Prosperity

Prosperity Plot Summary

Introduction

The pursuit of profit has long been considered the primary, if not sole, purpose of business. This narrow view has shaped corporate governance, business education, and economic policy worldwide. However, as societies face increasingly complex challenges like climate change, inequality, and technological disruption, the limitations of this profit-centric paradigm have become apparent. A more comprehensive understanding of corporate purpose is emerging—one that recognizes businesses as potential forces for addressing human and planetary problems while creating sustainable prosperity. This exploration challenges the conventional wisdom that shareholder returns must come at the expense of other stakeholders. Through examining historical evidence, governance structures, measurement systems, and legal frameworks, a new vision emerges of corporations as purposeful entities embedded in broader social and ecological contexts. This perspective doesn't diminish the importance of financial performance but reframes how that performance is achieved—through creating genuine value rather than extracting it. The transformation toward purpose-driven business represents one of the most significant opportunities for addressing our most pressing challenges while creating more resilient and valuable enterprises.

Chapter 1: The Fallacy of Shareholder Primacy in Modern Business

For over fifty years, the dominant paradigm in business has been the Friedman doctrine, which asserts that the sole responsibility of business is to increase profits for shareholders. This seemingly straightforward principle has shaped corporate governance, business education, and economic policy around the world. However, this doctrine represents a fundamental misunderstanding of what corporations are and what they should do. The Friedman doctrine portrays corporations as mere instruments of their shareholders, with managers acting as agents whose only duty is to maximize shareholder returns. This view fails to recognize that corporations are distinct legal entities with purposes that transcend the financial interests of any single stakeholder group. When we reduce corporate purpose to profit maximization, we ignore the rich tapestry of relationships and responsibilities that define successful businesses. The shareholder primacy model has led to serious negative consequences. It has encouraged short-term thinking, environmental degradation, growing inequality, and an erosion of trust in business. By prioritizing financial returns above all else, corporations have often neglected their broader social responsibilities and undermined their own long-term viability. This narrow focus has also led to a misallocation of resources, with too much emphasis on financial engineering and too little on genuine innovation and value creation. Moreover, the shareholder primacy model is based on a flawed understanding of economic efficiency. It assumes that maximizing shareholder value automatically leads to optimal outcomes for society as a whole. However, this assumption breaks down in the presence of market failures, externalities, and incomplete contracts. When corporations focus exclusively on shareholder returns, they often make decisions that benefit shareholders at the expense of other stakeholders and society at large. The fallacy of shareholder primacy becomes particularly evident when we consider the changing nature of corporate value. Fifty years ago, most corporate value was tied to tangible assets like factories, equipment, and inventory. Today, the vast majority of corporate value is linked to intangible assets like intellectual property, brand reputation, and human capital. These intangible assets depend on relationships of trust with employees, customers, communities, and other stakeholders. A narrow focus on shareholder returns undermines these relationships and, ironically, can destroy shareholder value in the long run.

Chapter 2: Purpose-Driven Corporations: Historical Evolution and Contemporary Value

The concept of corporate purpose has undergone significant transformation throughout history. Originally, corporations were created to serve public functions - building infrastructure, administering towns, providing education, and facilitating trade. The corporation was fundamentally a public institution, granted special privileges by the state in exchange for advancing the common good. This public orientation gradually gave way to a more private conception as corporations became vehicles for commercial activity and wealth creation. The evolution of the corporation reveals six distinct ages, each characterized by different purposes and organizational forms. The first age saw merchant trading companies established by royal charter to undertake voyages of discovery and promote commerce. The second age featured public corporations created by Acts of Parliament to engage in major public works like canals and railways. The third age, following freedom of incorporation in the nineteenth century, gave rise to the private corporation that fueled the industrial revolution. The fourth age brought service firms and financial institutions, while the fifth age saw the emergence of transnational corporations operating across national boundaries. The sixth and current age features the "mindful corporation" - focused on intangible assets, knowledge, and networks. This historical perspective challenges the notion that profit maximization is the natural or inevitable purpose of corporations. Throughout most of their history, corporations have pursued multiple objectives simultaneously, balancing private interests with public responsibilities. The narrow focus on shareholder value is a relatively recent development, emerging primarily in the latter half of the twentieth century. This shift was not the result of economic necessity or superior performance, but rather of changing ideologies and power dynamics within society. Purpose-driven corporations recognize that their existence depends on creating value for multiple stakeholders, not just shareholders. They understand that their license to operate comes from society and that they must contribute positively to the communities in which they operate. This broader conception of purpose does not ignore profits but sees them as the result of successfully fulfilling a worthwhile purpose, rather than as an end in themselves. As one executive put it, "Profit is like oxygen - necessary for life but not the purpose of life." The most successful corporations today are those that have a clear and compelling purpose beyond profit maximization. Companies like Patagonia, Unilever, and Mars have demonstrated that pursuing social and environmental goals alongside financial ones can lead to superior long-term performance. These companies attract better talent, build stronger customer loyalty, and develop more resilient business models. They also tend to innovate more effectively because they focus on solving real problems rather than simply maximizing short-term returns.

