The business of business is …

20/04/2011 § 3 Comments

“It is in exchanging the gifts of the earth that you shall find abundance and be satisfied. Yet unless the exchange be in love and kindly justice it will but lead some to greed and others to hunger”. Kahlil Gibran.

Following on from my previous post on emptiness, I took a break from posting a blog entry last week, while on a family holiday in Germany, staying with Dasha’s parents. I haven’t done too much work while away but I did have a phone call with someone that got me thinking.

The question was to do with the common practice in business to seek to justify any decision on the basis of a cost/benefit analysis. “If it doesn’t make sufficient profit,” they say, “we won’t do it.” This often seems a massive obstacle to the realisation of truly sustainable business, since it excludes so much that is important in life.

To me it is closely related to the whole purpose of being in business in the first place. When people say that the purpose of a business is to make money, it is the same as saying that a business has no purpose.  Making money is what you say you do when you don’t know why you are doing what you are doing.

Yet there is nothing wrong with making money. And indeed if you pay no attention at all to whether your business makes money or not, you are sooner or later likely to run out of it and go out of business.

Maybe we need to distinguish between making a business case for something i.e. justifying the cost of something to a business, versus prioritising shareholder value. Whatever business you work for (an Oxfam shop, the Eden Project, BP or Tescos) decisions need to be made about how you allocate resources. When running a business, there will always be costs that don’t immediately contribute to bringing in income, but that nevertheless contribute to strengthening the business in some way. The trick as a business person is to differentiate between those costs which don’t strengthen the business (a lot of sponsorship deals fall into this category, for example) and those that do. Even business philanthropy must contribute to the business as a whole, otherwise the business shouldn’t be doing it.

It is a surprisingly small step for most business people to go from “Everything must have a business case” to “The purpose of a business is to maximise shareholder value”. A small step but a massive one.

It is such a small step that it happens almost by accident. I believe nearly all businesses start with some meaningful purpose – it takes a lot of energy to start a business and that energy often comes from doing something that has meaning. Merck the drugs company for example was founded with the aim of healing the sick. As the business grows, new people join and the message gets simplified – staff are told to focus on serving customers, managing resources and making profit. Gradually the original purpose gets lost. Rather than have no meaning (without any meaning, people know intuitively the business would die) people adopt a meaning – pursue shareholder value.  This seems logical because shareholders sit at the top of the corporate hierarchy – they can fire the board, the board can fire the senior managers, the senior managers can fire the junior managers and so on. The remorseless logic of the limited company structure encourages staff to focus on shareholder value above everything else.

At the same time the step is so large that it can completely distort the culture and behaviour of the business, allowing people within the business to justify all sorts of wicked behaviour in service to shareholders, rather than having to justify how it serves any more complex purpose. Drug companies such as Merck now seem far more interested in pushing drugs than healing the sick.

I am fascinated with social enterprises (what I call business with a purpose) because they are consciously seeking to hold onto an inspiring and meaningful purpose while they must continue to make a business case for everything they do.  This involves weighing up monetary and non-monetary matters or, as someone put it to me once, mixing “value” with “values”.

Actually we make these sort of decisions every day in our private lives – where do I go on holiday, can I afford that book, that car, that flat, and so on. By the way, my theory is that making such decisions well requires healthy intuition, which women are in general better at than men.

Before the conversation with my friend, I hadn’t really thought about this before. Never having run my own business, I have been able to stand at one side and be critical of those who emphasize profit in their daily business activities, viewing them as no better than Scrooge or Shylock. Yet I see more clearly now that there is absolutely nothing wrong with making every day business decisions about how to spend your money and other resources in an efficient way. We could do with a lot more of it in our public services. The problem comes when this starts to dominate the conversations at work, to the extent that people forget what they have come to work for.

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§ 3 Responses to The business of business is …

  • Finn Jackson says:

    If the only purpose of a business was “to make money” then the rational thing to do would be to sell the business and invest the money raised in a portfolio of stocks, shares, and other investments that made a greater return, with less cost.

