In today’s FT, Sebastian Mallaby wrote about conflicts of interest in the context of investment banking, especially the conflict between investment banks’ own trading and the trading of their clients. He argues that one way to solve conflicts of interest in this industry is to break banks into functional units. Many of Mallaby’s insights are probably not surprising to people who pay attention to investment banking. But as someone whose primary interest is not investment banking, this article made me think about conflicts of interest and potential trade-offs in other industries and more importantly about what the primary objective of a firm should be.
For too long companies and business academics have focused on narrowly defined objectives. In my field of operations, for example, we often use profit maximization as the objective for operational decisions. My colleagues in other fields use shareholder value maximization as the sole objective. But should these always come before the interests of customers, employees, the society, and the environment? Should companies invest in their customers, employees, environment, or society only when doing so increases profits or shareholder value? Where has that thinking taken us during the last few decades?
Some of the companies I admire, like Costco and Mercadona of Spain, do not have profit or shareholder maximization as their objective. They put customers, employees, suppliers, and society ahead of profits and believe that by doing so they will create more value in the long term. A retailer I am working with right now states that its purpose is “to provide employees opportunities for growth and success.” This purpose is way more important than maximizing profits (ironically, this retailer makes A LOT more money than their competitors).
I have always believed that well-run companies that emphasize the interests of customers, employees, suppliers, and society are exactly the types of companies the world needs more of. But I am just a boring operations gal who is trained to solve small operational problems, not to provide answers to big questions like “what should be the purpose of a firm?” But in the last issue of Harvard Business Review, Michael Porter and Mark Kramer have a wonderful piece on what they believe the purpose of a firm should be. They argue that the purpose of a firm should be to “create economic value in a way that also creates value for society by addressing its needs and challenges.” They urge companies to reconnect company success with social progress and start creating shared value. What a breath of fresh air!