What’s the Purpose of a Public Company?

The Business Roundtable, a group representing the nation’s most powerful chief executives, last month abandoned the idea that companies must maximize profits for shareholders above all else, a long-held belief that advocates said boosted the returns of capitalism but detractors blamed for rising inequality and other social ills.

The new statement reads:  “Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity.  We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”  The Business Roundtable represents the CEO’s of 192 large companies and is chaired by JPMorgan Chase CEO Jamie Dimon.

That statement is far from Milton Friedman’s famous 1970 New York Times Op-Ed where he declared “the social responsibility of business is to increase its profits.” And “in a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires…the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation…and his primary responsibility is to them.”

For small, privately held, businesses the idea of a company’s purpose is not complicated – it is whatever the owner says it is.  But in publicly traded companies that are owned by thousands of shareholders and governed by boards of directors, this is a question worth examining.

While many praised the CEOs for their foresighted humanitarianism, others worry they have accelerated the demise of capitalism itself. In What Companies Are For, The Economist (subscription required) offers a historical perspective on the issues and has an interesting take, arguing that “…this new form of collective capitalism will end up doing more harm than good. It risks entrenching a class of unaccountable CEOs who lack legitimacy. And it is a threat to the dynamism that is the source of long-term prosperity—the basic condition for capitalism to succeed.”

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