These notes are about starting a new business. Too often people believe that big business has always been big. We forget that there is usually a story behind a large business, a story that starts with one person, or at most a few people, and an idea, an idea that solves a problem or provides a benefit.
I am sure there are many who, when ordering online, have understood “Track and Trace” (TAT) to be a useful tool by which we can monitor the progress of our package from the company to our home. In my experience TAT has merely highlighted the incompetence of most courier services.
NZ Post has been much maligned for its poor service. As a result we have witnessed the rise of private delivery services. But these ‘express’ or ‘fast’ or ‘courier’ delivery service companies are hardly bastions of excellent customer service themselves.
Over the past year I have received several packages without incident. Ordered a product. A few days later product arrives. Pleasant surprise.
But on other occasions, especially when one has requested and paid for an express courier service, it has been enlightening to follow ‘progress’. TAT then reveals the inefficiencies.
The following is an example of a relatively straightforward experience – probably a local ‘hub and spoke’ system in place – although one does wonder why it took just a day from Petone to Masterton but then two days from Masterton to Martinborough.
Tuesday afternoon: Package collected from a Petone store by Company X Wednesday morning: Package is checked into X’s Masterton Branch Wednesday afternoon: Package is “out for delivery” Friday afternoon: Package is delivered to me in Martinborough.
Here in Martinborough, by no means a rural location, one’s package could be marked “delivered” on the TAT website – but it is not at the front door, nor has one signed for it, nor is it at the next door neighbour. First we check at the local general store, P & K, which is also the local post office. Not there? Pop around to the local gas station. One or two courier companies believe that whatever the address in the village might be either of these two locations is ‘near enough’. Not at the gas station, either? Then sometimes a courier might hand it to over to our village postman who will deliver it along with NZ Post mail on the next working day.
Here’s an example, another package I ordered this week from Wellington City, sent via a different company.
Wednesday afternoon: collected from store in Wellington City Thursday afternoon: scanned by Courier A – based in Palmerston North Friday morning: scanned by Courier B – based in Masterton Friday morning (two hours later): TAT system says “Delivered” and signed by “Authority to Leave”.
I call and ask – where this has been “delivered”? Answer is that the package has been delivered to a local courier (obviously not on the company’s TAT system) and I can expect “delivery” within the next 48 hours. That probably means Monday.
The divide in responsibility between company provider and courier is most stark when ordering from abroad. Prior to Christmas I ordered from that infamous US company, “A”, and paid for the fastest courier service – and given a delivery date of Dec 12. No problem.
Two days later I receive an email saying delivery date postponed by a week. When I inquire, “a problem had arisen but now resolved”, and yes, Dec 12 still good.
Between Dec 12 and Dec 14 TAT shows no movement from the Auckland Depot. Why?
Company A says there was a “customs” problem, now resolved, delivery on 14th. Sorry, says Company A – but we’ll refund the courier charge. Nice.
Between Dec 15 and 20 there is much to and fro – as it turns out that A uses and International courier company which then subcontracts a NZ courier company! Each of the three companies has their own online TAT which show differing information.
Finally, on Dec 22 package arrives, just in time to be re-wrapped for Christmas. And I check the websites of the three companies involved – three different messages!
Modern IT was supposed to provide faster more efficient services.
Every so often I watch wistfully as in an old episode of an English drama, perhaps an Agatha Christie mystery or an early Sherlock Holmes. Invariably there is a scene where someone is sent to post a letter before the evening collection rom the village postbox, or a butler brings in the morning mail, or we see the postman delivering the afternoon mail. Multiple daily collections, twice daily deliveries. How did they do it?
There remains a strong widely-held belief among businessmen, entrepreneurs, and business students that the primary goal of a business is to maximise its profit.
Milton Friedman is often cited as the source of this view but they do a disservice to his 1970 paper “The Social Responsibility of Business is to Increase its Profits”.
First, the context. In the 1960s it had become popular for companies to support a range of charities – what was then termed Corporate Social Responsibility (CSR). Friedman argued that spending money on social causes unrelated to the core business was wrong and that instead the funds should be paid to shareholders as dividends who could then support charities of their choice, should they wish to. He was against such Corporate Philanthropy.
Perhaps CEOS thought they were following in the footsteps of great business philanthropists, such as Getty, Rockefeller, and Guinness. But mostly, these gentlemen gave away the money they had generated for themselves, their own money. Just as Bill Gates today gives away his own wealth and not Microsoft’s.
As Friedman says, in the article: “The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his ‘social responsibility’, he is spending his own money, not someone else’s.”
Second, let’s look at the full quotation: “… there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
How many CEOs, who rely on this quote to justify their pursuit of profits, do so in “open and free competition without deception or fraud”? Certainly not the US and European financial institutions who led the world into the Global Financial Crisis nor the Australian ones whose behaviour was severely criticised by the Hayne Royal Commission.
As Andrew Cornell, writing in ANZ Blue Notes, states: “Critically, it is the ‘rules’ of the game which are complex and, long term, rely on a social licence as well as black-letter regulation. Understood more broadly, the ‘rules of the game’ are not just black letter law but those principles which govern behaviour – they are set by society, by providers of capital, by staff, by customers.”
