Primary interest of the firm

In literature, as well as in both the corporate governance code and code of ethics, the terms “interest of the firm (or company)”, “interest of the company”, “best interest of the firm”, “self-interest of the firm” are often used but rarely defined. Furthermore, even when defined, scholars and practitioners give to those terms different contents and meanings, that may be grouped into three main categories depending on the theory used: shareholder theory, stakeholder theory and entity theory. These theories find their basis on the notion (or nature) of the firm (Chassagnon, 2011).

While for shareholder theory and stakeholder theory the firm is an artificial person (or legal fiction), a nexus of contracts (Coase 1937; Jensen and Meckling 1976), according to the entity theory the firm is a real person, even though it needs the law to be conceived (Mark 1987), with its own interest that is generally represented by its survival and growth. According to the shareholder theory, the firm is an instrument owned by the shareholders to maximize the return on their investments (Friedman 1970; Jensen and Meckling 1976). Consequently, the interest of the shareholders is the “interest” of the firm.

Unlike the shareholder theory, stakeholder theory (Freeman et al. 1984) draws attention to the need to balance the value creation for shareholders with the value creation for all the other stakeholders (e.g. employees, customers, suppliers, financiers). The interest of the firm is then considered as a sum of stakeholder interests. Some scholars provide evidence that stakeholders of the firm generally have a common interest in ensuring the success of the enterprise (Heath and Norman 2004; Kochan and Rubinstein 2000). As pointed out by Hill and Jones ‘Obviously, the claims of different groups may conflict (e.g., stockholder demands for greater dividends conflict with employee demands for higher wages). However, on a more general level, each group can be seen as having a stake in the continued existence of the firm’ (1992, p. 145). ‘This common interest does not necessarily generate a natural harmony of individual interests. Individuals can often derive personal advantage from actions that are contrary to the common interest; in other words, they can “free ride.” (Heath and Norman 2004, p. 252). It could happen that the interest of some stakeholders goes against the interest of the firm, for example when customers and employees collude, going against the interest of the firm. ‘Bartenders may double pour drinks at no extra charge to the customer in an effort to garner larger tips (…) as a form of pay-for-performance, tipping encourages employees to devote energy to tasks that they perceive will get them greater returns’ (Lynn et al. 2011, p. 1888).

Unlike the settings that move between shareholder and stakeholder theory, the real entity theory considers the firm as a separate entity from all its stakeholders (Allen 1992; Arthur 1987; Chassagnon and Hollandts 2014; Lan and Heracleous 2010). Being a real person, the firm has its own interest, its own rights and duties (Phillips 1993). According to this approach the firm is not owned by the shareholders (Blair and Stout 2001; Bower and Paine 2017; Lan and Heracleous 2010) and its interest is more than just a sum of the interests of its stakeholders.

3. Theoretical foundation of the primary interest of the firm as a real entity

Garriga and Melé (2004 pp. 65-66) point out that the theories on corporate social responsibility are focused on four main areas: 1) meeting objectives that produce long-term profits; 2) using business power in a responsible way; 3) integrating social demands and; 4) contributing to a good society by doing what is ethically correct. On the basis of this classification, the two scholars observe that ‘further research could analyze these four dimensions and their connection in the most relevant theories and consider their contributions and limitations. What seems more challenging, however, is to develop a new theory, which would overcome these limitations. This would require an accurate knowledge of reality and a sound ethical foundation’ (Garriga and Melé 2004, p. 66).

We assume that the starting point of the new theory should be the assumption that the firm is a separate real entity with its own interest and responsibilities to achieve all these dimensions. Indeed, a theory that seeks to address only the interest of a specific group of stakeholders (e.g. shareholders or employees) or a stakeholder group (e.g. both shareholders and employees) can only partially succeed in achieving all those ambitious goals, since any stakeholder (or stakeholder group) is normally oriented only to some of these dimensions (e.g. shareholders to the profitability of the firm, employees to the continuity of the firm regardless the effect on society). Considering the firm as a real entity implies giving it social responsibilities to non-shareholders as employees or suppliers (Chassagnon 2011).

Our purpose derives from the intersection of three theories: the theory of equilibrium (from the Italian doctrine Economia Aziendale), stakeholder theory and common good theory (from the Social Doctrine of the Church) (Table 1).

The intersection between stakeholder theory and common good theory was proposed by Argandoña (1998) who finds in the theory of the common good a theoretical foundation for the normative approach of the stakeholder theory.

