The socially constructed nature of the purpose of business

Figure: Key terms in business that demonstrate the social construction of reality

​Some people believe that the primary purpose of business is to maximize financial profits. We forget that this primary focus on financial well-being is relatively recent. For example, former CEO of RJR Nabisco, F. Ross Johnson—who in the 1980s “helped make the phrase ‘increasing shareholder value’ more than a buzzword”—notes that maximizing owners’ financial capture was not considered the primary purpose of business when he started out in the 1950s, nor can it be the primary purpose going forward.[1] For example, the Google Ngram below shows how: “profit maximization” is a socially-constructed phrase that started to be used in the 1940s, “shareholder value” started to be used in the 1980s thanks to people like Johnson, and “value creation” and “triple bottom line” started in the 1990s.




​





​

The socially constructed nature of the purpose of business was in full view when the Business Roundtable—a group of 200 large corporations that includes giants like Apple and JPMorgan—issued a new “Statement on the Purpose of the Corporation” (https://opportunity.businessroundtable.org/ourcommitment/) that challenges the long-held view that corporations should primarily serve the interests of its shareholders: “we share a fundamental commitment to all of our stakeholders.”[2] Despite such changes, negative externalities and income inequality continue to rise, and research suggests that the social and ecological performance of signatories of the Business Roundtable during the early months of the COVID-19 pandemic was no better than other corporations in terms of protecting jobs, workplace safety, pursuing racial equality, and they were 20 percent more likely to announce layoffs or furloughs, and less likely to donate to relief efforts.[3]

Question: Can you imagine a time when “profit maximization” and “shareholder wealth” will be replaced by “sustainable business” and “the well-being of the 99%”?

[1] Cited in Bell, G.G., & Dyck, B. (2012). Conventional resource-based theory and its radical alternative: A less materialist-individualist approach to strategy. Journal of Business Ethics, 99(1): 121-130.
[2] Wheeler, K. J. and 193 others (2019). Statement on the purpose of the corporation. Business Roundtable. https://opportunity.businessroundtable.org/ourcommitment/  Gelles, D., & Yaffe-Bellany, D. (2019, Aug 19). Shareholder value is no longer everything, top C.E.O.s say. New York Times. https://www.nytimes.com/2019/08/19/business/business-roundtable-ceos-corporations.html
[3] Goodman, P.S. (2020, Sept 20). Stakeholder capitalism gets a report card. It’s not good. New York Times. https://www.nytimes.com/2020/09/22/business/business-roudtable-stakeholder-capitalism.html; Useem, J. (2020, Aug 6). Beware of corporate promises. The Atlantic. https://www.theatlantic.com/ideas/archive/2020/08/companies-stand-solidarity-are-licensing-themselves-discriminate/614947/

---