**2. Critique of the financial model**

These trends have become more aggravated since 1970s. Since that time a number of taken for granted assumptions about what businesses are in the business for have also changed in small but profound ways. Increasingly the normative assumption that chief purpose of businesses is to provide a healthy return to their investors has been regarded like an obvious descriptive account of the basic nature of businesses. As Milton Friedman wrote in 1970, albeit still using normative terms, "The primary social responsibility of business is to make a profit." It has become

#### *What is the Business of Business? Time for Fundamental Re-Thinking DOI: http://dx.doi.org/10.5772/intechopen.94482*

a widely accepted assumption that most businesses, if not otherwise restrained or inspired, will make their critical decisions with the aim of maximizing their financial worth as gauged by their potential value if sold or the current value of their shares on financial markets. These assumptions about nature and purposes of businesses is well-illustrated by the current response of businesses to the announcement of Blackrock Investors that it would remove investments from firms that failed to operate in keeping with sustainability guidelines. Accordingly, because what really counts are financial returns, businesses will even adopt sustainable business practices if they can thereby attract and keep investors. I will elaborate on this analysis further along in this essay. Here, I simply want to call attention to the way the financial model of the nature and purposes of business has become more ascendant since the 1970s. Furthermore, this model, which is of course normative, is widely regarded as describing the taken for granted reality of how businesses by nature operate. This financial model is widely invoked to describe the basic nature of businesses in much the same manner as gravity is invoked to describe why planets circle around the sun or why prices go up when supply drops and demand increases.

The financial model for how business enterprises operate has gained widespread support for a number of reasons. It has, for example, been assumed that as businesses function in keeping with this model the economies as a whole have tended to grow, standards of living have improved, and customers have benefit. These are, of course, discussable if not debatable conclusions. It has been further assumed that, if sometimes when enterprises do businesses in compliance with this model they occasion adverse consequences, then companies can minimize or compensate for these adverse side effects by engaging in corporate social responsibility and sustainability practices. Fundamentally, it has been widely assumed that the financial model for business enterprises provides the most fitting way of describing the basic feature of the core business of businesses while also providing a workable framework for measuring how well businesses are in fact doing. Business enterprises have often become quite complex realities at once engaging with multiple stakeholders. In the past over many years, business people often attempted to gain a good sense of how well their enterprises were doing by variously reviewing their relationships with employees, customers, suppliers, creditors, and/or competitors. Often, to be sure, these surveys resulted in imprecise and incomparable assessments. Accordingly, it has seemed convenient to many business people to gauge the overall wellbeing of their enterprises by consulting a single measure, such as their financial value. Over time, the financial model has gained wider acceptance at the same time as investors have gained greater control over business enterprises [1, 2].

It has been possible to mount a very compelling case for the credibility and reliability of this model based on the assumption that any increases in value of financial investments were residual in principle and, it was assumed, in practice. According to this assumption, business enterprises are in principle expected to use their earnings first to pay their employees, their suppliers, their rents, their debts, and their taxes, to make appropriate upgrades in their operation, and then to use what remains to benefit their investors. Correspondingly, if businesses enterprises are doing so well that they can meet their regular expenses and still reward their investors, then to that degree, it has been assumed, enterprises must be doing very well indeed [3]. In practice, however, payments to investors are often assigned priority as evidenced by the disturbing trends I just described as well as the steady decrease in the proportion of business earnings being used to pay for labor costs and increases in the proportion used to pay investors.

It is possible to identify in a number of different ways how the ascendancy of the financial model for business enterprises has fostered adverse outcomes environmentally and socially. For example, many businesses have refused voluntarily to reduce both toxic emissions and pollution unless legally required. As they often explained, they could not afford these extra expenses without significantly reducing their financial returns or raising prices for their products. In the early 1980s many traditional manufacturing firms failed to invest funds in upgrading their productive technology because of high short term costs of these investments, even though lack of these upgrades eventually rendered them less competitive to foreign competitors. Although in Nigeria it did invest in exemplary ways in a number of CSR type programs over the years, nevertheless, in ways that would later occasion much trouble for itself, Shell Nigeria initially failed to bury its pipelines and failed to explore ways of using excess gas to generate and distribute electricity. Instead it flared 85% of this gas, thus both occasioning pollution and wasting a very valuable resource. Given the expectation of their investors during the 60s, 70s, 80s, and 90s, Shell Nigeria simply did not consider these alternatives [4].

