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Prosperity: Better Business Makes the Greater Good
What is business for? Day one of a business course will tell you: it is to maximise shareholder profit. This single idea pervades all our thinking and teaching about business around the world but it is fundamentally wrong, Colin Mayer argues. It has had disastrous and damaging consequences for our economies, environment, politics, and societies.
In this urgent call for reform, Prosperity challenges the fundamentals of business thinking. It sets out a comprehensive new agenda for establishing the corporation as a unique and powerful force for promoting economic and social wellbeing in its fullest sense - for customers and communities, today and in the future.
First Professor and former Dean of the Säid Business School in Oxford, Mayer is a leading figure in the global discussion about the purpose and role of the corporation. In Prosperity , he presents a radical and carefully considered prescription for corporations, their ownership, governance, finance, and regulation. Drawing together insights from business, law, economics, science, philosophy, and history, he shows how the corporation can realize its full potential to contribute to economic and social wellbeing of the many, not just the few.
Prosperity tells us not only how to create and run successful businesses but also how policy can get us there and fix our broken system.
In this urgent call for reform, Prosperity challenges the fundamentals of business thinking. It sets out a comprehensive new agenda for establishing the corporation as a unique and powerful force for promoting economic and social wellbeing in its fullest sense - for customers and communities, today and in the future.
First Professor and former Dean of the Säid Business School in Oxford, Mayer is a leading figure in the global discussion about the purpose and role of the corporation. In Prosperity , he presents a radical and carefully considered prescription for corporations, their ownership, governance, finance, and regulation. Drawing together insights from business, law, economics, science, philosophy, and history, he shows how the corporation can realize its full potential to contribute to economic and social wellbeing of the many, not just the few.
Prosperity tells us not only how to create and run successful businesses but also how policy can get us there and fix our broken system.
288 pages, Hardcover
Published January 1, 2019
98 people are currently reading
949 people want to read
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August 26, 2023
Discover how to transform the corporate model into a vehicle for good.
There’s no denying that we’re in a time of crisis. The health of our planet is ailing at an alarming rate, and the gap between the “haves” and “have-nots” has never been so extreme. Business practices have undoubtedly contributed to this state of emergency. The doctrines driving the corporate world have led to the decimation of the environment, and have impacted communities and skewed economic policy.
But it wasn’t always like this, and the corporate model isn’t innately self-serving. In fact, corporations have the potential to do significant good that would benefit many – not only shareholders. We just need to rethink the model we’re using.
This book will trace how the corporate model has transitioned from a structure that benefited the community to one that has widespread, disastrous consequences. It’ll then highlight ways to course-correct business thinking, and reestablish the corporation as a vehicle for social and economic well-being that still honors shareholder needs.
-
It’s time for a new business paradigm
Each year, thousands of future company directors begin the next stage of their professional journey – obtaining their MBA. During that first semester of study, they learn about the Friedman doctrine, named after American economist and statistician Milton Friedman. Over 50 years ago, Friedman’s book Capitalism and Freedom presented a concept that not only formed the foundation of business education for the past half-century, but has also defined business practice and influenced government policies on a global level.
This concept states that the sole social responsibility of business is to increase its profits, within the scope of the law. And this is what those future corporate directors are taught – that every decision they make should help generate profits for shareholders. This sentiment is so deeply ingrained that it’s viewed as a natural law – something as innate and unchangeable as gravity.
Following Friedman’s doctrine has undeniably resulted in many benefits. Some corporate shareholders have made huge amounts of money and stimulated the economy. And in the course of doing so, their businesses have provided communities with employment – as well as housing, food, entertainment, and services that make life easier or support our well-being.
But at the same time, following this doctrine has caused immense damage. It has – and continues to – decimate natural resources and harm the planet while increasing inequality and deprivation. Business reporting rarely accounts for this damage. In keeping with Friedman’s doctrine, what matters are financial and material assets – the assets that make money.
Although corporations believe they’re only answerable to shareholders, their decisions affect the well-being of whole communities and ecosystems. That means they should be accountable to those communities and the environment. But to achieve this, the business world will need to replace its old paradigm with a new mindset – one that repositions corporations and their role in society.
Imagine what the world would look like if, as part of their everyday activities, businesses focused on doing good as well as making profits for shareholders. That might sound wildly idealistic, but the reality is that humans invented and adopted Friedman’s doctrine. So why can’t we create a new model that harnesses the good while mitigating the bad?
