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The Profit Motive Versus “Trust”

Revisiting Fukuyama And The Purpose Of Business

“One of the central premises and argument for the value of corporations is that their interests are aligned with the society or community where they are operating. If they are not – if they are only operating in the interests of shareholders, this undermines a central premise for the utility of the free market.” 

Recently, I have been considering more and more the big-business paradigm; its intellectual pillars, culture, practices and management behaviors. This reflection resulted from various comments I’ve heard in discussions, business strategy seminars and conferences where the purpose of business, its drivers and the relative importance of the profit motive have been raised. I also noticed, in conversation with colleagues and friends, a theme developing that caused me to ponder examples of leadership, various organizations and management decisions that I have witnessed, experienced or been a part of since I began my professional life some 30 years ago.  It was interesting to me that across the arc of that time several patterns have emerged in respect of which my conclusions are not particularly positive. Though I do not lack hope, I am critical of certain developments in business, management thinking, corollary practices and what I perceive as a conventional wisdom that reaffirms the classical economic view that the profit motive is king and shareholder value is the primary objective of the firm. As I contemplated my personal values I followed my internal logic and conscience and I re-affirmed the conclusion that I favor social entrepreneurship and, by degree, the democratization of profits. This does not mean that I am a socialist, or an advocate of central planning. On the contrary, I remain convinced that reasonable reward for personal innovation and industriousness is imperative to development. The important question is what constitutes a “reasonable reward.” 

Bluntly stated, I propose a liberal-capitalist economy in which 40% of the wealth of a nation is owned by 2% of the population is anything but ‘reasonable’…Call me egalitarian (I do not think it an insult). I would simply encourage less focus on short-term return to the shareholder in favor of a longer-term view that may liberate entrepreneurism as well as release the firm from the overriding limitations of short-term measurement and strategic thinking (which is by its nature not strategic).  Consequently, I argue that given adequate support substantial factor growth, socio-economic prosperity and security and more equitably distributed wealth to all stakeholders in the firm as well as satisfying the requirement for a reasonable return to the shareholder.  When I studied economics, this was explained by the concept of the production possibility frontier curve shifting to expand production and thus increase the overall wealth in an economy.  If we accept that business is an inherently social activity and that originally businesses developed to enhance the efficacy with which we could produce and exchange goods and services, then the next question is the keystone. What principles should guide us in making our own society more productive and secure?

I am always surprised at how many proponents of neo-classical economic theory continue to support the case for the unfettered operation of the market mechanism and the primacy of the profit motive, maintaining that making a profit is the prime reason to be in business. In relation to this perspective, I refer to Francis Fukuyama’s (1995) work “Trust”, in which he examined the principles that make a good and prosperous society…his findings strongly challenged the orthodoxies of both the left and right. Fukuyama explained that the belief of conservative economists that only free markets unleash individual initiative and thereby foster greater prosperity is at the root of the popular myth that America was built by rugged individualists making unrestrained “rational” choices. I think it is arguable that this mythical rugged archetype underpinned Hank Paulson’s personal crusade to save America from ‘moral hazard’, preferring the banks to fail in 2008, rather than risk venturing near the proverbially slippery slope of interfering with the market mechanism despite the potentially catastrophic “systemic risk” posed by the complex interconnection of financial Services Institutions (FSI). It was only when the entire US economic system was clearly in danger of collapse that Paulson (the champion of market equilibrium) relented and introduced the ‘bailout’ package thus saving countless financial losses and socio-economic mayhem, hardships, and unemployment.  This digression exemplifies to some extent the ruthlessness, the depth of resistance to intervening in the market and the bias towards unfettered capitalism that has come to exist as an institutionalized mindset.  This mindset is reflected in the catastrophic evidence of corporate bad behavior in the banking Royal Commission currently underway in Australia.

In “Trust” (1995) Fukuyama argued that if Marxist economics undervalued the role of individual choice in a market economy, neoclassical theory certainly goes too far in the other direction, promoting a radical individualism that neglects the moral basis of community and ignores the many “irrational” factors that influence economic behavior. He maintained that prosperity and economic security is based in the moral bonds of social trust.  “This is the unspoken, unwritten bond between fellow citizens that facilitates transactions, empowers individual creativity, and justifies collective action. In the global economic conditions with which we are currently faced the social capital represented by trust is as important as physical capital.” I contend that Fukuyama’s argument may be used and extended to the theory of the firm that I studied at business school when I learned that profit was not the only or prime-ordinate reason to be in business. In 1995, Fukuyama argued that only those societies with a high degree of social trust would be able to create the kind of flexible, large-scale business organizations that are needed for successful competition in the global economy. He concluded that the greatness of the United States was built not on its imagined ethos of individualism and unfettered, laissez-faire capitalism but on the cohesiveness of its civil associations and the strength of its communities. It is interesting that Fukuyama predicted the drift away from the communitarian tradition and towards a more extreme individualism that defined Hank Paulson’s predilection to allow the financial institutions impacted by the sub-prime mortgage crash to fail as a matter of American capitalist principle despite the potential social cost. I would contend that Fukuyama was right on the mark.

