This article was published by the NZ Herald on February 4, 2020.
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.
This article was published by the NZ Herald on February 4, 2020.
This article was published in the NZ Herald on December 23rd, 2019.
If you would like to read the full column – and can not access the NZ Herald or don’t want to takeout a subscription for just one article – please email me at: firstname.lastname@example.org.
This article has now been edited and published by the New Zealand Herald on November 6th. You can read the article here.
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An article I wrote has been published in New Zealand Management – turns out it might be quite timely given the US Business Roundtable last week. Stop the debate and let’s see action.
I wrote this on my return from Vietnam.
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.
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:
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:
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.
Environmental, Social, and Governance issues.
The Business Case for being a responsible business” 2011 available on www.bitc.org.uk
The Impact of Corporate Sustainability on Organizational Processes and Performance by Robert G. Eccles, Ioannis Ioannou, and George Serafeim HBR Working Paper 2011
From the stockholder to the stakeholder:How sustainability can drive financial outperformance”by Smith School, Oxford Universityand Arabesque Asset Management 2014
Project ROI Defining the Competitive and Financial Advantages of Corporate Responsibility and Sustainability by IO Sustainability and Babson College 2015
“All In: The Future of Business Leadership” by David Grayson, Chris Coulter, Mark Lee Greenfield Publishing 2018
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:
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:
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!
Text of Rotterdam TEDx Talk
The theme of this year’s Rotterdam TEDx series is Great Heights. At first you may wonder what the connection is between food and education and great heights. I hope it will become clear.
Food courts are very popular across Asia.
In the modern metropolis of Singapore – people still flock to food courts like Newton Circus.
Most shopping malls will have a floor or a large part of a floor devoted to food. So even in luxurious shopping malls featuring shops selling all the latest Parisian fashion – there will be plenty of food choices.
They are a more recent innovation in The Netherlands. At Erasmus University there is a modest food court for students. In Utrecht – they have Speys as part of the Jaarbeurs convention centre – and of course, here in Rotterdam – we have the new Markthal offering a wide variety of foods – although strictly speaking this is not a true food court – as it is not possible to find a table where you can sit down and have a family eating food from multiple food stores.
In a typical food court, you’ll find there is a wide range of food options each served at a specialty outlet.
Individuals can mix and match their selections and then come together in the centre and converse over their separate meals.
Families love this because in one spot you can satisfy mum, dad, grandma, grandpa, and all the kids – each eating their favourite food.
Perhaps one will see that something another person is eating looks tastier and decides next time to try that. On the next occasion each is free to try a different food.
A food court serves food at all hours: breakfast, lunch, dinner and snacks from morning until late at night.
A TED presentation of a few years ago started with this picture – Hogarth’s depiction of a coffee house, often the source of many new ideas that drove the enlightenment – let’s see how modern day food courts fi tin.
The 21st Century is truly VUCA
We are living in what has been popularly described as the VUCA World. As with much of the modern language of business, VUCA comes from the military, in this case the US armed forces describing conditions in Afghanistan.
V for Volatile – just try to follow President Trump from one day to the next!
U for Uncertain – just what will Brexit mean?
C for Complex?
The Rotterdam University Research Centre, Sustainable Port City, Duurzame Havenstad, known as RDM to most, has set out 21 trends that could have an effect on the way the Port functions all of which illustrate the potential VUCA.
These trends include the increase in the use of robots and drones, the impact of the circular economy with reverse logistics becoming as important as forward logistics, the rise in renewable energy, and self-propelled vehicles.
Simple arithmetic says that the interaction of these 21 trends adds up to a staggering number of potential combinations.
A for Ambiguous?
Will robots yield fewer jobs? Fewer but higher-paying jobs? More jobs – but paying less?
We are currently in the 3rd, 4th, or 6th wave – depending on which academic you prefer to read.
The Australians developed the concept of the 6th wave of innovation.
The Germans described the 4th Industrial Revolution – adopted by the World Economic Forum.
And the American academic, Jeremy Rivkin – talks about the 3rd.
Whatever it is – the future is being driven by rapid advances in technology.
Just looking digital alone – here is one projection of the growth in connected devices. 50 billion by 2020.
