Not to get lost in a seemingly philosophical debate, but what is (or should or can be) the central purpose of modern business? While this might seem like a navel-gazing exercise, the answer provides the core principle around which to organize the firm and galvanize its resources. All four stakeholder groups are important, but it is impossible to maximize on four fronts simultaneously. Without a focal point there can be no criteria for setting priorities and making informed decisions. So which one should be primary?
The classic Milton Friedman answer is that it’s all about shareholder value. Peter Drucker puts the customer first, while Jack Welch placed employee engagement at the top of his list. Microcredit social entrepreneur and 2006 Nobel Prize winner Muhammad Yunus probably is the strongest voice for the social responsibility paradigm for business. (It’s worth noting that he was awarded the Peace Prize for his work, not the Nobel for Economics.) The importance of creating “shared value” for both business and society also is endorsed by Michael Porter (see Porter and Kramer, HBR, Jan-Feb 2011).
The Profit Motive and Recent Events
The shareholder value assertion embedded in the “greed is good” mantra of Gordon Gekko in the movie Wall Street has hit hard times. Whether or not the financial meltdown was caused by greed run amok, the post-Bernie Madoff, post-financial bailout world has seen a surge in demands for higher ethical standards in business (and business schools, by the way) and the explicit rejection of the premise that the over-riding purpose of business is to maximize shareholder value.
That said, we still have a capitalistic economic model and private ownership. The market value of a company is largely unaffected by its contributions to society and the environment (except insofar as such activities are also good for the business), and the shareholders still are the owners. It seems that our focus on the “stewardship” responsibilities of business is more along the lines of “first do no harm” than an actual expectation of positive social contributions to the detriment of the firm.
So, Which Should Be Primary?
Maybe this question seems simple and shouldn’t have kept me up at nights, but I needed an answer. But using what criteria? All four stakeholders are essential. None can be ignored. Saying they are equally important, however, is a cop-out and leaves me back where I started.
Rather than simply assert that one is dominant, I took another approach: is there one of the four stakeholders so intrinsic to everything a business does such that maximizing for this group is inherently compatible with advancing all of the others? In other words, concentrating on which of the four would be most likely to simultaneously promote the objectives of all stakeholders? Focusing on which group would best promote a “harmony of interest” across all of the stakeholders, as expressed in the business philosophy of Whole Foods CEO John Mackey?
Maximizing shareholder value clearly fails this test. Many firms have made buckets of money by outsourcing jobs to lower-cost labor markets (which might be good for the new workers overseas, but isn’t exactly a win for the home town employees), buying and then dismantling other companies and, of course, producing and selling an endless array of products with adverse health, social and environmental consequences. Research by Roger Martin (HBR, Jan-Feb 2010), moreover, indicates that companies driven to maximize shareholder value actually realize lower returns than those that focus on customer value. Greed, it seems, is not so good.
Conversely, while social/environmental good citizenship priorities need to provide some direction and help regulate the single-minded pursuit of profit, such values cannot be the organizing principle for private business, as such objectives often mean compromising on profits and employee interests. While employees may opt for better safety standards (a social good), it is not at all clear that they will line up with their company to pursue social and environmental issues that might not be in the interests of employees. Employees seem to happily work for firms producing and selling those products and services with adverse health, social and environmental consequences. The reality is that issues of sustainability and public good are macro-level concerns, while the firm (and individual employee) is micro-level. While we might criticize the individual or the company for not taking a broader perspective of “doing good,” this is the underlying problem with regards to the “tragedy of the commons,” the disconnect between short-term micro-level interests and macro-level broader group or public benefits.
By the same token, as illustrated above, putting employees first might require compromising on shareholder value or social/environmental objectives. Even in an information and services sector, where value is created by and dependent upon people, the assumption that maximizing employee-related interests also is in the interests of shareholders is subject to challenge.
This is not to say that the goals of engaged employees, shareholder value and social/environmental gains are inherently incompatible. There are countless examples where two or even all three can be aligned and pursued simultaneously. But, as illustrated above, there also are countless examples where these three objectives come into mortal conflict, such that maximizing one is unsuited to or counterproductive to furthering the others. The only group inherently aligned with all stakeholders is customers.
Maximizing customer value – which is accomplished by driving loyalty behaviors such as retaining customers, keeping customers longer, selling them more goodies and getting positive word of mouth – is, by definition, core to boosting shareholder value. Maximizing customer loyalty means maximizing the lifetime value of customers. The best predictor of true shareholder value (that is, the value of the company they own) may well be the sum of the net present value of customers. Maximizing customer loyalty is tantamount to and naturally aligns with the interests of building shareholder value. The previously cited research by Roger Martin suggests that “shareholders actually do better when firms put the customer first.”
Similarly, maximizing customer loyalty and delivering the best customer experience is intrinsically compatible with the objective of nurturing engaged employees. Customer experiences are largely a function of interactions with employees. Customer relationships and experiences can never be well served by disaffected employees, so concentrating on customers first is well-suited with employee engagement objectives.
Putting customers first also is in tune with broader social and environmental responsibilities. It is difficult to imagine a scenario in which promoting customer relationships and experiences and maximizing customer value would yield harmful social and environmental outcomes, as such outcomes would not be in the interests of customers.
Customer-focused strategies and tactics are inherently advantageous for all key corporate stakeholders. Since customers are the only stakeholder group whose interests are intrinsically compatible with and beneficial to all stakeholders, it seems clear that maximizing customer loyalty and customer value must be the core function of business and should be the central organizing principle for the firm. Putting customers at the center of everything the company does provides a lens for decision making that is inherently advantageous for all stakeholders and is best for business from every perspective.
I think I’ll sleep better tonight.