[Rajat Maloo is a III year B.A., LL.B. (Hons.) student at the National Law School of India University, Bangalore]
Recently, large corporations such as Unilever, Johnson & Johnson, and Facebook amongst several others have been expected to fulfil a different kind of social responsibility. Unilever and Johnson & Johnson were some of the few companies who have either discontinued or altered their fairness products in light of the Black Lives Matter movement. On the other hand, Facebook had to alter its policies regarding hate speech regulation when a slew of large corporations discontinued advertising with the social media giant. Although the law allows these companies to operate in the manner they were functioning, it is noticeable that large corporations are amending their product and service policies due to socio-political concerns. This once again raises a pertinent question as to what really is the purpose of companies in today’s world. This post briefly traces the purpose of corporations in the past and how it has evolved in the recent years and asks whether profitmaking still remains the major, if not sole aim, of corporate form of organisation.
During the medieval ages in India, numerous individuals came together to form Srenis – which were more or less like modern day corporations including features such as limited liability, separate legal entity, centralized management and internal governance rules. However, the primary motive was to come together as an organisation for efficient profitmaking. Sreni was sort of an essential form of organisation for individual traders to avoid potential threats from dacoits etc. Later, in the year 1600 when the East India Company (EIC) was founded, its primary aim was profitmaking – even though it had to enter into other domains such as military and polity to keep making those profits. Later in the 20th century, the renowned economist Milton Friedman in 1962 noted that the ‘…one and only one social responsibility of business is to use its resources and engage in activities designed to increase its profits…’. Thus, traditionally, both in India and the western world, corporations were formed to serve their shareholders with the sole purpose of making and maximising profits.
However, in the recent past, it has been rightly observed that companies are moving towards accepting broader social responsibilities and hence, are extensively moving away from the understanding that their sole purpose is to make profits for their shareholders. In this regard, there are several responsibilities that have been legally conferred upon the company or its management in the form of environmental, social and governance (ESG) factors in the UK. Similarly, the Companies Act, 2013 brought in the concept of corporate social responsibility (CSR) in the Indian context. CSR has also been mandated through the recent amendments to the companies legislation in India. The management of the company, namely the directors are also required to act in the best interests of the community and the environment. Despite these legally obligated social responsibilities that companies have to comply with, the primary purpose in law, remains profitmaking and generating value for shareholders.
The recent cases of Unilever, Johnson & Johnson and Facebook are slightly different and call for a reimagination of the understanding of purpose of corporations. Although not legally bound, several corporations had to either significantly alter their product policies in light of the Black Lives Matter movement or faced significant business losses due to other socio-political reasons. Unilever and Johnson & Johnson were a few large multi-national corporations who had to take flak for their fairness products in the wake of the Black Lives Matter movement. While the former decided to rename its product, the latter discontinued its fairness product itself.
Similarly, Facebook had to take censure when a flurry of companies decided to no longer advertise on its social media website due to its insufficient policies to curb hate speech. Companies such as Unilever, Verizon Communications and Hershey were some of the many who discontinued their advertising with Facebook. This resulted in Facebook’s share price falling steeply on a single day leading to large devaluation in shareholder value. Resultantly, it had to take several measures to regain advertisers’ trust.
This shows that large corporations throughout the world are now being guided by or affected by other socio-political issues apart from mere profitmaking. While not going into the sufficiency or significance of the measures adopted by these corporations, one thing is clear – that the companies are becoming more and more socially responsible, moving beyond the legal requirements such as ESG, CSR or similar requirements in the United States.
When companies are facing flak and disapproval in the recent times, it might seem that the social concerns are taking precedence over companies’ goals of profitmaking, even if it may cost the shareholders dearly. Although it is commendable that multi-nationals including Coca Cola are taking commercial decisions to curb racism and hate speech, has social responsibility become the purpose of corporations? Is the goal of corporate profitmaking really outdated? Not really.
The major goal of corporations remains profitmaking and creating value for shareholders. Just like corporations and managements comply with the legally necessitated social requirements such as ESG and CSR to avoid potential regulatory consequences, corporations are and will comply with other non-legally-necessitated social requirements to avoid flak from customers, employees and other business partners. The recent examples mentioned above are only a few of many such instances. However, in the end, the purpose still largely remains profitmaking and creating value for shareholders, even if that entails altering product names or taking other such measures.
Companies from Srenis to the EIC have signified great adaptability. If the situation requires that making profits will be convenient and efficient through formation of Srenis rather than individual trading, then so be it. Similarly, if entering into military and political arena was essential for profitmaking, then the EIC chose to do so. On similar lines, companies are adapting to the need of the day – that is, to come forward and take strict stance on issues such as racism and hate speech – however, the final aim and the underlying purpose of companies still remains profitmaking and generating value for shareholders albeit with a little bit of social responsibility.
– Rajat Maloo