According to Argandoña the firm participates to the common good, ‘producing useful goods and services, and producing them efficiently (so as to create wealth) and sustainably, so as to guarantee the conditions in which each participant receives from the company what he or she can reasonably expect’ (1998, p. 1097). However, the author does not specify how to achieve the right compromise between continuity and the social function of the firm. In order to fill that gap, we add the equilibrium theory (Amaduzzi 1948) to the stakeholder theory and common good theory.

The intersection among these three theories includes the two elements of what we call “primary interest of the firm”: 1) the objective of the firm (i.e. to satisfy customers’ needs through the production of useful goods and services); and 2) a condition for the sustainable survival and growth of the firm (i.e. ensuring a sustainable value creation in the short-, medium- and long-term). Within that condition there are two sub-conditions: the first is connected to the survival and growth of the firm (i.e. the value creation) while the second assures that the firm survives and grows in a sustainability way.

The three theories, individually, present all the advantages and limitations regarding the conditions for the survival and growth of the firm, as analyzed in the following sections. However, the limitations of one or more theories are compensated by the advantages of the others. The intersection finds a simultaneous equilibrium among various dimensions of responsibilities of the firm.

The satisfaction of needs through the production of useful goods and services is the basis of the business, or purpose of economic activity, i.e. a prerequisite for value creation. If an entity does not meet the needs it cannot create value for itself or for its stakeholders.

Moreover, the concept of “interest” with regard to the firm also leads to considering the duties that the stakeholders have in satisfying this common interest. The company is instrumental in satisfying the interests of its stakeholders, and the latter are instrumental to the interests of the former. The company, like any individual, therefore has not only duties but also rights.

Indeed, the company’s interest has been qualified as a ‘primary’ one in order to advocate its relevance compared to the particular (and temporary) interests of its stakeholders.

4. The Economia Aziendale and the theory of equilibrium

The Economia Aziendale (EA) is an Italian doctrine founded in 1927 by Gino Zappa (1927) who focuses on the ‘azienda’ as a coherent unity (i.e. inseparability) of ‘economic operations’, which characterizes institutions. Zappa (1956) defines the azienda as an ‘economic institution intended to last for an indefinite length of time and that, with the aim of meeting human needs, manages the production, procurement or consumption of resources in continuous coordination’ (p. 37, our translation), and the EA as a unitary science that studies the ‘existence conditions and life manifestations of the azienda’ (Zappa 1927).

According to distinguished scholars of Italian EA, the general purpose of all aziende is to satisfy human needs, through the production of useful goods and services (Amaduzzi 1978, p. 19; Cavalieri 1999, p. 118; Ferrero 1968, pp. 3-4; Masini, 1970; Onida 1971, p. 3; SIDREA 2009; Zappa 1956, p. 37). In the framework of the primary interest of the firm, the needs satisfaction is the first element, i.e. the objective of the firm, its raison d’être.

The aziende can then be classified as: business entities (or firms), public administrations and non-profit organizations (Cavalieri 2010).

The concept of institution allows distinguishing the particular interests of the stakeholders from the interests of the azienda. The organization durability ‘goes beyond the permanence of people constituting, in a specific moment, the organization itself’ (Airoldi et al. 1994, p. 163, our translation). Thus, ‘human beings could not defeat the course of time while aziende can be immortal’ (Anselmi 2014, p. 39, our translation).

The EA considers the firm as a ‘cell’ of the economic system that contributes to society well-being. ‘It is not possible to have, in fact, the development of the national economy without the development of the individual cells, the aziende, where the national wealth is concretely produced’ (Cassandro 1969, our translation). Ferrero points out that the firm is a ‘durable source of common welfare present and future’ (1968, p. 63, our translation). Onida observes that the company does not follow solely economic purposes, and its life has not only economic problems, since ‘as social institution, the company has necessary to contribute to the human being, to promote the development of his personality and to better achieve the purposes of human life associated to it, which they are essentially of ethical nature’ (1971, p. 44, our translation).

More recently, some scholars of the Economia Aziendale studied the link between that doctrine and the stakeholder theory (Signori and Rusconi 2009; Rusconi, 2018), and the principle of the common good of the social doctrine of the Church (Caldarelli et al. 2011; Costa and Ramus 2012).

The theory of equilibrium was proposed by Aldo Amaduzzi (1948), one of the Zappa’s pupils. Amaduzzi gives the conditions to be achieved in order to ensure the continuity and growth of business entities (one of the three types of aziende). In particular, the economic equilibrium, both in the long- and short-term, is considered, in a mathematical system, together with the financial and monetary equilibriums. The work of Amaduzzi has been pioneering in having underlined the survival conditions of the firm in the long-term, giving an answer to how and why the EA can contribute to the debate on the objective of the firm (Cavalieri 2010).

