The Role of the Corporation: A Businessman’s Perspective

These remarks were presented to the Committee on Catholic Social Teaching and the American Economy of the National Conference of Catholic Bishops in October 1983. Portions of the remarks have appeared previously in an essay by Mr. Madden in Democracy and Mediating Structures: A Theological Inquiry (American Enterprise Institute. 1983).

Many socio-economic issues are being questioned in America today, as perhaps never before. This searching can be most productive if the active participants in the dialogue can come to some agreement on basic principles.

Individuals work, save, and create. They often do so in teams, cooperative ventures or voluntary associations. The business corporation, large or small, is an institution designed to bring creative individuals together. From an economic point of view, the state and religious bodies largely are distributive organizations. They can distribute only what has been created. Since individuals are the essential force behind creativity and they produce what can be distributed, how can we motivate individuals to take those actions which are most likely to benefit society? It is my contention that complex value systems are at the heart of individual motivation.

Value systems are fundamental to the success over time of the large business corporation. It appears to me that these values depend upon and are consonant with religious values. A better understanding of how these values help create wealth and reduce poverty could provide a fruitful dialogue between religious and business people.

The corporation is an organization of individuals working together. It creates wealth by earning a reasonable rate of return and reinvesting that return for a growing profit.

Wealth can be created by investing for a reasonable rate of return. Wealth is not fixed. It can grow. Of course, it can also remain static or be dissipated; but it can’t be distributed if it is not created. If we are to reduce poverty, we must create the wealth to help those in need help themselves. But wealth cannot be achieved without a profit and profit is a word that is frequently misunderstood.

This leads me to the important need in our society for mediating structures, which have been defined as “those institutions standing between the individual in his private life and the large institutions of public life.” The necessity for mediating between the individual and the state is the classic case for such mediating structures. The family, the neighborhood and the church all are major mediating structures. It is my belief that the large business corporation also benefits society as a major mediating structure, as well as being a most effective vehicle for gathering individuals together to produce wealth.

To elaborate, let’s look at certain aspects of four concepts: the individual, the business corporation, the large corporation’s mediating role, and the compatibility of corporate and religious values.

The Importance of the Individual Person

If we really are concerned about how to correct the ills of modern society, we must focus first on the importance of the individual person and how that person, most often in association with others, can create wealth. Simply stated, we must realize that we cannot distribute what we do not have, and we cannot have what we do not create. Since individuals create and society can only distribute, we must develop a rational socio-economic and political philosophy with the individual person as its cornerstone if we are to keep our society healthy and growing.

The Corporation: An Organization Of

Individuals Creating Wealth

Through a Reasonable Rate of Return

Today, a corporation is defined as an association of individuals created under the authority of state laws that recognize it as a separate entity having its own rights, privileges and liabilities. This definition emphasizes individuals. I mention it here because of the importance I place on individuals in cooperation with one another as the critical element in the creation of wealth.

The purpose of the business corporation is specific: to earn a growing profit and a reasonable rate of return for the individuals who have created it. The essential element here is the reasonable rate of return, for without it the corporation would eventually wither and die. The profits generated by the return can be distributed to the shareholders or retained in the business for further investment. To the extent that adequate funds are wisely reinvested, this reasonable return will generate a growing profit.

The word “profit” is misleading in common usage because so-called profit seldom exceeds the normal cost of capital over any reasonable period of time. In any relatively free market, over time, if the rate of return exceeds the cost of capital, competition will enter the field, and the return will decrease. If the return drops below the cost of capital, new competitors will not enter the field, and existing competitors may reduce their involvement. Then the rate of return gradually will increase until it reaches a level at least equal to the cost of capital. The cost of capital will, of course, vary depending on the relationship of risk to reward; but over time, seldom is there anything left over, or any true economic profit. Rather, there is a cost of capital which will be equated with the reasonable rate of return expected under the circumstances. Therefore, when the accounting profit equals the corporation’s cost of capital, the true economic profit is zero.

The concepts may sound elementary, but they seem to be widely misunderstood. It is essential both to the health of business and to the overall health of our economy that people comprehend the system and feel confidence in it. At the Potlatch Corporation, we have written a corporate philosophy. It starts with our objective — to earn a growing profit and a reasonable rate of return. We go on to say that this objective can be effectively achieved only through talented, well-trained, and highly motivated people, properly supported by a sound financial structure, and with a keen sense of social responsibility to all of the publics with whom the corporation has contact. Each of these supporting principles for our corporate objective is based on individuals.