Modern businesses are not engaging in CSR (first make a profit and then give some back to society) and are world’s apart from the corporate philanthropists of the 1960s. They start with a clear consumer (or societal) purpose.
Danone – to bring health through food to as many people as possible
GSK – to help people do more, feel better, live longer
Philips – to make the world healthier and more sustainable through innovation
These and others are embedding environmentally-friendly and sustainable practices into their day-to-day operations as described in a recently-published book.
“All In: The future of Business Leadership” by D Grayson, C Coulter & M LeePublisher: Greenleaf 2018.
Should be required reading for all C-suite executives!
In this series of three brief articles, Ron Ainsbury, Visiting Fellow at the Cranfield School of Management and Senior Fellow at the Research Centre Business Innovation at the Rotterdam University of Applied Sciences, sets out why and how New Zealand directors should be directing efforts to ensure that their businesses have a clear purpose and have the governance systems in place to ensure that the purpose is followed. In this second article we look at the evidence that businesses that do embrace responsibility and sustainability outperform competitors.
The Business Case
Business leaders, seduced by the lure of shareholder value maximisation, often proffer multiple excuses for not taking more positive action on ESGissues, that they can’t afford it. Costs will go up. We are too small. Yes, we understand the triple bottom line – but for now it needs to be profit first, people and planet can come later, when we can afford it.
Yet, the evidence reveals these to be false arguments. Businesses that are embedding responsible and sustainable business practices show, lower costs, higher employee engagement and productivity and improved returns.
It may seem strange to have to set out a business case for being responsible and sustainable. Keith Weed, Unilever’s Chief Marketing Officer, has said “I’d love to see the business case for being unsustainable!”
The evidence is now conclusive. As the late Ray Anderson said – it is a better business model.
In 2010 Britain’s Business in the Community recognized a divide between those that “embrace sustainability-driven strategy and management, and those that don’t. These ‘embracers’ are the businesses that will survive and thrive”. BITC commissioned the Cranfield School of Managementto compile the business benefits for being a responsible business, “to help those currently at an earlier stage of the journey”. The studydemonstrated seven ways in which business benefits:
Brand value and reputation
Employees and future workforce
Risk reduction and management
Direct financial impact
Since that study, several further research papers have highlighted the benefits. In 2011 a Harvard studyprovided “evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance.”
In 2014 a study by the Smith School at Oxford Universityand Arabesque Asset Managementshowed that Companies with strong sustainability scores show better operational performance and are less riskyand that Investment strategies that incorporate ESG issues outperform comparable non-ESG strategies.
In 2015 Project ROIbuilt on the 2010 BITC findings cited above and provided detailed economic analyses on business benefits:
Share price and market value
Sales and revenue
Reputation and brand
Risk and license to operate.
The report concluded that a “more productive approach will be to develop business-aligned and integrated CR strategies.”
In January 2016 the Financial Times highlighted a reportby HBR Analytica and EY’s Beacon Institute that found “companies with a purpose beyond profit tend to make more money.”
In 2017 in a HBS Whiteboard session Andrew Winstonneatly summarises the arguments in “The Business Case for Sustainability.” No wonder then that so many leading global businesses are not just dabbling with ESG issues but going “All In”.
When Larry Fink, the CEO of the world’s largest investor, Blackrock, writes to the CEOs of companies he invests in and urges them to find their purpose and that the “board is essential to helping a company articulate and pursue its purpose” purpose – it is time for NZ Boards to sit up and take action.
In this series of three brief articles, Ron Ainsbury, Visiting Fellow at the Cranfield School of Management and Senior Fellow at the Research Centre Business Innovation at the Rotterdam University of Applied Sciences, sets out why and how New Zealand directors should be directing efforts to ensure that their businesses have a clear purpose and have the governance systems in place to ensure that the purpose is followed.
Perhaps, by focusing on purpose and embedding the culture and values to support that purpose, much of the unethical behaviour of corporations could be reduced and so much of the focus on the plethora of compliance rules, regulations and procedures minimised.
The Purpose of Business
The IOD’s Four Pillars of Governance Best Practice, states that ‘Corporate governance exists to help organisations achieve their fundamental purpose … typically to maximise shareholder value.’ Why?
This focus on short-term profit and maximising quarterly shareholder value has grown since the US Economist Milton Friedman first stated “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
As a result, since then, most business schools, business commentators and analysts have developed and used various profitability measures such as quarterly earnings per share, to gauge the success of businesses, and stock market investors narrow their focus even further, sometimes to daily profit expectations.
But shareholder value is not a legal requirement. The NZ Companies Act 1993, 131 (1) states that ‘A director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.’ Australian, US, and UK laws reiterate this, using ‘best interests of the shareholders’ as the guideline for a director’s decision-making.