Businesses have the potential to make significant positive change in the world. They just need to redefine what “success” actually looks like. But before we explore ways to achieve that, let’s look at how we got here in the first place.
-
Corporations have lost their connection to community
The concept of different people being legally contracted together for business can be traced all the way back to ancient Rome. We’re not going to travel that far back in time, but a quick history lesson can help explain why corporations have lost some of their potential to do good.
A corporation is essentially a structure through which economic activity occurs. What was once an exchange of goods in the market square, or the banding together of different tradespeople to create a building, is now an incorporated company whose activities and output can be studied and analyzed for the purposes of formal education and analysis.
Corporations were once a tool used by a regent and their parliament to promote their nation’s interests. By introducing freedom of incorporation, families were then able to set up their own companies. This was typically done with the understanding that the next generation would take over the business, and continue to generate family wealth and work opportunities for the local community. Things got a little more complicated when corporations became transnational, because they were no longer tied to a state or nation. But for a period of time, they were still largely controlled by families – like the confectionery company Cadbury or financial institution Barclays.
Then along came external investors, which meant the old business families had to relinquish some control. Corporations became co-owned by individuals with no intergenerational interest in the company. These individuals had one sole intention: to make a healthy return on their investment.
And so, over time, local branches of the business were shut down and relocated to cheaper labor markets to increase the profit margin and company value. Western corporations minimized product costs by using sweatshops, and banks maximized their profits by selling financial products that didn’t necessarily benefit the community long-term. In the process, the disparity in wealth distribution widened while the environment was plundered to feed the economic machine.
What’s been lost during this journey is a sense of commitment to the community. As a general rule, corporations no longer see themselves as part of an ecosystem with numerous and diverse stakeholders: their owners, family members, managers, employees, suppliers, customers, and the community. In the past, corporations created long-term goals that supported many – if not all – of their stakeholders, doing good to everyone’s mutual benefit. That’s no longer the case.
But corporations still have this potential. In fact, it’s precisely this capacity for long-term commitment to stakeholders – not just shareholders – that makes corporations a powerful vehicle for good, should they choose to be. Let’s investigate how that might happen.
-
Redefining purpose through effective governance
One of the main issues with Friedman’s doctrine is that it confuses company directors. When combined with pressure from shareholders, it tricks directors into thinking that the purpose of corporations is to make money. But that isn’t true.
The purpose of corporations is to solve a problem faced by the community. It might be to produce washing machines, so people can clean their clothes. Or it might be to deliver faster internet, or to facilitate travel from A to B. A corporation’s aim shouldn’t be to generate profits for shareholders – that should be a byproduct of it fulfilling its purpose.
In many countries, corporate law states that companies should also have a normative purpose. This is the company’s commitment to doing good in a way that extends beyond their immediate interests, like protecting the environment or offering education programs to the community. But shareholder pressure often means that this gets sidelined, or that a company’s obligations are met in tokenistic ways. And so normative purpose alone won’t transform corporations into a vehicle for good. Governance will need to play a role.
Corporate governance is typically associated with protecting shareholder interests, and policy advice in the US and UK supports this view. However, companies that follow what’s considered best practice corporate governance are the ones that fare the worst in a crisis – like when the dotcom bubble burst, or during the Global Financial Crisis.
The lesson here is that corporate governance shouldn’t be about increasing shareholder value; it should be about supporting a company’s purpose. All the mechanisms designed to govern – like the structure of the board, the appointment of board members, and risk management – should help facilitate the delivery of the company’s true purpose, not shareholder profits.
In addition to this, the corporation must expand its view of who its customers are. A company’s customer base should include everyone its activities impact – like employees, suppliers, the local community, and the environment – not just the direct consumers of its products. A more open attitude like this welcomes growth and innovation, which will help the corporation weather economic storms.
Realigning a corporation with its true purpose takes a visionary leader – someone who shareholders and employees alike trust to roll out this corporate change, and affirm why it’s worthwhile. It takes motivation and commitment. But when it’s successful, it showcases business innovation in its truest form while also shoring up the company’s long-term future.
And while studies that investigate the correlation between doing good and business health are in their infancy, evidence shows that approaching business in a socially responsible way is beneficial for corporations. For instance, high returns, low risk, and low costs are associated with corporate social responsibility, eco-efficiency, and customer satisfaction. And those are things that make all stakeholders – not just shareholders – happy.
