Redefining Business Purpose

Will Leaders Do Good? Will Shareholders Let Them?

If you’ve read the book “Sapiens,” you’ve learned that we humans help shape the context of the world we live in. Yes, there are parts of our world governed by nature and science (e.g., physics, mathematics, gravity, the solar system). But there are many constructs we invent and agree upon to make our world function. Just consider the different types of government that exist in the world— democracy, socialism, communism. Simply different constructs.

It’s similar for business, yet one construct has reigned for decades. We can thank economist Milton Friedman for the current unyielding focus on shareholder value. Before his doctrine took hold, in the early to mid-1900’s, business had more purpose, one beyond the bottom line. One that took employees and society into consideration, one that viewed the corporation as being part of an ecosystem that needed to find symbiosis with other stakeholders.

For more than a decade, there’s been growing interest in managing businesses to deliver more than shareholder value. Companies like Clif Bar and Patagonia took the lead in managing with a new rule book, albeit remaining private to avoid shareholders altogether. Then came the champions of B-Corps, vanguards further reshaping the business paradigm. And consider LTSE founded by Eric Ries, the author of “The Lean Startup,” which is creating the Long-Term Stock Exchange, one established for companies seeking to manage with a longer outlook, not a focus on short-term profits.

Mainstream companies are now starting to catch up. This past week, the Business Roundtable, a body of top corporate CEO’s, articulated a new business purpose, one that considers society and multiple stakeholders, not just shareholders. They acknowledged that in doing so they were aligning with how leaders are already shifting and currently managing their businesses.

Is that true, and will this new articulated purpose be enough to drive change? Many are suggesting the action is just a shell game. While on vacation one year, I tried to argue with a finance professor about the need to change what businesses measure, because what we measure is what gets rewarded. He, probably rightly, educated me that nothing would really change unless it’s part of our legislative system, like corporate tax law. That would demand change; a construct alone wouldn’t have teeth. That’s what this article from The Atlantic suggests about this Business Roundtable declaration. It won’t be enough.

Another criticism of the Business Roundtable announcement is that it is driven by consumer and social demand. That it isn’t what business leaders really want to do, nor will shareholders let them get away with it. They are taking this action simply because in today’s world it is good business. While that might be the case, is it any less powerful? Shouldn’t businesses be listening to their consumers and seeking to meet their needs and desires?

In this article by Steve Denning, in which he was criticizing Milton Friedman’s doctrine, he wrote:

“In 1973, Peter Drucker made a sustained argument against shareholder value in his classic book, Management. In his view, ‘There is only one valid definition of business purpose: to create a customer. . . . It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. . . . The customer is the foundation of a business and keeps it in existence.’”

Exactly. And, he goes on to say:

“In effect, shareholder value is obsolete. What we are seeing is a paradigm shift in management, in the strict sense laid down by Thomas Kuhn: a different mental model of how the world works.”

Precisely. A new mental model, a new construct.

It’s time. This new construct has yet to be broadly integrated into businesses. It’s easy enough to say that a company is focused on multiple stakeholders and has a focus on purpose. It’s hard to actually implement and live those philosophies. So, time will tell if the CEO’s who champion this position will make progress and get the support from shareholders to make this new construct a reality. But the first step with any problem is to declare it, bring it out into the open, and set a vision for a new possibility. We’ll accept this as a start towards better progress.

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