The Purpose of Business
Many corporate leaders struggle with shareholder primacy, the belief that the sole purpose of business is to pay as much money as possible to shareholders. They see how the constant demand to “maximize shareholder value” now robs them of the resources to invest in people and programs that can lead to much bigger, enduring success. But most don’t change because they feel they have no choice – that shareholder primacy is “just the way it is.”
Shareholder primacy isn’t a requirement, it’s a management choice.
Business hasn’t always been dominated by shareholders. Before the 1970s, companies balanced the competing interests of all their stakeholders – customers, employees, communities, and shareholders – and everyone’s lives got better.
So, if you decide to walk away from shareholder primacy, what do you do next? How do you move your company away from a lopsided focus on short-term profit to one that can enjoy sustained success by creating value for everyone?
Step one: Pick a side.
The first step is to decide if this change is one you truly want to make. There is no way to “half-ass” the purpose of your company. You’re either there to extract as much money as possible for your shareholders or you’re there to succeed by creating value for every member of your stakeholder ecosystem. If you choose the latter, it will mean disappointing some of your investors. But it will also strengthen your relationships with investors who value more than just money, not to mention customers, employees, and communities (all of which are vital to broad success.)
Step two: Figure out which human condition will be your specialty.
All of your stakeholders have one thing in common: They’re all human beings, with diverse needs that can’t all be satisfied with money alone. Customers want more than a bargain. Employees want more than a paycheck. Communities want more than tax revenue. And investors want more than capital gains. As human beings, they all want a million other things, including peace, justice, equality, art and music, a great meal with friends, and a sustainable environment for their kids. If a company can recognize this, it can get busy creating value that people will pay for, work for, and invest in. And that can bring sustainable success for the company and all its constituents.
Of course, your company can’t be all things to all people, so figure out which part of the human condition aligns with your expertise and own it. To be clear, human conditions don’t neatly align with industries, so you’re going to have to abandon the idea of being the category leader. Instead, devote yourself to providing all the things necessary to satisfy the needs related to a certain human predicament.
For example, companies in the “self-storage industry” tend to focus on building and maintaining secure spaces (such as rooms and lockers) where people can store things. However, the human condition that self-storage satisfies is known as “having too much stuff in my house,” a situation that could also be satisfied with options that don’t require storage, such as disposal, recycling, consignment, or even donation. Solving for the human condition opens the company up to provide more value for more customers and earn higher revenue and profit.
Step three: Assemble the components of satisfaction.
Human beings tend to receive satisfaction in four different ways: from things, from other people, from being in certain places, and from taking certain actions. These will become the “inventory” your company will need to carry because it’s what people are willing to pay for to satisfy their needs.
If it’s easier, think of these new customer interactions as a theatrical play you need to stage. Before the curtain rises, you’ll need props (products), actors (employees), a setting (store or other location), and a script (what customer-facing employees will say and do).
Step four: Decide what satisfaction will cost.
The diverse needs of human beings mean your customers (as well as your employees, investors, and neighbors) will want to want to know not just the monetary cost of transacting with your company, but also the non-monetary costs. What are the consequential impacts that come from their decision to buy your product, work for your company, invest in your stock, or allow your facility in their community?
Specifically, when they choose to engage with you, what behaviors are they encouraging when it comes to society and the environment? So, figure out your company’s overall footprint and share it.
Step five: Show everyone you mean it.
People don’t trust business. They’ve been burned too many times by empty promises and marketing speak. To overcome this skepticism, put some skin in the game to show that you are serious about serving humanity. One great way to demonstrate your commitment is to change your business structure to a Benefit Corporation (B Corp). Doing so changes your company’s legal charter so you are required to provide a specific benefit to society and to annually report how you’ve done. Failing to do either can result in your company being dissolved by the state. It’s a strong statement to all your stakeholders that you’re not just saying you’ve changed.
Step six: Tell everyone about it.
Once you’ve taken the first five steps, don’t forget to tell all of your stakeholders. Just like any other competitive advantage, your new focus won’t do any good if no one knows about it. And you’ll find that you genuinely have something to talk about, something positive that’s true to your company’s core – rather than trying to make up something that you hope will resonate.
In the end, if you believe that operating primarily for the benefit of your shareholders isn’t right, you can change your company. It’s your choice. And there are clear, simple steps to make it happen.
For more information, see A One-Legged Stool: How Shareholder Primacy Has Broken Business.
Image Credit: Kai Rohweder