Prosperity summary

The concept of different people being legally contracted together for business can be traced all the way back to ancient Rome. We’re not going to travel that far back in time, but a quick history lesson can help explain why corporations have lost some of their potential to do good.

A corporation is essentially a structure through which economic activity occurs. What was once an exchange of goods in the market square, or the banding together of different tradespeople to create a building, is now an incorporated company whose activities and output can be studied and analyzed for the purposes of formal education and analysis.

One of the main issues with Friedman’s doctrine is that it confuses company directors. When combined with pressure from shareholders, it tricks directors into thinking that the purpose of corporations is to make money. But that isn’t true.

The purpose of corporations is to solve a problem faced by the community. It might be to produce washing machines, so people can clean their clothes. Or it might be to deliver faster internet, or to facilitate travel from A to B. A corporation’s aim shouldn’t be to generate profits for shareholders – that should be a byproduct of it fulfilling its purpose.

When it comes to evaluating a corporation’s performance, the standard practice is to report on financial and material assets. But there are so many aspects of a business that don’t end up in the spreadsheet – for better or for worse. For instance, there are three resources that every business needs to maintain to survive, in addition to income and material assets. These three assets are natural, social, and human resources. And yet, when it comes to calculating profit, these assets aren’t accounted for at all. This is a major oversight for both a successful business and an ailing one.

To evaluate performance accurately, corporations need to consider all forms of capital – including natural, human, and social. Just like with any other asset, the cost of maintaining or replacing these three things needs to be factored into net profits. On the flip side, investment in them needs to be visible too – like furthering the education of staff or contributing to the well-being of the local community, many of whom might be a company’s customers or suppliers.

While corporations are diverse in their activities and output, there’s one thing they all have in common: none of them would exist without corporate law, the mechanism that creates corporations. This means that the law holds the potential to influence how corporations operate – and therefore how they impact the lives of everyone they touch.

Corporate law provides a framework by setting out the rules for how a corporation is established, structured, and run. This is the traditional view, at least, that our fresh-faced MBA students learn and will most likely adopt.