JThe Purpose of Businesses

Why do businesses exist? For shareholders or society? When looking from an ethical point
of view, the utilitarianism theory can help answer these questions. Utilitarianism believes
that the market should always maximise utility between everyone involved in the market
(Bentham, 1907). This means that the existence of firms as significant market players should
bring about the greater good. In this essay, I will argue that serving the needs of the
shareholders is not the sole purpose of firms. Firstly, using findings from Goodpaster (1991),
I will argue that companies can fulfill both the shareholders' and stakeholders' needs, hence
maximising utility in the market. Secondly, I will argue that caring about society is not always
at the expense of profits, as supported by findings from Bénabou and Tirole (from now on
B&T). However, I will also point out that it is not always realistic to expect firms to act pro-
socially, especially when their financial performance is at risk. Hence, while it is true that
companies do have an obligation to maximise the happiness of everyone involved in the
market, in reality, there is a limit to which they can do so.

Since companies benefit substantially from society and play a significant role in society, they
should be held responsible to other stakeholders and 'give back' to society. Goodpaster
(1991) highlighted how firms can include their shareholders' and stakeholders' needs in
their decision-making process. The PASCAL decision-making process emphasised two crucial
steps in decision-making, namely stakeholder analysis and stakeholder synthesis.
Stakeholder synthesis utilises the analysed information and takes into account the values
and priorities of the decision-maker. There are two types of stakeholder synthesis: strategic
stakeholder synthesis/fiduciary (firms only considering the interests of shareholders, which
might neglect the community's needs) and multi-fiduciary (firms maximising the welfare of
all stakeholders, which might neglect the needs of the business) (Goodpaster, 1991).
Unfortunately, this results in a stakeholder paradox because taking either one approach will
bring about ethical issues. Hence, Goodpaster introduces a solution that balances both
fiduciary expectations. He believes that management only has a fiduciary obligation to their
shareholders but has a moral fiduciary relationship with the other stakeholders (Nemo Dat
Principle). In other words, firms have financial obligations to the shareholders e.g promising
high profits, and moral obligations to other stakeholders e.g ensuring that the profits are
obtained legally or morally (without cheating or fraud). For instance, large corporations,
including Google, have developed a Code of Conduct to introduce and integrate values such
as integrity to ensure prosocial behaviour in the company and fulfilling both the
stakeholder's and shareholders’ interests. Thus, the utility of parties involved in the market
is maximised.

Furthermore, meeting the needs of individual stakeholders is also crucial for companies'
survival, and behaving pro-socially does not always come at the expense of the company's
financial performance. B&T (2010) believe that there are three motivations for individual
social responsibility: intrinsic altruism, material incentives, and social- and self-esteem
concerns. For instance, investors or customers may demand for more environmentally-
friendly products because of their genuine altruism to save the planet. They may charter
this act of philanthropy to corporations, where corporations are expected to behave pro-
socially on the stakeholders' behalf (Bénabou and Tirole, 2010). As a result, customers
would prefer buying from sustainable or environmentally-friendly businesses because they
feel they can make a difference. This point emphasises on how both society and firms can
benefit from firms' prosocial behaviour.

Additionally, when companies exist to serve a purpose in society, they will sustain profits in
the long run. B&T's (2010) "win-win" view on corporate social responsibility (CSR) believes
that companies taking a socially responsible stance can increase their market position and
competitiveness, which improves their long-term profitability. For instance, a study
conducted by Edmans (2012) found that companies listed in the "100 Best Companies to
Work For in America" generated 2.3% to 3.8% higher stock returns per year than their
competitors from the year 1984 through 2011. This provides evidence that when companies
act socially responsible (in this case) by prioritising their employees' well-being, the
increased job satisfaction encourages them to work better. This will be reflected in higher-
quality work and better brand image and reputation amongst customers which generates
long-term profits/stock returns. Thus, behaving pro-socially is not always at the expense of
the company's profits.

In my last point, I would like to mention that even though it would be ideal for companies to
act pro-socially and focus on long-term profits, it may not always be realistic. The previous
argument only works if the company is willing to sacrifice its short-term profits to achieve
long-term ones. Meanwhile, shareholders may have a more myopic view of creating wealth
in the short term. Most companies should still prioritise their obligation to the shareholders
if they wish to survive. Until now, many companies can still operate despite being infamous
for unethical working conditions e.g Adidas and Nike 'sweatshops'. These companies can
offer relatively affordable products due to the lower cost of labour (exploitation of labour)
which is attractive to customers and enables them to stay competitive and survive.
Moreover, Falk & Szech (2013) found that people tend to act less ethically in a market
environment due to shared feelings of guilt. They also argue that individuals tend to neglect
their moral values (objection against exploitation of labour, environmental damages, etc)
when they act as market participants looking for the most affordable options in the market
(Falk & Szech, 2013). Thus, as long as there is an economic demand for their products,
companies are unwilling to forgo their profits (especially in the short-term) to act pro-
socially. This portrays how despite companies needing to serve the stakeholders' interests
(explained in the previous parts), there is always a limit in which they can do so. Hence, it is
somewhat unrealistic to expect firms to always behave pro-socially.

To conclude, I firmly believe that businesses do not exist merely to attain profits. Since
businesses benefit significantly from society, they have moral obligations to their
stakeholders, and Goodpaster (1991) exhibited how businesses can fulfil both obligations to
shareholders and stakeholders. Furthermore, we also see how companies can behave pro-
socially without hurting their profits (Bénabou and Tirole, 2010). From the utilitarian
perspective, utility is maximised for parties involved in the market. Nevertheless, it is not
always possible for companies to always act pro-socially primarily when they have to
sacrifice their profits and when the market behaves in a way that indirectly supports their
unethical practices (Falk & Szech, 2013). Therefore, there is always a limit in which
businesses can fulfil their obligation to shareholders and stakeholders.

Word count: 1099 words.

 Bibliography

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Falk, A., and Szech, N. (2013). Morals and markets. Science, 340(6133), 707-711.
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