Business Thought

Profit Prosperity | Creating the Virtuous Organization

Economic sustainability is imminently consistent with the principles of a virtuous organization. One of the greatest contributions of business is the generation of wealth. Wealth raises the standard of living in communities by providing opportunities to create jobs, to sustain livelihoods, and to make resources available to others who share an entrepreneurial spirit. Businesses create and distribute value, and in many cases, the best way to provide that value is to ensure that the organization continues to survive for the intended and reasonably expected life of the purpose it serves. Thus, the virtuous organization is not an anti-profit philosophy. 

Milton Friedman’s shareholder primacy theory has been the normative doctrine in business schools and in practice for decades. However, the law does not compel corporations (or the people who run them) to sacrifice any other organizational interests in favor of dividend checks. Corporate law scholar Lynn Stout wrote a compelling argument suggesting that any reference to case law requiring profit maximization was patently false. As even Friedman – famous also for railing against corporate social responsibility – pointed out, shareholders are people. They invest in ideas and philosophies and values as well as opportunities for financial gain. 

Ultimately, virtuous organizations don’t exist solely to maximize profit for shareholders. Rather, virtuous organizations seek for economic sustainability, or the ability to financially support the needs and goals of their organization’s mission and purpose for its intended life duration while simultaneously distributing prosperity and value – tangible or intangible – ethically and fairly to all stakeholders. Virtuous organizations create both economic and social value. 

There is a relatively large body of research that suggests that investments in social performance also increase financial performance. While the details of the mechanisms behind this phenomenon are still a matter of debate, one thing is clear: customers and investors respond positively to opportunities to involve themselves with businesses that are interested in social value and not just financial value. 

This concept suggests that transparency is central to real fiduciary responsibility. So long as investors and consumers know what the company stands for and how it intends to spend their money, the choice of whether or not to invest or purchase – to risk their own capital – belongs to investors and customers themselves. If an investor chooses to allocate their money to a company with a social mission, they may expect a financial return on investment, but they will also expect a social return on investment that will provide them with non-financial personal value.

Capitalism facilitates value creation through business that extends beyond financial success. Take the importance of job creation as an example. To value jobs means to also value people. Jobs allow people stability. They pay for meals and mortgages and college educations. They provide an essential fabric that is woven through families and social networks, the rhythm of days and weeks. Jobs provide much more than just paychecks. Having a commonly-recognized currency has also provided enormous value to society. Currency allows individuals to make complicated trades in a free market and has exponentiated human growth, development, innovation, and prosperity. With money, people can purchase what they value. The freedom to choose with one’s own resources – assuming they have such resources – is a powerful force in support of self-actualization. A virtuous organization recognizes that they create financial value through profit and job creation, but they also acknowledge that they create social value through building community for their employees, facilitating innovation, and allocating important resources to corporate responsibility efforts. A virtuous company takes its profit and devotes it to increasing the firm’s ability to create all types of value. Reinvestment in the activities of the organization is key to a virtuous cycle of value enhancement. Innovation, expansion, and quality improvement only result if the invested funds can be used to generate them through research and development, excellent strategy, and wise infrastructure investments. This sort of reinvestment is expected by investors. It’s what they are investing in. The concept of reinvestment emphasizes that the value intended from this kind of capacity building activity can be viewed as independent from financial returns on shareholders’ investments. If an organization is mission-focused and working toward its vision for the world, greater reinvestment can translate to real gains for society. An organization committed to such a vision will align their growth and innovation strategies with new, better, cheaper, faster ways to get things of value to the people who need them. That might mean cleaner energy and more and better medicine, shelter, education, and art. 

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