ZOLLO: Good morning. It is my pleasure today to welcome Professor Nikolai Foss here for this dialogue, this discussion that we're going to have. Nicolai Foss has joined Bocconi University recently. He is the Rodolfo de Benedetti Chaired Professor in Entrepreneurship, but he is known to the academic world as one of the thought leaders really in strategy and a number of related subjects like entrepreneurship. Today we have gathered here to tackle some quite profound and complex questions. So we're going to try to make it as concise and straight to the point as possible. The first one, Nikolai, is to do with the role and the reason for the existence of the business enterprise. Nothing you know, simpler than that. FOSS: Right. ZOLLO: So, why do you think the business enterprise exists? What is the role of the business enterprise? FOSS: Right, well, thanks, first of all, for the very nice introduction, for having me here today. Now, the question that you pose is, well, that's obviously a major one and is also one that social scientists, particularly economists perhaps, but also management scholars, have discussed for a very, very long time indeed. And I think it's fair to say that when we talk about the existence of the company, some of the key issues here continue to puzzle us. For example, we still don't really have a truly watertight explanation of why the central beast, namely the business enterprise, exists. We have various good ideas but none of them are entirely watertight and entirely satisfactory. And this is a little bit like a scandal of social science. And of management research in general. ZOLLO: Yeah. A well hidden secret. FOSS: We fundamentally don't really have a super good explanation of why the business enterprise exists and what it does also relatedly. So, we have lots of different notions of what the business enterprise is and what it does. Some would say this is a contractual entity and it exists because it minimizes various costs associated with entering into contracts. Others would say, this is an entity that exists because it facilitates social learning. So, it's one of the primary loci of innovation and learning in the economy that exists for this reason, some would say. And sometimes these explanations of what the business enterprise is, what it does, are complimentary, but other times they are actually in opposition, they are rivalrous. So, you have, for example, people who say, economists typically, it exists for reasons of efficiency, while others may say well, it's really an instrument of, say, capitalist oppression. It exists for the reason of extracting surplus value. ZOLLO: Yes, exploitation. FOSS: Exploitation. My simple take is that the business enterprise is an organization that, the purpose of which is to create value for customers. Without customers, there are no enterprises, and of course, it also captures some of that value also. So it's a commercial entity if you like, but it's not necessarily a hierarchical entity, because you have one-person companies; It's not necessarily cooperation because I would submit that even if you have no law regulating companies, you would still see business enterprise. So, again, the business enterprise is of course something separate from the corporation. ZOLLO: So, I actually agree with pretty much everything you said. I would add though that the logic of the business enterprise as creating value for the customer could be extended to the logic of creating value for all the actors that actually contribute to the existence of the business enterprise. There is no business enterprise without employees, without suppliers, and also without communities or the investors, of course, to the extent that capital is important. Communities have to give their license to operate and that provides social capital and provides natural capital, the land, the air, the water, and so on. So essentially, the way that I’d maybe extend what you just said is saying more generally that business enterprise is an organization that exists for the purpose of creating value for all the providers of financial, human, social and natural capital. So, all the various forms of capital that the enterprise has to use in order to exist and thrive. What do you think? FOSS: I was trying to get at the minimum definition of what a business enterprise is, and you absolutely need the customers here. You can have associations between people that are not commercial, but they will never be business enterprises, and it's creating value for customers or consumers in a market context that makes it a business enterprise, rather than just another organization. So, that's why I stress that. But of course I agree with you that there are multiple stakeholders. These stakeholders have opportunity costs and in order to contribute to the business enterprise they must at least have those opportunity cost covers. So in that sense we are in agreement, yes. ZOLLO: Right. So Nicolai, you’ve already introduced the distinction between the general notion of a business enterprise and a more specific form of enterprise which is called the corporation. Perhaps you can share with us what in your view is the role and reason for existence of the corporation, vis-a-vis the bigger, the rest. FOSS: Right. So, this is another super complicated issue obviously. So, I said that the basic logic of the business enterprise is that it creates value for customers and appropriates part of that value. But it is not strictly, logically speaking, the same as saying that it exists for this purpose, I think. I think that the business enterprise and the corporation primarily exists in order to serve the interests of those input suppliers who actually control it. And this sounds like Milton Friedman or Michael Jensen obviously, because we can easily make the leap to the owners of capital, they control the corporation, and so on. But I think it's a little bit more complex than that. So I take the view that you will typically associate with Henry Hansmann, that business enterprises, including the corporation, are cooperatives. So, you can have some firms that are owned by employees, work-controlled firms. You can have companies that are owned by input suppliers, like those input suppliers actually supply capital. You can have companies that are owned by consumers or customers. And what is the optimal form of ownership depends on the characteristics of the owners, I think, fundamentally. And what, in Hansmann’s view, makes a group of owners particularly suitable for being owners, has to do with homogenetive interests. So, for example, if workers own an enterprise, there may be a problem because they are owners and