-
Creating new metrics for performance
When it comes to evaluating a corporation’s performance, the standard practice is to report on financial and material assets. But there are so many aspects of a business that don’t end up in the spreadsheet – for better or for worse. For instance, there are three resources that every business needs to maintain to survive, in addition to income and material assets. These three assets are natural, social, and human resources. And yet, when it comes to calculating profit, these assets aren’t accounted for at all. This is a major oversight for both a successful business and an ailing one.
To evaluate performance accurately, corporations need to consider all forms of capital – including natural, human, and social. Just like with any other asset, the cost of maintaining or replacing these three things needs to be factored into net profits. On the flip side, investment in them needs to be visible too – like furthering the education of staff or contributing to the well-being of the local community, many of whom might be a company’s customers or suppliers.
This is the only way to gain a true understanding of a business’s performance. After all, would you want your board to make an important decision based on an incomplete picture? Well, that’s what’s currently happening in most corporations. It also means that profits are likely to be inflated and therefore incorrectly distributed to shareholders, and that resources aren’t allocated in the most effective way. And even more disturbing, it means that national and international economic policy is being developed based on patchy information. This perpetuates damage to communities, the economy, and the environment.
So, how can we redress this situation and gain a better picture of business activities?
First, corporations need to acknowledge eroding natural, social, and human capital as liabilities in their profit and loss statements. For instance, if a business’s annual income is $100 million but it has caused $30 million worth of damage to the environment, then its income should be recorded as only $70 million.
Second, costs associated with maintaining natural, social, and human resources should be recorded as assets. So if a business spends $40,000 on maintaining river health, then its natural assets should increase in value by $40,000.
All companies, landowners, and nations should be responsible for restoring the damage they cause to the community and environment while carrying out their business activities. And the cost of that restoration should appear in their financial records so that profit, liability, and assets are accounted for accurately. After all, the perpetrator of any damage should be the party compensating for that damage – not the victims or future generations.
-
Transformation through policy
While corporations are diverse in their activities and output, there’s one thing they all have in common: none of them would exist without corporate law, the mechanism that creates corporations. This means that the law holds the potential to influence how corporations operate – and therefore how they impact the lives of everyone they touch.
Corporate law provides a framework by setting out the rules for how a corporation is established, structured, and run. This is the traditional view, at least, that our fresh-faced MBA students learn and will most likely adopt.
But what many people and entities overlook is that the law provides a way for different parties to come together and commit to delivering an outcome that would otherwise be impossible – just as it did in ancient Rome. These commitments are formalized via contracts, ownerships, and governance arrangements.
In addition to this, most companies have corporate commitments. These are statements identifying company practices around the nonfinancial assets mentioned earlier – matters like sustainability and inclusion. But these commitments, while full of good intentions, are problematic. They aren’t governed by contracts, lack metrics for evaluating progress, don’t define who’s responsible for driving them, and rarely include consequences for failure to deliver as a formal contract would. This is why they seldom have meaningful impact.
This raises some important questions. If we want everyone to thrive, should corporations be legally required to conduct themselves in a way that supports and grows social, environmental, and human assets in addition to financial ones? Should they be required to refrain from activities that damage these assets, just as shareholders would want directors to refrain from decisions that devalue financial assets? And should corporations be required by law to make amends and repairs if and when they damage nonfinancial assets?
Three forms of legislation already exist to facilitate the provision of corporate commitments: enabling, empowering, and enforcing legislation. What if three additional forms were added: requiring, refraining, and restoring?
A holistic framework like this would cover the needs of shareholders, other stakeholders, the community in which the corporation operates, and the environment. And it would allow directors to better strike the balance between responsibilities to shareholders and to the corporation itself. That way, shareholders could enjoy their profits while the corporation stays true to its purpose – delivering innovative solutions to society in ways that benefit everyone.
-
Over the centuries, the role of the corporation has transitioned from a vehicle that brings people together for a specific business purpose to one whose focus is on generating profits for shareholders – often at the expense of others and the planet.
But the corporation is a product of society. As such, we can reinvent it to be a powerful agent of change and support while still benefiting shareholders. By embracing corporate commitment and redefining asset management and corporate responsibility, we can create a healthier, more prosperous future on a global scale.
