Profit? Or Purpose?
What is the purpose of a company? Any company? Why do they exist? Why do they do the things they do, employ the people they employ, produce the products and services that they produce? Ask that question and most of the time you will get one answer - to make money. While that answer isn't wrong, it's also incomplete.
Legally, the directors of a company are required to maximise returns to shareholders. There are other legal requirements to make sure that a company is solvent, able to pays its bills and so on. So yes, making money is a important part of what a company does. But that's not its purpose - its reason for existing. Nothing exists just to produce money (except maybe for a mint but that's different). To be truly successful a company must fulfil some sort of other purpose - it must produce goods and services that people want to buy, and it must produce them in a way that is acceptable to the society in which they sell them. So really, an organisation's purpose is "Do XYZ, in order to be profitable". Not just "Be profitable".
If a company gets fixated on the "be profitable" part of its purpose, and many companies do, they end up losing sight of what it is that generates their profits in the first place - the goods and services that they produce. Costs, and corners get cut. Service drops away. Investment in improving the product or service falls. Innovation dries up. Customer service (and their willingness to buy from that company) falls. If your industry is a cosy oligopoly with high barriers to new entrants (banking, telcos, etc) or a monopoly (Facebook, Google) then even the risk of losing customers is minimal. After all where else would they go?
Worse that that, if the profit culture really takes hold, very bad things can happen. Bad things like charging customers for goods and services you have no intention of ever providing. Complicating your billing structure so customers can’t see when they had been overcharged. Charging extortionate fees for simple administrative tasks. Outright fraud and deceit.
Couldn't happen? Does happen. Frequently. Just look at the recent banking royal commission here in Australia. Some of our largest, and (previously) most respected companies, were caught multiple times doing exactly that - charging deceased customers for life insurance (of all things), charging customers for no service, deliberately changing terms on insurance policies to avoid paying claims. Even evading anti-money laundering laws and enabling thousands of transactions to organised crime, terrorism and child exploitation. All in pursuit of profit over all else.
Imagine what would happen if your local sandwich shop decided to pursue a profit over everything policy - stale bread on the sandwiches to save money. Use up that slightly smelly ham rather than throw it out. Short change the customers. Horrible. And a health hazard. But that's exactly what many of our large organisations do all the time.
A profit over all else strategy can be very effective over some time scales. In the short term it's great. Money just rolls in. Our banks (pre royal commission) were our most profitable companies. But over the long term it's a losing strategy. Eventually, customers will be so sick of what is going on that they will find any means to get away from you. Your friends in government won't be able to hold off the inquiries any more. Things will come to light and there will be a reckoning.
Our banks, post royal commission are still profitable. But their profits have been hit by billions in fines and penalties for outright illegal activities. Senior executives and board members have been forced to resign. Unfortunately, no one went to prison, although some of the breaches were serious enough that charges could have been laid. How does that stack up against the duty to maximise shareholder returns? Long term, profits will suffer and continue to suffer for a long time. Our banks have suffered enormous reputational damage and see customers leave for smaller, mostly online banks. That trend is likely to continue. The government (dragged kicking and screaming to do its job) is re-regulating the industry which will hurt future profits further. The regulators have found their teeth and are starting to dig deeper into the murk and uncover yet more significant breaches, resulting in more penalties and legal fees.
In the light of this impact to profitability caused by the single minded pursuit of profit, I think there is an interesting case to be made that directors, by allowing this to happen, have failed in their duty to shareholders. Maximising returns doesn’t just mean high share prices this week or this quarter, it means having a successful, profitable business next year, 5 years from now and next decade.
So what's the alternative? What can companies do to prevent themselves falling into this trap?
The answer is to keep in mind the organisation's full purpose - "Do XYZ in order to be profitable". Focus on the XYZ part. Do what the company is there to do - produce goods and services that serve customers’ needs - and do it well. Profits will flow from that. Profits are the result of fulfilling your purpose. They are not your whole purpose.
Every organisation has a purpose. It is there to do something useful. Otherwise it wouldn't exist. Banks aren’t just money making factories, they are there to provide useful financial services to customers - bank accounts, merchant facilities, credit cards, home loans and so on. That's their purpose. Do that well and profit will follow. Telcos are there to provide people with access to communications, fixed, mobile, voice, data. Do that well and profits will follow. Your local sandwich shop is there to provide a convenient and tasty place to get lunch. Do that well and profits will follow. Your company might not know what its purpose is, but it will have one.
Focus on purpose. Find your purpose. Live your purpose. Make your purpose front and centre for your company. Continually reflect on your purpose and make sure that your purpose is still fit for purpose - times change, customers’ needs change and your purpose should change with that.
Focus on purpose. Profits will flow from that.