In recent years the wisdom of focusing a businesses’ purpose on shareholder value has come into question. Martin Wolf writing in the Financial Times wrote: “Almost nothing in economics is more important than thinking through how companies should be managed and for what ends. Unfortunately, we have made a mess of this. That mess has a name: it is “shareholder value maximisation”. Operating companies in line with this belief not only leads to misbehaviour but may also militate against their true social aim, which is to generate greater prosperity.”
This view has been repeated in several articles, for example, James Montier of the global investment firm GMO wrote a well-researched article in which he demonstrated that
shareholder value maximization is “The World’s Dumbest Idea”.
It is time business went back to basics. With a few exceptions, businesses start when an entrepreneur sees a situation where a group of people can have a problem solved. As Peter Drucker once put it, “The purpose of business is to create and keep a customer.”
Creating and keeping customers could mean offering a new product or service that is cheaper, or of higher quality, longer-lasting, is disposable, offers superior performance, offers faster performance, and so on. In each case there is a group of people who are willing to pay for this innovation. If we look at the successful companies of today and trace back to how they first started, we see this clearly:
Nike, founded by an athletics coach, who wanted his athletes to have better performing running shoes
Google founded by students who wanted to be able to find academic papers on the internet more easily
Facebook founder Mark Zuckerberg wanted to help individuals share experiences with friends
Henri Nestlé wanted to help mothers who couldn’t breastfeed
Steve Jobs wanted everyone to be able to have computer power in their hands
Quakers offered to provide safe custody of gold for 17th century London goldsmiths and founded Barclays!
Each of these companies ventured into unethical behaviour, I assert because as they grew their governance focus shifted from purpose, values, and culture to short-term profitability, most probably as a result of stock market pressures.
Of course, there are many people who start a business simply dreaming they will become rich, but unless they find a market and provide an innovative solution, they won’t. If the entrepreneur manages the new businesses efficiently, then she or he earns a profit on the investment.
Drucker sets out three purposes of profit:
validation of the soundness of an enterprise’s efforts (the right purpose)
compensation for the risks that the business is incurring (dividends for investors
the generation of resources needed to fund future growth (sustainability).
The way to ensure the sustainability of the enterprise is to reinvest in innovation and meeting consumer needs.
Some continually argued against this profit-centred approach. Charles Handy, in the Michael Shanks Memorial Lecture in 1990 argued “To say that profit is a means to other ends and is not an end in itself is not a semantic quibble, it is a serious moral point.” And went on to address the purpose of business.
In recent years there has been a move away from Friedman’s profit-centred focus as business leaders have rediscovered the power of purpose. While John Elkington’s “People Planet Profit” may have started a trend towards businesses taking a lead in being socially responsible (CSR ) this new focus on purpose is not CSR it is central to the business. As David Grayson and others argue in their recently-published book, it is about companies going All In” (“All In: The Future of Business Leadership” by David Grayson, Chris Coulter and Mark Lee. Routledge 2018).
In October 2014 Coca-Cola Enterprise sponsored a “Future for Sustainability” Summit and commissioned a Cranfield School of Management and the Financial Times study, entitled ‘Combining Profit and Purpose’.
In a recent article, the strategy guru, Michael Porter wrote: “A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the wellbeing of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell? How else could companies think that simply shifting activities to locations with ever lower wages was a sustainable “solution” to competitive challenges?
The role of Purpose is thoroughly set out in a seminal book “The Power of Purpose” by John O’Brien and Andrew Cave, required reading for every CEO and Director, indeed, for anyone interested in starting or running a successful enterprise, whether for profit or not.
Even in the world of investment finance, where the purpose of investing is purely for profit, we see a realisation of the importance of Purpose. Earlier this year Blackrock’s Larry Fink encouraged CEOs to reconsider their purpose writing “Without a sense of purpose, no company, either public or private, can achieve its full potential.”
“The bottom line result is that purpose-driven, people-centric, values-driven companies outperform. Not just because they do better sustainably over time, but because they avoid the risk. They avoid the Volkswagen and the Tesco problems, and they avoid the thing that wipes 30% off their share prices.” Ann Francke, CEO, CMI
Instead of criticising those who have signed up to the New Zealand Climate Leaders’ Coalition we should all be encouraging all business leaders to go further and focus on the wide range of ESG risks and ensure that their individual businesses have a clear purpose. NZ directors may find that they will need to spend less time on compliance.
In the second article in the series Ron will present the evidence that businesses that focus on purpose and manage responsibly and sustainably, taking into account their potential impact on a wide range of stakeholders, generate superior returns for their investors.
Here is link to a video I have posted on YouTube. This was in 2016. I repeated the talk in March 2018 – the text of which I posted earlier.
Cleantech Delta and Rotterdam TEDx held “Clean Tech meets the Next Economy”. I was invited to share my thoughts on the way business education needs to change to support the Roadmap to the Next Economy which is a plan for the development of the 23 municipalities in The Netherlands from The Hague to Rotterdam. See https://tinyurl.com/y7hrsq82 for more details.
Rotterdam TEDx hadn’t arranged video but a start-up video company was filming – hoping to generate follow-up orders! I discover this video in my files when I moved cities!