There’s no denying that we’re in a time of crisis. The health of our planet is ailing at an alarming rate, and the gap between the “haves” and “have-nots” has never been so extreme. Business practices have undoubtedly contributed to this state of emergency. The doctrines driving the corporate world have led to the decimation of the environment, and have impacted communities and skewed economic policy.
But it wasn’t always like this, and the corporate model isn’t innately self-serving. In fact, corporations have the potential to do significant good that would benefit many – not only shareholders. We just need to rethink the model we’re using.
This book will trace how the corporate model has transitioned from a structure that benefited the community to one that has widespread, disastrous consequences. It’ll then highlight ways to course-correct business thinking, and reestablish the corporation as a vehicle for social and economic well-being that still honors shareholder needs.
-
It’s time for a new business paradigm
Each year, thousands of future company directors begin the next stage of their professional journey – obtaining their MBA. During that first semester of study, they learn about the Friedman doctrine, named after American economist and statistician Milton Friedman. Over 50 years ago, Friedman’s book Capitalism and Freedom presented a concept that not only formed the foundation of business education for the past half-century, but has also defined business practice and influenced government policies on a global level.
This concept states that the sole social responsibility of business is to increase its profits, within the scope of the law. And this is what those future corporate directors are taught – that every decision they make should help generate profits for shareholders. This sentiment is so deeply ingrained that it’s viewed as a natural law – something as innate and unchangeable as gravity.
Following Friedman’s doctrine has undeniably resulted in many benefits. Some corporate shareholders have made huge amounts of money and stimulated the economy. And in the course of doing so, their businesses have provided communities with employment – as well as housing, food, entertainment, and services that make life easier or support our well-being.
But at the same time, following this doctrine has caused immense damage. It has – and continues to – decimate natural resources and harm the planet while increasing inequality and deprivation. Business reporting rarely accounts for this damage. In keeping with Friedman’s doctrine, what matters are financial and material assets – the assets that make money.
Although corporations believe they’re only answerable to shareholders, their decisions affect the well-being of whole communities and ecosystems. That means they should be accountable to those communities and the environment. But to achieve this, the business world will need to replace its old paradigm with a new mindset – one that repositions corporations and their role in society.
Imagine what the world would look like if, as part of their everyday activities, businesses focused on doing good as well as making profits for shareholders. That might sound wildly idealistic, but the reality is that humans invented and adopted Friedman’s doctrine. So why can’t we create a new model that harnesses the good while mitigating the bad?
Businesses have the potential to make significant positive change in the world. They just need to redefine what “success” actually looks like. But before we explore ways to achieve that, let’s look at how we got here in the first place.
-
Corporations have lost their connection to community
The concept of different people being legally contracted together for business can be traced all the way back to ancient Rome. We’re not going to travel that far back in time, but a quick history lesson can help explain why corporations have lost some of their potential to do good.
A corporation is essentially a structure through which economic activity occurs. What was once an exchange of goods in the market square, or the banding together of different tradespeople to create a building, is now an incorporated company whose activities and output can be studied and analyzed for the purposes of formal education and analysis.
Corporations were once a tool used by a regent and their parliament to promote their nation’s interests. By introducing freedom of incorporation, families were then able to set up their own companies. This was typically done with the understanding that the next generation would take over the business, and continue to generate family wealth and work opportunities for the local community. Things got a little more complicated when corporations became transnational, because they were no longer tied to a state or nation. But for a period of time, they were still largely controlled by families – like the confectionery company Cadbury or financial institution Barclays.
Then along came external investors, which meant the old business families had to relinquish some control. Corporations became co-owned by individuals with no intergenerational interest in the company. These individuals had one sole intention: to make a healthy return on their investment.
And so, over time, local branches of the business were shut down and relocated to cheaper labor markets to increase the profit margin and company value. Western corporations minimized product costs by using sweatshops, and banks maximized their profits by selling financial products that didn’t necessarily benefit the community long-term. In the process, the disparity in wealth distribution widened while the environment was plundered to feed the economic machine.
What’s been lost during this journey is a sense of commitment to the community. As a general rule, corporations no longer see themselves as part of an ecosystem with numerous and diverse stakeholders: their owners, family members, managers, employees, suppliers, customers, and the community. In the past, corporations created long-term goals that supported many – if not all – of their stakeholders, doing good to everyone’s mutual benefit. That’s no longer the case.
