. Employees are not alone in this. The leaders create and continually improve systems that help create more successful employees. These systems are organizations known as companies.

    Companies that fail to do this go out of business.”

  3. Pingback: What are existing companies for? « Left Outside

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