From my own point of view, and in my experience over the last 20 years at least, there has been a perceptible change in business culture, mindset and behavior across many industry sectors and large corporations around the world.  I am not suggesting that the profit motive was not a significant factor in business previously only that a more institutionalized short-term venality appears to have developed, is rewarded and is seen rather nonchalantly as a convention in industry today…more so than it was 20 years ago. This is reflected in the obsession with growth, the primacy of the share price and value creation for the shareholder at the expense of the customer, the employee, the job market and the product or service. An example of this may be seen in the customer service problems associated with the cost-cutting activity of off-shoring i.e. job losses, cultural misalignment, language barriers, low customer satisfaction etc.  Today, business schools are producing graduates who think in terms of these types of activities being typical of how to manage for individual and organizational success…Incentive structures, managerial goals and objectives and executive compensation are geared to creating shareholder value, and operating initiatives are also based on delivering value to the bottom line and creating value for the shareholder.  Certainly, operating effectiveness is still pursued but only if it supports the prime goal of increasing value for the shareholder. If not then egregiously, there is no compunction about cutting heads, divesting otherwise strategic yet profitable assets, albeit that they are ‘underperforming’ in the eyes of the short term, the market-estimate-driven business context of today. The pendulum has swung significantly in the direction of capital and away from other measures of business success.

This is a very different philosophy to that which I recall studying at business school when introduced to theories of the firm that suggested that it could be conceived of as a nexus of relationships, or that one of the prime-ordinate goals of being in business was to be in business (in other words longevity was a key driver), and that ‘satisficing’ was often a better strategy than maximizing. These concepts certainly influenced my decision making, approach to, and behavior in business. My first career also influenced my behavior and business ethos, I was in the military as a young officer where the team forms an indivisible, collaborative unit, the individual is, of course, important, but no individual is more important than the team which achieves goals and provides security collectively. There may be something in that….

I often observe ‘generation next’ in the workplace discussing value creation for the shareholder as the prime concern of the firm in such a casual way that it seems fundamental to corporate DNA.  What I don’t hear being discussed by this generation are any of the alternate, long-term social drivers that may give purpose to the firm…and today strategy rarely leaves room for the longer-term gain if it can’t be implemented without negatively affecting the share price in the short term.  Again, this is not to argue that the profit motive and the individual aren’t important, I am merely positing that business strategy has become more narrowly focused in terms of its ultimate aspiration.  My concern is that the unfortunate bi-products of this type of corporate milieu may well be the institutionalized, myopic drive for corporate profits without empathy or consideration for the more social value that the firm may create and as a result the increasing hegemony of psychopaths in suits, and the continued decline of Fukuyama’s communitarian values and social cohesion.  Business can be a democratizing agent for wealth and prosperity without destroying the profit motive or stifling initiative and innovation but if it is to be so, the obsession with shareholder value must be balanced with other stakeholder concerns.

In summary, returning to the question of the principles and values that we should use to guide social prosperity and security, I propose that we must revisit and inform business study with a social context and compassion balanced against the reasonable goals of creating value for the shareholder and profitability.

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Stephen Pitt-Walker
Stephen Pitt-Walkerhttps://www.smiknowledge.com/Executive%20Education.php
STEPHEN has more than 25 years professional experience in strategic advisory, management consulting and complex strategic outsourcing acquisition integration management across multiple industry sectors. He has consulted independently since 2009. He is currently the chief executive of Integrated Strategy Solutions (ISS) – a strategy education and advisory firm; Founder of the International Strategy Collegium (ISC) - a ‘Think Tank’ for the interdisciplinary development of strategy – and a group of the same name on Linked In; and is global partner, leading the Strategy Discipline, at the Business Insights Group. Prior to this he was Vice President and regional Financial Services practice lead at Gartner Consulting (Asia-Pacific). Stephen has substantial international business and management experience having lived and worked in East Asia, the UK, Europe and the United States (holding global and multi-geography responsibility in a number of premium brand, multi-national corporations). Stephen is a former military officer, a graduate of Australia’s premier military academies and holds multiple postgraduate degrees and awards for outstanding academic achievement and teaching. He is a graduate (Certified Strategy Practitioner) and Fellow of the Strategic Management Institute (Australia), is a past Fellow of the Strategic Planning Society (London), and is a passionate life-long learner, educator and author. Stephen also has a long standing humanitarian interest (especially in the area of Human Rights under International Humanitarian Law in post conflict zones). He is the Founder and Director of the Global Human Rights, Not-for-Profit Organization, is an active volunteer International Human Rights advocate and International Relations researcher & analyst. His specialised areas of concern are the Middle East & Africa and East Asia.

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