But corporations still have this potential. In fact, it’s precisely this capacity for long-term commitment to stakeholders – not just shareholders – that makes corporations a powerful vehicle for good, should they choose to be. Let’s investigate how that might happen.
-
Redefining purpose through effective governance
One of the main issues with Friedman’s doctrine is that it confuses company directors. When combined with pressure from shareholders, it tricks directors into thinking that the purpose of corporations is to make money. But that isn’t true.
The purpose of corporations is to solve a problem faced by the community. It might be to produce washing machines, so people can clean their clothes. Or it might be to deliver faster internet, or to facilitate travel from A to B. A corporation’s aim shouldn’t be to generate profits for shareholders – that should be a byproduct of it fulfilling its purpose.
In many countries, corporate law states that companies should also have a normative purpose. This is the company’s commitment to doing good in a way that extends beyond their immediate interests, like protecting the environment or offering education programs to the community. But shareholder pressure often means that this gets sidelined, or that a company’s obligations are met in tokenistic ways. And so normative purpose alone won’t transform corporations into a vehicle for good. Governance will need to play a role.
Corporate governance is typically associated with protecting shareholder interests, and policy advice in the US and UK supports this view. However, companies that follow what’s considered best practice corporate governance are the ones that fare the worst in a crisis – like when the dotcom bubble burst, or during the Global Financial Crisis.
The lesson here is that corporate governance shouldn’t be about increasing shareholder value; it should be about supporting a company’s purpose. All the mechanisms designed to govern – like the structure of the board, the appointment of board members, and risk management – should help facilitate the delivery of the company’s true purpose, not shareholder profits.
In addition to this, the corporation must expand its view of who its customers are. A company’s customer base should include everyone its activities impact – like employees, suppliers, the local community, and the environment – not just the direct consumers of its products. A more open attitude like this welcomes growth and innovation, which will help the corporation weather economic storms.
Realigning a corporation with its true purpose takes a visionary leader – someone who shareholders and employees alike trust to roll out this corporate change, and affirm why it’s worthwhile. It takes motivation and commitment. But when it’s successful, it showcases business innovation in its truest form while also shoring up the company’s long-term future.
And while studies that investigate the correlation between doing good and business health are in their infancy, evidence shows that approaching business in a socially responsible way is beneficial for corporations. For instance, high returns, low risk, and low costs are associated with corporate social responsibility, eco-efficiency, and customer satisfaction. And those are things that make all stakeholders – not just shareholders – happy.
-
Creating new metrics for performance
When it comes to evaluating a corporation’s performance, the standard practice is to report on financial and material assets. But there are so many aspects of a business that don’t end up in the spreadsheet – for better or for worse. For instance, there are three resources that every business needs to maintain to survive, in addition to income and material assets. These three assets are natural, social, and human resources. And yet, when it comes to calculating profit, these assets aren’t accounted for at all. This is a major oversight for both a successful business and an ailing one.
To evaluate performance accurately, corporations need to consider all forms of capital – including natural, human, and social. Just like with any other asset, the cost of maintaining or replacing these three things needs to be factored into net profits. On the flip side, investment in them needs to be visible too – like furthering the education of staff or contributing to the well-being of the local community, many of whom might be a company’s customers or suppliers.
This is the only way to gain a true understanding of a business’s performance. After all, would you want your board to make an important decision based on an incomplete picture? Well, that’s what’s currently happening in most corporations. It also means that profits are likely to be inflated and therefore incorrectly distributed to shareholders, and that resources aren’t allocated in the most effective way. And even more disturbing, it means that national and international economic policy is being developed based on patchy information. This perpetuates damage to communities, the economy, and the environment.
So, how can we redress this situation and gain a better picture of business activities?
First, corporations need to acknowledge eroding natural, social, and human capital as liabilities in their profit and loss statements. For instance, if a business’s annual income is $100 million but it has caused $30 million worth of damage to the environment, then its income should be recorded as only $70 million.
Second, costs associated with maintaining natural, social, and human resources should be recorded as assets. So if a business spends $40,000 on maintaining river health, then its natural assets should increase in value by $40,000.
All companies, landowners, and nations should be responsible for restoring the damage they cause to the community and environment while carrying out their business activities. And the cost of that restoration should appear in their financial records so that profit, liability, and assets are accounted for accurately. After all, the perpetrator of any damage should be the party compensating for that damage – not the victims or future generations.
