Magazine Summer 2013

Why Making Money Is Not Enough

The world urgently needs businesses that have a higher purpose than profits.

Ratan Tata, Stuart L. Hart, Aarti Sharma and Christian Sarkar Reading Time: 3 min 

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Ratan Tata, former chairman of the Tata Group, argues that a company’s purpose is a spiritual and moral call to action. Image courtesy of Flickr user bvbmedia.

The problem with industrial capitalism today is not the profit motive; the problem is how the profit motive is usually framed. There is a persistent myth in the contemporary business world that the ultimate purpose of a business is to maximize profit for the company’s investors. However, the maximization of profit is not a purpose; instead, it is an outcome. We argue that the best way to maximize profits over the long term is to not make them the primary goal.

Profits are like happiness in that they are a byproduct of other things. Happiness, for example, can stem from having a strong sense of purpose, meaningful work and deep relationships. Those who focus obsessively on their own happiness are usually narcissists — and end up miserable. Similarly, companies need a purpose that transcends making money; they need sustainability strategies that recognize that you can make money by doing good things rather than the other way around.

Purpose is not about corporate strategy or tactics; these are both means to ends. Purpose is also not about social responsibility, which is simply a tool for managing reputation. Purpose is not even about corporate mission, which might be nothing more than an aspiration to dominate a particular marketplace. Rather, purpose is a spiritual and moral call to action; it is what a person or company stands for.

Many traditional industrial corporations have been constructed around extrinsic motivations like financial reward or recognition or fear of reprimand or losing one’s job. It has long been known that extrinsic motivation can only take you so far: Weaving intrinsic motivation into the fabric of an organization’s culture is therefore crucial. There is mounting evidence that employees throughout the world are hungering to find and bring their values to work. But they have not felt comfortable in doing so, as it may not appear “businesslike.”

We believe it is possible to build and lead companies that retain a deeper purpose. For example, the Tata Group had been conscious of its spiritual purpose from its start in the 19th century. Founder Jamsetji N. Tata believed that acquiring wealth was not the primary purpose of life; he considered that his company’s mission was to help the communities in which it operated. Even today, despite the growing wealth of the Tata Group, company leaders are not featured in the listings of the richest people in India or the world. This is because two-thirds of the shares of Tata Sons, the holding company of the group, belong to the Tata Trusts, one of the largest and oldest Indian philanthropic foundations.

Companies need a purpose that transcends making money; they need sustainability strategies that recognize that you can make money by doing good things.

Twenty years ago, when the movement for corporate sustainability first started to gain momentum, people spoke in terms of the need for fundamental change over the next decade or two. Now, two decades later, there is some good news and some bad news. The good news: A few corporations and entrepreneurs have begun to experiment with transformational strategies. Indeed, “clean technology” has become a fashionable investment category, and “base of the pyramid” business models targeting products and services to the world’s poor have become common.

Now for the bad news: We have not yet begun to fundamentally change the trajectory of the global economy. Indeed, over the past two decades, we have added more than two billion people to the global population and further intensified our ecological footprint on the planet. The science is clear: We have overshot the carrying capacity of the planet, and serious repercussions are now inevitable.

The science is clear: We have overshot the carrying capacity of the planet, and serious repercussions are now inevitable.

There is no more time to waste. For companies, the time has come to launch “corporate lifeboats” — such as new business experiments in next-generation clean technologies and serious business initiatives in the underserved space at the “base of the pyramid.” Now is the time for corporations to transform their operations for sustainability — and to strategically design, incubate and commercialize socially inclusive businesses and environmentally beneficial technologies, particularly in developing countries. We are in urgent need of sustainable business practices and technologies that are profitable for companies and simultaneously deliver economic, social and environmental benefits for the developing, as well as the developed, worlds. We are in urgent need of companies that have a greater purpose than making money.

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About the Authors

Ratan Tata is the former chairman of the Tata Group. Stuart L. Hart is the S.C. Johnson Chair in Sustainable Global Enterprise at Cornell University and cofounder of the Emergent Institute in Bangalore, India. Aarti Sharma is the founder and managing director of the Sustainable Value Alliance LLC, a consulting firm based in Woodridge, Illinois. Christian Sarkar is founder and CEO of Double Loop Marketing, based in Houston, Texas.