5. The Stakeholder Theory

Stakeholders are any group or individual who may affect or be affected by the obtainment of the company’s goals (Freeman 1984, p. 25). According to the stakeholder theory there is a need to take into consideration the expectations of all the stakeholders of the firm (not only shareholders). The reason behind stakeholder theory derives from two approaches: normative and instrumental (Donaldson and Preston 1995). The normative approach recognizes the existence of an ethical dimension (Phillips et al. 2003, p. 481) in addition to economic and legal ones – the moral duty of those who govern the company to consider the rights of all those involved. According to the instrumental approach, managers must pay attention to the other stakeholders because that is the best way to create value for the shareholders (Jensen 2001; Jones 1995; Plender 1997).

6. The Common Good Theory

The common good is the set of a society’s life conditions that promote the well-being and human progress of all citizens (Arjoon 2000; Martini 1993, p. 35), i.e. their cultural, moral and economic flourishing and growth. The concept of common good appears when the social human dimension is considered (Melé 2009, p. 235). While the shareholder approach and the instrumental stakeholder approach consider the man as a mere means to an economic end, the common good approach considers the man as an end in itself. It follows that his/her happiness and perfection (or flourishing) constitute the objective of the activity that he/she carries out.

The result of the application of the concept of common good to business entities (Argandoña 1998; Melé 2002, 2009; Sison and Fontrodona 2011; 2012; 2013) is to consider individuals as members of the same corporate community, who support the recognition and promotion of a common interest, together with the pursuit of their particular interests.

Stakeholders must see in their contribution to the firm the possibility to better meet their needs, while the firm should be interested in meeting stakeholders’ needs in order to improve its survival and growth. Argandoña observes that ‘the common good has to do with the creation of these conditions that will allow for those involved in the business to achieve his personal objective. It can be said that there is no conflict between the common and the personal good (...) The common good is not the sum of the individual goals of members: first, because these individual targets include many more things than the company can offer; and secondly, because the company facilitates the achievement of personal goals indirectly, through the achievement of its objectives’ (1998, p. 1097).

Individuals have needs (or wishes) that are satisfied with certain goods. For example, the remuneration that one receives for his/her job is a good that allows him/her to satisfy certain needs through the purchase of goods and services. The work, in turn, produces other goods for the individual, such as the possibility to perform an interesting job, to establish relationships with other people, to develop him/herself. Despite these goods being able to satisfy needs and desires, usually in the economy some of them are not considered as such, although they motivate the individual and contribute to the common good. Argandoña (2009, pp. 3-4) distinguishes three categories of goods: extrinsic goods (both physical goods, such as remuneration, and intangible goods, such as the satisfaction from recognition by superiors); intrinsic goods (e.g. the satisfaction for a well done job, the acquisition of knowledge, the development of certain capacities, interaction with other people); and transcendent goods (e.g. to satisfy the needs of customers, contribute to the success of the employees, and ensure profit to shareholders and the continuity and growth of the firm). This classification of goods becomes crucial since it gives importance not only to extrinsic motivations but also to the internal ones (Osterloh and Frey 2004), and thus not only on the results but also on the actions performed to enable those results. According to Arjoon et al. ‘Unethical practices occur when there is a disorder between internal and external goods (i.e., between means and ends). An exclusive focus on goods of efficiency can distort one’s perception and judgment through blind spots and moral slippages, which make it difficult to recognize ethical issues and to determine what is the right thing to do’ (2018, p. 150).

7. The intersections among the three theories

The three following intersections represented in Table 1 (§ 3) are now analyzed: a) Equilibrium theory and common good theory; b) Equilibrium theory and stakeholder theory; c) Common good theory and stakeholder theory. Thanks to those intersections, the analyzed limitations of one or more theories are compensated by the advantages of the others.

Equilibrium theory and common good theory

This intersection highlights the instrumentality of the theory of common good to firm continuity, by examining the effects that the dissemination of the common good culture and virtuousness generate on short- and long-term equilibrium conditions (i.e. economic, financial and monetary equilibriums). What is the effect of non-economic incentives (or intrinsic and transcendent motivations) on the equilibrium conditions? In addition, the effect on the equilibrium conditions can be studied by observing the obligations of the stakeholders to participate for the common good of the firm. Stakeholders must contribute to the common good so that the company can survive and grow. The rights/duties approach recalls the principles of reciprocity, fairness, and loyalty in business and stakeholder relationships. Cooperating in order to achieve a shared objective, stimulates identification with the company (Akerlof and Kranton 2005; Stryker and Burke 2000).