therefore they want to maximize profits, maximize the value of the company, but they also have interests as workers. They care about security, about pay, daily work conditions, and so on. So, here you may already have objectives that are in conflict. And when you have owners of financial capital owning the firm, the corporation, in this case, you have relative homogeneity of interests, which has all sorts of advantages, all sorts of transaction costs-related advantages. Because, for example, if something unanticipated happens and people need to negotiate, it's best to have those who have relatively homogeneous interests make the decisions in response to the change requiring adaptation. So I guess that would be my preliminary take on this. There's also another related issue which has to do with what you might call ownership competence. So I have some recent work with Peter Klein, and Les Aline (?) and Todd Zenger where we developed this notion of what does it mean to be a competent owner? And there is a case for saying that it's often, not always, obviously, but very often those who supply financial capital to the enterprise who actually are the competent owners, those who can exercise the best control over the company and its daily operations and also, of course, its long-term strategic developments. ZOLLO: That obviously has a lot of implication, what you just said, in terms of competence, clearly the question is quite broad, where are the key competences that are required at the organization. FOSS: Absolutely. ZOLLO: I was actually reflecting on what you just said. You know, the notion of the corporation as a cooperative, is obviously very much in line with my own thinking as well. But where you're taking that concept though, to essentially use the notion of homogeneity as a guiding principle to identify an appropriate solution for which owners should run, particularly the corporation, that I think requires a bit more consideration. The difference, in my view, between the corporation and the general notion of an enterprise is, first of all, that the corporation has a legal entity, has an identity that is being given by the government in order to achieve certain type of roles that that government or that community or social community might have in that particular moment, historical moment or geography, or context in general. Now, obviously, that changes a lot. Today, we have the United Nations, for example, that had led a multi-year effort to define the social goals in terms of sustainable development, which all the governments in the world and corporations have contributed to develop, as well as other parties. The question then becomes, is the corporation allowed to exist for the benefit of itself as an identity, or is that benefit a mean to an end, which is socially determined? FOSS: All right. Many, many things here. Can I respond? ZOLLO: Sure. FOSS: So, in a sense, you're changing the debate a little bit from stakeholder issues now to CSR issues. And, of course, they're related, though they’re not the same thing, I would say. First of all, the corporation doesn't exist for itself. It's key at least to the way I see things that it exists for the purpose of serving the interests of the group of input suppliers. ZOLLO: And we agree on that. FOSS: Okay. Then, the second thing is the CSR issues here. So you said the existence of the corporation and its objectives also reflect the surrounding society. Obviously, that is the case. The question is to what extent the corporation should internalize these things. ZOLLO: Exactly. FOSS: So, the way economists have typically looked at this is that here we're talking about things like externalities. So all these sustainability issues, they're fundamentally at the core of the externalities. And we're also talking about public good issues. And economists would typically say, “That's what we leave to the government.” And people like, I suppose people like Michael Jensen and I suppose Friedman, to a much smaller extent than most economists would say, “Let's also leave a little bit at least to the government.” But the key question here is the following: who can repair these externality and public goods problems at the smallest cost? So, I think you are jumping to the conclusion that corporations should repair externalities. This is what we mean by part of the CSR agenda. But is not always the case that corporations… ZOLLO: I agree. FOSS: It’s usually not the case I would say, that they can do this at lowest cost. ZOLLO: Well, there are two things I will say. First of all, obviously, I'm not taking the extreme position that corporations are the only ones who can repair social damages. That would be quite an extreme position certainly that is not reasonable, at least in my view. But there are some damages for sure for which the corporations are among the leading providers of solution. Environmental damage, for example, but also a number of forms of social damage that has been directly created by business activities. The more interesting question is whether to provide those solutions, we can rely on the homogeneity issue. And I agree with you, shareholders with some limitations, but they are more homogeneous than, say, suppliers or employees and so on, and certainly, more than a multi-stakeholder logical differ. Now, is that, however, a reasonable criterion when the problem precisely is how to create more value for all these providers of different forms of capital and to incorporate, take at least some responsibility for the eventual damages and you know, for communities’ wellbeing. That, I think, that issue of homogeneity versus, so there are advantages of homogeneity but there are also a lot of advantages from heterogeneity. FOSS: Yeah. There are many trade-offs here. So I do think that companies and their owners should try to repair what you call damages. I actually think that they should. And interestingly, if you look at the original essay by Friedman, the famous 1970 essay, which is sort of the bete noire of much of the CSR literature. Friedman is not against CSR. He is not against CSR. He's not against people who own companies doing things that are good for their communities through the companies. What he's against is managers doing this without the consent of the owners. So it’s what economists call an agency problem that he is really criticizing. So you're saying that there could be a problem here. If it's only the owners of financial capital, anonymous investors, for example, they're a very dispersed ownership. Perhaps the ownership is also geographically dispersed. Then, there may be a problem here with respect to, let's say, call it, repairing local