What Is The Role Of A Company?

Elizabeth Warren thinks capitalism is broken

In the four decades af­ter World War II, share­hold­ers on net con­tributed more than $250 bil­lion to U.S. com­panies. But since 1985 they have ex­tracted al­most $7 tril­lion. That’s tril­lions of dol­lars in prof­its that might oth­er­wise have been rein­vested in the work­ers who helped pro­duce them.

American capitalism is a sick giant.

Larry Fink, Blackrock’s CEO and capitalist sage, blames short-termism. Others claim the damage has been caused by ideology and excess.

However, for all its challenges, the American economy is remarkably strong, resilient, and self-correcting.

Warren Buffett’s economic theory is straightforward: “For 240 years it’s been a terrible mistake to bet against America.”

As we enter an era of mass disruption, it is worth exploring the central organizing unit in the American economy: the company.

Specifically, what is the purpose of a company in an economy?

From Elizabeth Warren to Larry Fink, there is no widely accepted answer.

The Business Roundtable — the leading interest group representing business, currently chaired by Jamie Dimon — has had two diametrically opposed answers to this foundational question.

In 1981, it stated that companies “have a re­spon­si­bil­ity, first of all, to make avail­able to the pub­lic qual­ity goods and ser­vices at fair prices, thereby earn­ing a profit that at­tracts in­vest­ment to con­tinue and en­hance the en­ter­prise, pro­vide jobs, and build the economy.”

Fifteen years later, the Business Roundtable contradicted its early point by stating that the “prin­ci­pal ob­jec­tive of a busi­ness en­terprise is to gen­er­ate eco­nomic re­turns to its own­ers.”

In theory, these two statements would reinforce each other. My Milton Friedman-believer brethren say that economic returns for owners inevitably generate quality goods, investment, enhance enterprise, provide jobs, and build the economy.

But in reality, these objectives can easily cannibalize one another. Indeed, maximizing economic returns for owners often means dramatically limiting other worthwhile objectives for workers.

This debate is important because the role of companies will determine strategies to a series of large, contemporary issues: income inequality, automation, digitization, and the future of innovation.

After all, if economic engines singularly exist to reward owners, why would we train or nurture any workers?

Until we answer this deeply important question, the giant — our giant — will never be well.