Chapter 3: Trust and Commitment as Foundations of Effective Governance

Trust lies at the heart of effective corporate governance. Without trust, the complex web of relationships that sustains a corporation would unravel, making business transactions prohibitively costly or impossible. Yet traditional approaches to corporate governance have often undermined trust by focusing exclusively on control mechanisms designed to align management interests with those of shareholders. This narrow approach fails to recognize that corporations are fundamentally commitment devices, not just control mechanisms. The conventional view of corporate governance treats managers as self-interested agents who must be monitored and incentivized to act in shareholders' interests. This perspective has led to an overemphasis on external controls - independent directors, audit committees, executive compensation schemes tied to stock performance, and the threat of hostile takeovers. While these mechanisms have their place, they reflect a fundamental distrust of management and can create a self-fulfilling prophecy where managers behave opportunistically because they are expected to do so. A more effective approach recognizes that corporations succeed by making credible commitments to various stakeholders. Employees commit their careers and develop firm-specific skills based on the expectation of fair treatment. Suppliers make relationship-specific investments based on the expectation of continued business. Customers rely on companies to maintain product quality and provide ongoing support. Communities provide infrastructure and social license based on expectations of responsible corporate citizenship. These commitments cannot be secured through contracts alone; they require trust. Corporate governance structures should enable and reinforce these commitments rather than undermining them. This requires moving beyond the shareholder-centric model to recognize the legitimate interests of multiple stakeholders. It means developing governance mechanisms that allow corporations to make credible commitments to employees, customers, suppliers, communities, and the environment, as well as to shareholders. These commitments are not constraints on corporate success but essential foundations for it. The ownership structure of a corporation significantly influences its ability to make credible commitments. Family-owned businesses, industrial foundations, and companies with long-term anchor shareholders can often make more credible commitments than companies with dispersed, transient ownership. This explains why family businesses have remained dominant in many successful economies despite their supposed inefficiencies from a shareholder-value perspective. They can commit to purposes beyond short-term profit maximization and maintain those commitments over time. Trust and commitment in corporate governance also require appropriate legal frameworks. Corporate law should enable companies to adopt governance structures that support their specific purposes rather than imposing a one-size-fits-all model based on shareholder primacy. This might include dual-class share structures that protect founding visions, board representation for employees or other stakeholders, or benefit corporation status that explicitly recognizes social and environmental objectives alongside financial ones.

Chapter 4: Aligning Capital with Long-Term Purpose and Value Creation

The current financial system excels at providing liquid, low-risk, short-term investments for shareholders but often fails to supply the patient, committed capital that purposeful corporations need. This misalignment between the demands of investors and the requirements of purposeful business represents one of the most significant challenges in reforming corporate capitalism. Addressing this challenge requires fundamental changes in how we think about capital, investment, and corporate finance. Financial capital is just one of several forms of capital that corporations depend on. Human capital (the skills, knowledge, and well-being of employees), social capital (relationships, networks, and trust), natural capital (environmental resources and ecosystems), and intellectual capital (ideas, innovations, and knowledge) are equally essential. Yet our financial and accounting systems focus almost exclusively on financial and manufactured capital, treating other forms as externalities or ignoring them entirely. This creates a distorted picture of corporate performance and value creation. The transformation of the financial system must begin with a recognition that different forms of capital require different governance structures. When financial capital was scarce during the industrial age, it made sense for shareholders to exercise primary control over corporations. Today, as financial capital has become increasingly abundant, other forms of capital - particularly human, intellectual, and natural capital - have become relatively scarcer. Control rights should shift accordingly, with greater influence given to those who contribute these critical resources. Investment timeframes represent another critical dimension of alignment. Many corporate purposes require long-term investments with uncertain payoffs, yet most investment capital today is managed with short-term horizons. The average holding period for shares has declined from years to months, creating pressure for quick returns at the expense of long-term value creation. This mismatch between investment horizons and corporate purposes undermines the ability of corporations to pursue meaningful innovation and address complex societal challenges. Institutional investors, particularly pension funds, sovereign wealth funds, and endowments, have a crucial role to play in aligning capital with purpose. These institutions have long-term liabilities and should therefore be natural providers of patient capital. Some, like the Canada Pension Plan Investment Board and Norway's Government Pension Fund Global, have begun to embrace this role by extending their investment horizons, engaging actively with portfolio companies, and integrating environmental, social, and governance factors into their investment decisions. However, most continue to focus on short-term relative performance. New financial instruments and institutions are also needed to better align capital with purpose. Impact investing, social impact bonds, and green bonds represent promising innovations that explicitly connect financial returns with social and environmental outcomes. Similarly, alternative ownership structures like benefit corporations, industrial foundations, and stewardship trusts can help shield companies from short-term market pressures while ensuring accountability to their stated purposes.