damage. That’s your concern, isn’t it? ZOLLO: But also, the competence that you were mentioning before. I'm an owner. If I'm a shareholder of a large corporation, I can be a shareholder for a fraction of a second with trading programs. Does that make me a competent owner? I don’t think so. And then, on top of that, the solution to these complex problems might come from the heterogeneous engagement. An heterogeneous group of providers of different capitals that, yes, they have different interests, but they all share the interests of the well-being of the corporation. So that's where maybe the debate is still quite open. FOSS: I think it's quite open, and I think that a number of those people who are very often routinely, if you’ll pardon my expression, best by many proponents of CSR, like Friedman and Michael Jensen, actually recognize the kind of tradeoffs that you point to. ZOLLO: Yeah. FOSS: So, Jensen, for example, has this notion of enlightened value maximization, which basically, at some level, you have to take the interests of various stakeholders into account. ZOLLO: Well, Michael Jensen has also evolved to incorporate, also ethical issues in the decision making. And so there is a growing recognition, I think, of the boundaries, expanding boundaries of the corporation and also of the individual mindset, individual view of the role of the corporations within society. And again, Michael Jensen is certainly one of those who has evolved quite a lot in his way of thinking. So Nicolai, building on these considerations, how would you like to think about the possible governance solutions, precisely, to tackle these issues? How would you suggest us to think about it? FOSS: Well, I take that you, as you can probably guess from what I've said already, that there is a lot to be said for what you might call the traditional model of governance in a broad sense, that there really is a reason why it has survived for such a long time and why it's so influential in government. And these reasons have to do with efficiency, I suppose. It's true that we see a lot of experimentation with management models in terms of including empowering various stakeholders. We also see a lot of experimentation with the way the boundaries of the operation are structured. But all of this in a sense, it takes place within the framework of the established model. There are sometimes all these wild claims around the boss-less company, the wikified company, and so on. But you know, these are freaks in a sense in the big evolutionary picture, right? The dominant model still rules the roost. That said, however, it is clear, also based on what we have just talked about, that going back to the idea of enlightened value maximization, that you cannot maximize the long-term value of the company if you ignore or mistreat or disregard important stakeholders, obviously, or completely disregard anything to do with CSR. So, yeah, corporations can do something here, and there are plenty of examples. And you, of course, being the CSR expert as you are, you know that there are many, many examples of companies who managed to combine social purpose with very high profitability, such as LiCo, Tata Group, even in the financial industry, the Swedish Handelsbanken, for example, partly employee-owned actually, very pro-social purposes in the mission statements, very, very successful banking operation. If truth be told, I'm not sure we entirely understand why they can be successful balancing these seemingly, or apparently, not seemingly, conflicting objectives. But perhaps it’s got something to do with employee motivation. Employees like being in a company with a pro-social motivation. It spills over into their motivation. They themselves may become more pro-social in the workplace, which is good for knowledge, for learning, for innovation. And if this is the case then you would expect that there would be an incentive for companies to do these things. But I think it's extremely important to do it in an oblique way. You cannot at the same time have a very strongly pro-social mission and then at the same time say we exist because we seek to maximize shareholder value. You cannot. You can pursue the latter goal but you have to do it in an oblique manner, as John K would argue. So this may be part of the solution that these oblique ways of managing so the social purposes are reached and profitability as an indulgence outcome that these models actually spread. ZOLLO: I must say the question about the apparent inconsistency between social and economic goals I think can be easily overcome by considering not only motivation and innovation advantages in terms of engaging employees, but also, and perhaps even more powerfully, engaging customers, suppliers, and to some extent other governments and local communities and investors for all the various markets for which the firm operates, the labor market, financial markets, resource markets and product markets. You have this increasing recognition that to the extent companies open up and involve the various providers of these types of capital, there is a tit-for-tat, right? They also would provide ideas, knowledge, engagements, energy, good will, and that, obviously, is good for the longterm, not only survival, but actually the profitability of the organization. Now the question is whether the governance structure is really adequate today. I think that the experimentation that you were referring to is still a major requirement, particularly if we look at the future and the evolution. We really don’t know what is the appropriate governance structure precisely to achieve this opening and engagement. We don't know, and I agree with you, extreme forms of experimentation might not be appropriate, but appropriate forms of experimentations certainly are, in my view. FOSS: Sure. But this is, historically, this is how capitalism has developed. And our market societies. So again, from policy perspective I guess the issue is, is there any role for the state, for governments, for public decision makers in this process? Or should we just leave it to market forces, essentially? Well, this is another conversation that we can have. ZOLLO: You’re opening an entirely different… But I think that we had a chance to really exchange a lot of really important ideas, quite deep questions tackled. And obviously, it's only your and my perspectives. FOSS: Obviously. ZOLLO: And to that extent, we hope, whoever will have given us the good service to see this video will take his own or her own perspective on what we just said. So thank you very, very much Nicolai, for this discussion. FOSS: Well, thanks again for having me here. Thank you.
