Peter Crow
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What is the real purpose of business?

7/11/2014

4 Comments

 
Does the question posed in the title of this musing have a straightforward, even profound‚ answer? I would have thought so. In fact, when I am asked this question—as happens on a fairly regular basis—my reply is that the purpose of business is to provide a return to the shareholders, whether by way of a dividend or a capital gain, or both. The shareholders own the asset (the business), so it seems fair that they receive a reward for making the asset available. I've thought this for the long time, on the basis that the shareholders are the ones that put up the money in the first place. Staff, suppliers and others receive payments for services rendered and products supplied at the time they are provided.
However, if companies become selfish and get too greedy, by trying to maximise profit at the expense of almost anything else, as some do, then cries of protest can be expected from some quarters. Do cry-ers have a point? Maybe, but not if they are promoting some form of social engineering, whereby profits are distributed to others beyond the shareholder base. Businesses exist for the purpose of making money for their shareholders. They are not social clubs for a wide group of so-called stakeholders. Others disagree, I know, but the purpose of a for-profit business is to make a profit! Otherwise, the business would be a not-for-profit agency.
It would seem to me that, in the context of an open market, those companies that achieve dominant positions are very good at what they do. Yet no business is exempt from the invisible hand. The self-regulating behaviour of the market described by Smith over 200 years ago remains in control. It will have an effect, perhaps sooner rather than later if boards and shareholders get too greedy with profit maximisation.
So, back to the question. What is the real purpose of any business? To make a profit for its shareholders, and those that do this well, in an ethical manner, can and should expect to operate successfully for many years.
4 Comments
Peter Tunjic link
7/11/2014 11:18:28

Hi Peter,

The distinction between "for profit" and "not for profit" is interesting.

Under Steve Jobs, Apple unquestionably became the most successful company of modern times and amassed enormous profits but didn't distribute its reserves to shareholders through dividends or buybacks. Rather, it retained these profits for future use. At that time, was Apple a for profit or not for profit? Or are these evaluative terms pretending to be descriptive.

Hope the conference in Zagreb goes well. I'm off to the Drucker Forum. Who, coincidentally, thought the business of business is to stay in business.

Reply
Peter Crow
7/11/2014 12:37:52

Thanks Peter and nice to hear from you again. You raise an interesting point. My initial take on your point would be that Apple remained a for-profit business throughout. There is a world of different between the profit / non-profit motivation and and decision to make or withhold distributions. Apple, under Jobs, was intently focussed on making serious amounts of profit as far as I could see.

All the best for the Drucker event. When and where is it on, and will you be posting summaries for non-attenders to read?

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Peter Tunjic link
9/11/2014 08:16:23

Hi Peter,

The conference is in Vienna on the 14th and 15th of November. It is being telecast and details can be found here http://www.druckerforum.org/.

I'm not sure if I'll be posting summaries as I'm working on a series of unofficial perspectives as my contribution the forum. I'm looking at the ways the shareholder primacy movement uses PR and marketing techniques to advance their cause. It's interesting stuff.

On Apple, Jobs success suggests that "for profit" does not necessarily mean "for distribution" to shareholders as of right. I also work with companies limited by guarantee that are prohibited by law from distributing their profits. I can assure you that they pursue profits as enthusiastically as any other client.

Kim Møller Rasmussen link
11/11/2014 19:10:50

Hi Peter.
Thank you for bringing the topic up.
If you look at it from a higher perspective, a business will only be succesfull on the long term if it brings value to society. That being tax-payments, jobs, profits to be used for expediture keeping consumption up, profits for new investments supporting future growth in society.
Does it not bring value to society because of exploitation of the natural resources, breaking laws, pollution, too high profits benefitting on others etc. eventually it will be out of business.

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Peter Crow PhD CMInstD

Company director | Board advisor
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