What is the real purpose of a company? - Business Works
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What is the real purpose of a company?

by Dr Graham Wylie, CEO, The Medical Research Network In this well-presented discussion, Dr Graham Wylie, CEO of the Medical Research Network, discusses the various roles of a company and its responsibilities in today's society.

I was asked an unsettling question at a recent meeting of CEOs, gathered together to learn about how to manage our businesses better: "What is the purpose of my company?"

Our speaker was trying hard to get us to focus on our purpose. And, of course, he has a point; if we don’t have a purpose, how do we know we are doing the right thing? The alternative is to just float about and not bother about a purpose, never know if we are doing anything of value and make essentially arbitrary decisions if we want to. Daft, right?

Well, if you say it that way, it sounds daft, but if you call it 'flexibility' it starts to sound more sensible. It is often said that most new businesses don't end up doing what they first started out to do, making such flexibility a core survival behaviour in such organisations. Certainly in my own career I started as a young man with lots of plans and although I have achieved a lot over the years and had a successful career, I can't say any of it actually happened as planned.

For me, this means the ability to change your mind, adjust your direction and rethink your plans. Whatever I come up with for a purpose, it has to fit into this schema somehow. It has to be something to give direction and focus whilst still being flexible.

why a company?

So what is it? One of our group had asked his mother who had formed his business with his father many years ago. Simple and elegant, her answer was that they formed the business to ensure their family was secure, protected from the vagaries of external influences and had a steadily improving quality of life. I was bowled over – beats the hell out of 'achieving a £10m EBITDA by 2020', which was my first offering.

I was already uncomfortable about my financial approach, because it was inherently unsatisfying – I knew it was not the reason I had started the business. I barely knew what EBITDA was when I started the MRN and if you had asked me before this exercise I would have mumbled on about making sure everyone had a good salary and an eventual return, as well as achieving my own personal goals.

what is the purpose of ANY company?

I got to thinking about it more fully. I realised I had a 'heads down' approach to this question, which meant I had limited horizons, context and analysis – just staring at my feet really, in mental terms – what I needed was a heads up view – the bigger picture. I had to start with the question, what is the purpose of ANY company?

Classic capitalist dogma says using the motivators of individuals to look after themselves will promote growth for all and a healthy economy for all, whereas now we can see that unfettered greed can severely damage an economy. Every man for himself is powerful of course, because it needs no social controls to work and has worked in the past. However it isn’t perfect and, when risk is unlinked from return, it can be extremely damaging.

Digging further into the concept of purpose I then come to all the stakeholder statements. These feel like they are more on the right track because they are multi dimensional. They explicitly recognise there is more to a company than shareholders and that there are other investments people make in a company that are not financial, but they still don’t explain anything. The concept is unbounded which makes it useless - too broad and it looses any discernment as to the views of the stakeholders and too narrow and it looses balance and fails to represent the full community it should represent.

My next step is to get clarity on the obvious stakeholders and ask the question: "Who or what allowed them to get into that position?".

If we want to know why companies exist, we need to first ask the people who formed them - and I still can't do better than my friend at the CEO club - to provide security, self-determination and improving quality of life for the their family.

We then need to look at the context of society that allowed them to be created and become dominant.

History suggests that companies are the extension of a long term trend for people to specialize in what they do. In fact, it goes back to the reason for a capitalist economy of any sort – we need an economy because we need money and we need money because it allows people to be rewarded in a single unified manner for the whole host of human endeavor, allowing them to specialize, exchange their service for money, then buy another service they need. Otherwise, we would all live off the land, eating and wearing what we could grow and make ourselves.

Companies, therefore, in social terms, are a means of organizing ourselves into specialist units to provide goods or services that someone else values enough to pay for. Society allows this to happen because we all become better and better at what we do, we get more efficient and effective and ultimately we provide more for society. That is why the standard of living of people today is so much better than prior to the industrial revolution. That is why almost everyone has TVs, HiFis, mobile phones, comfortable homes, cars and holidays. Not everyone of course, society is far from perfect – but overall we are immensely better off than we used to be.

so, why does society allow avarice?

So, for me, as a description of the purpose of companies, this starts to look good – we have the personal founder's purpose coupled with a contextual reason from society. However, despite being multidimensional and specific enough to have true meaning and learning from it, certain questions are left unaddressed - such as why society allows the risks of companies – in other words, avarice. It also fails to explain how it works. We now have an explanation of why companies are allowed to exist and what their purpose is, but it is untested. A way of testing it is to ask: "If this is the purpose, how does it translate into the day-to-day activities of companies?" How did we get the TV, the car, the mobile phone? They came from an open exploration of what people might value. Who in Henry Ford's time would have predicted the sales of Grand Theft Auto on a play station? They couldn’t, so you need to give encouragement and space to innovation in the company purpose. Society demands it, which implies some coherent thought by an entity called society – which of course does not exist – score one for Margaret Thatcher - and companies are a major source of such innovation, so it needs to be part of their role, their purpose. Hence the need for a value proposition in a purpose – people in society need to want the products or services on offer – if they don’t then the company fails.

