In my book Foundations of Corporate Success, published in 1993, I was sympathetic to the ‘nexus of contracts’ approach, believing – as I still do – that the essence of the firm was an assembly of relationships among individuals. But I did not then realise, as I now do, that the advocates of this idea visualised these relationships as transactional rather than social. A central argument of the present book is that by excessive emphasis on the transactional nature of business relationships we have undermined not only the relationship between business and society but also the effectiveness of business, even in transactional terms.

PART 6: The Corporation in the 21st Century

24: Combinations and Capabilities

“The modern firm is a community, rather than an office or a factory. It is defined not by its plant and machinery but by its capabilities. The successful business is characterised by the distinctive nature of its collection of capabilities and the match between these capabilities and the needs of its customers – and other stakeholders. The claim that George W. Bush told Tony Blair that ‘the problem with the French is that they don’t have a word for entrepreneur’ is, sadly, apocryphal.

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.

He was searching for a way to meld them together. He emerged from the fog clear in his mind to define the core purpose of the company in terms of ideals he learned studying Plato and other philosophers. He rejected conventional business school dogma that the purpose of a company is to maximize shareholder wealth, replacing it with the purpose to provide a place for people to flourish and to enhance the community. To be clear, the company would also seek to grow profits and generate robust cash flow, but mainly as a necessary means to fuel the core purpose.