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Profits Before Purpose? Impossible!

Thursday, July 19, 2018
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Every company has a purpose. It serves a need and provides value. In some cases, a company’s purpose may seem obvious. However, purpose can also be spun and branded to the point of obfuscation (or even outright deception).

Crossroads: Why and for Whom Do We Exist?

In the class I teach to undergraduates at Duke University, my students learn how to build a framework for exploring the role companies play in society, their business models, and the risks they face in an ever-changing context. One of the more fascinating analyses they conducted was of investment banks like Lehman Brothers (full disclosure: a former client of mine), Goldman Sachs, Merrill Lynch, and Bear-Stearns. These banks grew by providing services that were beneficial to their most important stakeholders—their clients and the communities in which they operated. Banks help create liquid capital markets. They help absorb and manage risk. They’re critical to the proper functioning of our economy. The trouble they found themselves in, which wreaked havoc on entire economies, can be traced back to losing sight of their purpose. The seeds for the entire 2008 financial crisis were sown when banking industry leaders and their teams prioritized profit (in many cases personal profit) over purpose.

Lehman’s death led me to believe that the most critical long-term risk any company faces is allowing itself to experience a fundamental disconnect between the role it plays in society and the way it makes money. It’s a saying as old as time: “No one can serve two masters.” When your purpose is at odds with the way you generate returns, eventually something has got to give. For some companies, the tension becomes obvious only after it’s too late.

Purpose in an Ever-Changing World

Straying from purpose is certainly a major risk. Another risky situation is when the context of the firm’s place in the world changes and its purpose slowly becomes less relevant.

Companies across every sector are grappling with the ways technological innovations simultaneously threaten their old business models. They are scared of becoming irrelevant and don’t always appreciate the cost of chasing the wrong ideas. In response, forward-looking companies like Coca-Cola, IBM, Wal-Mart, and Microsoft have reimagined their purpose. The challenge is imagining new business models that make money while also serving the real needs and interests of society.

Consider the auto industry. Electrification, autonomous vehicles, and changing consumer preferences mean the world automakers have inhabited for nearly 100 years is completely up for grabs. Last year, Ford boldly declared itself a “mobility” company, not an automaker. What that means, and how they will make money on mobility, are questions now at the heart of their strategic discussions. Will Ford build service-based businesses models that generate revenue? Will they leverage the data that comes with this business model? Will their purpose serve their interests, or the real needs of society?

The risk for all large companies is that strategic discussions can happen in ways that are fragmented and segregated. Mid-level leaders and their teams make decisions to optimize their piece of the puzzle. This is what happened at Lehman: The desk that was creating and selling CDOs (collateralized debt obligation) was making money. They built and sold more. Nobody asked if this money-making activity was undercutting the core role that Lehman as an investment bank was intended to play by building trust in the capital markets. Eventually we got the answer—and many paid the price.

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Currently, we are seeing a very similar scenario play out at Facebook. When Mark Zuckerberg testified before Congress, he communicated two conflicting purposes: the one that Facebook puts forth publicly (connecting the world) versus their actual purpose (capturing and serving up big data).

In 2012, Zuckerberg wrote a letter to shareholders that included the phrase, “Simply put: we don’t build services to make money; we make money to build better services.” He seems to believe this is true; however, investors require returns. His team went to work seeing what could generate income, and as certain products gained traction, they created more. The company grew. Decisions were made by mid-level leaders to optimize their part of the business. Data became a form of currency and leverage they could use to increase ad revenues while also increasing the stickiness of the Facebook experience. All the signals were positive. No one asked if there was a tension between that original letter and Facebook’s profit margin (an insanely high 39 percent). Facebook’s drift from 2012 to 2018 happened slowly and over the course of thousands of decisions. Sooner or later, their leaders will have to face this tension and decide what to do. There are no easy answers of course, and the sooner they start, the more hope they have. Here’s one way to go about it.

Questions to Ask

There are three simple areas of introspection any leader can (and should) consider, especially when they face change and uncertainty:

1. Why do we exist? How would the world be different if your company weren’t here? Being brutally honest is important—list out the stakeholders you impact both positively and negatively. Quantify the impact on each group. For Facebook, there is truth in the statement that they provide a space for people to connect. However, it’s also true that they create a captive market for advertising.

2. How do we make money? What’s your business model? What are the sources of your revenue? Who do they come from in your stakeholder group? Look at expenses—do you spend (or invest) in service of your important stakeholders’ real needs?

3. What risks do we face? What’s changing that you need to be paying attention to? Beyond competition, is there something happening in your context (such as disruptive technology, changes in preferences, generational change) that puts either your purpose or your business model at risk? Or is there any internal tension between the real role you play in society and the way you make money?

Part of navigating transitions is a commitment to knowing, evaluating, and sometimes changing a company’s purpose to keep alignment between your reason for being and the way you generate returns. As history suggests, the leaders who tune into the real reason society allows their firm to exist will be rewarded with profit and longevity.

About the Author
Pete Gerend is a Lecturing Fellow in Psychology & Neuroscience at Duke University. He’s also a Global Managing Director of Duke Corporate Education, a part of Duke University and the premier global provider of leadership-development solutions. More information is at www.dukece.com.
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