Business leaders can pursue profits and maintain a strong value system
Nov 19, 2019 11:37AM
By Michael R. Weeks
Not long ago, the faculty members of The Citadel Baker School of Business were reviewing a draft of a potential exit exam for our graduates when we came to an innocuous multiple-choice question: What is the purpose of business? The proposed answer was short and to the point—to create value. Yet, in a room full of academics, there is never a simple answer.
This one question led to an almost hour-long discussion that goes to the existential heart of a school of business. What is the purpose of business? If it is to create value, then create value for whom? Customers, shareholders, the common good? As dean of the Baker School of Business, it became clear to me that if we have difficulty answering this question among ourselves, we had a problem.
Our discussion was timely as it occurred when a group of CEOs, The Business Roundtable, released a lengthy statement about the purpose of business. That statement generated substantial discussion because it seemingly relegates shareholder returns to just one of the many goals of a business. This Business Rountable view moved away from the model proposed by Nobel laureate Milton Friedman that businesses should be driven by profit maximization. Friedman felt a firm should obey the law and maximize profits.
Although I understand the aims, I have philosophical quibbles with the Business Roundtable statement. I certainly feel that businesses should maximize profits. The primary obligation is to the owners of the firm. The problem is that a simple goal of maximizing profits places no constraints on the firm. How far will a CEO go to maximize profits? Will he lie? Will she steal trade secrets? Will employees be treated fairly? Simply obeying the law doesn't always guarantee ethical behavior.
Moreover, relegating our behavior to legal standards invites increased government regulation; a situation lamented by most executives.
So what constraints shall we have?
A business school education can't cover every scenario an executive may encounter. Consequently, it is imperative that a business school curriculum instill values that guide decision making in a more general sense. First among those must be integrity.
Leaders must be forthright and transparent. For example, they must insure that the firm's marketing claims are accurate and complete. Several drug companies are currently being investigated for safety claims about products that were not supported by the evidence. Financial services firms have been charged with opening accounts without customer knowledge. Incentive systems that prioritize profits without maintaining a strong sense of integrity in the corporate culture create an environment that breeds corruption.
Next, leaders need to ensure that a firm treats everyone with dignity. Organizations need to pay fair wages and have reasonable working conditions. Many of the most egregious examples come from overseas operations, but leaders should never prioritize profits over treating people with respect.
Dignity also applies in the ways we interact with customers. Taking advantage of customers with limited knowledge is not in a firm's best interest, nor is it a means to long-term returns for shareholders.
Finally, business leaders must demonstrate authentic concern for the community. The most obvious element here is stewardship of the environment.
Beyond environmental concerns, businesses must be good civic partners and consider larger impacts that support strong and resilient communities. A business doesn't need to be a champion for every cause. However, if each business takes responsibility to be a good citizen and wise steward of common resources, all will benefit—shareholders included.
The invisible hand of the market is a powerful force that can benefit shareholders and communities. Profits sustain shareholders, employees, governments, and communities and yield productive energy to make our world better, but the ultimate concern is that leaders have a robust value system. No amount of government control or regulation can overcome leaders who do not possess a strong moral compass. Business schools have an obligation to reinforce those values and build leaders that make good citizens.
As I worked through my thoughts, I came to appreciate that the core values of my institution, The Citadel, neatly encapsulate these ideas: honor, duty and respect. These are timeless values.
Ultimately, we do not need to rewrite the purpose of business. It has always been and always will be profit maximization. What we need to do is ensure that our business leaders pursue profits while maintaining a strong value system that promotes a healthy, civic-minded culture.
Michael R. Weeks, Ph.D., is the Dean and Robert A. Jolley Chair of Business Administration for the Tommy and Victoria Baker School of Business at The Citadel.