The Purpose-Driven Culture – Shareholder Value is Not Enough.

By Jonathan Franchell

The quest for meaning is a profoundly human experience. Throughout our lives, we search for purpose. Yet, much of our time is spent working. Should this pursuit of meaning not extend to the daily grind? 

Many companies simply exist to increase shareholder value. Ruthless pursuit of financial gain for the benefit of few is an uninspiring mission. Why don’t we expect more in the world of business? 

Smarter, savvy companies are taking a more holistic view of value creation in order to survive and grow. Like individuals, businesses must also be on a quest for meaning to survive, compete, and thrive in today’s market. 

Photo credit: "Sunset in Solitude" by Joshua Earle

Where does the concept of shareholder maximization come from?

Many companies are organized around one purpose and one purpose only: maximizing profit (a.k.a. “maximizing shareholder value”). An article from Forbes in 1962 articulated the core of this concept well:

“The objective of our company is to increase the intrinsic value of our common stock. We are not in business to grow bigger for the sake of size, not to become more diversified, not to make the most or best of anything, not to provide jobs, have the most modern plants, the happiest customers, lead in new product development, or to achieve any other status which has no relation to the economic use of capital. 

Any or all of these may be, from time to time, a means to our objective, but means and ends must never be confused. We are in business solely to improve the inherent value of the common stockholders' equity in the company.” 

Maximizing shareholder value is a simple concept, which makes it a delectable one. The idea is to sustain and grow profits over time while increasing the total amount in the stockholders' equity in the balance sheet. Investors can recoup their investment in a business through distributions and eventually sell the business equity. 

This argument of shareholder value gained momentum in the 1970s with Milton Friedman’s Friedman doctrine. This concept states that a company has no social responsibility to the public or society. The mission of a business is to simply increase its value for shareholders. 

Shareholder value as a business concept only gained more prominence during the 1980s and 90s as growing legions of business schools and MBA programs taught its tenants to fend off competitive threats. This philosophy ruled the Fortune 500 until the 2008 financial crisis and other mishaps forced many business leaders and influencers to publicly question a singular focus on financial gains. Perhaps the ends (financial gains) don’t always justify the means (those impacted by company actions)? 

The Flaws of Shareholder Value Maximization 

While the concept of shareholder value maximization gives businesses a clear, focused aim, its simplicity can be harmful. When a company’s mission is defined narrowly around investor returns, short-term strategies drive the actions of the business. Longer-term thinking is discarded in favor of quarterly returns.  

Quarter-over-quarter performance is easily measured in numbers, but the actions companies can take to achieve these quarterly numbers can harm longer-term prospects. Cost reduction strategies can be a useful tool for business performance, but these strategies can also hurt an organization’s long-term prospects. Many companies will reduce headcount, training investments, research and development, and quality controls to achieve a better quarter-over-quarter margin. The longer-term effect of these cuts can be severe. 

David M. Cote, the former Chairman & CEO of Honeywell, articulated the dilemma elegantly in his book “Winning Now, Winning Later” when he said, “The notion that there is no way to pursue long- and short-term goals at the same time, and therefore leaders have no choice but to embrace short-termism, is one of the most pernicious beliefs circulating in business today.”

A maniacal focus on shareholder value has been widely criticized and linked to acute societal and business problems, such as: 

• wealth inequalities 
• layoff practices 
• pollution 
• worker safety 
• financial engineering
• job outsourcing 
• revolving-door hiring
• bankruptcies 
• debt to equity ratios 
• work-life-balance issues 
• increased risk-taking
• “house of cards” business models
• executive compensation unfairness 
• short-term over long-term strategy
• bureaucratic stagnation
• in-fighting
• consolidation & acquisition instead of longer-term growth 
• a lack of innovation

Corporations are legal entities, but there is no legal imperative that binds corporations to only one master. The question I am raising is, “Wouldn’t companies be better off if they devised a more balanced view of value creation?” 

