Why Is Success
Morally Corrupt?
Continuing from the previous article, Drucker argues that no one but the management of a particular business can decide what the objectives of public responsibility should be. Those objectives must be set according to the social and political conditions that affect the individual enterprise, and must reflect the beliefs of the management. This is where management steps beyond the confines of its own little world within its enterprise to participate responsibly in society.
Television's Jim Cramer often derides our government as being "of, for, and by the corporation." His line is entertaining, somewhat cynical, and very true. The days of a single man building a successful business of any size never really existed. If you go back in time, the business entities that created anything of value to society were organizations of size and capital. Organizations that did not have a profit motive could not survive without external feeds of capital. The fact is, for many centuries, governments and business entities have shared a symbiotic and interrelated relationship.
To vilify a business because of it's size and success could be corrupt thinking. What makes Apple different from Exxon? Both are very profitable. Both pay taxes. One gets tied to the whipping post every quarter for its results, the other gets rock star treatment—except when one of its contractors has labor issues. But both create wealth, and both support the lives of millions of people directly and indirectly. They both contribute to the wealth of the world. So why is one a villain and the other a star?
Business enterprises are the organs of our society. Like the lungs of our bodies, they serve a function in the social fabric of our world. As such, the modern business enterprise imposes responsibilities and obligations on the managers. Our society’s growth has made those responsibilities broader in scope than they were less than a century ago. As the company grows, the same responsibilities grow deeper and broader in scope.
Think of it this way - the successful modern business has a life span greater than the life of one man. The success rate of business entities is really a poor bet—only five percent of startups survive and grow, and of those, only five percent make it to the next level, and five percent to the next level, etc. Managers who fail to pay attention to all eight of Drucker's prescriptive objectives of business crash and burn their companies. Those companies may fade or merge into other companies, creating wealth for the founders and managers. Or, they may just flash out and turn the business into a smoking wreck, leaving the employees out in the cold and the investors and creditors with a capital loss.
The companies that truly last, that span multiple generations, have managers who accept the moral obligation to attend to all eight of Drucker's objectives. Resources brought together must have a high degree of permanence to be productive, and aggregated to create true competitive market satisfying power. Bosch, Siemens, General Electric, DuPont, Ford, Boeing, Exxon—the list goes on. These are enterprises where successive generations of managers took hold of a moral obligation to lead their companies to address all eight of Drucker's objectives. Their actions still contribute to the the wealth of our society today.
So why do politicians want to punish the profit of some and not the profit of others through taxation? The issue is not new; it is now centuries old. The robber barons of the transcontinental railroads, the meat packers, the dress makers, the steel mills, the auto companies, the oil companies. The endless list goes on. As industry grew, regulation grew, leading to more control, and more change.
A level playing field is not a reality. In nature there are winners and losers. Do business leaders go astray? Yes, they do. Berkshire is a recent example. The horror of Enron is another. One company accepted the moral obligation to be ethical and police itself. The other… well, we know that sorry story.
Management must accept the eighth of Drucker's objectives. They must accept a moral obligation for how the business operates in society. But it is management's obligation to do that, not government’s. Government should only take action when laws are clearly violated.
Can You Control With Profit Punishment?
One can argue that regulation is needed to keep management from violating the social contract between the enterprise and society. Examples of how businesses in the past violated that social contract are often cited as justification for more regulation. These examples often fail to acknowledge the obvious—that regulation was necessary because of the absence of clear boundaries, or clear conversation, and that the regulation was a result of a vacuum in the social contract.
Our society needs the modern business enterprise. The modern business enterprise is the goose that produces the gold in our GDP egg. To tax business enterprises, to change consumer behavior in order to create social change—all these serve to strangle the gold-producing goose. In a classical liberal sense, government intervention in the interest of "fairness" is a moral corruption.
Politically progressive politicians, here in the Western Hemisphere or in Europe, are reluctant to allow permanent concentration of economic power in private hands. Lord Keynes would argue that it is the responsibility of government to regulate and protect society from rapacious capitalists. Hayek would argue that the free market automatically punishes those businesses that do evil to society. We see examples of how the Keynesian approach only inspires even more efforts to game the process. We also see examples in which social groups in the market, in overt and covert ways, attempt to pressure business leaders to change their practices.
Without a concentration of economic power, of capital and resources, the modern business enterprise in our industrial society cannot exist. If the modern business enterprise of today does not exist, our society ceases to produce the wealth that supports the standard of living we enjoy today. Look at all the modern conveniences that enable our high quality of life and you will see the product of concentrated economic power. The agrarian society of the nineteenth century disappeared in western society during the twentieth century. That change is continuing for much of the rest of the world today.
That change creates angst. The unrest we see in the Middle East is a battle between the top-down of control and the bottom-up of freedom. Some of those who do not want to see change are fighting. One man’s "freedom fighter" can be another man’s "terrorist." It all depends on your point of view.
Society must grant a charter of perpetuity and theoretical immortality to the entity of the business enterprise, and thereby it must grant a degree of authority to the managers that lead the business enterprise. Managers must accept the moral obligation granted by society to guide their businesses for the common good of both the company and the social body of which it is an organ.
Under that social contract, managers cannot base their decisions purely on the interests of the owner of the property. Society expects and requires the management of a business enterprise to assume some responsibility for the public good.
This responsibility can take a number of different forms. A classical expectation is that business managers shall operate within an ethical standard of conduct. This means that managers are expected to place the common good and the freedom of the other stakeholders above their own interests and those of the companies they work for. This ethical standard of conduct has come into question with the recent management shakeup at Berkshire Hathaway.
For the modern business enterprise to survive, it must recruit the ablest, best educated, and most dedicated people available into its service. The promise of a career or economic success is not enough to attract those people. People require a vision and a sense of mission. We human beings want to satisfy a desire to make a meaningful contribution to our community and society. Therefore, to attract the best and brightest, a business and its management must embrace public responsibility. The business enterprise must demand that management consider the enterprise’s public responsibilities at all times. Management defines and prescribes the marketing, pricing, patent, and labor policies of the enterprise.
Business decisions carry a social impact. The first responsibility of a business to society is to operate at a profit—a profit that ensures growth. Management has a moral obligation to maintain the wealth production and maintain the resources to make adequate profit to offset the risk of economic activity. By increasing the wealth-producing capacity of its resources, the enterprise increases the wealth of society. A growing enterprise creates the means for society to live, to thrive, and to pursue happiness.
Critics of capitalism argue that business managers operate only out of greed. But the history of the previous century clearly demonstrated how socialistic or communistic enslavement of wealth did much more damage to society than the greed of the captains of business. Socialist greed for power corrupted, murdered, maimed, and stunted the growth of many societies.
Look to the successful and sustained business enterprises in our world, those that have been with us for 10 generations or more, and you will see business enterprises led by teams that assert the management principle that the public good must be the private good of the enterprise. Many of us depend not only on the goods and services provided by these business entities, but also on the wealth created by them; we all are investors in those enterprises. We depend on those business enterprises because they provide us our economic livelihood.
It is the moral responsibility of the managers of a business enterprise to create wealth. Management's moral responsibility is to create sufficient profit to support the sustained growth of the enterprise. That profit must be sufficient to overcome the risk of loss that the business enterprise will encounter. Profit is never a sure bet—there are fat years and there are lean years.
High taxation will always chase capital to where it is appreciated, not scorned. Only when the reward greatly outweighs the risk can a business enterprise survive withering taxation.
Excessive taxation of success is a morally corrupt form of punishment.
Articles in This Series
Call Us! 877-674-7495 info@dksco1.com