Chapter 5: Measuring True Value: Beyond Traditional Financial Metrics

Current accounting practices fail to capture the full spectrum of value that corporations create or destroy. Financial statements focus almost exclusively on transactions that affect financial capital, ignoring impacts on human, social, natural, and intellectual capital. This narrow focus distorts decision-making, misallocates resources, and undermines corporate purpose. A more comprehensive approach to measurement is essential for aligning corporate behavior with genuine value creation. The limitations of conventional accounting become evident when we consider a company that depletes natural resources, exploits workers, or damages communities while generating strong financial returns. Current accounting standards would show such a company as highly profitable, even though it is destroying more value than it creates. Similarly, investments in employee development, community relationships, or environmental stewardship often appear as costs that reduce short-term profits, even though they build valuable assets that contribute to long-term success. This asymmetry creates a systematic bias against purposeful business practices. A more accurate approach would distinguish between "fair" and "fake" profits. Fair profits are those that remain after accounting for the full costs of maintaining all forms of capital on which a business depends. Fake profits, by contrast, are those that come at the expense of depleting human, social, or natural capital without making provision for their maintenance. By recognizing this distinction, we can identify businesses that are truly sustainable versus those that appear profitable only because they externalize critical costs. Implementing this approach requires extending the principle of capital maintenance beyond financial and manufactured capital to include other forms of capital. Just as companies depreciate physical assets and make provisions for their replacement, they should account for the maintenance of human, social, and natural capital. This would involve recognizing liabilities for the costs of restoring depleted capital and treating investments in these capitals as assets rather than expenses. Several pioneering organizations have begun to develop frameworks for more comprehensive measurement. The International Integrated Reporting Council promotes reporting that connects financial performance with impacts on multiple capitals. The Sustainability Accounting Standards Board has developed industry-specific standards for measuring and reporting material environmental, social, and governance factors. The Natural Capital Protocol provides guidance for identifying, measuring, and valuing impacts and dependencies on natural capital. These initiatives represent important steps toward a more holistic approach to measurement. Importantly, this expanded approach to measurement does not require placing monetary values on everything. The goal is not to reduce all forms of value to financial terms but to ensure that decisions are informed by a comprehensive understanding of impacts across multiple dimensions. This might involve using a combination of quantitative and qualitative indicators, with monetary valuation applied selectively where appropriate. The key is to make visible what current accounting renders invisible.

Chapter 6: Legal Frameworks That Enable Purposeful Business

Law plays a defining role in shaping corporate purpose and behavior. Unlike most other institutions, corporations are legal creations - they exist because the law says they do. This gives corporate law extraordinary influence over how corporations function and whose interests they serve. By reconceiving corporate law as a means of enabling purposeful commitment rather than simply defining rights and responsibilities, we can create a legal framework that supports corporations in addressing society's most pressing challenges. The current legal paradigm in many jurisdictions privileges shareholder interests above all others. In the United Kingdom, for example, the Companies Act 2006 states that directors must "promote the success of the company for the benefit of its members [shareholders] as a whole." While directors must "have regard" for the interests of employees, customers, suppliers, communities, and the environment, these considerations are secondary to shareholder interests. Similar principles apply in the United States, particularly in Delaware, where most large corporations are incorporated. This shareholder-centric legal framework constrains corporate purpose in two ways. First, it creates legal risk for directors who prioritize other stakeholders' interests over those of shareholders, especially in the context of potential takeovers or activist campaigns. Second, it reinforces a cultural norm that equates good governance with maximizing shareholder returns, making it difficult for companies to pursue broader purposes even when the law might permit them to do so. A more enabling legal framework would place purpose at the center of corporate law. Rather than presuming that corporations exist primarily to serve shareholders, the law should require companies to articulate their specific purposes and hold directors accountable for advancing those purposes. This approach would recognize that different corporations serve different functions in society and should be governed accordingly. It would also acknowledge that shareholders themselves have diverse interests and time horizons, making "shareholder value" an ambiguous guide for corporate decision-making. Several jurisdictions have begun to move in this direction. Benefit corporation legislation, now adopted in over 30 U.S. states, creates a new corporate form that requires directors to consider the impact of their decisions on all stakeholders and to pursue a public benefit alongside financial returns. Similarly, the French "Entreprise à Mission" status allows companies to define a social or environmental purpose in their articles of association and establish governance mechanisms to ensure its pursuit. These innovations demonstrate how corporate law can enable rather than constrain purposeful business. Beyond these specific reforms, corporate law should enable a diversity of ownership and governance structures that support different types of corporate purpose. This might include dual-class share structures that protect founding visions, industrial foundations that maintain independence and long-term orientation, or employee ownership models that align corporate success with worker well-being. Rather than imposing a one-size-fits-all model based on shareholder primacy, the law should provide a menu of options that allows corporations to adopt structures aligned with their specific purposes.