Roadmap – Next Economy
In an attempt to make sense of the future – 23 municipalities have combined together to set out how the Rotterdam Delta should respond to the future
“In 2025, the metropolitan region of Rotterdam and The Hague will be the international market leader in the design, development, manufacture and marketing of solutions in the area of sustainable living in a heavily urbanised delta region. In the region, coherent solutions will be devised, tested and produced for global logistic, energy, food and safety issues.”
The Roadmap sets out five strategic areas of focus – or future economies – for the Delta:
1. The Renewable Energy economy
2. The Digital economy
3. The Circular economy
4. The Start-up economy
5. The Inclusive economy.
Arising out of this, in Rotterdam we have the Innovation Quarter seeking to redevelop older parts of the harbour known as the RDM and M4H districts. In fact, all this week we have had 90 students, from the Rotterdam Business School and the NEOMA Business School in France, tackling a problem specific to attracting new businesses to the planned circular economy area of M4H.
The question arises, are we preparing our students to be a part of this Road-mapped economy? I fear not. As in many countries, I see that education is stuck in a 19th Century paradigm.
‘The Times’ recently published its 2018 world rankings of universities. I was pleased to see my alma mater, Oxford, remaining on top of the global list.
But more troublesome are reports that student satisfaction is low.
A third of students don’t believe their course is offering value for money
Over a quarter believe feedback from tutors is poor and too many students end up regretting their choice of course.
In the recently published book, ‘Overschooled and Under Educated’ the author John Abbott asserts that education is about preparing children to become good citizens and adults who will thrive at unstructured tasks – not just successful pupils.
In 2014, The London School of Economics found a mismatch between what universities were providing and what businesses need. Their research among CEOs identified three core capabilities sadly lacking in recent graduates:
The ability to connect different parts of the business in a holistic way
Collaboration and teamwork.
These capabilities are echoed in a Twente University paper entitled “21st Century Education”.
As the eminent international advisor on education and creativity, Sir Kenneth Robinson, has pointed out, our model of education was developed during the industrial revolution – fit for purpose in the 19th century. If you were to ponder who succeeds in the current system, he asserts – the answer is university professors.
But if we are to achieve the goals of the Road Map then what we don’t want are more university professors.
Now, you might be wondering. This is all very interesting, but what does this have to do with greatness? The theme of this conference?
Here’s my concern. Are we providing our students, our future leaders, the kind of university education that will allow them to be great? Inspiring them to pursue their own greatness? To find, what Sir Ken Robinson calls their Element. Where they can be great.
Over the past three years I have been inspired by my students. They come from everywhere. All parts of Asia. The Middle East. Africa. The Netherlands and other parts of Europe. Central and Latin America. Even Australia.
They come to study business but they are also imbued with a desire to create a better world. They are aware of the problems of the modern world – climate issues, poverty, and they want the businesses they work for or create to be good citizens.
So, are we providing them with the education that will prepare them for this future?
I know that we are not.
Too often this is the view of the classroom. And old textbooks are the focus of learning.
We need schools that start to encourage new capabilities. Pupils to learn basic facts and theories but also we need to encourage an entrepreneurial spirit, nurture and develop their imagination and creativity and not snuff out these innate capabilities.
I was quite intrigued by this Infographic – produced by Funders and Founders. Everyone will become an entrepreneur.
I have asked several cohorts of graduate students – has your university career prepared you to be more entrepreneurial? To be creative, innovative? The overwhelming response has been NO.
As Prof Ken Robinson has pointed out the current education system, in many countries, stamps out creativity and instils uniformity.
We need to encourage young people to develop a flair for learning to learn.
This latter capability is going to be fundamental in the 21st Century. With knowledge changing rapidly, we are going to have to be continually re-learning.
What do we need?
Of course we are going to need specialist skills, built on a foundation of facts and proven theories – so engineers of all types, scientists, and doctors. I am not arguing against the need for pure science and academic rigour in disciples – what I am arguing is that we need a different approach to conveying that knowledge from the academic world to the community at large.
We also need creativity, entrepreneurial spirits to foster new technological, business, and social solutions:
Basic skills and knowledge
Collaborative and team-building skills
We see so many advances being made by differing specialists collaborating, e,g.:
” New health solutions combining basic medical knowledge with nano-robotics, engineering, and IT
” Engineers studying nature – zoology and botany to create new materials or new ways to harness energy from the sun.
