The third in a series on the topic of the purpose of business. Follows:
Business exists to establish and drive mutual value creation. Steve Denning challenged this statement, preferring Drucker’s assertion that the purpose of business is to create and keep a customer. I responded, and he has challenged my response:
we may be talking about different things: theoretical purpose of a firm and how to run it
“satisfying all the stakeholders” isn’t a viable heuristic to run a firm. See Making Management as Simple as Frisbee
“satisfying all the stakeholders” was tried in mid20thC. It led to Garbage Can firms.
Steve refers to “garbage can firms” in his Forbes article, Is The Tyranny Of Shareholder Value Finally Ending?, an eloquent take down of prioritizing the pursuit of shareholder value. When it comes to garbage it quotes a trio of academics – Cohen, March and Olsen – who in 1972 explained:
that pursuing multiple goals caused organizations to resemble “garbage cans” with three main characteristics. First “the organization operates on the basis of a variety of inconsistent and ill-defined preferences.” Second, the organization’s “own processes are not understood by its members.” Third, “the audiences and decision makers for any particular kind of decision change capriciously.”
As a result, “choices are made only when the shifting combinations of problems, solutions, and decision makers happen to make action possible.”
Steve equates my definition of the purpose of business with stakeholder capitalism, and in his article he warns of a “risk of a return to garbage can organizations”:
With its balancing of the interests of multiple stakeholders, stakeholder capitalism is hard to distinguish from managerial capitalism of the mid 20th Century. Balancing multiple interests may work in the context of a board of directors that has the time and expertise to spend days or weeks, say, on evaluating a single multi-billion decision on an acquisition.
But as a guiding principle for driving growth and innovation throughout a large organization, it’s impractical. It risks taking us back to the world of garbage can organizations …
In this article (2003) by Professor H. Jeff Smith in the MIT Sloan Management Review, stakeholder theory is defined as:
placing a duty on managers to balance the shareholders’ financial interests against the interests of other stakeholders such as employees, customers and the local community, even if it reduces shareholder returns.
In Managing the Extended Enterprise: The New Stakeholder View (2002) Post, Preston and Sachs present:
a new “stakeholder view” of the firm that holds that stakeholder relationships are the ultimate sources of the firm’s wealth-creating capacity. According to this view, long-term business success requires a firm to develop and integrate relationships with its multiple stakeholders within a comprehensive management strategy.
And by way of comparison to exemplify Steve’s historic observation, while US Secretary of Labor under Clinton, Robert Reich reported that in 1951 Frank Abrams, chairman of Standard Oil of New Jersey, proclaimed:
The job of management is to maintain an equitable and working balance among the claims of the various directly interested groups… stockholders, employees, customers and the public at large.
Neither of my previous posts mentions stakeholder capitalism (aka community capitalism) and for good reason I now realise – my head wasn’t in that space. I’m only working it through now because Steve is prodding me to do so. (Yet another +1 for ‘working out loud’.)
It looks like I’ve had a tendency, incorrectly, to think about stakeholder capitalism as deliberate (the typical top-down formulation of strategy). Just note the actors referenced in the four quotes above: board of directors, managers, the firm ie, its management, and once more management. Indeed Steve infers that this could be its only practical modus operandi.
However, as my references to complexity in my previous posts betray, my thoughts are framed in terms of the artful blend of the deliberate and emergent, and weighted towards the emergent if only because I suspect most firms will need to spend more time towards that end of the spectrum. Emergent strategy (you might say bottom-up, responsive) is requisite for sustainable business. To influence better, be influenced better. Such adaptive capability may be considered a competitive advantage today; tomorrow it will be a qualifier.
(Drucker recognised the need for adaptive strategy way back in 1969 in The Age of Discontinuity: Guidelines to Our Changing Society.)
Systems such as sociocracy and holacracy, and the responsive organisation manifesto, emphasise the why and who over the what and how, ie:
Rather than controlling through process and hierarchy, you achieve better results by inspiring and empowering people at the edges to pursue the work as they see fit – strategically, structurally, and tactically.
Of course there are examples of stakeholder value companies that organize themselves this way. The benefit corporation (aka b-corp) has emerged in the US in recent years to enshrine a stakeholder value perspective in the directors’ fiduciary duties no less, and Patagonia, renowned for its self-management principles, was one of the first to reincorporate as such.
For those not (yet) convinced of my definition of business purpose, you might at least agree that Patagonia exists to establish and drive mutual value.
