12 October 2021

B-CCaS based at the University of Edinburgh Business School, is a catalyst for positive social and environmental change in the interaction of climate, business, policy, and society. We have asked each of our academics to find their voice and explore their own ideas in this series of Thought Leadership pieces. We hope they bring about debate, discussion, and even disagreement. We believe that these are the bedrocks of deep thought, reflection, analysis, and progress.
Busy New York Street

In this first piece in the series of Thought Leadership, Director of B-CCaS, Dr Sarah Ivory, explores the purpose of business in society.

Why does business exist?

I ask this question of virtually all of my university students and executive education participants. The answer may seem simple and obvious to you.

What I find fascinating is that one person’s simple and obvious answer is often different to another’s. So perhaps the question is not so simple after all?

I often present two different statements and ask which people agree with most:

  • A: Business exists to make a profit, and does so by producing goods and services.
  • B: Business exists to produce goods and services, and in doing so makes a profit.

When I ask this, irrespective of the audience, I get approximately half who vote for A, and half who vote for B. Even more interesting than this, when probed, I find there are many (from each camp) who can not even imagine that the other camp exists. In addition, I also find a group who believe B should be the case, but that A actually reflects reality.

So this fundamental question about why business exists is contested. That is, your simple and obvious answer to the question might not be the same as your neighbour’s answer, or your boss’, or your business partner’s.

This is not necessarily a problem — people can have different views on this, and indeed different business can exist for different reasons. But it does become an issue when we consider the important role and function of business in society, as well as the significant environmental and social issues we are facing and to which business has contributed.

With the UN climate conference (COP26) approaching in November, the importance of business in addressing the climate crisis cannot be understated. While this could and will take a number of forms, one which will take centre stage in discussions in Glasgow will be the role of financial flows — away from projects that contribute to the climate crisis, and towards projects that contribute to climate solutions.

This leads me, in my discussion with my students, executives, and colleagues, to pose a third option to those above:

  • C: Business exists to support a thriving society, by producing goods and services, and in doing so makes a profit.

That is, business should exists for society’s benefit: not primarily for the wealth accumulation of shareholders. Lynn Stout, renowned Cornell Law Professor, wrote in The Shareholder Value Myth1 about the dominant ideology of shareholder primacy, and the damage it was doing to society, to companies, and to shareholders themselves.

She goes about debunking the myth of shareholder value through the lens’ of history, law, and evidence. This is not an anti-profit argument. It is questioning the aim of maximising profit, the temporal period over which profit-maximisation dominates attention, the distributive question of profits for who, and the question of profit at what costs — that is, the externalities of profits.

When did shareholder primacy come to dominate? There are a number of complex answers to this question. Michael Lounsbury2 suggests that differences in approaches to mutual fund management between Boston and New York provides an interesting location for divergence.

Until the 1950s, the mutual fund investment industry in the US was centred on Boston, and dominated by a trusteeship approach, focused on investment in chosen companies over the longer term, capital preservation and intergenerational transfer. From the 1950s there was a geographic and ideological shift: from Boston to New York’s Wall Street, and from trusteeship to performance focused.

The latter focused on short-term annualised returns linked to growth funds which were more speculative and led to more trading of shares, rather than long-term ownership of companies.

Are we at a turning point? Some signs certainly suggest so. As long ago as 2009 Unilever’s then CEO Paul Polman announced his company would no longer provide quarterly analyst reports and urged shareholders to put their money elsewhere if they did not buy into his long-term value creation model "which is equitable, which is shared, which is sustainable"3.

The influential US-based Business Roundtable which boasts 200 of America’s most prominent CEOs had, until recently, an explicitly enshrined philosophy that 'the paramount duty of management and of boards of directors is to the corporation’s stockholders' and that 'the interests of other stakeholders are relevant as derivative of the duty to stockholders'.

Then in 2019, the Business Roundtable released a Statement on the Purpose of a Corporation which dramatically refocused their philosophy not on the stockholder, but on all of their stakeholders stating that 'we commit to deliver value to all of them, for the future success of our companies, our communities, and our country'.

Investment managers such as Baillie Gifford in Edinburgh are highlighting their 'Boston-esque' approach to investment comprising longer term and active ownership under their banner of Actual Investors which they state "requires a rejection of the now conventional wisdom that has led our industry astray: investment management is not about processing power, trading, and speed. It is about imagination and creativity, and working constructively on behalf of our clients with inspiring individuals and companies who have greater ideas than our own"4.

I often close my discussions with student and executives not with the question of why business exists, but with a more fundamental question: who gets to decide?

In the words of Katherine Trebeck and Jeremy Williams in their thought-provoking book The Economics of Arrival5, our current economic system is based on growth as a means to the end of prosperity.

Having now achieved that end — having arrived at prosperity, if only collectively, rather than using appropriate distribution to achieve this individually — we need to regroup and decide what our economic system, and our businesses which are at the heart of it, exist for.

Because if you think about it, this is the key sticking point in achieving the change we need towards Polman’s vision of a more equitable, more shared, and more sustainable society as a whole.


Dr Sarah Ivory is the Director of the Centre for Business, Climate Change and Sustainability at the University of Edinburgh Business School.


1 Stout, L. (2012). The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public. Berrett-Koehler Publishers.
2 Lounsbury, M. (2007). A Tale of Two Cities: Competing Logics and Practice Variation in the Professionalizing of Mutual Funds, The Academy of Management Journal, Vol 50(2).
3 Boynton, A. (2015). Unilever’s Paul Polman: CEO Can’t be 'Slaves' to Shareholders’, Forbes, Jul 20.
4 Baillie Gifford. 2021. Actual Investors. Accessed 12/10/21. Available at: https://www.bailliegifford.com/en/uk/about-us/actual-investors/
5 Trebeck, K. and Williams, J. (2019). The Economics of Arrival: Ideas for a Grown Up Economy, Policy Press