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Comments (9)
Denise Hilton
The world needs more intellectual brains. It's not about building business anymore, it's about bringing new ideas to the table and create new revenue channels. Of course blogs like www.webemployed.com are helping people search for those ideas but we need to make it happen on a global scale.
Justino Manuel de Oliveira Marques
A very useful and interesting article for the near future firm's strategy.
Sustainability belongs not only to the business itself or to porsue ecological purposes but it is related to financial balances, as well.
Some financial instability may be responsible for puting in question all firm's sustainability features, even knowing that agency costs (or som of them) come from management inefficiencies perpetrated by managers and/or owner-managers. 
These inefficiencies provokes agency conflicts and may be concentrated in an uncontrolled rising of short-term bank  financing if anyone will be able to overcome them. On the other hand, the financial desequilibrium will be deeper if there is not an interaction between short and long-term financial strategy. This is very important to preserve a financial compensation when short-term financial inefficiencies are not covered by long-term contributions and vice-versa.
For all sustainability purposes, together with making money, it will be very important to ensure sustainable business practices and technologies, but financial sustainability, as well. 
Financial sustainability based on an interaction between short and long-term financial policies (restricted financial sustainability), dividend policy sustainability and a more embraced financial sustainability based on the combination of the two last.
Some other firm's sustainability problems will be overcome, mainly those associated with a purpose that transcendes making money and that they feel are following strategies that making money not enter in conflict with doing good (whole fair and balanced) things.
ABHIJIT BHATTACHARYA
There is nothing wrong in making profit as the main objective of a firm if it clearly spells out what it actually does to create value and thus, earn that profit. In the age of information democracy, making money by doing one thing while promising another to the customers is bound to be a short-lived endeavor.   In the past, businesses could often make super profit for a prolonged period without really giving top priority to customer value creation. This was possible because in a market with high information asymmetry, the businesses could exploit customers’ ignorance and also their inability to access competitors’ offerings from across the globe with the click of a mouse.  Internally, the top management due to its position of power and the one-way communication channel could always pursue a singularly focused profit motive using various means – from outright imposition of decisions on subordinates to subtle coercion (aptly described by someone as Highest-Paid-Person’s-Opinion or HIPPO syndrome).  Lack of opportunities for employees and customers to get connected with the public at large also provided good protection to the corporate leadership. They could successfully hide dissatisfaction of many stakeholders over the chosen profit maximizing path of the company.  But, with the digital revolution the situation is undergoing a total change. Even an intern of a company is powerful enough to communicate with the whole world to let us know what is going on inside the organization. In such a situation the leadership of the firm must acknowledge the need to explain through a process of transparent dialogue how the company intends to earn profit by creating value for the customer and the society. Otherwise we may face a situation when Tata Nano – the world’s cheapest car and a brilliant innovation in automobile engineering – can earn huge profit by choking the already congested Indian roads and make transportation ultimately a nightmare for an ordinary citizen as more and more individuals start switching from two-wheelers to four-wheelers. Also, considering India’s precarious environmental conditions the long-term social cost of Nano can be equally high. It probably does not make much sense if a portion of the profit from Tata Nano is regularly transferred to the social welfare trust of Tata Sons to address the healthcare or environment problems caused by Nano itself.  In the emerging world the companies must realize that the processes which they intend to follow for achieving their main objectives of earning high profit (which is a perfectly legitimate objective)  have to be aligned to the long-term objectives of delivering happiness to the society.

abhijit1957@gmail.com
Jeff Mowatt
In describing the new bottom line, we said

"An inherent assumption about capitalism is that profit is defined only in terms of monetary gain. This assumption is virtually unquestioned in most of the world. However, it is not a valid assumption. Business enterprise, capitalism, must be measured in terms of monetary profit. That rule is not arguable. A business enterprise must make monetary profit, or it will merely cease to exist. That is an absolute requirement. But it does not follow that this must necessarily be the final bottom line and the sole aim of the enterprise. How this profit is used is another question. It is commonly assumed that profit will enrich enterprise owners and investors, which in turn gives them incentive to participate financially in the enterprise to start with.