Back to the food court
The need for business education is clear
Encourage inter-disciplinary work – active interaction between researchers, lecturers, students, and business people
Develop stakeholder-engagement and cross-sectoral partnership building skills
Nurture creativity and entrepreneurship.
Or is it?
What to teach? The importance of topics seems to vary.
I was perusing Friedman’s book ‘Thank you for being late’ where he discusses Teller’s view of the rate of growth of new, technological knowledge and contrasts that with human adaptability.
One of my colleagues is studying 21st century skills and has found a large discrepancy between what educators think their students need and what students believe are their priorities.
Here is the list of essential topics.
Here are the student survey responses.
But why should we try to force students into a specific box right now? Maybe numeracy Is not important – now – but perhaps will be in the future. So why not allow students to return to add to their knowledge – when they need it?
My view of the future business university is a kind of educational food court.
The university of the future should allow students to mix and match topics of their choice. Not just choosing from a range of pre-structured, fixed degrees – but choosing from a wide range of subjects. Including the creative arts.
Why not a degree in which you study management, mathematics and music?
Just as a food court serves food at all hours so students will be encouraged to return to the university at all times in their lives – to learn new stuff. The current stuff.
I see the university of the future offering short, specialised courses. And as new technologies and new capability requirements emerge in the 21st century, universities will develop new very-focused courses perhaps only a week in length.
Instead of degrees – business schools will offer shorter courses in specific skills and capabilities and award certificates attesting to achieved competencies. In the same way that boy cubs, scouts and girl cubs and guides collect proficiency badges. Right now I’d like to sign up for a cryptocurrency proficiency course and badge.
Businesses will send their managers armed with live problems to these courses – aiming to achieve solutions to their current business issues – collaborating with lecturers and full-time students.
Perhaps studying for a degree might become obsolete for business. It may well be that certain disciplines (such as medicine and law) will still need focused basic degrees – although rapid changes in medical technology will force constant retraining.
But right now too many of our universities are too silo-ed.
As David Grayson of Cranfield University writing in the ‘Financial Times’ asserted: “Part of the problem is the emphasis for academic career progression on publication in three- and four-starred academic journals which can encourage incremental development of academic theory.”
The Roadmap may need such incremental development in basic sciences and technologies – but it also requires breakthrough, creative solutions.
Steps we are taking at RBS
In my experience, the current accreditation system in the Netherlands does not encourage rapid innovation. We need members of our education boards and administrators to return to school and study entrepreneurship and creativity – then return to their roles and transform the system.
At RBS – central to the structure of our one-year Master degrees is building in the capabilities of:
Creativity – divergent thinking, and not just thinking but how to apply and operationalise
Critical and analytical thinking – problem-solving skills, making judgements
Collaboration – emotional intelligence, interpersonal communication, and teamwork (not just between known allies – but also between competitors and unexpected allies). We create cross-disciplinary teams of students to work with businesses to tackle real-life business issues.
We have experimented with new forms of collaborative and distance learning – first with Brazil and more recently with Barcelona. But instead of encouraging development – supporting experimentation – instead of helping overcome potential issues – the overwhelming response I have observed is – why do you want to change. Why can’t you just leave things as they are.
The dead weight of inertia and fear of change.
In a recent blog on LinkedIn, Sahed Ladapo these graphs, showing technology, businesses and public policy.
If you then take one of the observations of Sir Ken Robinson, that our educational systems were designed in the 19th century, we can posit that they were fit for purpose in an era when the rate of change of knowledge was sedentary when compared to that of the 21st Century.
Now we can understand the frustration of forward-thinking educators – I’d like to include emyself int hat category – who recognize that their role is really to help students grapple with a fast-changing world and would thus like to focus on building fundamental capabilities, like learning how to learn – but have to operate in a rigid structure that discourages change.
Our educational systems need to become more fleet-footed.
Look at what is happening in China. Often we think of China as being a cheap manufacturer of western products – but their students of today are being prepared for a different world.
If we are going to inspire this new generation to become great leaders – whether in business, politics and society, the sciences, or the arts – we need to introduce some radical changes.
In conclusion, I challenge our educational bureaucrats – unleash the greatness in our current generation – start to become versatile, creative, and fleet of foot yourselves and if you can’t – get out of their way.