Equilibrium theory and stakeholder theory

This intersection refers to the instrumentalities of stakeholder theory to the firm’s continuity, which implies identifying the firm’s stakeholders and their interests, defining the degree of consideration to be attributed to each category based on their characteristics, and defining resources to be allocated in response to their expectations. In other terms, it is suggested to examine how the stakeholder management affects the economic, financial, monetary and interest equilibriums, in the short and long-term.

The intersections between the equilibrium theory and both stakeholder theory and common good theory derive from the revision of the Amaduzzian theory of equilibrium by Cavalieri (2010) who, entering into the merit of how economic activity is conducted, adds to the three equilibriums of Amaduzzi the overall strategic equilibrium, understood as ‘a simultaneous balance between the various social and market participants’ (Cavalieri 2010, p. 28). Although not explicitly referring to the theories of stakeholders and common good, the overall strategic balance, investing ‘both the firm’s relations with the environment (markets, civil society), as well as internal relationships, and orienting them towards the logic of a relational type’ (Cavalieri 2010, p. 30, our translation), seems to take into account the essential elements of both theories.

Common good theory and stakeholder theory: the equilibrium of interests

That intersection, on which the equilibrium of interests is based (i.e. the fourth equilibrium included in the primary interest of the firm, see Table 3), refers to the study of Argandoña (1998) which finds in the theory of the common good a theoretical foundation for the stakeholder theory. He argues that reflecting on the concept of common good and applying it to the stakeholder theory can help to better understand not only this latter theory but also the common good (Argandoña 1998, p. 1094). If the orientation towards the common good is accepted ‘it becomes clear that there will always be conflict, but not between the common good of the firm (properly understood) and the individual good (again, properly understood) of those that have a part in it. If there is conflict, it will be between the particular interests of one person or group and those of another; between particular interests and a misunderstood common good’ (Argandoña 1998, pp. 1097-1098).

The intersection of the theory of the common good with stakeholder theory highlights the normative approach of the latter, which recognizes the existence of an ethical dimension (Phillips et al. 2003, p. 481), a moral duty to respect the rights of the stakeholders.

The equilibrium of interests is intended as a balance between the interest of the firm (survive and prosper) and the interests of its stakeholders. This equilibrium is achieved when the rewards, not only monetary (e.g. non-material extrinsic goods, intrinsic and transcendent goods), received by stakeholders are aligned to the contributions (including their virtuousness) they provide to the firm. The equilibrium of interests can therefore be analyzed on at least two levels: the first is the balance between the interests of the firm and those of capital and labour; the second level considers all the other stakeholders, as well as community and environment.

The equilibrium of interest can be measured, even if partially, through non-financial indicators (e.g. customers’ or employees’ satisfaction). These measures are sometimes considered to be leading indicators of future financial performance (Jensen and Berg 2012; Yongvanich and Guthrie 2006). The equilibrium of interests is a precondition for the economic, financial and monetary equilibriums (§ 4.2), and it is closely connected to the sustainability of the economic equilibrium from both a social and environmental point of view. It follows that the equilibrium of interests is the outcome (positive and negative) that the business has on people and the environment, and therefore is closely connected to the business model adopted by the firm (Di Carlo, 2017) and by its virtuousness. In this regard, Cavalieri points out that ‘the distribution of the value among all the persons involved in the production process does not take place after the value has been created, but it is implicit in the way the value is created’ (2010, p. 26, our translation).

8. The overall equilibrium and the primary interest of the firm

The intersection among equilibrium theory, common good theory and stakeholder theory provides the primary interest of the firm, supporting the so-called integration thesis (Agle et al. 2008; Garriga and Melé 2004), or reconciliation thesis (Gibson 2000, p. 246), which sees no contrast between instrumental and normative ethical behaviours, since the instrumental approach does not refer to the interests of a single stakeholder category (e.g. shareholders) or of a group of stakeholders (e.g. shareholders and employees), but to the interest of a company to its continuity, a common good on which everyone should converge. In other words, not only ‘good ethics is good business’, but also ‘good business (for the firm) is good ethics (for all stakeholders and community)’, in the sense that really caring about stakeholders means conducting the business in a profitable way.

The primary interest marks the boundary between physiology and pathology in following the stakeholder and/or the common good approach. In particular, the satisfaction of stakeholders’ needs (material and non-material) can be guaranteed as long as it has positive effects on (or at least does not worsen) long-term equilibrium conditions. While in some periods, or in some contexts, management may be able to meet the interests of all stakeholders and to spread common good, in others it may not be able to do so, given the risk of compromising the survival of the company. Meeting the current interest of stakeholders by compromising a firm’s continuity is not ethical.

According to the primary interest model, the overall equilibrium needs to achieve simultaneously: the economic, financial, monetary and interest equilibriums.