-
Transformation through policy
While corporations are diverse in their activities and output, there’s one thing they all have in common: none of them would exist without corporate law, the mechanism that creates corporations. This means that the law holds the potential to influence how corporations operate – and therefore how they impact the lives of everyone they touch.
Corporate law provides a framework by setting out the rules for how a corporation is established, structured, and run. This is the traditional view, at least, that our fresh-faced MBA students learn and will most likely adopt.
But what many people and entities overlook is that the law provides a way for different parties to come together and commit to delivering an outcome that would otherwise be impossible – just as it did in ancient Rome. These commitments are formalized via contracts, ownerships, and governance arrangements.
In addition to this, most companies have corporate commitments. These are statements identifying company practices around the nonfinancial assets mentioned earlier – matters like sustainability and inclusion. But these commitments, while full of good intentions, are problematic. They aren’t governed by contracts, lack metrics for evaluating progress, don’t define who’s responsible for driving them, and rarely include consequences for failure to deliver as a formal contract would. This is why they seldom have meaningful impact.
This raises some important questions. If we want everyone to thrive, should corporations be legally required to conduct themselves in a way that supports and grows social, environmental, and human assets in addition to financial ones? Should they be required to refrain from activities that damage these assets, just as shareholders would want directors to refrain from decisions that devalue financial assets? And should corporations be required by law to make amends and repairs if and when they damage nonfinancial assets?
Three forms of legislation already exist to facilitate the provision of corporate commitments: enabling, empowering, and enforcing legislation. What if three additional forms were added: requiring, refraining, and restoring?
A holistic framework like this would cover the needs of shareholders, other stakeholders, the community in which the corporation operates, and the environment. And it would allow directors to better strike the balance between responsibilities to shareholders and to the corporation itself. That way, shareholders could enjoy their profits while the corporation stays true to its purpose – delivering innovative solutions to society in ways that benefit everyone.
-
Over the centuries, the role of the corporation has transitioned from a vehicle that brings people together for a specific business purpose to one whose focus is on generating profits for shareholders – often at the expense of others and the planet.
But the corporation is a product of society. As such, we can reinvent it to be a powerful agent of change and support while still benefiting shareholders. By embracing corporate commitment and redefining asset management and corporate responsibility, we can create a healthier, more prosperous future on a global scale.
February 21, 2021
I enjoyed the Oxonian style of the book, efficient yet witty with a refreshing thesis opposing profit-driven companies with purpose-driven ones, with a comprehensive overview of the dimensions that are pertinent in explaining how these differ.
I would have loved to read more about the historical origins of the corporation, treated summarily in the Evolution chapter, as well as the accounting recognition of externalities, but found my interest waning when Regulation, Infrastructure chapters dragged on a bit. A worthwhile reference.
I would have loved to read more about the historical origins of the corporation, treated summarily in the Evolution chapter, as well as the accounting recognition of externalities, but found my interest waning when Regulation, Infrastructure chapters dragged on a bit. A worthwhile reference.
August 25, 2023
Despite the various economic issues in theory and application, only a limited number of individuals have directed their attention towards corporations themselves; Mayer makes a valiant effort to comprehend the functioning and reasons behind the workings of a company, mainly when it falls short of its intended potential.
Context:
- The concept of different people being legally contracted together for business can be traced back to ancient Rome
- Over 50 years ago, Friedman’s book Capitalism and Freedom presented a concept that not only formed the foundation of business education for the past half-century but has also defined business practice and influenced government policies on a global level
- This concept states that the sole social responsibility of a business is to increase its profits within the scope of the law. This sentiment is so deeply ingrained that it’s viewed as a natural law – something as innate and unchangeable as gravity
- In the past, corporations created long-term goals that supported many – if not all – of their stakeholders, doing good to everyone’s mutual benefit. That’s no longer the case
Takeaways:
- Corporations have lost their connection to community
- The purpose of corporations is to solve a problem faced by the community
- The doctrines driving the corporate world have led to the decimation of the environment and have impacted communities and skewed economic policy
- Ways to course-correct business thinking and reestablish the corporation as a vehicle for social and economic well-being that still honours shareholder needs
- To evaluate performance accurately, corporations need to consider all forms of capital – including natural, human, and social
Questions:
- The reality is that humans invented and adopted Friedman’s doctrine. So why can’t we create a new model that harnesses the good while mitigating the bad?