I had a great boss out of university. As I retell in Attenzi, he really disliked any contentment with employees leaving their brains at the door only to pick them up on the way home, metaphorically speaking of course. He wasn’t having a go at the people, but rather any organization that accepted or indeed systematized this state of affairs. These people form vibrant local communities, towns and cities. They deal with deep emotional issues with friends and families, buy complex financial products and, in short, continuously balance everything life throws at them from one day to the next.
It’s in this light that I want to shrug off Steve’s insistence that we only need the customer-centric heuristic to guide our everyday actions at work lest (my words not his) we be too stupid to understand the balance of things. I’d rather sustain my faith that people can explore the options and make hard choices, and that the only organizational guidance we need is agreement on the values by which we operate, agreement on the organization’s purpose and organizing principles, and a systematic sensitivity to the impact of our behaviour, decisions and actions (see The quantified self, the quantified organization, and the organized self).
Emerging organizing principles and the technological transformation of sensitivity are fundamental determinants in resigning Drucker’s definition of business purpose to history. And so is the humanization of work (in contrast to Steve’s argument that customer-centricity is the path to the humanization of work) …
Intelligence is the ability to acquire and apply knowledge and skills, including but far from limited to the acquisition and application of heuristics. And anything that purports to support the humanization of work must surely encompass the freedom to express one’s intelligence. The freedom to make hard choices.
From How to make hard choices, a 2014 Ted Talk by Ruth Chang:
Imagine a world in which every choice you face is an easy choice, that is, there’s always a best alternative. If there’s a best alternative, then that’s the one you should choose, because part of being rational is doing the better thing rather than the worse thing, choosing what you have most reason to choose. … A world full of only easy choices would enslave us to reasons. … (However) when alternatives are on a par, the reasons given to us, the ones that determine whether we’re making a mistake, are silent as to what to do. It’s here, in the space of hard choices, that we get to exercise our normative power, the power to create reasons for yourself …
When we choose between options that are on a par, we can do something really rather remarkable. We can put our very selves behind an option. … This response in hard choices is a rational response, but it’s not dictated by reasons given to us. Rather, it’s supported by reasons created by us. When we create reasons for ourselves to become this kind of person rather than that, we wholeheartedly become the people that we are. You might say that we become the authors of our own lives.
… Far from being sources of agony and dread, hard choices are precious opportunities for us to celebrate what is special about the human condition … And that’s why hard choices are not a curse but a godsend.
I wonder if it isn’t too great a leap to presume that such freedom at work might correlate to greater employee engagement? And perhaps then better outcomes for all stakeholders including those precious customers?
Emergent stakeholder theory
Time, or more precisely the evolutionary process over time, will tell which definition of the purpose of business makes most sense this century.
Prior to that conclusion, to subscribe to “Business exists to establish and drive mutual value creation” one must also subscribe to emergent strategy and the superiority of new forms of organization over command-and-control hierarchy. Sociocratic. Holarchic. Connected. Responsive. Wirearchical. Perhaps, now Steve has forced me to clarify it, this purpose may be described as emergent stakeholder theory, both normatively and pragmatically distinct from deliberate stakeholder theory and, I hypothesize, naturally averse to garbage!
Talking of nature, I’m very interested in understanding the similarities and dissimilarities between organization and natural ecosystems.
In all things of nature there is something of the marvellous. If one way be better than another, that you may be sure is nature’s way.
Aristotle knew this instinctively. We know it mathematically.
Could customer-centricity be akin to ascribing the forest’s success to the success of one species of tree? … plainly ridiculous. Yet at the same time, the forest does not set itself a purpose.
Organizations are dynamic not static. They don’t so much exist as transmute, continuously. Emergent stakeholder capitalism in practice might be explained by the same dynamics that finds self-interest in cooperative evolution, or you might invoke some Kantian theory of beneficent duty. Regardless, I suspect sustainability demands the collective intelligence integral to emergent stakeholder theory.
If you don’t subscribe to this work-in-progress rationale for emergent stakeholder theory then you’ll continue to be guided by the totem of customer-centricity and to the purpose of creating and keeping a customer. At least, that is, until each stakeholder in your business, and quite possibly the customers themselves, see something more attractive in the mutual value creation camp. As John Husband picks out in the comments to the first post in this little series, the crux of that matter comes down to nothing more intellectual than asking:
After all, how long do you tend to participate in organization personally when the value you see is less than that you perceive elsewhere?
Image source: Mr.TinDC.