The Purpose of Business: Its Stakeholders
and their Claims
The Purpose of Business: Its Stakeholders
and their Claims
What is the appropriate role for business to play in a
free market democracy?
Who decides?
The answer provides a “normative foundation for
business”.
Examples of “socially responsible” companies:
Examples of “socially responsible” companies:
Who are the primary stakeholders in a business
and what claims do they have on it?
Stakeholders
Claims
What does “the social responsibility of business”
or “corporate social responsibility” (CSR) mean
in our society?
What does the contemporary concept “the social
responsibility of business” mean?
1. “Social responsibility is the expectation that businesses or
individuals will strive to improve the overall welfare of society.”
1.
From the perspective of a business, this means that managers must
take active steps to insure that society is better off as a result of the
business’ existence.
(From Dess, G.G. et al. (2008) Strategic Management. New York: McGraw-Hill Irwin)
“Values-led business is based on the idea that business has a
responsibility to the people and the society that makes its
existence possible.”
Timberland's program of social responsibility
 What types of activities does Timberland’s
program of Social Enterprise include?
 http://responsibility.timberland.com/
 What are the costs of this program to
Timberland?
 What are the benefits?
Milton Friedman’s thesis on the social
responsibility of business
“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 or fraud.”
from The Social Responsibility of Business is to Make a Profit, 1970
“Companies that focus on making money become
more competitive, and that in turn means more
economic growth, and more jobs, and all the other
results that ‘stakeholders’ care about.”
Robert Eaton, Chairman & CEO of Chrysler
How does Friedman support his thesis that the social
responsibility of business is to increase its profits?
Supporting arguments for Friedman’s thesis on the social
responsibility of business
 The responsibility of the
corporate executive is to
maximize profit because this
is what shareholders want.
(p.2)
 The underlying political
principle of the market
mechanism: “In an ideal
market resting on private
property, no individual can
coerce any other”. (p.5)
 The vagueness of the term
“social responsibility” as it
applies to business.
 The appeal to social welfare:
When profit-seeking occurs
in competitive markets, firms
direct society’s resources to
their highest use as measured
by the willingness of people
to pay. (Adam Smith)
 The realities of competition.
(p.3)
 Is social responsibility really
anything other than profit
maximization? (p.4)
According to Charles Handy, what is the
purpose of business?
According to Charles Handy, what is the
purpose of business?
 The purpose of business is not to make a profit. It
is to make a profit so that the business can do
something else. That “something” becomes the
real purpose of the business. (p.5)
 “To many this will sound like quibbling with
words. Not so. It is a moral issue. To mistake the
means for the end is to be turned in on oneself . .
. “ (p.5)
 “ . . . The suspicions about capitalism are rooted
in a feeling that its instruments, the corporations,
are immoral in that they have no purpose other
than themselves.” (p.5)
David Packard’s philosophy of business
“I think many people assume, wrongly, that a company exists simply
to make money. While this is an important result of a company’s
existence, we have to go deeper and find the real reason for our
being. As we investigate this, we inevitably come to the conclusion
that a group of people get together and exist as an institution that
we call a company so that they are able to accomplish something
collectively that they would not accomplish
separately–they make a contribution to society . . . ”
from What’s a Business For?, Charles Handy, 2002
Summarizing: Can we find some agreement
between the arguments of Friedman and Handy,
some common ground that would point toward
the purpose of business?
What is the primary objective of this business? How do you
think Blake Mycoskie would respond to Friedman’s view of the
social responsibility of business?
For most of the 20th century, professional managers of public
corporations did not view themselves as "agents" whose only purpose
was to maximize shareholder wealth. Rather, they viewed themselves
as stewards or trustees responsible for steering great social institutions
— public corporations — for the benefit not only of shareholders but
also employees, customers and the nation. This system of "managerial
capitalism" was hardly perfect. But, ironically, it produced better
results for investors than the "shareholder primacy" philosophy that
dominates public corporations today.
from 'Maximizing shareholder value' is ill-conceived concept by
Law
Lynn Stout, professor of corporate and business law at the Clarke Business
Institute at Cornell Law School (Los Angeles Times, 9/212)
“The job of management,” proclaimed Frank Abrams, chairman
of Standard Oil of New Jersey in a 1951 address that was typical
of the era, “is to maintain an equitable and working balance
among the claims of the various directly interested groups . . .
stockholders, employees, customers, and the public at large.” The
top executives of America’s major corporations had emerged from
World War Two as ‘corporate statesmen,’ who had overseen
defense production for the nation as a whole. Many continued to
view themselves more as professionals with public responsibilities
than solely as agents of private interests.
Reich, R.R. (1998). The new meaning of corporate social responsibility.
California Management Review 40:2, 8-17
Quantifying the impact of corporate
social responsibility
1. A 1992 study found that employees’ morale tripled in
firms that are heavily involved in their communities
2. Corporate Citizenship’s 2002 poll found that 84% of
Americans would be likely to switch brands to one
associated with a good cause if price and quality were
similar (cited in Dess, G.G. et al. (2008) Strategic Management. New York: McGraw-Hill Irwin)
3. 71% of store customers surveyed said they would be
more likely to buy Timberland products
(From Timberland & Community Involvement, HBS –5/29/98)
4. The evidence from “Does it Pay to be Good?”
(Trudel, T. & Cotte, J.(2009) Does it pay to be good? Sloan Management Review. 50:2. 61-68)

A Middle Way: “The Biggest Contract”
(Ian Davis, Worldwide Managing Director of McKinsey & Co.)
A. CSR is often a defensive, piecemeal, non-strategic reaction to
social pressure
B. Companies need to build social issues into strategy in a way
that reflects their actual business importance rather than taking
a reductionist approach of “the business of business is
business” which can lead to a focus on short-term performance
C. How IBM uses its expertise
The business enterprise must be founded on a sense of responsibility
to the public and to its employees. Service to its customers, the
wellbeing of its employees, good citizenship in the communities in
which it operates–these are cardinal principles fundamental to any
business. They provide the platform on which a profitable
company is built.
We shall build good ships here at a profit if we can–at a loss if we must–but
always good ships. (Newport News Shipyard, 1917)
From Hopper and Hopper, The Puritan Gift, 2007 (p.116)