Figure 1: The four main types of corporate purpose
Despite capitalism’s two-century track record of improving most people’s lives on every major material indicator, capitalism now faces “a crisis of legitimacy”. “A movement to reset capitalism is already underway,” the Financial Times says. “Lots of business-people are now talking about purpose and the need to instil new ways beyond pure shareholder value.” The question is whether the new ways will make things better or worse.
Prior Missteps On Corporate Purpose
The last 90 years have seen several missteps on corporate purpose. From the 1930s to the 1970s, corporate managers embraced “stakeholder capitalism”. (See Figure 1.3 above). Executives were expected to optimize among all the stakeholders - customers, staff and partners, shareholders, and society as a whole. The result? Not surprisingly, we saw many “garbage can organizations” emerge. These were organizations in which it was unclear as to which direction the firm was heading. In September 1970, Nobel-Prize winning economist Milton Friedman’s famous New York Times article, followed by the efforts of his collaborators, economics professors Michael Jensen and William Meckling, conceived and launched the virus of maximizing shareholder value (MSV) on an unsuspecting world. (See Figure 1.2 above) Fifty years later, the resulting MSV pandemic is still raging with well-documented and disastrous consequences: short-termism, distrust, income and wealth inequality, declining financial returns and lower long-term shareholder value. It wasn’t capitalism itself that caused all these problems: it was the virulent virus of maximizing shareholder value that still going strong.
Why The MSV Virus Still Lives On
In August 2019, hundreds of big firms in the Business RoundTable (BRT) formally renounced their support of MSV. Yet the renunciation was as effective against the MSV pandemic as a porous facemask. MSV is still embedded in most big firms' goals, strategies, plans, processes, budgets, sales, and marketing processes, basically everything. And it’s not just inside the firms. The continuing impact of the pandemic is reflected in the public mission statements, and below-average financial results, of firms like IBM, GE, Electrolux, and many others. Even if we ever get to a point when there is broad agreement that MSV is a noxious idea, it will still take decades to undo the damage done by the MSV virus to firms and to society. Thus, the BRT declaration of 2019 didn’t kill the MSV virus. On the surface, it merely returned us to the confusion of the very stakeholder capitalism that had failed us in the mid-20the century. (See Figure 1.3 above). Once again, in theory, managers were supposed to optimize among the stakeholders - customers, staff and partners, shareholders, and staff in the interests of society. Not surprisingly, since MSV was by now embedded in most firms, these firms continued as before, that is, with MSV.
Yet Another Misstep: ‘Profit And Purpose’
Now, as the hypocrisy in the BRT 2019 declaration has become well documented and all-too The Alternative Of Customer Capitalism visible, a new effort is under way by the commentariat to set matters right by accepting that firms should be allowed to embrace profits as their goal, while also adding an idealistic purpose. This is like proposing to travel in two opposite directions at the same time, as shown in Figure 1.4 above. Going in two different directions at the same time may seem less confusing than going in four different directions at the same time as in stakeholder value in Figure 1.3, but, in substance, the error is the same: you can only go in one direction at once.
The Alternative Of Customer Capitalism
Meanwhile, a funny thing had happened. While this was occurring. In the first two decades of the 21st century, customers had struck back. Power in the marketplace had shifted from seller to buyer. Through the Internet, globalization, and deregulation, customers suddenly had choices, reliable information about those choices and an ability to communicate with other customers. The firm-driven marketplace of the 20th century had turned into a customer-driven marketplace. In this new world, firms found that that needed primarily to focus on delivering continuous new value for customers. Those that did so began making huge amounts of money. Those that weren’t, struggled. The shift to an obsessional focus on co-creating customer value was reinforced by other factors:
- The shift from an “economy of scarcity” of physical products to a digital “economy of abundance” of services meant firms had to choose carefully among the many things they might deliver;
- Firms had to be very attentive to customer potential needs, not just customer wants.
- Data started becoming the most valuable resource. · New kinds of business models became key enablers.
Today, the evidence is in. For those with eyes to see, customer capitalism is well underway. Firms that focus on continuous innovation for customers and are organized to be nimble, adaptable, and able to adjust on the fly to meet the shifting whims of a marketplace driven by end-users are flourishing. They have become the most valuable firms in the world and are among the best performers in terms of environmental performance. By contrast, firms focused on shareholder value and being run in the manner of the lumbering industrial giants of the 20th century, are struggling, in both financial and environmental performance. Moreover, when a firm prioritizes creating new value for customers, everyone else tends to benefit. Peter Drucker’s 1954 book, The Practice of Management, argued that the whole world was mistaken in thinking that the purpose of a firm is to make money for itself. Making money is the result, not the goal of a corporation. Businessmen aren’t necessarily selfish when they are creating value for their customers. The true wisdom behind Drucker’s thinking is that firms that created great workplaces that in turn delight their customers are not only likely to flourish themselves: their activities also tend to benefit society. Those that don’t tend not to survive. The question is whether firms really want to return to the murky world of mid-20th century multi-stakeholder capitalism where no one knows what the purpose of the firm really is. The alternative is to advance to customer capitalism where firms are primarily focused on continuous innovation for customers while also taking into account the interests of other stakeholders and the community. Getting beyond the public relations games of redefining corporate means nothing less than re-imagining capitalism, leadership, management., and how the economy needs to be run for broad based prosperity.
From Cuddly To Tough
The Financial Times wrote in 2019 that big companies by signing the BRT declaration, had “turned cuddly”. It wasn’t so. it turned out that the BRT renunciation of MSV was not for real. It was a head fake, just for show. In any event, real-world solutions are not about becoming cuddly. They are about becoming more tough minded about what works and what doesn't. Capitalism doesn't inherently create inequality: inequality is generated by the lethal virus of MSV that was concocted in the laboratory of Milton Friedman and his fellow collaborators, Jensen and Meckling in 1970s. More hard, tough-minded work is needed to rid us of this virus and the inequality that it spawned.
@ Copyright Stephen Denning 2022: This article was published first in Forbes.com and are re-published here, with permission, all rights reserved.