Studying at business school in the late 1970s, my ears rang to the mantra “the purpose of the company is to maximise shareholder value” but somewhere in the back of my mind were echoes of another view, that “the purpose of the company is to survive”.
Both these views are defective, the first more thoroughly than the second. The first may represent the aspiration of shareholders and has provided a convenient fig leaf for executive teams in large companies that have benefited from a remuneration architecture that has supported an escalation of executive salaries in the anglo-saxon world. Through the perspective of the Escondido Framework, the firm (and the management team at its heart) needs to earn returns for shareholders that will be sufficient for the shareholders not to organise for the replacement of the management team, which can arise by firing and hiring, or may arise through the transfer of the firm through the sale of the shares to another firm with its own management team. Arguably, this latter version is tantamount to the dissolution of the firm and its absorption into another – in other words it amounts to a failure of the company to survive.
These views are more thoroughly defective in that that do not address the reason for the organisation existing. Fundamentally, it is there to undertake an activity that is better, in simple terms more efficiently, undertaken within an organisation than as a collection of independent, market based transactions. The undertaking of that activity, or group of activities, in a way that is sustainable and attractive to all the players that engage with the organisation is the heart of the purpose. This lies behind the mission and vision statements that are at the heart of organisations’ strategies. It is this that engages employees: they don’t say that their job is to maximise shareholder value; they are there to make widgets or to do stuff for people.
The issue about survival, even if it is generic and is not related to the productive activity that is at the heart of the raison d’etre of the organisation, is material. Even at a time when the shareholder value message dominates, the fascination of management consultants, academics, politicians and the press with the survival of companies remains. Furthermore, the people within companies, and other organisations too, are concerned by the survival of the entities that they operate within. This reflects not only their material interests (salary, pension, working conditions) but also their pride and self image.
Turning this back to the Escondido Framework model of the organisation, this means that organisation has to continually reposition itself against the market interfaces that it interacts with to occupy a viable position for the long term that simultaneously meets the needs of customers, employees, suppliers, host communities and governments, and suppliers of capital, by doing things that it does best, and getting better at them.
However, there is an alternative, more cynical framing of organisational purpose. This reflects the reality of the power of those who control the levers of power within the organisation, typically although not exclusively the executive directors or senior management team to define and interpret corporate purpose as whatever meets the personal values, lifestyle and wealth creation objectives of the controlling management group. In many organisations, these are substantially aligned with the model above. This will happen with corporate leaders who identify very closely with their companies, highly socialised as a consequence of seeking to be recruited by them, imbibing corporate values, investing their careers with them, loyal to their colleagues and to other stakeholders with whom they have dealt over many years, valuing their personal reputations and legacy, and subject to effective external governance that aligns their personal rewards.
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