According to Dr. Jerry Osteryoung, a professor at Florida State University, the purpose of business is to serve others who have a vested interest in its success, such as its employees and investors, because they are the ones who suffer the most if the business fails.

To fully understand my response, one must first read the Professor’s Full Article as follows:

When I was in classes getting my PhD. in finance, my professors told me over and over, “The purpose of a business is to make money for its owners.” Unfortunately, I cannot tell you how many times I repeated this mantra to my students over the years. Now, however, I have a very different opinion on the subject.

A firm cannot stay in business just to make money for its owners at the exclusion of everything or everyone else. If an entrepreneur takes the attitude that he or she deserves to make all of the money, the business will suffer and will most likely crash and burn. Just consider who stands to lose the most when a business fails.

Some folks — my former professors included — would argue that the owners lose the most since they have the most at risk. There is no question in my mind that entrepreneurs lose a bunch as they generally have the most invested in terms of dollar amount. They are not; however, the ones hurt the most by a business failure. A business closing is devastating to the employees.

Employees are one of the many entities that have a vested interest in a business’ success. In addition to owners, stakeholders such as employees, vendors, banks and customers have so much tied up in a business. They are vitally concerned with the firm’s well being and will put forth much effort to ensure its success. However, success is impossible unless all of the stakeholders are taken care of.

When a business fails all of the stakeholders suffer. Take for example a financial institution. A financial institution risks much of its depositors’ funds to support a business, and if the company fails, its own financial performance suffers.

If employees are not treated reasonably, the whole business will suffer as both the quality and quantity of work declines. So many entrepreneurs forget how important each and every employee is to the success of the business, and they often fail to treat employees well. If the business should fail, these employees are the ones that are going to pay a very high cost.

My colleague and I recently assisted an entrepreneur who had been operating a business with over 50 employees for a very long time. The business was losing hundreds of thousands of dollars each month, and we tried to give the entrepreneur the resources he needed to turn things around. When the situation failed to improve, we realized that there was only one alternative left: he had to close the business and file for bankruptcy.

Telling this entrepreneur that closing the business’ doors was the best course of action was, by far, one of the hardest things I ever had to do in this job. What made it so hard was not that we had to give the entrepreneur this bad news, but because we knew what a loss it would be for all of the stakeholders, particularly the employees. Through no fault of their own, the staff would lose their jobs.

In my opinion, the purpose of a business is to serve the stakeholders. Businesses must earn money to acquire additional funds and assets, but its staff and other stakeholders are vital contributors to this endeavor. The key is to balance and deliver on the needs of all the stakeholders.

My Response

I first met Dr. Osteryoung at an IBBA conference in 2007, he was one of the featured speakers. Which is why I was so surprised to read his perspective on the purpose of small business. Yes, a business owner must be practical in her/his operational approach because others do hold “stakes” in the success or failure of the company. Everyone loses when an enterprise closes its doors. But to say that the purpose of business is to serve others dishonors the very stuff upon which the U.S. was built.

Small businesses are the engines that power our economy. According to SBA statistics, small firms generated 60 to 80 percent of net new jobs annually over the last decade, employ 50.6 percent of the country’s private sector workforce, represent 97 percent of all the exporters of goods, account for almost 40 percent of our gross national product, represent 99.7 percent of all employer firms, and generate a majority of the innovations that come from the U.S.

When a firm closes its doors, business taxes and payroll taxes are lost, suppliers lose revenues from a lost customer, landlords lose rent, employees are out of a job, the taxes those employees pay are lost, those employees lose buying power and, consequently, sales taxes are lost as well. Everyone in the community loses. No one wins.

But who loses the most is the question. Lenders, investors, and employees take calculated risks when they choose to invest or work for a firm. They have choices and their loyalties are calculated based on self-interest, not out of the goodness of their heart or in the best interest of the company. Nor will these stakeholders lose everything if the business fails. Lenders will invest in other ventures and employees will work for other firms. On the other hand, the business owner is the most loyal to the company and is its biggest risk taker. No one will work harder for the business, sacrifice the most for that business, forgo vacations and time with family, reinvest every penny into that business, forgo sleep even.

It is simplistic to believe that business owners think that they “deserve to make all the money,” as the professor implies. Successful business owners understand they must take care of those who have vested an interest…a self interest, in their firm. The market is competitive for employees and financing. Business owners know that. It is in their own self interest to provide for those who work for them and who invest in them. If they do not, those workers and investors would leave in a heartbeat, a New York minute even. These stakeholders would not wait around for the business to go to bankruptcy if they knew it was happening. It is human nature. The business owner, the captain, however, will go down with the ship. They have nowhere else to go, in their mind.

So, to say that everyone has the same stakes, or the business owner loses less, is a falsehood, and undervalues business owners. An owner should enjoy the most benefit from the company should it be a success, just as they would suffer the greatest from its failure. The “key” here is that the stakes, loyalties, and vested interest are not equal.

If not for the ingenuity of business owners and entrepreneurs, there would be no investments to make by lending institutions, there would be no jobs for those employees, there would be no new technology and innovation for our future. As Ayn Rand might have said, no one owns the “engine” but its inventor, no one slaves over it like its inventor, and no one has rights over it but its inventor.

So, I say, “The purpose of a business” is to serve the ingenuity of its owner. The rest is opportunity for others.