The purpose of an organisation is often understood as the fulfilment of a market need through the provision of a product or service. Achievement though is most commonly measured and reported by reference to short term maximisation of shareholder value (profit). This difference may lead to dysfunctional decisions – doing things to satisfy the measurement system rather than the purpose! It also suggests that what is really important to the actors in the organisation is profit. Maybe because that is the easy thing to understand and measure?
Commercial organisations give primacy to the interests of their shareholders (and/or other providers of capital). Theo Vermaelens (INSEAD) presents the pure shareholder view:
“Maximising shareholder value … [over time] … is the raison d’être of all companies throughout the world.”
(https://www.insead.edu/executive-education/interviews/finance/maximising-shareholder-value) reviewed 24th June 2019
That implies that an organisation can have no purpose other than accumulation of monetary value. Alternatively, The Institute of Directors state that the duties of a Director include (amongst other things):
• To promote the success of the company for the benefit of its members.
(https://www.iod.com/services/information-and-advice/resources-and-factsheets/details/Directors-duties-and-responsibilities) reviewed 24th June 2019
They do not, at least in that guidance, define either success or member benefit – that is left to the members. The company will, in its Articles of Association, have established the purposes which it exists to pursue. These are usually widely drawn – but profit may be assumed rather than explicitly stated. A quick visit to the UK Government website on this matter…
(https://www.gov.uk/limited-company-formation/memorandum-and-articles-of-association) reviewed 4th July 2019
….. showed that in none of the ‘model’ memoranda or articles of association was there a requirement to pursue profit. Perhaps profit is a consequence of trading activity rather than its purpose?
In a business environment where social enterprises, not for (distributable) profit and community interest companies are increasing in volume, value and visibility, we need to understand that any organisation, over time, must generate as much income as it does cost if it is going to survive. In doing so it may focus on stakeholder value rather than shareholder value. Stafford Beer pointed out that rather than being the sole objective, profit might be thought of as a constraint on the continued existence of any enterprise while Russ Ackoff opined that the most useful ‘product’ of the existence of some companies, their true contribution to social value, was to generate employment!
A stakeholder view explicitly considers the range of people and organisations engaged with or affected by an organisation, which would include owners of the capital (the shareholders) as well as customers, employees, neighbours, suppliers and society at large. If an organisation is going to be truly sustainable then purpose must be drawn more widely than profitability. It must, IF the organisation is going to be truly sustainable, meet the needs and expectations of all of its stakeholders. It must align its activities with its purpose and measure success by the fulfilment of that purpose while observing all of the constraints (including that of profitability) that surround it. In order for that alignment to be authentic we must ensure that the purpose of the organisation and the values and beliefs of its actors are aligned and that how we measure performance is consistent with that identity, not devalued in an inadequate proxy metric.
Many years ago testing authenticity the question was asked:
‘Why do you do that?’
Peter Dudley answered: “We do what we do because we are who we are”. Our real purpose, our identity, is expressed NOT by what we say but what we do!