24 March 2011

What’s A Corporation Good For?

Last week Campbell Law School colleague Kevin Lee mentioned the unusual mission statement of Quebecois corporation Ouimet-Tomasso, Inc. I’m not sure this is the current version but here is one I found:

As a highly ethical, economically competitive provider of
    quality frozen diners and entrées,    
centered on and driven by our people,
and in cooperation with a loving God,
to innovatively generate continuous growth,
    in human well-being,
    in customer enthusiasm, and
    in long-term economic performance.

Quite interesting but it’s not what most folks take to the purpose of business organizations generally. Many (most?) believe that profit limited, if at all, by positive law is the ne plus ultra of the modern corporation. But if not profit, then what? Businesses that lack profit tend not to survive long. At least not in their non-profitable form. Perhaps Aristotle’s doctrine of the four causes can help us understand the relationship between profit and corporate purpose.

Aristotle recognizes four types of causes to identify to answer a “why” question like, “Why do corporations exist?” The material cause (that out of which something is made), the efficient cause (the source of the change of or to the material cause), the formal cause (the form or structure of what is it we are asking “why?”), and the final cause (the end/purpose/goal of the thing).

The material cause of a corporation is that which it does--build cars, produce drugs, clean carpets, or stream internet porn. The efficient cause of corporate activity is capital, which turns the “stuff” of corporate activity, its material cause, into what folks buy. Capital lasts only so long, however, if the corporate activity doesn’t yield a profit. So it’s here, at the level of efficient cause, that profits fit in an Aristotelian account. Then it’s on to the formal cause, the stuff of law school courses in business associations, like Articles, By-laws, resolutions, minutes, and so on. Finally, the final cause.

Before suggesting a corporation’s final cause, however, we should note that it won’t be the same as the corporation’s efficient cause. In other words, profit is not the goal of corporate activity; it is simply one of the “causes” that permits the corporation to achieve its goal. Many probably intuitively recognized this when I listed steaming internet porn among the material causes of a corporation. It strikes most folks that something other than profitability (believe me: internet porn is profitable) should serve as the corporate goal. But the leading contemporary theoretical accounts of the firm in fact stress profitability--shareholder return--as the corporation’s only goal, at least for publicly traded ones.

I think we can trace the single-minded emphasis on profit über alles on themes of success and envy. The rapid and increasing success of natural sciences beginning in the 16th century can be attributed to their turn away from contemplating final causes to a focus on efficient ones. In turn, the social sciences like law were envious: “why can’t we be a ‘real’ science, too?” So beginning with Legal Realism in the 1920s and continuing through law-and-economics from the 1980s to today, we have seen a virtually exclusive emphasis on what is taken to be law’s efficient cause--welfare maximization. And welfare maximization for a corporation can be little other than profit.

An entity without a final cause or goal is like a powerful chainsaw spinning out of control: it can do a lot of damage. Corporate profitability alone, like breathing alone, is not good. Only profit directed toward an end that is good is profit worth earning.

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