What is the Purpose of a Company?

What is the Purpose of a Company? 3

The recent statement issued by the Business Roundtable on corporate purpose, has raised a lot of media attention and buzz on professional networks like LinkedIn. Although the statement itself is not as revolutionary as it seems, (already the 1981 version did also acknowledge the importance of multiple constituencies for companies’ long-term success). Yes, for sure the 1997 version did focus a lot on shareholder’s primacy, and overall its true that aligning 200 CEOs around such a statement must have been a difficult endeavor.

As HBR underlines, the question is what are the effects of this statement going to be. Multiple authors and academics have focused on the risks of excessive focus on Shareholder value (Ralph Gomory is just one of the many names, that has been focusing on Corporate Goals). This declaration is not setting out a new world of corporate affairs though.

the language of the preamble suggests that it is little more than a new description of what CEOs already do—or believe they do.

This is why a lot of the articles and commentary, that saw a “victory” for example of Employees over Shareholders, are a faux-pas. Which is why some of the most interesting suggestions where on what can be the steps needed to really make a difference.

What is the purpose of a company?

I believe that all this discussion has luckily raised the curtain again on a very important topic, around what the purpose of a company really is. For too much time we have simply equated “for-profit” as the sole (or main) purpose for which an organization was actually built. During my years at the University of Bologna teaching Strategy for Non Profit, I used to challenge this assumption already by showing a different classification of organization, where profit was incidentally defined as a “mean for some specific organizations to reach their purpose”. What however needs to be recognized is that the legal and regulatory frameworks across the globe have typically favored very specific forms of organizations, characterized on sharing this profit among shareholders.

This very narrow focus is definitely an issue, as brilliantly illustrated in Daniel H. Pink’s books Drive – The surprising truth about what motivates us.

Way too often Purpose has been confused to a certain extend with Vision, Mission and Values. In my mind it is something that is much broader than this, and is directly and intimately linked to what keeps all of the stakeholders “attached” to an organisation: Employees, Shareholders (or other forms of investors, or donors in the case of not-for-profit), Customers, Suppliers… all relate to the organization because of its purpose. And only if we find a purpose that can encompass and balance this multiple “stakes” at play, our organization will be successful.

Recent developments: Customers and Suppliers

In the past decade or so, the impact of a renewed conscience by consumers, has led to a more focused drive of importance of the relationship with Customers and Suppliers. The raising importance of CSR (often pushed also by country requirements and political intervention, another important stakeholder), has brought a lot more focus on this relationship, with renewed investments and a more focused attention.

Employees: The loosers in the traditional world

Way too often, the primacy of Shareholders, joined with the increased focus on Customers and Suppliers (addressed in “silos”), led to a negative impact on Employees consideration. Sacrificed on the altar of “cost cuttings” measures, kept under the radar of one of the top cost dimensions, a lot of the focus on employees has given raise too issues, that also the most actual Talent chatter has never really solved. In too many cases employment is still subject to a burden of legal, regulatory and customary burdens that end up even more stressing this negative relationship.

In this context, a lot of the discussions around giving more focus on employees are really welcome. The Silicon Valley model has created a new understanding of Talent that requires more attention and focus. But unfortunately there are still too many areas of our economy where Employees are not yet put at the core of the corporate strategies.

Is creating a Purpose-led company the next Nirvana?

The answer is simply no. And the reason is that Purpose will for sure help (yes), but only if the entire and intricate web of dependencies that form the governance and management structure of an organization, are consistently adapted to be purpose-linked. In other terms, we can write the most wonderful Purpose for our organization, but if management is still incentivized on P/E ratio, or Shareholder Return, or short erm sales targets… all this will still contribute to a less-then-relevant result for most of the employees in an organization.

Sergio Caredda - Blog Signature
Loading comments...
%d bloggers like this: