The purpose of business

What is the purpose of a business aka firm, company, corporation, etc?

We have all been educated, socialised and some might even say indoctrinated to believe that the purpose of a business is to make profits. Period. We have all heard the mantra ‘profit maximisation’ or ‘shareholder value’. I mean even the taxman assumes that the purpose of any business is to make profits.

The concept of an LTD or a PLC (the predominant legal structure adopted to pursue business opportunities) is for the risk-takers (the owners of the business) to invest their capital in a start-up or a going concern, for the company to then employ managers to run the business and engage employees and for the whole business to pursue 'profit maximisation' and increasing shareholder value.

Granted, Corporate Responsibility (CR) has recently entered everyone’s business lexicon in Malta and this does soften the emphasis on ‘profit maximisation’ but only superficially; nothing fundamental or game changing.

This having been said, the world of business (beyond Maltese shores) has changed dramatically, especially since 2008. For instance, there exists today an organisation- the Inclusive Capitalism Initiative- whose very mission is to ‘…to improve capitalism so that it creates long-term value that sustains human endeavour without harming the stakeholders and broader environment critical to its success.’ The ideas propagated by this global non-profit and others similar to it, are fast gaining traction with influential business leaders supporting them and changing what business people believe the purpose of business should be. One could say that it’s the end of business, as we know it.

My point is that capitalism (the pursuit of profit) can no longer come at the expense of anyone or anything. Put another way, there can be no trade-offs today and this has a direct effect on business. It’s not my company’s profits at the expense of the environment; increasing shareholder value at the expense of the number of people we employ; or even my business success based on exploiting (squeezing every last cent out of) our customers. If that is how you run your company, I am sorry, but you are a dinosaur, an anachronism, and will soon go out of business. The business landscape is fast changing. Customers' expectations have changed. It's a whole new world.

In today’s day and age, the (new) purpose of a business arguably is to generate profitable and sustainable value for the benefit of all key stakeholders. By key stakeholders, I mean the principal actors who have a real and significant capability to contribute directly to the success or failure of the business. I am here thinking of employees, shareholders, customers, etc. The idea is that you cannot run a company in favour of one stakeholder (shareholders) but at the expense of the other key stakeholders and this change must be reflected in ones core business strategy and values.

As a side point, but it is extremely important to point out, please appreciate that the very concept of ‘profit maximisation’ itself, only entered the field of economics, and later business management, as an assumption; an assumption intended to explain the behaviour of firms. My point is that there isn’t a law of business, which dictates that profit maximisation, should be the sole purpose of business. In truth, this was an assumption, which economists made and eventually turned into a normative goal, to explain (rather simplistically I hasten to add) the legal-economic rationale of a business. A business, for instance, can have as its purpose, economic break-even coupled with rapid market share (e.g. Amazon in its first decade); to share its profits with both shareholders and environmental NGOs (e.g. Patagonia); to be the biggest and best employer even if at the expense of suppressed short term profits (e.g. Google). My point is that profit maximisation is only one of many objectives, which a business can pursue and this can radically change its purpose for being.

In fact, proponents of ‘inclusive capitalism’, and I am here referring to revered, and much respected, free-market economists of the likes of Martin Wolf (Financial Times) and Roger Martin (Rotman School of Management), who have been keen advocates of the free market all their lives, contend that society in effect grants business a ‘license to operate’ on the understanding that on the balance, the impact of business on society is positive; if it isn’t the purpose of business must change. By license to operate, I am referring to the right of an LTD or PLC to enjoy ‘separate legal status’, ‘unlimited life’ and/or ‘limited liability’. I consider these as extraordinary privileges granted by the state, on behalf of society, because it is assumed, on the balance, that society is better off e.g. citizens have jobs, the government has increased tax revenue by taxing profits, the economy is competitive. I might even argue that all of our successes, innovations and progress in the last few centuries is based on the free market capitalism and business enjoying the above mentioned privileges.

In fact, business-management guru, pioneer of modern business strategy and economist, Michael Porter of Harvard Business School, has come up with the concept of ‘shared value’ in response to this radical change in the purpose of business. By ‘shared value’ Porter means ‘…policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates' and and this to me should be the purpose of business in the twenty-first century.

In conclusion: hugely successful and well known companies like Google, IBM, Nestle, Unilever and Lego, to mention but a few, are already embracing and making a success of ‘shared value’. Why shouldn’t your business do the same? To do so, however, you need to re-think the purpose of your business. You can do this by asking yourself: What is the purpose of my (our) business? What are my (our) goals? Who has a direct stake in the success of my (our) business? Which key stakeholders have sufficient power to affect its performance and supply resources that are critical to the success of the business? How is my (our) business going to be a positive force?

The answers to these questions can help you re-think the purpose of your business.