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Monday, October 04, 2004

What is a Good Business?

When Milton Friedman advocated that the only purpose for a business organization is to maximize the wealth of its shareholders, he was arguing that the firm must take care only of profits as its ultimate purpose. Even if there were other non financial agendas that the firm seeks to accomplish, such as charity and contribution to the social welfare of the community, as long as these decisions were made to ultimately maximize the returns on the shareholders' investment, the firm has fulfilled its purpose as a social instituion. Such a view of the business organization seem decidedly un-Christian, and so many Christians advocate an opposing view, called the Stakeholder view of the Business.

According to the stakeholder view, there is a fiduciary duty that the firm owes to its diverse stakeholder groups. Stakeholder theorists argue that maximizing profits for shareholders is not the primary purpose of the business, since such a focus will make the organization morally deficient as a social institution. Since businesses are social organizations, they are moral agents and therefore their actions, and decisions have moral implications. Part of the moral responsibilities of these organizations have to do with looking after the social well being of the communities where it functions, the people who impact the organizations and vice versa, its clients, its vendors or suppliers and so on. Therefore, leaders of such organizations have a duty to look at all the facets and agendas of the various groups of stakeholders in its decision making and activities.

One key argument against the stakeholder view is that pandering to the often competing claims of the different stakeholder groups can be painstakingly paralyzing, stifling the effectiveness of the firm's management. Stakeholder theorists often overstep their boundaries in their call for justice and equity in their demand for a business to fulfill its obligation to the various stakeholder groups.

An alternative view I believe is what I call the strategic view of the purpose of a firm. Since we hold that business organizations are moral agents, we can talk about the character of a firm. The character or personality of the firm can be exemplified by its mission statements and business objectives. This way we can judge each business according to how well it has fulfilled its goals and objectives and how it has behaved in accordance to its own stated mission. We can also critique the mission statement, its goals and objectives and its policies to see if they measure up to what we understand a good business organization ought to be. We can then apply standards of justice, equity, fiduciary responsibility, fairness and excellence to measure the goodness of a firm.