What is the purpose of a company?

company purpose and directionSomething to reflect on over the festive period is a debate we have been hearing more and more about recently, challenging the purpose of a company as a corporate entity.

It may seem obvious at first sight but there are actually several questions to be considered.

The assumption that companies exist to make money may appear to be self-evident, but for whom and for what purpose?

Is it simply for the benefit of its shareholders? But what about its other stakeholders?

What about employees, many of whom may have worked for the company for far longer than shareholders have held shares? Indeed, many employees may also expect the company to be able to pay their pension in the future.

Where also do lenders and creditors stand especially in the UK where their interests are paramount in insolvency proceedings?

The local community and environment are also becoming important stakeholders with ever more focus on corporate social responsibility, health and sustainability related legislation.

In the EU there has been some effort to harmonise company behaviour across different countries, such as in the Directive, Solvency II, which aims to unify a single EU insurance market and protect the public from bail-outs.

Do cultural differences affect the purpose of a company?

Despite attempts to harmonise legislation, there are cultural differences that are likely to prevail. For example, in Southern Europe much legislation is primarily for the benefit of employees.

Most regulators seem to focus predominantly on trying to prevent risk-taking, particularly by banks, which are essentially companies that primarily make their money out of risking capital.

In the UK, there has been a growing culture of shareholders taking money out and leaving companies leveraged to the hilt risking jobs, pensions and creditors.

Another reason behind the large number of new companies being formed is as an employment vehicle for their shareholder/directors. This might be sensible given the personal liabilities of being a sole trader versus the protection of the corporate veil. But was this intended?

It is understandable that ever more regulation imposes ever more responsibility and increasing personal liability on directors to discharge their duty to the various stakeholders of a company.

So what exactly is, or should, a company be for? and for whose benefit?

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