The Purpose of Profit

By  on March 20, 2013


The Vital Edge is dedicated to a new generation of “people-centered and mission-driven businesses.” This new breed differs from traditional companies in many ways, none more important than their reason for existence:

“The purpose of people-centered, mission-driven business is to serve people in profitably fulfilling a mission.”

Packed into that statement is a lot of nuance, so let’s break it down.

What is the Purpose of Profit?

Profit is a wonderful driver of efficiency. The quest for profit is also a powerful stimulus to value creation in our economy. And from the perspective of organizational goals, the drive to maximize profits is very straightforward; the bottom-line focus brings tremendous clarity to business operations. Profit is a powerful driver of entrepreneurial energy that is important to business and to society.

The problem with business today isn’t the profit incentive itself, but on how profit is used.

The Money-Centric View of Business

Today, most business leaders – especially those in large, public companies – believe that the primary purpose of business is to maximize profits for shareholders. In this view, the purpose of your company is to give me, the investor, a return on my investment. This is the money-centric paradigm of business and it is rooted in the idea that companies are really just property. And if companies are property, it’s not a huge leap to the idea that they are there primarily to extract value for the people who own them – in the form of dividends and capital gains.

The money-centric view of the firm acknowledges an important role for people because they are so provably critical to generating profits. If the firm is property, then the people are …” human resources” and when we hear phrases like “people are our most important asset,” it’s really just reinforcing the notion that people are a means to the end of creating wealth for shareholders.

Money-centric companies may frame their work in lofty statements of Corporate Social Responsibility, but the reality is that their mission is mostly a marketing veneer without much deep impact on corporate strategy and operations.

You can think of it as concentric circles of priority, with mission being less important than people, and both mission and people focused on serving the core purpose, which is money.

Rethinking the Purpose

This understanding of business is now facing a growing chorus of critics from all corners, including some of our most successful business leaders:

“On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products.” – Jack Welch, former CEO of General Electric

A central tenets here at the Vital Edge is that this older view of the purpose of business runs counter to our modern, highly networked, economy. Shareholder value is a result, rather than a purpose for business.

When companies obsess over short-term shareholder returns, they tend to dangerously under-invest in the people who are most critical to their long-term success and they tend to externalize costs in ways that harm society and the planet. That might have worked in the old days, but not in our highly interconnected world, where value creation is collaborative and it’s harder and harder to hide our secrets.

So what might a business look like that viewed profit not as an end in itself, but rather as a means to some other ends? And, what might those ends be?

Mission-Centered Organizations

When it comes to organizations that put mission at the center, most of us think of not-for-profit organizations. These entities can teach businesses quite a bit when it comes to understanding impact and how to measure it, and when it comes to the all-important job of motivating people outside the organization to engage deeply in its work.

Unlike for-profit firms, nonprofit organizations don’t have owners, so when revenues exceed costs, the earnings are simply reinvested back into fulfilling the mission. While a growing number of nonprofit organizations are developing earned revenue strategies, most still overwhelmingly rely on philanthropic support to cover their operating costs.

That means that, unlike businesses, these organizations tend not to have customers who benefit directly from the organization’s programs and are thus willing to pay for them. The demand for services is thus uncoupled from the supply of services. Earnings provide an important source of capital to increase service capacity. Without that, these organizations suffer from an inability to scale up promising solutions.

The lack of paying customers also leads to two other problems. First, it can lead to a distracting focus on the sometimes fickle interests of philanthropists, which often leads to “chasing the money” rather than investing in things that really meet the needs of the organization’s true beneficiaries. Second, it makes it difficult to generate the cash that’s required for an organization to invest deeply in its people, which can lead to a chronic underinvestment in the people most critical to the long-term success of the mission. Mission, then money, then people. 

Social enterprises represent a hopeful path out of this predicament through harnessing the ability to earn revenues in service of a missionB Corporations represent a growing movement to bring this approach into mainstream business.

People-Centered Organizations

People Centered Organizations

Lots of organizations say they put people first, but a growing number of them actually put their money where their mouths are.

In some cases, these organizations choose different ownership structures that give employees, customers and suppliers a stake in the enterprise. Employee Stock Ownership Programs (ESOPs) are one example of this approach. Cooperatives are a still deeper approach, where the organization is owned outright by a particular set of stakeholders. The highly successful REI is a customer-owned cooperative, while Organic Valley is owned by suppliers, the farmers who supply the firm’s milk.

Some other companies use stakeholder principles to ensure that the interests of employees, customers, suppliers and other people who are critical to the organization’s long-term success are taken into consideration in the management and governance of the firm. Firms like UK retail giant, John Lewis Partnership, go to great lengths to ensure workplace democracy for employees.

People-Centered, Mission-Driven Business

People-Centered, Mission-Driven Business

In combining these principles, there is a good case for prioritizing people, then mission, and then money. Priorities matter. In this case, the fundamental assumption is that people truly are the heart of the firm and that the most important thing a company can do is invest in the people who are most critical to creating value for the firm. Invest in the employees, the customers, the suppliers and all the firm’s other critical stakeholders, and you create capacity that will keep the organization delivering its mission and generating strong earnings for a long time.

This isn’t some nostalgic wish to bring back the good old days of business. This is about a fundamental shift in the way value is created in our modern, networked economy. The days of a vertically integrated, hermetically sealed General Motors are now long, long gone. Economic value is increasingly co-created with customers, with suppliers, with distributors, and even with communities. The future of business is radically connected, and it operates in a world of transparency, where it is increasingly hard to run away from our bad decisions. The most successful businesses will embrace this interdependence with the full range of their stakeholders and take full accountability for their impact in the world. It’s not just about minimizing the unintended consequences of our work. It’s also about designing products and services so that when customers use them, good things happen in the world.

Though they’re harder to develop, business strategies designed around stakeholder and social impact are the future of business competition.

Balancing people, mission and money is hard work. Right now, businesses that really know how to do this are the exception, not the rule. We tend to associate them with the fringe and write them off as economically unviable because the business press tends not to spend much time focusing on these firms. You can’t invest in REI stock, so why cover the company in a business article? The reality, however, is that there are a growing number of firms pioneering this new way of doing business. What’s more, technology will play a critical role in enabling precisely the kind of connection and impact evaluation so critical to the people-centered, mission-driven approach to business.

There is a deep synergy that exists between people, mission and money — a synergy that is just waiting for a new generation of entrepreneurs to unleash. Going this next level deeper in strategy requires a whole new level of creativity.

You could say that this is the future of business design.

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