The purpose of business is profit

Published in The National Business Review (Auckland), 30 August 2019

In case you missed it, the World Rugby Federation members have adopted a new code of conduct. Right in time for the 2019 World Cup, national teams have agreed on a more holistic approach to playing the game.

Teams will now consider the feelings of all stakeholders, including those of their opponents’ supporters. They will avoid emphatic wins – making draws the new norm.

To lure back sports fans preferring soccer, teams will chase a round ball and soccer rules will apply in one half of each game. To emphasise fairness, at the end of each tournament, the team that caused the least penalties will be declared the winner.

If this strikes you as absurd, you are right. The rugby story was entirely my fabrication. However, a similar but real regime change is happening in the American business world.

Last week, the Business Roundtable, a peak lobby organisation of large American corporates, issued a new “statement of corporate purpose.” Signed by chief executives of more than 180 US companies, it states that profitability is no longer their main goal but rather it is a general responsibility toward all stakeholders: customers, employees, suppliers, communities and shareholders. Yes, in that order.

A cursory look at the signatories may lead to contrary conclusions, though. Perhaps I am missing something but Boeing’s handling of its disastrous 737 MAX programme was hardly community focused. American Airlines’ newfound commitment to “leading the way in meeting or exceeding customer expectations” will surprise its long-suffering basic economy passengers. And the new pledge to deal “fairly and ethically” with stakeholders may still sensitise Goldman Sachs’ employees for future interactions with Malaysian sovereign wealth funds.

It is hard not to be cynical about the US Business Roundtable’s statement. Instead of waxing lyrical about stakeholders and responsibility, I wish all signatories had just respected the law of the land, paid their taxes and kept their distance from politicians and regulators.

Hiding behind façade

Instead, the statement only leaves a taste of green, white and red-washing. These are all profit-oriented companies. Always were. Always will be. But they are now hiding behind a façade of being in business to serve clients, employees, communities and the environment. It is just dishonest.

It would be even worse if these executives really believed their new values statement. That would mean they had forgotten what companies are about. Which brings me back to the rugby analogy.

Good rugby teams play with passion and according to rugby rules. Their purpose is not to please every spectator but to win and make their fans happy. Change any of these elements and the sport is no longer rugby (and probably not worth watching any more).

With business it is the same. Good businesses are passionate and play by the rules. Their purpose is not to please everyone but to make a profit for their owners. Take away the profit motive and we are no longer talking about business.

American psychologist Jonathan Haidt, who recently visited New Zealand, explains that each profession and field has its own clearly defined purpose – or telos.

The concept was well known in ancient Greece. Philosophers such as Aristotle would ask about the end goal or purpose of an object, person or practice. They called it the telos. By its suitability toward that telos, they would then judge its quality.

Sounds complicated but it is not. If the telos of a knife is to cut things and if it is not good at cutting things, it cannot be a good knife.

In his lectures, Haidt has eloquently explained the danger of confusing the telos of one field with that of another. Take medicine, for example. The telos of medicine is laid down in the Hippocratic Oath which, put simply, requires medical practitioners to heal according to scientific standards.

What would happen if doctors were told they should no longer follow this telos but, say, the telos of business? The thought would send shudders down our spines as patients. We would not want to be treated by a doctor defined by the profit motive. Such a doctor would not be true to her profession – the different telos would have corrupted her practice.

Not that doctors should not deal with businesses. They should – and they do. Just as they work with lawyers, scientists and regulators. But they should keep in mind who they are and what they are about.

The Business Roundtable’s statement of purpose shows how top American business leaders are in danger of forgetting their telos. Their telos is to make a profit and if they do not make a profit, it is not good business.

Making a profit is thus a sign of success. It is nothing to be ashamed of. Just as the All Blacks would never be ashamed of beating the Wallabies or the Springboks. That is what they are about. Their telos.

The case for ethics

That said, the pursuit of profit should be bound by rules and ethics. To quote Haidt again, there is a “business case for business ethics.” In line with economic research, he stresses the importance of a company’s reputation for its success. He also maintains that illegal conduct can be costly for companies, and claims that ethical companies are more efficient. This is a testable hypothesis and, based on economics of reputation, it is highly plausible.

Still, saying that companies should behave legally and ethically is the same as telling a rugby team they should play by the rules and not bite or spit at their opponents. Though that may be a good reminder, it does not change their telos.

Those US corporate leaders adding their signatures to the Business Roundtable’s statement are unlikely to have given it much thought. Their key competence is running successful businesses.

For these chief executives, it was costless to proclaim to work for the greater good of humanity instead of something as profane as profit. Politicians, The Economist and some millennials might even confuse such blatant virtue signalling with enlightened leadership.

But in doing so, US corporate leaders have not been true to themselves. They have not been true to the telos of business. Least of all, they have not been true to their stakeholders.

The Roundtable’s re-statement of purpose therefore does a disservice to responsible, ethical and purposeful capitalism.

Just as we should not change the basic rules of rugby lest we destroy the game itself, we should not change the basic principle of the market, either. In rugby and in capitalism, the purpose is to win.

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