What is the Purpose of the Corporation?

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In earlier times, corporations were not only about generating profits. They combined skills, efforts and capital of many different people to undertake public works such as supplying water to cities, building bridges or railroads. They were limited in size and they did not enjoy limited liability.

Corporate culture started shifting in the 1970s, when US scholars promoted the idea of maximising shareholder value (MSV) as a company’s sole purpose. This belief developed by economists such as Milton Friedman and Michael Jensen at the University of Chicago has led to a focus on quarterly earnings and short-term share price as the main basis for investment and business decision-making. The idea has also misled many to believe that shareholders own companies, which is not true under the law of any known country.

However, MSV is now embedded in business thinking and education, incentivised through regulation and it is pushing companies to extract value instead of creating it.

The eventual formulation and recognition of a new understanding of the purpose of the corporation will create a space for a discussion on the regulation of externalities and is essential for a change of our economic system as a whole. Vanguard companies and investors are already leading the way. It’s up to all stakeholders to re-imagine and create corporations ready to face 21st century challenges.

Corporate Governance for a Changing World: Report of a Global Roundtable Series