That, however, is not the only possible outcome for use of profits. Profits can be directly applied to help resolve a broad range of social problems: poverty relief, improving childcare, seeding scientific research for nationwide economic advancement, improving communications infrastructure and accessibility, for examples – the target objectives of this particular project plan. The same financial discipline required of any conventional for-profit business can be applied to projects with the primary aim of improving socioeconomic conditions. Profitability provides money needed to be self-sustaining for the purpose of achieving social and economic objectives such as benefit of a nation’s poorest, neediest people. In which case, the enterprise is a social enterprise." 

http://www.p-ced.com/1/node/80
PAUL O MALLEY
The original intent of the focus on shareholder value was to protect the interests of investors from the agency problem created by professional managers (CEOs and senior managers in public companies) acting in their own interests. As Roger Martin has pointed out in his excellent book, "Fixing the Game," that led to the widespread use of stock-option compensation for senior managers, with disastrous consequences. 

The best run companies have always understood that profits are an outcome, the result of creating authentic value for customers and employees, while also paying attention to the impact the firm is having on the wider society. The reason this approach is not more widely adopted is precisely because of agency problems. To nudge more companies in the direction of authentic value creation, we have to push the culture of business in a more purpose-focused, ethical direction, while aligning key structural elements (like compensation, transparency of reporting, the election of directors, etc.)

I believe there are greater opportunities today for firms to survive, and even gain a significant advantage,  by building their culture and structures around authentic value creation. The reason for this new wave of opportunity is the exponential increase in transparency being driven by the web and social networks. Customers want to do business with companies that put their interests first, including their interests as citizens (not just consumers).  It is much easier to figure out which companies and leaders are really expanding the value pie (for customer, employes, investors and the society/planet) versus those that are playing a zero-sum game with a narrow focus on short term profits. 

For more on the power of an authentic value approach to business see: http://www.valuegroove.com/blog/forget-profits-five-keys-reaching-your-business-goals-2013
Heiko Fischer
Bill Hewlett and Dave Packard argued this 80 years ago. Listen to them outline the "Purpose of a Company" in the Context of the HP-Way:

http://h20621.www2.hp.com/video-gallery/us/en/51ff2f20c410f3bee8560d5fa177ca09b01c2bc6/r/video

Questions are:
1. Why does it not catch on?
2. Why does it not scale well?
3. Why do the rare gems rarely survive the pioneer leaders who embody this spirit?
Chandran A
Excellent message for companies leading the money wagon .In  a deeper thought I feel many companies of the future will  make their business to meet societal needs and then work towards profit along with.This balancing act is will question the existence and growth of the venture.

At R V Institute of Management Bangalore , I teach this lesson to my students. This thought is to begin from B-School.
Kapil Poojari
Great Article. Companies still believe in the traditional view of business that it exists to maximize profit by fulfilling consumer needs. Others believe that a fund allocation alone is not enough. Unless we redefine the role of business in our society we will continue to have structural problems that create conflict. It's high time we challenge fundamentals of business and management education. It's time to create  "Trusteeship Institute" This article here http://www.futurescape.in/the-trusteeship-institute/  details out why "The Trusteeship Institute" is critical in today's time.
jacques.saint-pierre
I don’t know where you got that “there is a persistent myth in the contemporary business world that the ultimate purpose of a business is to maximize profit for the company’s investors.”  Unfortunately, you contribute to the persistence of the myth. The expression “maximizing profit” comes from pure economics in a world of certainty. Anyway, would it be short term, medium term, or long term profit? We are living in a world of risk and uncertainty and you will find in any textbook on corporate finance that the ultimate purpose of a business is to “maximize the value of the firm”. It is the best way to attain social welfare in a market economy. It is also, the only objective that is coherent with the teaching of financial theories of the last forty years. You also find the objective of maximizing the value of the firm in practically ever annual reports although there's many a slip 'twixt the cup and the lip as the proverb says.