Mediating Structures

To repeat, mediating structures stand between the individual and the large institutions of public life. They take in everything from churches, private schools, museums, and hospitals to organizations for the arts or public welfare. Corporations are frequently excluded from the definition of mediating structures, but I believe corporations, and especially the large corporation, should be included.

Before pursuing the concept of mediating structures further, let me briefly discuss a concept of the state, which is the classic “large institution of public life.”

My dictionary defines the state as the supreme public power within a sovereign political entity, or an aggregation of individuals united under a single government.

The objective of the state generally should be to do for its citizens only those things they cannot do for themselves, either individually or through voluntary organizations they select and control. The state is almost never able to act impartially; whenever it acts, it is bound to favor some individuals and impinge on the rights of others. It follows, then, that the activities of the state should be limited to those areas where the majority of individuals who make up society agree on a goal but cannot or will not act — as individuals or through a mediating structure — to achieve it. The principal of subsidiarity should be practiced in this regard.

Tocqueville, writing about an earlier but still strongly recognizable nation, said, “in America, the people are enlightened, awake to their own interests, and accustomed to take thought for them. I am persuaded that the collective force of the citizens will always be better able to achieve social prosperity than the authority of the government.” This is in direct contrast to the thesis Franklin D. Roosevelt presented to Congress a hundred years later, which became almost an article of faith in the development of public policy. Roosevelt said, “As new conditions and problems arise beyond the power of men and women to meet as individuals, it becomes the duty of the government itself to find new remedies with which to meet them . . . Government has the definite duty to use all its power and resources to meet new social problems with new social controls.” Political debate over the past four decades has largely revolved around which part of government — local, state, or federal — should accomplish these goals, rather than on whether there might be a better and more efficient social mechanism for achieving them.

In a sense, we have accepted the premise that society consists of the individual person and the state, with nothing in between. We forgot that mediating structures can exist in between.

The purpose of mediating structures is to serve individuals, to help them to realize their own objectives more completely, to allow them freedom of choice. An individual has a number of identities. From the corporate point of view, one can be a shareholder, an employee, or both. One can be an investor, a customer, a supplier, or simply a citizen of a community that is affected by a corporation. In these various roles, an individual can find resolution of many of his or her conflicts through the mediating forces a corporation can provide in the social, economic, and political areas.

It often has been argued that the functions appropriate for mediating structures can be handled equally well by the state. I believe this approach has two serious flaws. First, the state cannot, in a present complex society, react equitably to all citizens, on a general rule-making basis. The concept of subsidiarity addresses this issue directly. The state can never be as responsive to all the individuals who make it up as can the tens of thousands of mediating structures. Second, the state has consistently proved itself to be a most inefficient vehicle for accomplishing the objectives of mediating structures.

It is my thesis that for the mediating structure to be effective, it must represent the individual person, offer an alternative choice, and be relatively free from state control. This thesis starts with the family and the church and includes all of those private organizations providing mediating services for the individual, including the business corporation, large or small.

The Corporation’s Mediating Role

Turning to the corporation’s mediating role, I suggest that the large business corporation is a mediating structure of the utmost importance to our nation: and that unless it succeeds first in its objective of a growing profit and a reasonable rate of return and second in its role as a mediating structure, this nation will not achieve its major socio-economic goals.

For any nation to achieve its societal goals, productivity must improve. Individual productivity can improve only so far; then machines, technology and large-scale efficiencies must take over. The Chinese have finally realized the inevitability of this shift.

These efficiencies make it possible for the large corporation to tackle the challenge of the mediating role. Corporations with large resources can often afford to devote more attention to subjects unrelated to bare survival than smaller ones can.

Obviously, the corporation is not perfect: it is run by humans, and it is prey to all their faults as well as all their strengths. If we as a nation are to achieve continued well-being for our people, I believe we must be competitive in our productive sectors. Productivity depends on the wide use of capital in vast amounts. This capital is initially created by the savings of individuals, and it will be managed by individuals who are entrusted with it as were the three servants in the Gospel of Matthew who received talents from their master. The two faithful servants, whose honest work returned a profit on the talents entrusted to them, were rewarded, each according to his ability. The unprofitable servant was cast into outer darkness.

