The purpose of the modern corporation

What is the purpose of the modern corporation and how can society ensure that corporations comply with at least minimal standards of acceptable behaviour? In today’s society, associations like corporations are important. A corporation is recognised by civil laws and regarded in all ordinary transactions as an individual. According to Evans ; Freeman, (1995, p. 199), corporations ‘have ceased to be merely legal devices through which the private business transactions of individuals may be carried on.

‘ There are indeed many purposes that the corporation are to achieve. They are seen essentially as a vehicle for maximising the wealth of their shareholders, to maintain goodwill with their stakeholders and most of all, to maximise their profits. The focuses for this essay are on the main purposes of the modern corporation discussed above. However, there is a view ‘gaining widespread acceptance that corporate officials and labour leaders have a social responsibility that goes beyond serving the interest of their stockholders or member’ (Friedman, 1962, p. 27).

This essay will also discuss about the types of problems within the modern corporations which leads to the society such as government, customers, pressure groups and communities to convince the corporate officials to accept certain behaviours towards the society, in which to enable the corporations to have at least minimal standards of acceptable behaviours. One purpose of the corporation is to take responsibility for stakeholders’ benefits.

Stakeholders are defined as ‘constituency in the environment that is affected by an organisation’s decisions and policies and that and influence the organisations’ (Robbins, et. al, p. 92). Stakeholders are simply groups that have a claim on the firm. Such groups include employees, suppliers, local community and media. The corporation main purpose is to manage ‘for the benefit of its stakeholders: its customers, suppliers, owners, employees, and local communities’ (Evans ; Freeman, 1995, p. 205). The reason why managers bother to care about managing stakeholder relationships is because Robbins et. al (2003, p. 93) state stakeholders lead to other corporation outcomes, ‘such as improved predictability of environmental changes, more successful innovations, greater degrees of trust among stakeholders, and greater organisational flexibility to reduce the impact of change. ‘

Another purpose for the modern corporations is profit maximisation. Friedman, who focused on the narrow view of the corporate social responsibility, believes that profit maximisation is a must ‘so long as it stays within the rules of the game, which is to say engages in open and free competition without deception or fraud’ (Friedman, 1962, p.28).

This is one of the problems in dealing with social responsibility as firms only aim to maximise their profits. ‘in the present climate of opinion, with its widespread aversion to capitalism, profits, the soulless corporation and so on, this is one way for a corporation to generate goodwill as a by product of expenditures that are entirely justified in its own self interest’ (Friedman, 1962, p. 32).

Corporations’ leaders have reckoned with a profit motive, with ‘a desire to evade whatever response of controls is imposed’ (Arrow, 1972, p. 39). Another fact is that the distribution of profit maximisation is very unequal. According to Arrow, (1972, p. 40), stresses that ‘the competitive maximising economy is indeed efficient – this shows up in high average incomes – but the high average is accompanied by widespread poverty on the one hand and vast riches.

‘ Therefore, the firm will have the ‘tendency to pollute more than is desirable; that is, the benefit to it or to its customers form the expanded activity is really not as great, or may be as great, as the cost it is imposing upon the neighbourhood’ (Arrow, 1972, p. 40). The third purpose of the modern corporation is the enhancement of capital growth and increase the wealth for their shareholders. Under managerial capitalism, ‘management vigorously pursues the interests of shareholders or stockholders’ (Evans & Freeman, 1995, p. 200).

This occurs when the corporation is making a profit; when profit is made, there will be dividend payouts to the shareholders resulting in increase in wealth. The problem with this type of purpose is that shareholders, given the difficulties associated with trying to bridle directors through shareholder voting and/or derivative suits, rational shareholders would never give up control over trillions of dollars of financial capital, and trillions more in specific human capital and implicit contract claims, to nakedly selfish boards (Evans & Freeman, 1995, p.205).

However, there are problems arising from the modern corporation. In recent years, a corporation affects groups in the stakeholders by selling its products, which leads to competition in the market, in turn paying wages to employees, sets the product price to customers and establish good economic relations. However, corporation is also a contributor to pollution.

For example, in the automobile corporation, according to Arrow (1972, p.39), the automobile firm affects other through determining the quality of its car products, in respect to its safety purposes, the pollution it produces are mainly from the exhaust, pumping out carbon monoxide, a very dangerous gas. Other problems such as employees in the third world countries, in which corporations are located, are being mistreated. Many employees are ‘still exposed to hazards that kill and maim them; even young children are working’ (Pincus, 1998, p. 765).

Many are paid relatively low wage per hour every day. For example, in Honduras, the sweatshops that made a line of clothing to supply to Wal-Mart, the workers, including underage and pregnant women worked for more than 20-hour days at only $0. 31 per hour (Pincus, 1998, p. 767). What makes matters worst is that even developed countries such as the USA, for example, the ‘garment operations situated in California had been spot-checked that 93% had health and safety violations’ (Pincus 1998, p. 766).