Is Profit the Purpose of Business?

You may think that business is all about profit, business people are unethical and business in general is a black art of guile and greed. Over the years I have found this to be mostly untrue.

The story that business people are bad and what they do is morally questionable is false. For every Enron, there are 10,000 good companies. And most companies, like most people, are trying to do the right thing.

Business can solve the world’s problems. And more people are coming to believe that. Having observed business for more than three decades, I can tell things are changing. Thousands of new businesses are working to make the world a better place and, most importantly, add real value to our daily lives.

We need to recast the very way we think about business, especially in the aftermath of the global financial crisis, in which the old model of business — profit maximization — contributed to the meltdown.

Stakeholder Theory argues that stakeholders come first — whether they’re suppliers, investors, employees, customers or the community.

The old way of thinking about business presupposes the point of business is to make profits. This is akin to believing that breathing is the purpose of life. Yes, you have to breathe to live, just as businesses must make profits. But the purpose of business is usually determined by a passionate entrepreneur chasing a dream to change the world.

John Mackey, co-CEO of Whole Foods Market, is an example of the new order of those great business leaders who practice conscious capitalism. Mackey says that entrepreneurs — though they want to make money — start businesses out of passion. Think about it this way, he said: Physicians make money, but their mission is to heal; teachers make money, but their desire is to educate; and architects make money, but they yearn to build. The question then is: Why the myth that business people only want to make money?

The Motley Fool’s main mission, says its CEO Tom Gardner, is to help people become better investors. Kip Tindell, CEO of The Container Store, explains that taking good care of its 6,000 employees leads those employees to take very good care of customers and other stakeholders. The result is profit.

Putting Purpose Back Into Capitalism

Capitalism has always had its share of critics, who claim it leaves scandal, pollution and poverty in its wake. Capitalism may not be perfect, but it is the greatest system of social cooperation created thus far. Capitalism works because entrepreneurs and managers figure out how customers, employees, suppliers, communities and people with the money all can cooperate to mutual benefit. Competition is important, but it is a second-order property that gives people more choice in a free society.

Business is a deeply human institution, but its purpose is not to make as much money as possible. The purpose is something else. We need to put purpose back into capitalism because business is primarily about purpose and creating value for stakeholders — money and profits follow.

Business and ethics go hand in hand. Sometimes we act for selfish reasons and sometimes for other-regarding interests. Incentives are important, but so are values. Most people tell the truth and keep their promises and act responsibly most of the time. And we need to encourage that behavior. When these expectations are not met, it is not just bad ethics, it is also bad business.

Critique by creating something better. If you think that too many executives just concentrate on profits and money, then start a business that focuses on a purpose more than profits and relies on the passion of its employees.

About the Faculty

R. Edward Freeman

Freeman is best known for his work on stakeholder theory and business ethics, in which he suggests that businesses build their strategy around their relationships with key stakeholders. His expertise also extends to areas such as leadership, corporate responsibility and business strategy. Since writing the award-winning book Strategic Management: A... Learn More

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