What Are the Aims of Business?

Dr. Gregg has made a valuable contribution to a long-running debate over the question, “What is the purpose of business?” I will not add my own unique answer to this question. Nor will I belabor my many points of agreement with Gregg. Instead, I wish to critically examine the debate’s implicit foundation, and thereby suggest a modification of Gregg’s conclusion.

Note the definite article (“the purpose” and “the telos”). This implies that there is, or can be, a single purpose for business that holds true in all times and places. Thus, the participants in the debate argue over whether the purpose of business is to create value for shareholders, or to balance the interests of stakeholders. Or now, perhaps the purpose of business is to maximize one’s ESG score, (however that happens to be measured this week). This implicit premise has enabled countless books, articles, and op-eds, most often framed around a related question: whether Milton Friedman was in fact a saint or demon.

Another path, though, lies here: What if there are many purposes of business? This is in some ways a provocative question, because it suggests the decades of debate may have been futile. And yet the course of the debate over business seems to confirm the suspicion that it may be based on a false presumption of singular purpose.

Consider just the free market corner of the debate. There are libertarian shareholder supremacists, to be sure, such as Milton Friedman and T.J. Rodgers. Yet there also are self-proclaimed libertarian stakeholder theorists such as John Mackey and even R. Edward Freeman. And that’s not to mention the nuanced free market pragmatists, ranging from Tyler Cowen to Deirdre McCloskey and Bart Madden.

Intelligent people starting from the same philosophical premises have reached vastly different conclusions about the purpose of business. And three of these were accomplished business leaders (Madden, Rodgers, and Mackey). Even practical experience will not lead libertarians, sometimes accused of stubbornness, to converge on a single answer.

In accordance, America’s federalist system of corporate law permits a large degree of variation in corporate purpose from state to state. Different states have established different standards for fiduciary responsibility through case law and legislation. And with the advent of the legal form of benefit incorporation, both public and private corporations can formally commit to stakeholder governance.

Indeed, Gregg affirms “the liberty to invest in self-described ESG funds or companies that claim to be ESG compliant.” And he notes that “Businesses are also free to create as many ESG investment vehicles as they want.”

In principle, not so much has changed since Robert Hessen first defended corporations against the concession theory expounded by Naderites (and later by Warrenites). As Hessen explained, corporations are the result of voluntary contracts. Much like marriages, corporations are recognized, but not created by the state. There can be as many possible business purposes as contracting individuals can invent and sustain.

For the above logic to hold, however, the contracting parties must be aware of, and therefore agree to, the same purpose. It is not ethical for managers or boards to give the shareholders the impression they will pursue one purpose, and then pursue another, contradictory purpose. Such a bait-and-switch scheme might not even be legal.

Gregg defines ESG as “a framework that purports to help investors and those claiming stakeholder status understand how well companies are contributing to the realization of goals over and above profit.” Some ESG advocates do articulate it that way, but others define ESG in terms of its relation to the pursuit of long-term profits. To hear them tell it, ESG is simply a means of accounting for systemic risks that get in the way of long-term value creation for shareholders. Current ESG approaches do not seem to be effectively accounting for systemic risk. ESG, though, is nothing if not malleable.

Debating the purpose of ESG may be as futile as debating the purpose of business in general. Where Gregg, I, and every other liberty-minded person should agree, though, is here: we must steadfastly defend our current system of corporate governance and finance from all attempts to centrally direct capital towards a single political agenda. We have seen a glimpse of this in the Accountable Capitalism Act, the SEC rulemaking that Gregg described, and in proposals to weaponize the Federal Reserve. These are just the first battles in what will likely become a longer war, for which our adversaries have long prepared.

If current business leaders wish to preserve the relative freedom they now enjoy, they must indeed acquire the “measured self-confidence” to which Gregg refers.

The first ESG documents go back to 2004. State pension managers advocated for ESG long before any states started pushing back against ESG. Libertarians and conservatives are coming very late to the party, as evidenced by the complete lack of aligned alternatives among the largest asset managers. Nonetheless, we have a significant advantage: they are trying to radically overhaul our current systems of finance and corporate law and fight against market forces, while we are aiming largely to sustain the American traditions in these fields and to respond to market signals. More fundamentally, our approach is consistent with America’s plural society and federalist system, whereas imposing a single political agenda on the entire economy is certain to invite significant resistance.

Our first step should be defending the legitimacy of shareholder primacy, as well as other business objectives. Second, both public and private investors must make sure that their assets are managed in a way consistent with their worldviews. The rise of index investing has meant that more and more asset managers consider long-term systemic factors. How managers select and weigh these factors, though, is ineluctably tied to personal beliefs. An asset manager who believes that fighting wealth inequality and ending all fossil fuel investment are essential for portfolio growth may behave differently from an asset manager who believes that rule of law and dynamic innovation are overriding concerns. To be sure, these are just preliminary suggestions. Success here will take much more.

The primary threat to liberty has evolved: from explicit state ownership of the means of production in the manner of Moscow, to effectual political control of capital and corporations in the manner of Beijing. This subtlety may permit stakeholder capitalism to become yet more dangerous than communism. Its advocates pretend to be merely reimagining capitalism, not engaging in revolutionary regime change. And sadly, it has gained adherents on the right, as well as the left. Not to mention among the astonishingly wealthy, who desire even greater power and influence despite seeming to suffer guilty consciences from the positions they have already attained.

If current business leaders wish to preserve the relative freedom they now enjoy, they must indeed acquire the “measured self-confidence” to which Gregg refers. Wanted: CEOs with backbones.