    Business owners (and directors) do not do this, because there is another purpose as well as making the most money.

    Businesses exist for the service of people, not the other way around.

    The purpose of a business is to satisfy the needs of three groups of people: customers, employees/suppliers, and lenders/investors.

    The opportunity to build a successful/sustainable business lies in finding ways to build an organisation (and a set of contracts) that lies somewhere in the overlap between these three different sets of needs.

    The purpose of a business is to make money, by using resources, to satisfy a customer need — today, and in the future. (Management directs the first three activities. Leadership directs the last two.)

    If we find it difficult to do this, because “shareholders sit at the top of the corporate hierarchy” then it is because lawyers (sorry) have created a structure that does not match the reality of the activities needed to create a successful, sustainable organisation, or because of a deliberate/unconscious choice to place the interests of one set of people above the interests of another.

    This is the same as what happens with the current First-Past-The-Post voting system. “Because there are more people voting for this candidate than any other, none of the views of the people who voted for the other candidates matter.” The views of (usually) a minority group in the constituency are taken to outweigh the views of all the others.
    I believe a better way, in politics and in business is to find policies, and actions that at a minimum have the support of at least half the population.

    • Thanks Finn,

      I agree with a lot of what you say. I am struggling with the statement “the purpose of a business is to satisfy the needs of three groups of people: customers, employees/suppliers, and lenders/investors.” Is this an ideal scenario – an attempt to state what should be, or are you saying this is what is? If the former, I find it a bit constraining (for example what’s wrong with serving needs of customers and suppliers, and meeting the investors’ needs not as a purpose but as a necessary part of the equation – if that is you need lenders or investors at all). If the latter, that’s certainly not my experience.

      As for blaming lawyers, I don’t disagree but, like policitians, I believe we get the lawyers we deserve…..

      Keep the comments coming please – definitely makes the blogging experience a richer one.

      • Finn Jackson says:

        Hi,
        You wrote, “I am struggling with the statement “the purpose of a business is to satisfy the needs of three groups of people.”

        My comment came from two places.

        One was “The Escher Cycle”, which says that a successful business is something that “makes money, by using resources, to satisfy customer needs (today and in the future).”

        To create a successful business, all we have to do is set up a system that makes money, by using resources, to satisfy customer needs.

        Take away any one of these three ‘legs’ and the stool collapses.

        So, the ‘Purpose’ of the business is to achieve all three. And that means finding the best way to satisfy the needs of the three groups of people involved in those three activities.

        This is a systems approach to thinking about the question.

        The second approach is just to think about the people.

        “Do people exist to serve business?”
        No — businesses exist to serve people.

        “What people do they exist to serve?”
        Well, the customers who want the services that the businesses provide.
        And the shareholders, who want to invest in the future cash flows and the social impact that the business will generate.
        And also the employees (some of whom work for “suppliers”, which is just a different contractual basis of employment) whose needs for income, personal development and self-actualisation are met by the business.

        These are the three (main) groups of people who are engaged with the business.

        Choices made by the directors and managers affect the extent to which the needs of each group are met, and the balance between them.

        Improving the ‘contract’ between the business and any of the three groups can improve the performance of the business: better returns bring more/better investors; better products/services bring more (loyal) customers; better working conditions, salary, training, development bring more (loyal, high morale, better quality) employees.

        Providing a better ‘service’ to any of these three groups of people brings a cost to the business.
        So managing the business is about balancing these three sets of competing needs, and finding a way for them all to overlap — so that everyone gets their needs at least partially met, and the business makes enough money to stay in business.

        If the law, as you say, intrinsically favours one group over another, then that is only a cultural choice on the part of the law of the moment. And since it is unbalanced, it is not necessarily in the best interests of the business, as a balanced adaptive system.

        PS
        Please do delete one of my duplicated comments if you want to.

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