- If we want everyone to thrive, should corporations be legally required to conduct themselves in a way that supports and grows social, environmental, and human assets besides financial ones?
Next steps:
- Redefining purpose through effective governance, asset management and corporate responsibility
- The business world will need to replace its old paradigm with a new mindset
- Corporations must acknowledge eroding natural, social, and human capital as liabilities in their profit and loss statements. For instance, if a business’s annual income is $100 million, but it has caused $30 million worth of environmental damage, then its income should be recorded as only $70 million
Context:
- The concept of different people being legally contracted together for business can be traced back to ancient Rome
- Over 50 years ago, Friedman’s book Capitalism and Freedom presented a concept that not only formed the foundation of business education for the past half-century but has also defined business practice and influenced government policies on a global level
- This concept states that the sole social responsibility of a business is to increase its profits within the scope of the law. This sentiment is so deeply ingrained that it’s viewed as a natural law – something as innate and unchangeable as gravity
- In the past, corporations created long-term goals that supported many – if not all – of their stakeholders, doing good to everyone’s mutual benefit. That’s no longer the case
Takeaways:
- Corporations have lost their connection to community
- The purpose of corporations is to solve a problem faced by the community
- The doctrines driving the corporate world have led to the decimation of the environment and have impacted communities and skewed economic policy
- Ways to course-correct business thinking and reestablish the corporation as a vehicle for social and economic well-being that still honours shareholder needs
- To evaluate performance accurately, corporations need to consider all forms of capital – including natural, human, and social
Questions:
- The reality is that humans invented and adopted Friedman’s doctrine. So why can’t we create a new model that harnesses the good while mitigating the bad?
- If we want everyone to thrive, should corporations be legally required to conduct themselves in a way that supports and grows social, environmental, and human assets besides financial ones?
Next steps:
- Redefining purpose through effective governance, asset management and corporate responsibility
- The business world will need to replace its old paradigm with a new mindset
- Corporations must acknowledge eroding natural, social, and human capital as liabilities in their profit and loss statements. For instance, if a business’s annual income is $100 million, but it has caused $30 million worth of environmental damage, then its income should be recorded as only $70 million
December 20, 2022
What is the purpose of a corporation? What is the reason of its existence?
Colin Mayer proposes a new view to currently existing dogma of 'profit maximization' or 'maximizing shareholders' value':
"producing profitable solutions to problems of people and planet"
Thought-provoking and inspiring read.
Recommended to all business leaders, board members, consultants, policy makers, and anyone interested in the world of business and big corporations.
Colin Mayer proposes a new view to currently existing dogma of 'profit maximization' or 'maximizing shareholders' value':
"producing profitable solutions to problems of people and planet"
Thought-provoking and inspiring read.
Recommended to all business leaders, board members, consultants, policy makers, and anyone interested in the world of business and big corporations.
January 20, 2019
This is a VERY important book. Not always an easy read, but at the end the power of its ideas prevails. I think is vision of the corporation and ultimately of capitaliam will be adopted and considered normal in years to come.
April 15, 2021
Incredibly important ideas for the future of business and humanity in this book. Sometimes a bit dry, but such sound insight and clarity into how corporations need to, and can evolve to improve society.
July 26, 2019
Lots of fascinating ideas but a rather dense text with some dull stretches into corporate and financial law.
August 25, 2023
It’s time for a new business paradigm
December 24, 2018
In all the diatribes about the problems with economics (its theory and its practice) too few have focused on the corporation. Colin Mayer's book is a gallant attempt to understand how the company works and why, especially in the UK, it is not fulfilling its promise.
Of course, the company / corporation is a remarkable invention that brings people together and galvanises them into joint activities. Professor Mayer concisely takes apart the common Friedmanite view that the role of the company is to maximise shareholder returns and, via a tour through the history of companies, shows why this is an inadequate and harmful preoccupation.
The purpose of the company is the key. Each company requires to show its purpose and values and carry it/them out to the full if it is to provide returns to its shareholders. The questions are what a purpose should be and whether they can accommodate all the elements of capital alongside shareholder capital - such as financial, natural, human, social. Adopting these other purposes would, Professor Mayer claims, repurpose the corporation to its proper role in the world - the role (in its sixth / seventh reincarnation) to the mindful corporation.
