What is the purpose of a company? Making money for shareholders is important, but it shouldn’t be the only company purpose.
What are companies for? What is their purpose? This may seem like an odd question to be asking at these challenging times, but I think it is one of the most important questions we should be asking as a society, and it is more relevant than ever right now. Bear with me for a second, and I will explain why.
Since Milton Friedman’s landmark article in 1970, the main consensus in the neoliberal economics doctrine has been that companies exist for the sole purpose of maximising benefit for their shareholders, for that and for nothing else.
Capital is king, and it is the main generator of wealth, economists would say, so companies’ purpose is to maximise profit for those who put in the capital. Then the market’s “invisible hand” would make it possible that even if companies and their managers were bent on maximising their profits, consumers, employees, suppliers, and society as a whole would also benefit as the wealth that was created redistributed amongst the different actors involved.
This model has benefitted some very handsomely while leaving many others behind. The richest have become much richer, getting an increasingly bigger part of the pie, whereas a big part of the population is now worse off than 40 years ago. Inequality is rampant and at historic highs, and it is getting worse every year. We will see what happens after the crisis caused by the pandemic abates, but it is possible that the chasm widens even more.
A new economics is possible
As explained by the billionaire Nick Hanauer in this enlightening Ted Talk, the premises on which the neoliberal economic model is based are not only morally dubious but scientifically spurious, so the entire edifice is built on shaky ground.
A society in which inequality increases to higher and higher levels is neither desirable nor sustainable in the long run, so we need to do something about it.
The good news is that a new economics is possible, and we can all build it together. Corporations are an important part of the solution.
Companies are key parts of a thriving society. They generate wealth, employment, and innovation, they solve problems and cater to the needs of society, but as we have seen over the years, the “invisible hand” of the market does not always bring desirable results to all. We have seen fraud, corporate negligence costing lives, environmental scandals, wage stagnation amongst middle and lower-class employees, rising inequality, climate change, loss of privacy… Companies are not the only ones to blame for all these negative effects, but they are the main contributors to many of them. You can fix many of these if you change the way companies are run, and for that, you must start with their purpose, with the very question with which we started this article.
Companies with a purpose
Many CEOs and company owners have realized that the way this is going it is not sustainable, neither for society in general nor for themselves and their companies, and they have started to react. Last summer, 181 CEOs of some of the most important companies in the US signed the Statement on the Purpose of a Corporation, whereby they distanced themselves from the doctrine of profit maximisation for shareholders only to embrace the idea that their corporations are committed to all their stakeholders: consumers, employees, suppliers, society as a whole and, of course, the shareholders and owners of the company.
Around the same dates, a similar initiative was signed, this time in France, by 34 global multinational companies under the auspices of the OECD.
The Business for Inclusive Growth, or B4IG, is a pledge from these companies to reduce territorial inequalities, provide equal opportunities to all, promote diversity and inclusion and reduce gender inequality.
Denis Machuel, CEO of Sodexo (the company I proudly work for, among other things, because I think it is a company with a clear purpose and values), explains in this post why Sodexo is one of the signatories of the B4IG and why companies should abandon the sole use of financial indicators such as ROI to measure their success and complement them with others, such as a Return For People & Society (RFPS), by which the impact a company has on all its stakeholders, society and the environment should also be taken into consideration.
The reasons for company purpose
The cynics among you will say that this is another PR and marketing stunt from multinational corporations to clean their image, that they say it but don’t really mean it, that the interests of different stakeholders will inherently always be in conflict and that when that happens, some stakeholders’ interests, usually those of shareholders, will always prevail over the rest. You may be right, but I think it is possible to align the interests of all stakeholders as much as possible, or at least to be respectful of all parties, and that it is actually in the interest of companies and their owners to do so. There are several reasons for it.
First and foremost, it is the right thing to do. Companies and their owners do not exist in a vacuum or in isolation; they exist in a society and coexist with many other agents. If society thrives, the elements forming it will also thrive. It is morally and ethically right to try to favour that society and the elements in it as much as possible.
The second reason is that it is actually beneficial for companies and, therefore, shareholders.
Society does not work as a zero-sum game, in which for me to win, you must lose. It is possible to make the pie bigger and for us both to win.
It is, for example, what happened when Henry Ford doubled the salaries of the employees working for Ford in the 1910s. All the competitors thought he was crazy and that the company would go bankrupt, but what happened is that he attracted the best talent, he got his employees engaged, and he increased his consumer base, as his own employees had then enough money to afford a Ford Model T car. Other companies had to increase the salaries of their workforce, too, thus creating an increasingly bigger consumer base and ushering in the mass market consumption economy. The rest is history.
Start with WHY
As Simon Sinek repeatedly told us, both in his book Start with Why and this Ted Talk, “people don’t buy WHAT you do, they buy WHY you do it”. He argues that consumers (often subconsciously) buy a product or service from a company because their values are aligned with those of that company. They are attracted to the WHY of the company, their purpose, their raison d’etre, why they sell those products or services, and what this tells them about themselves or about the person they want to be or be seen as. This applies not only to consumers but also to employees and, why not, suppliers. A company with a clear and attractive purpose will attract the right type of employees, also moved by the same purpose, who will be especially engaged and motivated to work in that company.
There is ample research out there that when people (consumers, employees, suppliers, the public in general) trust a company, this company will outperform its peers for obvious reasons: consumers will be readier to buy its products, even paying a premium; employees will be more engaged, the company will be able to attract and retain the best talent; suppliers will want to work with that company, there will be more goodwill between company and suppliers, etc. Ethics and integrity are essential to building trust, and a purpose that goes beyond the maximisation of profits helps too.
What are companies for?
In times of crisis, like the one we are living in now, this trust is even more important. We are suffering exceptionally hard times, and harder times will come. This crisis is different to previous ones in that it has its origins in a health crisis. People are getting sick and dying. Add to that the isolation caused by the lockdown and the economic crisis that has already started, and it is not looking pretty. People are feeling fear, anxiety, sadness, and uncertainty. In these dark times, they need to trust in their institutions and the companies they work for.
The companies that focus on people first, business second, will not only be doing the right thing, but will also weather this storm better and come back stronger.
So, what are companies for? They are here for much more than to make money for their owners. They are here to sell great products and services at reasonable prices to their consumers and to treat them fairly, to look after their employees and make them feel included and appreciated, to partner with their suppliers to grow together, to have a positive impact on the communities in which they operate and, last but definitively not least, to ensure their growth is sustainable and respectful with the environment. Companies have a very important social function to play, and the day all companies realise this and show it, not only with words but also with their actions, everybody will be better off, starting with the companies themselves.