What is Purpose of a Business?
However, before doing so, I was delighted to find recently, that I am in the esteemed company of no less than the influential Business Roundtable (BRT), an association of the chief executive officers of nearly 200 of America’s most prominent companies.
Back in 1970, Milton Friedman, it was simple. “There is one and only one social responsibility of business,” the Nobel Memorial Prize winning economist wrote: to “engage in activities designed to increase its profits.” Companies must obey the law. But beyond that, their job is to make money for shareholders.
And Friedman’s view prevailed, at least in the United States. Over the following decades, “shareholder primacy” became conventional business wisdom. In 1997, the influential Business Roundtable (BRT), an association of the chief executive officers of nearly 200 of America’s most prominent companies, enshrined the philosophy in a formal statement of corporate purpose.
Times change.
On Aug. 19 last year, the BRT announced a new purpose for the corporation and tossed the old one into the dustbin. The new statement is 300 words long, and shareholders aren’t mentioned until word 250. Before that, the group refers to creating “value for customers,” “investing in employees,” fostering “diversity and inclusion,” “dealing fairly and ethically with suppliers,” “supporting the communities in which we work,” and “protect[ing] the environment.”
Earlier this year, I came up with my own definition of “The Purpose of a Business.”
When posed this question, there are a number of answers often given. Some of those follow, together with some observations regarding each response.
To make a profit
No, that’s not a purpose; that’s the result of what the business does.
To provide value to customers
Maybe, but what’s in it for employees? Why should they be interested in providing value?
To maximize profits for its owners or stakeholders while maintaining corporate social responsibility
Sure, but again, where do employees fit in?
To serve and satisfy its customers
Again, this definition seems to fall short.
I suggest there’s another definition which serves the owners, employees, customers and the community:
“To enhance the lives of everyone it touches
and the community in which it exists”
(That is, employees, customers, strategic alliances, the owners and the community.)
The greatest impact for the business = customers (the lifeblood of any business)
The greatest impact for customers = employees (without whom the business cannot exist)
The people we do business with, but are not customers = our natural allies (suppliers, consultants)
Us = the custodians of the business for the time being (those with the greatest level of responsibility)
Therefore, if we agree that the employees have the greatest impact on customers — and therefore on revenue, reputation and results — surely, the most important thing a business can do is:
Engage….
Empower….
Support….
Train, and indeed,
Love…. its employees.
Once employees feel like they really matter, they can be entrusted to deliver to customers in a way that has them becoming repeat customers and advocates — indeed, evangelists — for the business.
The first step towards this level of engagement is to share the company Vision and its Core Purpose with employees, so that everyone has a complete understanding of the bigger picture.
So, I’m in good company.
All well and good, but the challenge remains: How to engage with all of the stakeholders and have them agree and act according to this principle?
While I’m still working on this challenge, let’s look at the statement from the BRT….
Statement on the Purpose of a Corporation
Published by the Business Roundtable, Aug. 19, 2019
Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment, and economic opportunity for all.
Businesses play a vital role in the economy by creating jobs, fostering innovation, and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications, and other services that underpin economic growth.
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity, and respect.
Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
Generating long-term value for shareholders. [They] provide the capital that allows companies to invest, grow, and innovate. We are committed to transparency and effective engagement with shareholders.
Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.
John Matthew
johnm@switchdirections.com.au