This is in addition to a discussion of the role of government alongside the company and many other factors such as the role of banking and shadow banking, regulations and laws, governance. It is a wide-ranging analysis that is thoughtful and, in some areas, ingenious. If adopted, there is no doubt that the world would be better off as the mad drive for profit (and higher GDP) is offset by qualitative factors that are so central to our lives.
There are caveats that I would make, of course.
First, while there is discussion of the differences between SME's and the larger, global corporations that fill most of the pages, the evolution of the former into the latter is not mentioned. How companies are set up by individuals and then enter the harsh, competitive world when the owners may well be taking no salaries, working most hours and are slaves to the business and then how those that survive this process develop to larger companies and then how a few (a very few) make it to the the world stage like Amazon or Facebook or Google or Microsoft, is not shown. This would be fascinating as the purposes and values may be seen to evolve as the environment in which they operate changes. Survival goes to those that best adapt to that environment.
Second, the global nature of companies in the 21st Century means that changes of the nature that Prof Mayer proposes are hard to see in one country. The competitive nature of business means that true purpose and value across all "capitals" in country may run foul of a more cut-throat approach elsewhere, where short-termism kills off the long-term approach.
Third, the means to change mindsets so that the mindful company can accommodate all the areas that Prof Mayer suggests (which are perfectly correct in principle) is not seen. No guide to companies is shown that enables progress to be made; it seems all or nothing, which I am sure is not what is proposed.
Perhaps the best that can be done is to see this book as an excellent challenge to the world of business and to governments that care about the future of man and womankind. The role of companies should be a central one and requires more thought and time than seems current, when most are concerned by regulatory issues at the margins, or externalities. All of these are important, but Prof Mayer is right to bring up the core issues against which we should all be judged.
Prosperity is a well-argued, concise, well-written book providing vast amounts to consider.
Of course, the company / corporation is a remarkable invention that brings people together and galvanises them into joint activities. Professor Mayer concisely takes apart the common Friedmanite view that the role of the company is to maximise shareholder returns and, via a tour through the history of companies, shows why this is an inadequate and harmful preoccupation.
The purpose of the company is the key. Each company requires to show its purpose and values and carry it/them out to the full if it is to provide returns to its shareholders. The questions are what a purpose should be and whether they can accommodate all the elements of capital alongside shareholder capital - such as financial, natural, human, social. Adopting these other purposes would, Professor Mayer claims, repurpose the corporation to its proper role in the world - the role (in its sixth / seventh reincarnation) to the mindful corporation.
This is in addition to a discussion of the role of government alongside the company and many other factors such as the role of banking and shadow banking, regulations and laws, governance. It is a wide-ranging analysis that is thoughtful and, in some areas, ingenious. If adopted, there is no doubt that the world would be better off as the mad drive for profit (and higher GDP) is offset by qualitative factors that are so central to our lives.
There are caveats that I would make, of course.
First, while there is discussion of the differences between SME's and the larger, global corporations that fill most of the pages, the evolution of the former into the latter is not mentioned. How companies are set up by individuals and then enter the harsh, competitive world when the owners may well be taking no salaries, working most hours and are slaves to the business and then how those that survive this process develop to larger companies and then how a few (a very few) make it to the the world stage like Amazon or Facebook or Google or Microsoft, is not shown. This would be fascinating as the purposes and values may be seen to evolve as the environment in which they operate changes. Survival goes to those that best adapt to that environment.
Second, the global nature of companies in the 21st Century means that changes of the nature that Prof Mayer proposes are hard to see in one country. The competitive nature of business means that true purpose and value across all "capitals" in country may run foul of a more cut-throat approach elsewhere, where short-termism kills off the long-term approach.
Third, the means to change mindsets so that the mindful company can accommodate all the areas that Prof Mayer suggests (which are perfectly correct in principle) is not seen. No guide to companies is shown that enables progress to be made; it seems all or nothing, which I am sure is not what is proposed.
Perhaps the best that can be done is to see this book as an excellent challenge to the world of business and to governments that care about the future of man and womankind. The role of companies should be a central one and requires more thought and time than seems current, when most are concerned by regulatory issues at the margins, or externalities. All of these are important, but Prof Mayer is right to bring up the core issues against which we should all be judged.
Prosperity is a well-argued, concise, well-written book providing vast amounts to consider.
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