Chapter 7: Building Ecosystems for Sustainable Corporate Transformation

Purposeful corporations cannot thrive in isolation. They require supportive ecosystems of investors, customers, suppliers, employees, communities, and public institutions. Building these ecosystems involves reimagining the relationships between corporations and their stakeholders, creating new institutions and practices that enable purposeful business, and developing policies that align private interests with public good. This systemic approach recognizes that transforming business requires changes not just within individual corporations but across the entire economic landscape. Financial ecosystems play a crucial role in supporting purposeful business. Traditional capital markets often prioritize short-term returns over long-term value creation, making it difficult for purposeful companies to access the patient capital they need. Alternative financial institutions and practices are emerging to address this gap. These include impact investors who seek social and environmental returns alongside financial ones, stewardship-oriented asset managers who engage actively with portfolio companies, and new ownership structures like perpetual purpose trusts that lock in mission over the long term. Educational ecosystems also shape corporate purpose. Business schools have traditionally taught that maximizing shareholder value is the primary objective of corporate management, reinforcing the shareholder primacy paradigm. A more balanced approach would teach future business leaders about the multiple dimensions of corporate purpose and performance, the importance of stakeholder relationships, and the role of business in addressing societal challenges. Some business schools have begun to move in this direction, integrating ethics, sustainability, and social impact throughout their curricula. Regulatory ecosystems establish the rules within which corporations operate. Rather than focusing narrowly on preventing misconduct, regulation should enable and encourage purposeful business. This might involve tax incentives for long-term investment, procurement policies that reward social and environmental performance, or reporting requirements that make corporate impacts on multiple capitals more transparent. Regulatory approaches should also recognize the diversity of corporate forms and purposes, avoiding one-size-fits-all solutions that may undermine innovation. Innovation ecosystems connect corporations with sources of new ideas and approaches. Purposeful innovation requires collaboration across traditional boundaries - between large corporations and startups, between business and civil society, between public and private sectors. Innovation hubs, accelerators, and incubators focused on social and environmental challenges can catalyze these collaborations. Similarly, open innovation platforms can engage diverse stakeholders in developing solutions to complex problems that no single organization could address alone. Community ecosystems ground corporations in the places where they operate. Purposeful corporations recognize their interdependence with local communities and build mutually beneficial relationships. This might involve investing in local education and infrastructure, sourcing from local suppliers, engaging community members in decision-making, or addressing specific community needs through corporate capabilities. These relationships create value for both the corporation and the community, enhancing resilience and legitimacy.

Summary

The transformation of corporate purpose from profit maximization to prosperity creation represents one of the most significant opportunities of our time. By reimagining corporations as purposeful entities that create value for all stakeholders while addressing society's most pressing challenges, we can harness the immense power of business as a force for good. This transformation requires fundamental changes in how we think about corporate purpose, governance, measurement, law, and the ecosystems within which corporations operate. The core insight that emerges from this analysis is that corporations are not merely instruments for generating financial returns but complex social institutions with profound impacts on human well-being and the natural world. Their legitimacy and success depend not just on their ability to generate profits but on their contribution to broader societal purposes. By recognizing this fundamental truth, we can begin to reimagine corporate capitalism in ways that align business success with human flourishing and environmental sustainability. The path forward involves not abandoning markets or profits but embedding them within a broader framework of purpose that connects corporate activity to genuine value creation for society as a whole.

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Colin Mayer

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