This is an important and underappreciated point: there is no shortage of ‘patient capital’ – institutions such as pension funds and university endowments are naturally looking for investments that may only pay off in the long term – but there is a shortage of patient individuals working in the finance sector, an industry remunerated almost entirely by transactions. The result is a constant flurry of financial activity engaging senior executives, investment professionals and advisers which rarely adds to, and often detracts from, the effectiveness and success of the underlying business. The financial pressures that motivated strategy at Merck and Valeant not only damaged the standing of the businesses and their products but also diminished the returns to their shareholders in the long run. In later chapters I will show that these are far from exceptional cases. The history of pharmaceuticals illustrates much that is right and wrong in the relationship between business and society. I have described four problem areas: the motivation and standards of behaviour of leaders of the industry; the interface between business and finance; the difficulty of constructing a regulatory regime that is relevant and effective; and the sometimes too tenuous relationships between prices, costs and values. None of these issues is unique to the pharmaceutical sector: similar questions arise in every kind of business, and the answers are necessarily specific to industry, time and place. But in this book – and another that will follow – I will illustrate principles and directions of travel.

PART 2: A Brief History of Business

4: The Mechanical Firm

“A central thesis of this book is that this transactional account of business is not just repellent but mistaken. It does not describe how successful business works – or could work – in modern society. Individuals do, of course, respond to incentives, but a better description is that individuals tend to behave in line with the behaviours expected in their environment; they are led to do what the community approves, both through praise and material reward. Social aspects of work, including both relationships within the workplace and those between business and society at large, are crucial to both personal productivity and personal fulfilment.

For Penrose, the firm was defined not by the assets it owned or the contracts it made but by its capabilities and its ability to deploy those capabilities in productive services: ‘All the evidence we have indicates that the growth of firms is connected with the attempts of a particular group of people to do something.’ Perhaps that seems obvious. But her emphasis

on ‘the group’ recognises the centrally cooperative nature of business activity, and her identification of purpose – ‘to do something’ – establishes its problem-related focus.

I believe it is appropriate – indeed necessary – to view the business organisation in the same way. The proper goal of corporate activity is the flourishing of the multiple stakeholders of the corporation: employees, investors, suppliers and customers, the communities in which it operates and the corporation itself. For the corporation to flourish, it must contribute to the flourishing of the society in which it operates. And ‘the doctrine of the mean’ is as relevant to the business organisation as it is to the individual. The directors and executives of a flourishing company operate within a mediating hierarchy, which meets the needs of all its stakeholders, gives them an opportunity for voice and protects the business from the adverse consequences of stakeholder exit.

The focus on the firm as a collection of capabilities gives a different and more illuminating perspective for understanding the extraordinary diversity of business organisations and of businesspeople over geographies and over time. The core ideas in this book – collective intelligence, radical uncertainty, disciplined pluralism, relational contracts and the mediating hierarchy – have been extensively developed and discussed by earlier writers, though much of that work has been outside the context of business organisation. The relevance of each to the argument of this book arises from a belief that in the modern world successful commercial relationships are not simply instrumental and transactional; they are social and are embedded in a wider framework of communities and teams. That transactional view was both incorrect and unattractive. This book is written in the hope that a better account of how business and its stakeholders flourish will point the way not just to a better understanding of business but to the better conduct of business itself. In a successor volume I will try to explain some of the implications of that understanding for both business policy and public

Policy.