A New  Purpose – Expanding Value Creation 

Companies have stakeholders that extend beyond their investors. Customers, employees, partners, communities, suppliers, the environment, and those that are impacted by the corporation’s pursuits must be considered in its value proposition. By taking a wider look at the value creation process, companies can strengthen their offering to all groups and become healthier long term. 

This approach is gaining traction with corporate leaders around the globe. The Business Roundtable revised its belief that “the paramount duty of management and of boards of directors is to the corporation’s stockholders.” Thanks to this change of heart, the organization issued an updated statement in 2019 to expand the purpose of corporations and corporate governance: 

“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity.”

The Business Roundtable’s Statement on the Purpose of a Corporation addressed previously ignored topics such as customer value, employee investment, fairness, ethics, supporting communities, and long-term value for investors. The statement was signed and supported by almost 200 leading CEOs that viewed this revision as a “modern standard for corporate responsibility.”

Ethics are not the only driver of this cause. Companies that have a moral compass are more attractive, sustainable, and competitive. As we humans evolve, so must our institutions. Purpose and meaning is a human need, and companies cannot escape this pursuit – especially considering how their efforts impact the world in which we live. 

Purpose-Driven Culture

Company culture is the great difference-maker between strong and weak performance over the long term. Strong work cultures empower employees to bring energy, enthusiasm, creativity, and innovation to their work. A winning company culture, however, is not something you can ‘buy off a shelf.’ Culture is never turnkey. It must be cultivated and improved over time. 

Purpose plays an outsized role in culture. Employees need to believe in their work and their contribution. The best employees will eventually ask, “What am I contributing to?” 

Purpose is the heart of a company, culture is how you organize around that purpose. 

Increasing shareholder value or investor return is not a powerful motivator for teams. Creative, inspired people will gravitate toward companies that set out to achieve something profound, meaningful, useful, or impactful. Companies must have a value proposition that applies to all those affected by that company’s work---clients, employees, partners, suppliers – and generates shareholder value as a by-product. 

The key findings of Deloitte’s Core Beliefs & Culture Survey highlight the role purpose play in business performance: 

“Organizations that focus beyond profits and instill a culture of purpose are more likely to find long-term success.” 

Punit Renjen, the Global CEO of Deloitte, elaborates on this concept in further detail when he describes how purpose plays a role in driving business confidence and investment:

“There is a clear connection between a sense of purpose that delivers positive impacts for all stakeholders and sustained business success. Furthermore, leaders need to articulate a culture of purpose–and, equally important, serve as a visible, consistent example of those behaviors. That’s a terrific blueprint for any organization that wants to become and remain exceptional.”

Today’s world is different than that of the twentieth century. Business moves faster today. Technology is disrupting the way we work. Creativity is transforming even the most mundane businesses. 

When the Business Roundtable articulated the purpose of a corporation in 1997, they summarized the institutional learnings of the century before them, but just 22 years later, those principles had been turned on their head. In the face of ever-changing complexity, a purpose-driven culture keeps us focused, energetic, inspired, and growing. 

Sources:

Photo credit: "Sunset in Solitude" by Joshua Earle

Business Roundtable (BR), Our Commitment, businessroundtable.org, AUG 19, 2019

ERNIE SMITH, BUSINESS ROUNDTABLE: CORPORATE PURPOSE GOES BEYOND SHAREHOLDER PROFITS, associationsnow.com, AUG 20, 2019

Kilroy, Denis; Schneider, Marvin (2017-08-21). Customer Value, Shareholder Wealth, Community Wellbeing: A Roadmap for Companies and Investors

Milton Friedman, Shareholder Value Is No Longer Everything, Top C.E.O.s Say, NYTimes, Aug 19, 2019

Punit Renjen, Deloitte Global CEO, Culture of purpose Building business confidence; driving growth, deloitte.com

Rappaport, Alfred, Creating shareholder value: the new standard for business performance, The Free Press, 1985