In addition, since the 1970s, businesses generally have found they can reduce their expenses and make higher returns for investors by investing in technologies that reduce the need for workers. Smart machines have been installed to make automobiles and many other manufactured products. In ever greater numbers smart machines are undertaking clerical work. In addition, in order to reduce labor costs, firms both contract with external suppliers for a number of their services and supplies rather than undertaking these operations themselves and they hire increasing portions of employees on a part time and temporary basis, thereby often freeing themselves from having to pay fringe benefits [5]. As a result of these strategies, post-tax corporate profits in the United States increased from an average of 5% GDP in 2000 to between 8% and 9% for the 2010s. If profit levels had remained at 5% of GDP, than average wage levels would be 6% higher [6]. With a measure of alarm a number of recent observers have called attention to the dramatic decline in employment opportunities over the past several decades [7–9]. Official rates of unemployment hide the problem, because increasing number of adults have either dropped out of the labor market or are working in temporary jobs part time or part year. After surveying both current trends and informed estimates of future developments, Yang describes the sizeable decline in employment opportunities that has happened and will happen in factory work, trucking, clerical positions, legal firms, and even therapy [10]. Of course, the current pandemic has rendered the situation of employees even more precarious.

In addition to factors I have already discussed, the financial model has in practiced operated to increase the wealth of the wealthy in several other ways. For example, many businesses have deliberately incorporated or established their headquarters in jurisdictions with very low or no corporate taxes. Many businesses have also established subsidiaries in these tax havens again to reduce their taxes and increase thereby their overall financial value [11, 12]. Interestingly, much of the effort put into fostering responsible governance of business has been designed at reducing the arbitrary activities of senior executives and at increasing the influence of Boards of Directors, who are in turn in many countries primarily expected to represent the interests of investors. Furthermore, along the same lines, while the compensation levels of executives have greatly increased, much of that increase has assumed the form of paying executives with larger portfolios of shares in their own companies, thereby instilling and reinforcing an intrinsic interest for executives in augmenting the financial value of their firms. In practice the ascendancy of the financial model has been closely associated as well with the growth of large firms within particular markets. As the financial value of particular firms grow, they become able to buy out competitors, thereby increasing the concentration and near monopoly power of these financially successful enterprises. This has become a seriously worrying trend. In 1980 the aggregate revenues of the 1000 largest

#### *What is the Business of Business? Time for Fundamental Re-Thinking DOI: http://dx.doi.org/10.5772/intechopen.94482*

firms represented 30% of the GDP of the OECD countries. By 2010 the aggregate demand of the 1000 largest firms had increased to represent 70% of the GDP of these countries [13]. Thomas Piketty has argued that the wealth of the wealthy increases naturally as a characteristic feature of industrialized market economies [14]. In contrast, I think that recent increases in the wealth of the wealthy results from discrete policy decisions not only by national governments but also by the way many business enterprises are organized and governed.

We can find much evidence to demonstrate that operating business operations in keeping with the financial model has aggravated environmental problems, reduced employment opportunities, and increased inequalities in wealth. These all represent disturbing trends. To be sure, in keeping with this model, many businesses have increased their financial value and as a whole financial markets have greatly expanded. From the perspective of the financial model, the overall economies of most countries seem comparatively healthy with a few incidental problems. And the latter might well be addressed, so the defenders of this model contend, by more vigorous business social responsibility initiatives. However, if we think these environmental and social consequences as well as disparities in wealth represent very serious problems, then we are indeed called upon to see if there are other models for operating businesses that might be both viable and less likely to occasion such adverse consequences.

As a way of understanding and managing businesses, the financial model – often referred to as the shareholder model – has been criticized by a number of observers and interested parties. A number of pension funds have lobbied business to adopt more sustainable practices. Most recently the Business Roundtable, an influential association of chief executives in the United States, made a strong case for adopting the stakeholder model of the firm and thinking about the purposes of business in relation to this model. Acknowledging the vital role that businesses play "creating jobs, fostering innovation, and providing goods and services," the statement signed by more than 200 chief executives, on behalf of their companies, asserted their "fundamental commitment to all our stakeholders" [15]. The Business Roundtable expressed an important but modest commitment to an understanding of productive enterprises, now viewed in relation to multiple stakeholders. This statement expressed no overt commitment towards alternative views of corporate governance that might, like policies adopted in Germany, for example, provide for greater representation of workers on corporate boards. Even so, the Economist magazine initially was so alarmed by this statement that it argued in a lead editorial that "this new form of collective capitalism will end up doing more harm than good." Overlooking the way the German model of governance has operated in practice to render executives more responsive and responsible to several stakeholders on whose contributions their businesses depend, the Economist editorial instead opined that the model proposed by the Business Roundtable "risks entrenching a class of unaccountable CEOs who lack legitimacy" [6]. One might argue that the stakeholder model favored by the Business Roundtable actually increases while broadening the accountability of chief executives. In any case, the Business Roundtable maintains, as I maintain in this essay, that the business of business is to foster productivity, rightly understood, in ways that enhance the wellbeing of the enterprises as a whole and fittingly benefits all of their stakeholders.