The parable spoke only of profit, but much more was meant. The servants who were entrusted with their master’s talents and the servants, or managers, of today’s corporations know there is more to business success than profits.

At Potlatch we say that our growing profit and reasonable rate of return can only be achieved by talented, well-trained, and highly motivated people, properly supported by a sound financial corporation with a keen sense of responsibility to all of the publics with whom the company has contact. That is, we must be a mediating structure to succeed in our objective. There is no question in my mind that we do act as a mediating structure, although failures do occur, since we are only human.

In the employee area we strive to provide competitive wages; regular, steady work; safe and attractive working conditions; opportunities for personal growth; and respect for the dignity and integrity of each employee. In the financial area we deal fairly, honestly, and openly with all our lenders, recognizing that they represent many individuals who have entrusted funds to them, yet we also recognize our primary financial obligation to our own shareholders. In this sphere we mediate directly for our shareholders and indirectly for our lenders.

With regard to our publics, we not only recognize their importance, but we also frequently mediate for them. Such mediation can vary from advocacy of a fair in-heritance-tax bill for small timberland owners who supply us with fiber, to the support of a state-wide study of public education. Or, we contribute directly and indirectly to other mediating structures. These contributions run the gamut from partially financing a local health center for the aged to building a Little League ball park.

“Altruistic Egoism”

From another perspective, the large business corporation must apply self-interest with regard to its shareholders’ reasonable objectives, yet it must be sensitive to its social role.

Are self-interest and mediating structures compatible? I contend they are.

In the field of medicine, Dr. Hans Selye of the University of Montreal summed up the essentials of his famous theory on stress as “altruistic egoism.” First know yourself, he said, be self-interested, then apply yourself to the common good.

Why should not the large business corporation take the same approach? If you know your corporate self, your economic reason for being and develop your corporate talents, then don’t be ashamed to be self-interested for your shareholders. Then apply this self-interest to altruistic aims, to charitable purposes, to the common good; that is, make a good competitive product; create opportunities for unprejudicial employment, worthwhile work, and personal growth for your employees; deal fairly with your customers, financial backers, and suppliers; aid the communities in which you operate — in general, be a mediating structure.

If the large business corporation can do all this, I con-tend that it should be supported in achieving its objective of a growing profit and reasonable rate of return, as well as encouraged to contribute to the welfare of our society by remaining a most valued mediating structure.

Compatibility of Corporate

and Religious Values

In 1981 the Connecticut Mutual Life Company published a report on American values in the 1980s. Some conclusions of this extensive independent poll were considered surprising. In the first place, Americans generally expressed satisfaction with their work. Moreover, the study found that “it is religious commitment which is the strongest predictor of satisfaction and involvement with one’s work.” Compared to the least religious, it found that:

° The most religious Americans are more likely to feel a sense of dedication to their work (97% versus 66%).

° The most religious are more likely to feel their work contributes to society (91% versus 53%).

Furthermore, this study concluded that “religious leaders, and to a lesser extent business executives, consistently express higher degrees of commitment to religion, to their work, to their family and to their community than do other leadership groups.”

I do not consider these conclusions surprising. Successful large corporations depend for their success on a whole set of fundamental moral-religious values. It should not be surprising, then, that the leaders of these large corporations, most of whom have had their career development within this corporate environment, should reflect and be imbued with these fundamental values.

What are some of these values? Let me randomly pick a few words from these remarks and from our Potlatch corporate philosophy, which was first published in September 1972.

“Integrity, faith, trust, ethical conduct, honesty, loyalty, motivation, quality, charitable purposes, respect for the dignity and integrity of each employee as an individual person, open two-way communication, fair relationships, affirmative actions which fulfill the company’s legal and moral obligations to provide equal opportunity for all employees, deep concern for the environment, social responsibility, self-fulfillment and the importance of the individual person.”

While even this short lists provides internal overlaps, it does give a flavor of the kinds of fundamental value systems that create corporate cultures and which have enabled many large corporations to survive and prosper over time.

It is, therefore, my contention that the large business corporation is a mediating structure which draws great strength from the values nurtured in the Judeo-Christian tradition. Furthermore it is my belief that strengthened religious values are critical to the economic success of this country. I would strongly advocate extended and extensive dialogue between religious and business leaders to sharpen the focus on these values so that a better understanding might be achieved as to their relevance.

By

Richard B. Madden was Chief Executive Officer of the Potlatch Corporation.

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