This is the thread that eventually leads to shareholder value and EBITDA statements, because if people value what you provide you will make a profit. This therefore drives innovation. Our definition of purpose has now has to say a company must meet the needs of the founder for security, self-determination and a rising quality-of-life and meet the needs of society by organising its people to make something of value to others.

What else, then, does society want from companies?

Society as a whole is, of course, a non-entity, but there are people we put in charge who represent society – politicians – who are therefore a personification of social demands. Politicians are those tasked with ensuring social structures like companies meet the needs of society – and they do so for all society, not just sub-components. This is where I sense we are breaking away from the simplistic stakeholders view. We are starting to explore the non-obvious stakeholders in companies.

businesses should innovate and more

Politicians need to ensure that business owners don’t just innovate and search for the greatest return above all else – otherwise we would all be bankers who make a ridiculous amount of money for the value they add and the world would implode. No, we need to have all activities in society represented in organisations that allow specialisation. Some will have greater value than others (although none should be zero), but they all need to be present or the system fails. This leads to subsidies - for transport perhaps, so that the bus or train service goes everywhere, not just those places where there are enough people to pay for it. The value of operating a train service drops, but the needs of society are met. Society also needs to provide for those who cannot provide for themselves. For these two reasons society needs companies and individuals within them who are well paid so they make enough money to pay into a social fund for those who cannot look after themselves – otherwise known as tax.

I therefore find myself with a purpose statement that grows to include ensuring a company makes enough money to ensure all of society’s needs are met within the services provided and that they contribute to the tax system for those who cannot look after themselves.

From our previous argument, we are also left with the fact that companies are a critical component of society that we have to encourage and that companies need to innovate to develop society further. If the return from companies, to those brave or foolhardy enough to form them or run them, is no better than not doing it, then no one in their right mind would do it.

to innovate you seem to have to fail many times before you catch the wave

Thousands of companies go bankrupt every year to fuel the innovation that society demands. This is because to innovate you seem to have to fail many times before you catch the wave when you finally hit on something that people want and value, which in turn allows you to succeed. You have to try out a lot of ideas to find the ones that work and stick.

So, why do they keep trying? Their perceived potential rewards must be high – not just in terms of money, but, back to where we started, to protect themselves from the vagaries of the economy and other employers and to increase their quality-of-life. I believe it is self-evident that to get so many to keep trying the return they are striving for has to be significant. This is harnessed self-interest, the tool we have used extensively to get where we are today, at least in the western democracies.

Society has some other self evident needs however – for the majority of people in society who do not own or run businesses who need something to do, they need to work to get money to operate in society. Companies provide that through the specialization function. The key added element here is that people need to work and to be rewarded for it and this is a social function of companies.

My final definition therefore is that companies are a vehicle to provide forms of specialisation in society that generate positive value to drive social improvements in quality-of-life. Whilst doing this, they are also provide a significant return to their creators - in terms of money, protection from the vagaries of the economy and self-determination and keep their staff fulfilled with they are doing and getting paid for it. Coupled with this is the fact that the company provides enough value to ensure that its service is available to as much of society as possible and that they make enough money to pay company taxes and for their staff to pay personal taxes, for those society members outside the reach of 'paid for' services and products. This means the solution presented by our guru (right at the beginning) is a little more complex than achieving just what the founder wants. Actually, we have a social responsibility to also ensure the rest of the purpose of the company is fulfilled.

Which is why, much to my surprise, I find myself in violent agreement with our new Archbishop Welby here in the UK, who is launching a publicity campaign to promote his position of banking reform as he is on the banking commission for the government. Because banks have the same responsibilities as the MRN, which means fulfilling their social role. Here I find some further complexities, because the social role of a bank includes supporting other companies. Small companies in the UK provide around 45% of GDP and employ around 16% of the working population and require capitalisation. Banks and the government, VCs or Angels are the major sources of this money. Without this capital our economies will crash. Is it fair to ask banks to fulfil this extra social role? They also have to meet other elements of the purpose of a company which drives them to maximise profit. Perhaps this is incompatible with the role of funding small businesses, especially when you consider that companies that need support have to cover all functions in society, many of which will not return at the highest level.

professional training for bankers to understand their greater social role

Dr Welby advocates a requirement for professional training for bankers to understand their greater social role, a professional body to whom they answer, akin to the GMC [General Medical Council] for medical practitioners. This provides a 'higher body' to whom they should answer, over and above their immediate corporate hierarchy and objectives, a direct reflection perhaps of the complexities of their greater social responsibilities. I am totally in agreement, as my own experience as a physician directly supports the power of this sort of regulation in setting acceptable behaviours.

If we want people to take social responsibilities, we need to know what they are and educate people in them. It is clear from the multitude of corporate visions that do not recognise the purpose of companies as I have defined here, that this is not common knowledge and that the the message needs to be spread.

For more information about the Medical Research Network, please visit: www.themrn.co.uk

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