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.

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  1. […] and retail associates in particular. The link to what we have discussed yesterday commenting the Business Roundtable new view on corporate […]

  2. […] that it ties in the entire value chain of relationship between customer, workers, decision makers. The purpose becomes then really a connector for everything, provided it is perceived was […]

  3. […] ultimately our real customers: the many multi-faceted talents within our organisations? For sure, organizations are claiming that empoloyees are more and more relevant, we are declaring we want to focus more and more on th experiences of […]

  4. […] Cause allows Sinek also to discuss a revision of the Responsibility of Business, a topic that has lately been very much discussed, reviewing the link between advancing a purpose, satisfying customers and generating […]

  5. […] incentives, whereas the scientific evidence favour a lot more intrinsic motivation drivers such as Purpose. Which means that any of our Incentive Systems need to include both the financial aspect (monetary […]

  6. […] we plan our organisations, we need to consider intentional design of motivation. The relevance of Purpose is more and more clear, also after Sinek’s […]

  7. […] is that Consistency is rarely explored. Companies typically engage a PR firm to design their new Purpose Statement, they engage with the likes of BGC or McKinsey to redevelop their Strategy every few years, they […]

  8. […] Three areas are notably absent from the list below: Leadership, Purpose (although I have written about this topic before) and Ecosystems. I will cover these topics in the coming […]

  9. […] to the three questions needs to be The Purpose that an organisation has. We have already discussed this. But Purpose and Strategy are not precisely the […]

  10. […] holistic view, but that is far out of the debate from many different organisations. Is Purpose an answer in this direction? The author recognises that many business leaders are trying to […]

  11. […] Strategy. The Strategy needs to be formal enough to allow you to sustain your Purpose and maintain or gain an advantage over your competition. It should also be flexible enough to […]

  12. […] most decisions and gives energetic imprinting on the critical organisational attributes of Purpose and Culture. The Business Model is defined more by the actions taken then by a […]

  13. […] human-focused organisation models have, and we should all insist on a more relevant role of the Purpose. But again, any dogmatic approach will result immediately in some kind of misleading reading, and […]

  14. […] to the three questions needs to be The Purpose that an organisation has. We have already discussed this. But Purpose and Strategy are not the […]

  15. […] their voice will be heard. They are valued as individuals that belong to a team and share a sense of purpose with their organisation. Everyone knows that they are safe in expressing their viewpoints […]

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