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Dr Jerzy Supernat
Institute of Administrative Studies
University of Wrocław
Justice as a purpose of business:
A stakeholder theory of a modern business corporation*
There would be no life without justice;
and even if they were, it would not be worth living.
G. del Vecchio
This paper will consider the question of the purpose of business or
a business corporation, thus a philosophical issue, what may arouse a lively
discussion among the persons interested. It might also be observed that . mutatis mutandis . this question
corresponds with the disputes about the sense of existence of an individual
that have a religious or ethical nature, and go beyond scientific
considerations. The author's intention will be to prove the need and
possibility to accept that a common purpose of business is not profit, but
justice.
Nine out of ten persons when asked in Poland what the purpose of business
is, are likely to answer: 'Profit' or even 'Maximization of profits'. Moreover,
this understanding of the purpose of business is not only characteristic of an
ordinary man or average manager, but also of the representatives of economics
or organizational theory. This understanding developed in Poland together
with the transformation of the social and economic system, and as a result of
blind acceptance of the notions of the new capitalist system. E.g. in the
popular dictionary of Business English available in Poland at the beginning of
the 90., J.H. Adam defined business in the following way: 'a person, firm,
company or other organization which makes or produces a product, buys and sells
goods or provides some kind of service, usu. for the purpose of making a
profit' [Adam 1989, p. 82]. The main followers of the idea that profit is the
purpose of business are, certainly, A. Smith and M. Friedman. The latter has
for instance written: 'there is one and only one social responsibility of
business . to use its resources and engage in activities designed to increase
its profits so long as it stays within the rules of the game, which is to say,
engages in open and free competition, without deception of fraud (.). Few
trends could so thoroughly undermine the very foundations of our free society
as the acceptance by corporate officials of a social responsibility other than
to make as much money for their stockholders as possible. This is a
fundamentally subversive doctrine' [Friedman 1962, p. 133, cf. Hayek 1981, p.
65 and next]. Meanwhile, in the West, a
lot of authors [esp. Drucker 1993] have been already for a long time stating
that business cannot be defined and explained in terms of profit and
profitability because this approach is false, and even irrelevant. Of course,
this approach does not mean that profit is questioned in a business activity.
P.F. Drucker writes as follows: "If archangels, instead of business men, sat in
directors' chairs, they would still have to be concerned with profitability
despite their total lack of personal interest in making profits" [Drucker 1993,
p. 33]. However, he thinks that profit is not the purpose of business, but a
limiting factor on it: making a minimum profit is indispensable to cover risk
of a business activity and to avoid a loss. That a person is in business to
make a profit (with or without the profit motive) concerns only them (and their
guardian angel). It does not tell us what this person does and what their
business is about.
In P.F. Drucker's opinion, the purpose of business should lie
outside of the business itself; it should lie in society for the reason that
business is an organ of society. Therefore, in his opinion, there is only one
valid definition of business purpose: to create a customer. T. Levitt adds that
this purpose is not only to create a customer, but also to keep a customer
[Levitt 1983, passim]. The statement that the purpose of business is to
create and keep a customer can be today confirmed by emphasis put on
relationship marketing and by intention to change business corporations into
Customer Centric Organizations (CCO). It is the customer who determines what a
business is. And only these goods or services the customer considers a value
and is willing to pay for determine the sense of business and secure its
existence. Because it is the purpose of business to create a customer, any
business has two . and only these two . basic functions: marketing and
innovation. In P.F. Drucker's opinion, especially marketing is the
distinguishing and the unique function of business and . according to him . it
may be stated that business is set apart from all other organizations by the
fact that it makes use of marketing. In other words, in his opinion, any
organization that uses marketing is a business. However, it might well be
noticed that not only business can fulfill itself through marketing whose
objective is a mutually beneficial exchange (thus it is not about this
marketing whose objective is a sale of products of a business conducted by
convincing us that a purchase of these products shall guarantee the quality of
our life; in practice marketing is often associated in our minds with this materialistic
ideal and this is the reason for its poor reputation), but any organization in
fact; in other words, non-profit organizations can also use marketing.
Therefore P. Guptara defines marketing as "those activities performed by
individuals or organizations, whether profit or non-profit, that enable,
facilitate and encourage exchange to take place to the satisfaction of both
parties" [Guptara 1988].
Coming back to the issue of profit in business, two its functions
can now be discussed. First of all, profit is a result of the functioning of
business, and is a measure of how good a business is in the field of marketing,
innovation and also productivity. T.J. Peters and R.H. Waterman characterize
the perfectly managed American corporations and write: "The idea that profit is
a natural by-product of doing something well, not an end in itself, is almost
universal" [Peters, Waterman 1982]. Secondly, as mentioned before, a (minimum)
profit is indispensable for business to survive (it is loss avoidance that is
the most important principle of business economics, and not profit
maximization). In other words, a business has to yield enough profit to cover
risk that always arises out of a business activity. In fact, a business has to
cover not only its own risk, but also has to cover losses incurred by such
businesses that fail to realize a profit. This results from the fact that a
society has a factual interest in the existence of an active economic
metabolism in which some businesses always incur a loss, and eventually wind
up. This is the basic guarantee of a free, flexible and open economy. A
business also has to finance essential costs connected with the functioning of
society (education, defense etc.), which means that a business has to earn
enough to be able to pay taxes. Finally, a business has to raise capital to
bear a cost necessary to conduct research on its own development in the future.
Yet, it might and should be observed that the success and survival
of any business depend not only on meeting expectations of its customers. The
expectations of other groups of persons who have a natural interest in the
business should also be met, especially of owners / investors, managers,
employees, suppliers, creditors, local and central government, local community
and the public at large. In brief, the expectations of different stakeholders
should be met. In R.E. Freeman's opinion [Freeman 1984] the term 'stakeholders'
appeared for the first time in 1963
in the papers of members of the Stanford Research
Institute, and meant only those groups without whose support the organization
would cease to exist. This understanding allows us to distinguish two meanings
of this term: sensu stricto, and sensu largo accepted in this paper [cf.
Evan, Freeman, 1997, p. 185 and next]. Therefore, we may say that these
purposes whose fulfilling serves to meet the natural expectations of its
stakeholders are the purposes of business. And the statement that any business
should render to its stakeholders their due allows us to say that it is justice
that is a common purpose of business.
Nota bene that justice is a fundamental and underlying purpose of every
society. According to art. 2 of the Constitution of the Republic
of Poland of April 2, 1997 (Journal of
Laws, No. 78, item 483): 'The Republic
of Poland shall be a
democratic state ruled by law and implementing the principles of social
justice'.
However, justice as a common purpose of business may be considered a
utopia. Therefore, we shall bring into focus the fact that the problem of
business purposes refers in fact to the basic principles of the functioning of
an individual, a society, and a country. These principles include the following
rule binding already in ancient Rome:
Iuris praecepta sunt haec: honeste
vivere, alterum non laedere, suum cuique tribuere (These are the legal
principles: live nobly, be good to others, and give to each person their
due). Nevertheless, justice as the
purpose of business requires that certain objectives should be achieved. The
objectives are expressed in a more specific way, and in accordance with the
expectations of the groups of persons who have an interest in the functioning
of business. W.F. Gast has identified six natural and true objectives of a
business corporation [Gast 1954, p. 14 and next, cf. Junckerstorff 1960, p. 18 and next, and Ryan
1997, p. 413 and next]:
1.
The production of a want
satisfying product or service.
The tendency
might well be noticed to confuse the purposes of business with the motives for
engaging in business. Whereas it is profit that is a dominant motive for a
person to enter in business, it shall be brought into focus that profit is
realized only after some products have been sold or some services have been
performed. For this reason, the true purpose of a corporation is to produce
goods that customers want to buy or to provide services for which there is a
demand.
2.
The economically productive
employment of persons.
It might be
easily observed how much importance is placed by society on the proper
employment of persons, and how much attention is devoted to the problem of full
employment. Business accepts this importance and attention. W.F. Gast has
written: 'A large number of alert businessmen have freely expressed a deep
conviction that employment must be given the status of a business objective,
coordinate with profit, and have disclosed a profound concern over the social
consequences of a failure to so regard employment. To put the matter into very
plain words, a business must be considered to exist partly to make and to
maintain jobs for employable persons' [Gast 1954, p. 15]. The concept of
'economically productive employment' puts emphasis on the capacity of the
individual to contribute to the production of goods or services for which there
is a demand. To be productively employed every person must bring some ability
and skills that the corporation needs, and can later utilize.
3.
The satisfaction of normal
occupational desires.
