In case you’ve been vacationing off the planet for the last 30 years, we live in the era of shareholder supremacy. Milton Friedman wrote “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits…”
Just because he was a smart, confident, articulate guy doesn’t mean Friedman was right. But we’ve all somehow managed to hear this statement as The Truth rather than one good man’s perspective.
The purpose of any business is to serve customers. Period. Without customers, there is no business. A lack of customers makes a business look like a hobby, or a pipedream, not a going concern. To be a going concern, the business must be sustainable, which takes a lot: a value proposition to meet current needs and wants, people, processes, technology, and capital, among others.
Capital has many forms. Investment capital. Working capital. Intellectual capital. Human capital. A perspective that I think is more valuable than Friedman’s comes from the late Walter Wriston, CEO of Citicorp: “Capital goes where it’s wanted, and stays where it’s well treated.” Capital is used to enable the productive assets of the enterprise. It’s fuel, without which the enterprise cannot move forward. In the same way that the purpose of a car is not to maximize fuel, the purpose of a business cannot be to maximize profits. But like a car without fuel, try running a business without capital (and commensurate, without profits). To preserve capital, it has to be treated well, which in the case of financial capital means generating market rates of return. For human capital, people need to see growth, recognition (and reward), and fulfillment, or they too will go where they are better treated.
Financial capital and the profits to sustain it are a constraint for a business, not the objective. It’s part of the rules of the game, not the purpose of the game. You have to follow this rule or you don’t get to play. Among the many stakeholders in a business, shareholders – investors — are an important group to be treated well, but they cannot be sustainably well treated if their interests always come before all others. Their satisfaction is an indirect result, not the objective.
The velocity of capital continues to accelerate, and we may need to re-think how to treat it well in the context of why, and under what circumstances, the business exists. How are you managing this challenge?