by Fabio Accardi and Emiliano Di Carlo
The debate on corporate finalism, i.e. the purpose of existence of organisations, has always involved scholars, managers and, in general, a plurality of actors who are interested in economics and management issues. The reasons for this interest are deep and can be traced back to the crisis that the capitalist system is going through and which has made obsolete the theories focused on the sole ability of companies to create an economic surplus value in terms of margins between the resources used as raw materials/utilities, labor force and outputs in terms of products/services. The constant greater use and saturation of resources in environmental (raw materials/utilities) and social (workforce) terms and the progressive participation in consumption of larger segments of the population make the only parameter of the profitability of the individual production organisation unsustainable at the global community level.
For these reasons, since the middle of the last century we have witnessed a transition from a conception mainly focused on satisfying the desires of shareholders alone (shareholders theory) to a vision that sees organisations at the service of a plurality of stakeholders for whom profit is not the only relevant dimension (stakeholders theory).
In the debate between the proponents of the two theories, in recent years we have witnessed the emergence of an alternative vision that seeks to meet the needs that the significant changes we are witnessing require. We are referring to the vision that sees the primary interest of the firm (PIF) as a guiding principle that must be pursued separately from the specific one of its shareholders and stakeholders who have a duty (including a moral one) to have this interest pursued. This interest consists in satisfying the needs of customers/users through the production of useful goods and services, creating sustainable value for the company itself, its stakeholders, and its community. This approach, suggested by Di Carlo(1), has a multidimensional character as it requires that the decision-making process takes into account, simultaneously, the economic and sustainability aspects (social and environmental), counteracting those psychological phenomena that impoverish people’s choices that focus mainly on one dimension, be it economic or social. In this sense, combining the survival of the global context with that of the individual unit, it appears to be the most complete to be incorporated into the corporate mission and therefore shared by all the actors: ownership, governance bodies, management, and of course the internal assurance functions. Therefore, after having explored this vision in terms of implications and recent developments, we will try to highlight how important it is to properly frame the issues related to governance and risk control, emphasising the important role that the actors of the governance of internal controls can play in its pursuit.
The theory of PIF: from the firm as an instrument to the firm as a real person with an interest in contributing to the common good
In the context of theories on corporate finalism, the theory of the company’s primary interest stands as a third way to the shareholder vs stakeholder dilemma, placing itself in the context of theories that consider the company as a real entity (or institution) with its own interest (Di Carlo, 2021) (2).
In particular, following the institutionalist approach, typical of the Italian economic-business doctrine, and of the theory of the legal entity – proposed, among other things, by the US legal doctrine in the field of commercial law – the PIF considers the company as an entity with its own interest, distinct from that of all its stakeholders, where economics and sociality are positioned on the same level, guiding, from time to time, in the choice of stakeholders to be privileged and/or possibly sacrificed in the value creation process.
The company itself becomes a responsible stakeholder with its own interest – expressed by a competent, autonomous and independent governance – in durability, which can simultaneously take into account the economic and social dimensions. No stakeholder is, in fact, the bearer of an interest that is able to take into account, autonomously and independently, all the dimensions to be taken into account in order to ensure that the company can survive and develop in a sustainable way, i.e. contributing to the common good. It is precisely this that suggests considering the company as a real stakeholder, with a multidimensional interest, expressed precisely by governance, which is able to direct towards this asset.
The idea of the company as a stakeholder, bearer of a superior interest related to the good of the community in which it lives and operates, allows us to understand the importance of creating value not only for its primary and secondary stakeholders, but also for the company itself; only in this way, in fact, can it contribute to the well-being of the wider community.
The primary interest of the firm answers the question of why the company exists, i.e. what its raison d’être is, its role in the economy, as discussed extensively above. The company is considered as a real person who has an interest in “serving the present and future common good”. The PIF includes two interdependent elements: the scope (commonly defined as the purpose) of “satisfying the needs (even unexpressed) of customers/users through the production of useful goods and services”, i.e. why the company exists, why it produces certain goods and services; A condition of survival and development, summed up with the term “sustainable value creation”, which considers the company as a dynamic system capable of lasting, tending to serve the common good in a lasting way. In the PIF, cost-effectiveness and sociality, business and compliance, are positioned on the same level, assuming equal importance. This mitigates the risk of ideologisation of one or the other, as recommended by many in the field of economic-business studies.
The achievement of the optimal balance by the virtuous company: the responsibilities of governance
The virtuous company, i.e. the company that takes care of itself and others and serves the common good, is the one that achieves the optimal overall balance. This equilibrium is pursued when, given certain internal and external forces, it is not possible to improve one of the individual equilibrium conditions (economic, financial, monetary and interest) without worsening, in the long term, the condition of survival and development (quantitative and/or qualitative) of the company. It can also be said that the overall equilibrium is a system of particular equilibria (of equations), i.e. a set of four equilibria, interrelated with each other, which the solution of the system (survival and sustainable development of the firm in the long term) must satisfy simultaneously. It is precisely the presence of internal and external forces – which express interests of various kinds – that requires the company to be conducted with the guiding principle of the PIFas its compass which, by promoting its continuity over time, compatibly with the well-being of stakeholders and the community, allows from time to time to choose which of these forces to welcome and which, on the other hand, neutralise or eliminate.
In order to assign people a moral responsibility towards the PIF, it is essential not only that they have a clear understanding of what PIF is and how to pursue it, but that they are also able to assess how their actions (or inactions) affect the economic, equity, monetary and interest balances of the company.
