Doing Business with Purpose
With the death last week of the Nobel laureate Milton Friedman, business lost one of its brightest and most influential gurus. His saying 'There's no such thing as a free lunch' has become part of popular English usage, but in business circles his name is associated with another dictum: 'The social responsibility of business is to maximise profits.'
This idea, which has been dubbed 'shareholder value', has helped to provoke a vigorous reaction in the form of the 'corporate social responsibility' movement, which insists that business has responsibilities not only to shareholders but to stakeholders: customers, employees, suppliers, society at large and the environment.
Despite the obvious appeal of this argument, there are several reasons why Friedman's point should not be too easily dismissed. After all, any good that business can do is dependent on it making a profit, and shareholder value obliges managers to put the interests of shareholders first rather than their own. Moreover, shareholder value is not so much the invention of business gurus as the product of our demands for the best return on our investments.
Nonetheless, there is a serious problem with shareholder value, though it's not one we might expect: it conflicts with the way most businesspeople think. According to recent research, the great majority of CEOs believe that corporations should balance their obligations to shareholders with those to wider society. Only one in six, in fact, agrees with Friedman on this score. None of the most admired companies regards shareholder value as its main purpose; and, paradoxically, companies that do focus on shareholder value perform less well than those whose first priority is to serve their customers.
What motivates most businesspeople, evidently, is the sense that they're providing something that people want or need. And will want or need again. And again. Business, it seems, is less about serving a remote share index than about creating and sustaining long-term relationships with people. Perhaps this reflects the nature of our universe: ultimately, true purpose and meaning are found not in the quantity of material returns but in the quality of relationships.
Business shoots itself in both feet, therefore, if it makes maximising profit its chief objective. Not only does it damage its reputation by convincing the public that it's up to no good, it also reduces its shareholder value - two outcomes that Friedman would have been keen to avoid.
Peter Heslam
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