The latest print edition of Reason magazine features a debate of sorts about the "purpose" of a corporation. Milton Friedman, the Nobel prize-winning economist, took the orthodox free market position that the purpose of a corporation is to maximize long term shareholder value.

John Mackey, founder and CEO of Whole Foods, suggested that he runs his business based on balancing the interests various stakeholders: shareholders, employees, vendors, the community, etc.

I'm going to suggest that their views are not really in conflict, but that the question is itself not all that well put.

Instead, the purpose of SHAREHOLDERS is to find and invest in corporations that maximize THEIR interests, not the other way around. As I make my living investing in the stock market, I have some perspective on this. I buy and sell stocks that meet MY criterion. I really don't care what the "motivation" of the corporation is -- be it maximizing profits, balancing stakeholder interests, or something else.

I've worked for 4 publicly traded companies over the years, and have known the senior managements of those companies reasonably well. While they might suggest that their motive was something akin to Friedman's, their behavior was often at odds with their stated motive. I, for instance, saw embezzlement go unpunished and securities fraud (or, perhaps, misrepresentation) several times. While my experience may well be anecdotal, I suspect that virtually all public corporations experience some level of conflicted behavior.

However, I would say I think Mackey's onto something. Clearly his company has done an excellent job at maximizing shareholder value. (Full disclosure: I don't own Whole Foods, though I wish I had!)

Companies like Mackey's Whole Foods and Southwest Airlines, for example, may well be living proof, however, that Friedman's view is irrelevant. This new model of corporate management just seems to work. Southwest Airlines, for example, is wildly profitable while its competition is wildly unprofitable and frequently in and out of bankruptcy.

My observation is that companies like Whole Foods and Southwest Airlines have really one motive: Love. They love their customers, their employees, even their competition. They seem to be motivated by doing the right thing far more than their profit-only-motivated competition. Perhaps ironically, the profits that Whole Foods and Southwest generates by doing the right thing are superior to most in the marketplace. These companies take a bottom-up approach, and let the profit chips fall where they may (generally, for them, deep into the black). Other corporations -- in trying to maximize profits first -- often fail to meet their goal because the goal opens the door for corrupt behavior, which we've all seen quite a bit of in recent years. Profits are a residue, not a goal. You can't have profits if you don't have, for instance, satisfied customers. Profit-only corporations are attempting to reverse engineer the market process, and it's clear to me that that generally doesn't work.

So, as they have the claim on the profit residue, it's on the INVESTORS to determine which corporation is likely to maximize his or her return, regardless of the company's STATED motive.

In other words, the purpose of the corporation is whatever the Board of Directors and managements say it is. That's their right. It's the investor's right to pick and choose which corporations meet their requirements best. Just as it is for customers, employees, and vendors.

It's as simple as that.

Or something.

-Robert Capozzi