The shift from traditional theories (shareholders and stakeholders) to PIF therefore requires two significant cultural shifts: companies must be recognised as real persons (institutions) with legal and moral responsibilities for their actions; all stakeholders, including companies, must be considered not only as stakeholders, but also as bearers of responsibility, and must be guided by virtue ethics from stakeholders to responsible holders.
The concept of responsible holders places emphasis not only on rights, as typical of stakeholder theory, but also on duties. This aspect is crucial because while in the concept of “stakeholder” there is the risk that the rights (of stakeholders) will prevail, leading to unintended or unforeseen consequences, in the concept of “responsible holder” both rights and duties (not only contractual but also moral) are considered with equal importance and weight. This balanced approach implies a broader and more comprehensive assumption of responsibility, which can help to ensure more informed and coherent actions, promoting more sustainable outcomes, both economically and socially. The responsible holder does not just ask himself what the company can do for him, but also what he can do for the company. This aspect is particularly important in the identification and management of risks.
Although stakeholder theory is gaining increasing recognition in both the academic and professional worlds, numerous studies highlight the importance of limiting the demands of those stakeholders who, sometimes without realising it, aspire to a reward (not only financial) greater than their contribution, or boast demands that lead to even high degrees of moral blame(3). Following the logic of virtue ethics, at the basis of PIF, business ethics is evaluated, among other things, not so much with the results pursued as with the actions that the company and people put in place to pursue the PIF, i.e. to reduce the gap between the interest that it currently expresses and the primary interest that legitimises it towards the community.
The responsibility of governance, and more generally of leadership, is to create the conditions of corporate virtuosity to allow people to best express their virtues, i.e. to mitigate vicious behaviour.
PIF and risk and control governance (RCG)
Having affirmed the relevance of corporate governance for the purposes of the PIF, it follows that Risk and Control Governance (RCG), which is the prerequisite for its effective implementation, assumes a crucial role. So let’s ask ourselves in what terms the RCG should be structured for these purposes and what role can the internal assurance functions play(4). To illustrate the first aspect, it may be useful to resort to a quote from the philosopher Vito Mancuso(5) who expresses how ethos means first and foremost “dwelling” and highlights how our first home is the body, which is inhabited by a logic of relational harmony between the various parts. This metaphor can also be extended to organisations which, like living organisms, should be equipped with adequate immune systems. These systems consist of a set of organs that have the task of defending the body from agents that can cause infections.
Declined in corporate terms, we could consider these agents as risks while the bodies consider them similar to the internal actors who oversee the control and compliance system, and specifically the internal assurance functions. In this sense, the importance of the role of guarantee that these functions play so that corporate risks are adequately monitored at the level of design but also in terms of effective behaviour is evident. This thesis is reinforced by the consideration that the role of assurance historically delegated to “external” controls has proved to be insufficient in the past, since it has been the external actors of the controls themselves responsible, in some cases, for serious deficiencies and non-compliances that have generated damage and losses at the system level.
It should be noted that further distortions have arisen in cases where the entities to which controls are entrusted have not followed risk-oriented logics but have weighed down their structures by increasing onerous and useless bureaucratic controls. Increasing the weight of internal controls aimed at preventing and mitigating risks is a precondition for all actors to be able to orient themselves towards truly virtuous behaviour and not just apparent and façade. How so? Here we can recall what has been recalled as the backbone of the PIF: the concept well expressed by S. Zamagni(6) of “taking care”, well highlighted in the previous paragraph. Similarly to the concept of compassion, which has recently been the subject of in-depth study in managerial disciplines(7), this approach fosters a dialogue between people based on the ability to interpenetrate the other, which does not mean mere uncritical acceptance or pity but the consolidation of a sense of relationship and commonality with all the actors with whom one interacts. In this sense, it works towards the creation of virtuous relationships between organisations and people, encouraging dialogue and the sharing of common visions in terms of shared responsibilities and interests, as the pursuit of the PIF requires. This ability to dialogue with all stakeholders certainly represents the main future challenge that the actors in the governance of internal controls in organisations will have to face. They also need to evolve from internal stakeholders to responsible holders as “business champions” in acting ethically and virtuously.
Fabio Accardi is a Professor of Risk, Governance, Compliance & Internal Auditing – Chartered Accountant and Member of Supervisory Bodies. He regularly writes for the Italian website of the Risk & Compliance Platform Europe.
Emiliano Di Carlo is a Full Professor of Business Administration at the University of Rome “Tor Vergata”.
(*1) Di Carlo E. ( 2017) “Interesse Primario dell’ Azienda come Principio-Guida e Bene Comune” – G. Giappichelli Editore
(*2) Di Carlo E. ( 2021) Il bene dell’azienda come terza via al dilemma shareholder vs stakeholder, Rivista Italiana di Ragioneria e di Economia Aziendale, (9-10-11-12), pp. 278-295
(*3) Kaptein, M. (2023). Stakeholder Ethics: Defining The Ethical Responsibilities of Stakeholders to and for Companies. Available at SSRN 4659253
(*4) Accardi F. ( 2024 ) “Governo e Controllo dei Rischi .Manuale per scelte consapevoli e sostenibili – Metodologia, Casi e Applicazioni”. Franco Angeli Editore
(*5) Mancuso V. ( 2019) “La forza di essere migliori”. Garzanti Editore
(*6) Zamagni S. ( 2019) ”Responsabili,come civilizzare il mercato”. Ed.Il Mulino
(*7) Seppala E. (2015)” Why Compassion Is a Better Managerial Tactic than Toughness” Harvard Business Review
