The purpose of business & measuring it

Current Read

The purpose of business & measuring it

Share on linkedin
Share on twitter
Share on facebook
Share on email
Share on print

If we are to go by the way the capital markets evaluate businesses, we would be led to believe that the primary and sole purpose of business is to maximize shareholder value. This is the only measure on which the leaders of businesses are evaluated and rewarded. Yes we do expect them to behave and conduct themselves in a manner that meet the norms of society and the good news is that the large majority of companies go about doing their business in the right way. But that alone should not be good enough. .

We would like to argue that if you went back in history, businesses were set up with the purpose of serving the society, meeting a need of the society. In return the business would get returns which would allow it to take care of its employees and provide profit back to the investors. The primary purpose was to serve that unmet need. It was a mechanism for the individual to contribute his or her energies to make a contribution to the society/world.  

Companies should therefore be evaluated on how well it serves the need of society (customers), how does it take care of its employees, the contribution to the planet and also the returns it provides to its shareholders.

There are studies which measure each of these facets individually, however in today’s era most recognition and importance is given only to shareholder returns. Ideally the equity research reports prepared by the stock brokers should include a detailed assessment of each of these four components to ensure a fair measurement of performance of the business. We think that there exists a large number of investors who will be willing to accept a lower return on their investment if the company does fare better on serving a society need in a better way or building employment in a tougher macroeconomic environment.  The rise of social enterprises* is very good proof that a growing number of consumers and investors are keen on supporting businesses that do not prioritize profit.  

Our biggest challenge is that in recent times, the capital markets have focused on profit growth and market capitalization as the primary measures of success. This constant review on a daily basis has distorted the ability of companies and its leaders to have a holistic view of the purpose of business.  

We started looking for examples of companies which do a good job of being organized in a manner to serve society better. It will come as no surprise to many that Japanese companies do extremely well in this regard.  For example, Sumitomo Group has organized itself around its Founders Precepts which were defined almost 400 years ago.  Its mission statement “To achieve prosperity and to realize dreams through sound business activities”.  The founder shared that “Benefit for self and others, private and public interests are one and the same.” It also went onto prescribe that the company should avoid short-term profiteering in order to develop long-term value to all stakeholders by being aware of social and business needs. Based on these precepts, in 1891 two articles were prescribed as Sumitomo’s operational rules, shown below:

  1. Sumitomo shall achieve prosperity based on solid foundation by placing prime importance on integrity and sound management in the conduct of its business. 

  2. Sumitomo’s business interest must always be in harmony with public interest; Sumitomo shall adapt to good times and bad times but will not pursue immoral business.

It is missions and values like these which allow companies to stay relevant and stand the test of time. This case study prompted us to further review some of the oldest companies in existence. This was to explore if there is some trend between longevity and business purpose / corporate values. Again, many of the oldest companies are from Japan.    

Our research also led us to how a company was organizing itself to be in business for the next 300 years.  Softbank, a leading conglomerate from Japan, celebrated its 30 year anniversary in 2010.  Founder and CEO, Masayoshi Son took this opportunity to present the next 30-year vision for the company. A year earlier, he had released a tweet and asked for opinions from both within and outside the company.  He mentioned that Softbank mission was to make the lives of people in 21st century richer and more enjoyable.  He asked people to respond to his question, “What would be the saddest thing in your life, What would be the happiest thing in your life?”.  Based on the response, he presented Softbank’s Vision for the next 30 years. He summarized the future business philosophy for the company as Information Revolution: Happiness for Everyone.

http://webcast.softbank.jp/en/press/20100625/index.html#_ga=1.138714294.481746341.1426646367 

He also articulated the company’s aim: To be a Corporate Group growing for the next 300 years.  It is heartening to see a growing trend of companies who are beginning to take the lead in defining the purpose and measure of success for businesses moving forward.  Capitalism has helped drive good economic growth, but it has also led to greater income inequality. 

What is the purpose of your business? Is it possible to have a more holistic way to measure the success of a business? How are you measuring the success of your business?

More to explore