The question of the underlying purpose of business and the role of corporate leadership has come up again in an excellent article by Joseph Bower and Lynn Paine, “The Error at the Heart of Corporate Leadership,” in the May-June 2017 issue of Harvard Business Review.
There are two general schools of thought about the purpose of a business, note Bower and Paine.
One view holds that shareholders own the business and the board and management exists to serve the shareholders. And what do shareholders want? They want to maximize their return on investment. The role of the board and management, therefore, is to do the bidding of shareholders to maximize shareholder value. Bower and Paine call this the agency-based model, or shareholder-centered approach to corporate governance.
The other prevalent view holds that “a company’s health, not shareholder’s wealth – should be the primary concern of those who manage corporations.” On this premise, the purpose of a business is to create a product or service that is desired by others, and that profit and increasing shareholder value is the reward for successfully doing so. Bower and Pain call this the company-centered approach to corporate governance.
Given the binary choice provided by Bower and Paine, I’d line up as an advocate of the second perspective, the company-centered model, in which the health of the enterprise goes hand-in-glove with its business results.
When I graduated from business school I was an advocate of the shareholder-first model. That’s what we were taught. The way I thought about it was that managers were accountable to the board of directors for maximizing shareholder value. Coming from a marketing background, my take was that the best way for management to accomplish its objectives was to be market-focused and customer-centric.
But over the years, I’ve come to realize that at its core, business is a formalized organization of people, and wherever people are involved, ethics and morality is at play. There isn’t ethics for people and ethics for business. There isn’t people ethics and business ethics. There is just ethics to guide the validity of actions where people are involved.
The problem I have with the maximize shareholder value approach to business is that it tends to be held by those who try to disassociate themselves from the connection between profits and people. It’s not that people and profits don’t go together – they must. And an enlightened perspective and approach to business must of necessity integrate the two. Bower and Paine, in their HBR article, are trying to differentiate between two approaches, and I’m not sure that “company-centered” goes far enough to become “customer-centered” to satisfy my own concerns.
The reason I prefer the customer-centric foundation for the purpose of business is that it is easier to integrate with ethics and economics because it is people-centric, not profit-centric. As Peter Drucker so aptly put it in 1954, “The purpose of a business is create (and keep) a customer.”
The formulation for the purpose of a business that I’ve now adopted is slightly different than Drucker’s original with a greater emphasis on the humanistic component that must underlie and legitimize all business endeavors. My revised formulation: the purpose of a business is to create and keep customers while contributing to human happiness and well-being.
The addition to Drucker’s formulation comes from pioneering psychologist Mihaly Csikszentmihalyi, professor of psychology at the Peter F. Drucker School of Management, and his study of visionary leaders, published in Good Business: Leadership, Flow, and the Making of Meaning.
In the introduction to the summary of his research, Csikszentmihalyi writes: “What we have learned from these visionary leaders are some concrete notions about how to conduct good business – how to run organizations that make a reasonable profit, but above all else contribute to human happiness and well-being” (P. 196, italics added).
The idea that business consists of people serving people seems axiomatic and too obvious to ignore. Unfortunately, they don’t teach this in business school and management training courses, and we’re all worse off because of it.
© 2017, Barry L. Linetsky. All Rights Reserved.