Linda Gorchels blogs

What is the Purpose of a Business?

This is a question likely to cause disagreement, if not downright altercations.  Some believe the ONLY reason a business exists is to make money. Others view money as an end-result. The question may boil down to whether profits and purpose are contradictory or compatible.

Make a Profit. Period.

This spring I saw an article in Harvard Business Review titled, Companies Don’t Always Need a Purpose Beyond Profit. The gist of the article was that businesses sometimes publish lofty mission statements that feel “empty,” causing employees to feel cynical rather than inspired. Freek Vermeulen, the author, suggested that making a profit was an admirable goal:

In my view, organizations shouldn’t be shy about stating profit as its explicit and ultimate purpose. In fact, in addition to helping us earn a living, profit may be the best way to do good in the world. Economic growth, for example, is an effective way to reduce poverty – likely more so than aid – because it benefits the lowest income brackets in a country significantly. Moreover, increases in wages and wealth have been shown to have positive effects on other critical societal problems, such as crime, malnutrition, infant mortality, mental health, and general feelings of happiness. Hence, many of the most important social issues in our world are closely tied to economic wealth.

Vermeulen’s comments suggest these results MIGHT happen if companies have profit as their ultimate purpose. It doesn’t mean they WILL happen.

There’s a difference between goal and purpose. Even if the goal of a (for-profit) business is to make money, the purpose is how it does so. As Russ Ackoff, former organizational ethicist once said, “Profit is to a corporation what oxygen is to a human being: necessary for its existence, not a reason for it.”

While it’s true that some mission statements are aspirational at best (and disingenuous at worst), it’s worth exploring how companies provide value beyond stockholder earnings.

Profit with Purpose

The Business Roundtable, one of the preeminent business lobbies, published a revised statement of corporate purpose earlier this month. Close to 200 CEOs of America’s largest corporations signed on to the update to move away from stockholder primacy and to acknowledge all stakeholders. In effect, the organizations committed to customers, employees, suppliers, communities, and the environment, in addition to traditional stockholders.

Some may argue that this is symbolic since mission statements make these claims all the time. True. But this is a visible commitment beyond the unread pages of an annual report or the obligatory webpage broadcast.

A Harvard Business Review follow-up article discussed the history of stockholder capitalism, and compared it with stakeholder capitalism. According to the authors, purpose-focused firms outperformed the market. But there was a caveat. This only happens when the purpose is diffused throughout the organization. It has to be real. Authentic.

On the other hand, an op-ed in the USA Today by Steve H. Hanke presented an opposing view. Hanke said, “The Roundtable’s new anti-capitalist mission statement promises to dilute and muffle shareholders’ voices and further politicize corporate governance.”

Hmm. Is recognizing multiple stakeholders anti-capitalistic? Not in my view.

The Future

I was encouraged by the Business Roundtable’s revised statement. And I’m hopeful it will trigger new performance metrics. Yes, it will be a challenge. And yes, there will continue to be diverging viewpoints. But it’s not impossible.

Profit is neither good nor evil. However, profit maximization at any cost can cause negative consequences. For the good of my children and grandchildren, for the good of society, and for the good of the planet, I hope we learn how to balance the goal of earning profit with the purpose of addressing broader interests and a longer-term perspective.