Persons expect
that their jobs shall give them certain personal and professional satisfactions.
All employees have wage expectations, but it might be now more and more noticed
that financial return is not their sole expectation. They also focus on such
issues as satisfactory working conditions, future opportunities, personal and
professional development and recognition for their achievements. Therefore, all
those factors shall come into being in a business corporation in order to meet
the expectations of the employees [cf. Cox 2000 and Gratton 2000].
4.
The economically productive
utilization of capital and land.
Not only persons
must be properly and economically employed. The same applies to capital and
land that must be properly and effectively utilized in order to fulfill the first
objective of production of a want satisfying product or service. W.F. Gast
concludes that 'it is a social, as well as a private obligation of managers to
cause the land and the capital which they employ to be as efficient as
possible' [Gast 1954, p. 15].
5.
A just wage to labor.
One element in
the social doctrine of the Roman Catholic Church achieved general acceptance in
the 20th century, and this element consists in the introduction of
the concept of the living wage as a moral imperative. Pope Leo XIII in Rerum
Novarum (15 May 1891), Pope Pius XI in Quadragesimo Anno (15 May
1931), Pope John XXIII in Mater et Magistra (15 May 1961) and Pope John
Paul II in Laborem Exercens (14 September 1981) and in Centesimus
Annus (1 May 1991) all stressed the right of the worker to a just wage [see
also Neuhaus 1994 and Bednarski 1999]. Of course, there is no worldwide living
wage and its determination varies depending on the circumstances. Nevertheless,
the norms for a living wage are well recognized, and . in H.R. Light's opinion
. 'the manager must ensure that wage policies are determined in accordance with
the principle of equity and justice' [Light 1950, p. 14].
6.
A just return to investors of
capital.
According to
W.F. Gast persons who invest capital in a business corporation not only expect,
but even deserve financial return. First of all, investors offer a strong
incentive to a corporation necessary to provide employment to persons, and to
ensure the production of goods and services. Secondly, they take a decision to
invest their savings, which involves risk. Finally, their investments are made
with the expectation of yield. For these reasons, the question is not whether
there should be a return, but 'how much' and 'in what form' should investors
receive their compensation for the financing of the business corporation. W.F.
Gast thinks investors shall receive their return in proportion to the degree of
risk they assume.
The concept of business based on the idea of stakeholders, and the
idea of justice as business purpose leads to such capitalism that respects
human dignity. In I. Kant's understanding, to respect human dignity means to
observe a rule to treat a man as purpose per
se: 'Any human being cannot be ever and by anyone . even by God . treated
as means to even the most lofty purpose' [Kant 1994; see Rawls 1972 to find a
contemporary interpretation of this rule]. The belief that a man has a right to
be treated as purpose per se, and not
only as means questions managerial capitalism whose basic concept expresses the
idea that the basic obligation of business managers is to realize the interest
of the owners: the shareholder is king. The stakeholder theory of a business
corporation proves that a business shall be managed for the good of all groups
of persons interested, and should not single out any of the groups (although it
may happen that one group can benefit at the expense of other groups).
According to this theory, the basic obligation of managers . who are special
stakeholders . shall be to coordinate and balance the expectations of all the
groups who have a natural interest in the business. Nb. this understanding of
the managers' function constitutes in Japan an element of the traditional
style of managing business: 'The Management Board (.) shall be considered to be
a representation of all participants of the business corporation, and not of
the shareholders only' [see Gregory 1985]. Justice, being the purpose of
business, questions and diminishes validity of the egoistic interests of
different stakeholders, and facilitates consolidation of the organization and
fulfilling the basic obligation of business managers.
Abstract
According to many authors and to general public opinion, the purpose
of business is profit, or even its maximization. Not questioning the importance
of profit in the economic activity, the statement shall be considered that a
common purpose of business is not profit, but justice. The success (and
survival) of any business depends on meeting expectations of not only its
owners / investors, but also many other groups of persons who have a natural
interest in the functioning of business (managers, employees, suppliers,
creditors, local and central government, local community and the public at
large). The statement that any business should render to its stakeholders their
due brings to a conclusion that it is justice that is a common purpose of
business.
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* Opublikowany w: Gospodarka narodowa i przedsiębiorstwa na początku XXI
wieku, pod redakcją Leona Olszewskiego, Kolonia Limited 2003, s. 165-171.
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