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.
Sometimes the problems that grab the headlines just seem so far out of our reach.
There is a global food imbalance; on one side of the planet, starving millions, on the other side obese kids.
We see evidence of pollution on a global scale, resources dug up out of the ground then discarded into the ocean, rivers, and landfills, despoiling water resources and the countryside, not to mention the air.
We read of health problems in developing countries killing babies and children by the thousands.
Here in Europe we read of youth unemployment but also an ageing population often in need of special care: a demographic imbalance.
These are just some of the problems that beset our world. Sometimes these problems seem insurmountable. “What can I do?” you might ask yourself. “How can I solve the world’s food problem? How can I save the planet from pollution, or solve these health problems, or energy shortages, or youth unemployment?”
One answer might be to start using your creativity, your ingenuity, and build on what others have developed. Stand on their shoulders and use your entrepreneurial spirit to come up with your own solution. Here are a few examples of individuals who have developed innovative solutions to some of the world’s social and environmental problems. Why not follow their lead?
At the age of just 15, living in Sussex, England, Tristram Stuart started feeding his pigs with food waste from his school kitchen. Sale of the delicious pork that resulted augmented his pocket money. He supplemented school food scraps with waste from local stores and nearby farmers. Then he noticed that what was being dumped appeared highly nutritious. He wondered, “Could I survive on this?” and set himself a challenge to eat only food waste for a month. This he did, successfully. Thus started his interest in food waste and a global campaign to reduce food waste. While campaigning across the world he organised a number of “Feed the 5,000” events where local chefs would provide free food to the public made from food that had been discarded. Today, major supermarkets are starting to promote “ugly fruit”.
What could you do in your community?
Nature has its own solutions to waste. Humans often shy away from maggots and cockroaches but these humble creatures near the bottom of the food chain eat up natural waste and then become food for others.
Vetiver is a remarkable grass that has been found to have multiple benefits, particularly in combating soil erosion, while providing useful products from its leaves and roots. The leaves are used to make thatching material for roofs and rope and an essential oil distilled from its roots is used in making perfume. Its roots also absorb substances potentially harmful to humans.
A cosmetic company realised it could generate a source of the essential oil for its own use and at the same time make use of its absorbent properties to clean polluted canals in Manila.
What natural solution can you apply to clean up the environment in your home?
Low-tech – Health
Charities donate expensive medical equipment to developing countries. Often these end up either not being used or broken after a few months because advanced technology can not be repaired: the skills needed to do it are not available within remote, rural communities. Jonathan Rosen pondered this question. He noticed that everywhere he went there seemed to be mechanics who could fix a utility vehicle – so why not make an incubator solely out of vehicle parts!
Low-tech – Education
Another challenge faced by communities in less developed parts of the world is the lack of electricity. It’s hard for people in remote areas to keep up with news – with limited access to electricity. And schools and teachers can be far away. So – develop a wind-up digital radio and cassette player. Now remote schools can be given cassettes with educational material and people can listen to radio stations providing news – and more educational content.
Is there a low-tech, low-cost solution that you can apply to address a problem?
Rockcorps gathers together young people and offers them tickets to an upcoming popular concert – in return for four hours of community work. The principle they have uncovered is simple:
If you give away something for nothing – it has little value.
If you buy something – your enjoyment increases.
But if you work to earn – the pleasure derived is highest.
Now, thousands of young people have worked on community projects and earned a great experience.
Do you have a creative idea to tackle the unemployment problem in your community?
Love shoes – Life shoes? No Lyf shoes!
ALY KHALIFA was getting a headache visiting a shoe factory – heat and volatile chemicals. He wondered: “Why do we need to make shoes this way – harming the health of the workers and polluting the environment?”
He then put together:
Very old technology: Japanese gateways built with interlocking wooden joints
Very new technology: 3D printing
… and came up with LYF shoes: design your own look, 3D print components, all components made from recycled and recyclable materials.
What great ideas could you combine in an innovative way to tackle an environmental or social problem?
You don’t have to be a giant corporation to change the world
The technology revolution is here – you can build on knowledge in a way that previous generations couldn’t. The power of the internet gives you access to the latest technologies such as Green chemistry, Biotechnology, Alternative energy, and Nanotechnology – to name a few.
There are plenty of resources available to assist the budding entrepreneur such as Angel clubs; Incubators; Charitable grants; government and university subsidies – and Crowd funding. Investors are just looking for the next smart idea.
There is no shortage of problems in today’s world – what we need are solutions. What the world needs now is your creativity, your imagination, and your ingenuity. So – which challenge will you take? The world is waiting for your smart idea!