[dropcap]O[/dropcap]ne of the first steps to building regenerative business is rejecting the idea that your business is just a piece of property designed to maximize returns for your external shareholders. A regenerative business views profits as critical, but not as something to be extracted to boost dividends and share price. Profits are a vital source of fuel to sustain your mission and the full network of stakeholders who fuel it.
Here on the Vital Edge, I write a lot about businesses that invest heavily in technology, but what’s a bit different here is that the goal of these tech investments is not increased productivity merely to maximize shareholder returns. Instead, I’m talking about seeing stakeholders as your ultimate source of value creation and using the technology to boost their “generative capacity.” In other words, I’m talking about arranging the technology – and the capital – around your people, rather than the other way around.
Profit is a Stimulus to Value Creation
The quest for profit is a powerful entrepreneurial catalyst that creates real economic and societal value. As an organizational goal, profit is straightforward. It brings tremendous clarity and operational efficiency to business. For these reasons and many others, profit is important to both business and to society.
A deeper look at the effects of the chase for profits on modern society suggests that something is amiss with this powerful force. Yet the problem isn’t with the profit incentive per se, but with how it is being used today.
The Shareholder-Centric View of Business
Today, most business leaders – especially those in large, public companies – have come to believe that the primary purpose of business is to maximize profits for shareholders. In this view, the primary purpose of your company is to give me, the investor, a return on my investment.
This is a “shareholder centric” paradigm for business and it’s rooted in the belief that companies are just a form of property. From there, it’s not a huge leap to the idea that that piece of property is there simply to extract value for its owners – in the form of dividends and capital gains.
If the company is property, then employees are become “human resources” and “our most important assets.” In short, people become merely a means to the end of creating wealth for shareholders.
Shareholder-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 real impact on corporate strategy and operations. You can picture it as concentric circles of priority, with mission being less important then people and both serving the core purpose of 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
Think a minute about what Welch is saying when he says that “shareholder value is a result, and not a purpose for business” – he’s saying that even if you do care about shareholder returns, focusing on building shareholder value is not how you get there.
When companies obsess over short-term shareholder returns, they tend to: a) dangerously underinvest in the people most critical to their long-term success; and b) externalize their costs in ways that harm society and the planet. That might have worked in the old days, but not in today’s highly interconnected world, where value creation is highly collaborative and it’s becoming harder and harder to hide our secrets.
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 its mission. While a growing number of nonprofit organizations are now 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 paying customers who directly benefit from their programs. As a result, demand for their services isn’t coupled with supply, which makes it hard for nonprofit organizations to scale up promising solutions to our most pressing social and environmental problems. I speak from painful, personal experience when I say this, by the way.
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 what best meets the needs of the organization’s true beneficiaries.
Second, it makes it difficult to adequately compensate and invest in developing people, which eventually catches up with the organization and impacts its long-term capacity to serve its mission. From the perspective of concentric circles of focus, nonprofit organizations tend to be mission, then money, then people.
Social enterprises represent a hopeful path out of this predicament, by fueling their mission through revenues earned from customers. B Corporation and BALLE are examples of important initiatives to catalyze mission-driven approaches in business.
In some cases, these businesses 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 another, related 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 its suppliers – the farmers who supply the milk.
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 giant UK retailer John Lewis Partnership go to great lengths to ensure workplace democracy for employees. WorldBlu is a leading proponent of these ideas.
More generally, the field of organizational management has experienced an important shift over the last half century as it’s moved away from seeing humans as cogs in an organizational machine, and towards a new approach that emphasizes deeper, more intrinsic, engagement of people in their work. This new thinking celebrates our humanity and the importance of happiness itself. It is also receiving growing attention, thanks to organizations like Delivering Happiness.
The approach to business strategy and technology that I write about here on the Vital Edge is people-centered and mission driven – and in that order of priority. People, then mission, then money.
Priorities matter. In this case, the fundamental assumption is that people truly are the heart of a business and that the most important thing you can do is invest in the people who are most critical to creating value for your organization. Investments in employees, customers, suppliers and other critical stakeholders create capacity that will keep your business delivering on its mission and generating strong earnings for a long time.
This isn’t some nostalgia for the good old days of business. It’s simply a recognition of the way value is created in our modern, networked economy. The days of a vertically integrated, hermetically sealed General Motors are 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’s harder and harder to run away from our bad decisions.
The most successful emerging businesses are those that embrace their interdependence with stakeholders and take full accountability for their impact in the world. What’s more, these businesses will create powerful synergy between their stakeholders and their social missions. One of the most effective ways of doing that is through designing products and services so that when they are made and used by stakeholders, good things happen in the world.
Though harder to develop, business strategies designed around stakeholders and social impact are the future of business.
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 doesn’t spend much time focusing on these firms. Investors can’t buy REI stock, so why report on the company in financial news?
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 kinds of stakeholder partnerships and impact evaluation that are 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. This is the future of business design and it is the essence of what I write about here on the Vital Edge.