I recently participated in a panel discussion about the social impact of business. The first question from the moderator was, ‘What is the purpose of business?’
To answer this question, one must parse its intention regarding the term ‘Purpose.’ When asked about ‘the’ purpose of business, I assume we are answering in the context of ‘primary purpose’ or ‘core purpose.’ Beyond this distinction, an answer should distinguish between business collectively – as in the collective conduction of commerce, or an individual business- as a company. These are not the same. Additionally, core purpose and higher purpose are often conflated.
In this article, I look at the differences between business collectively versus the individual company, between core purpose and higher purpose, and the role of stakeholders and shareholders.
The Core Purpose of Business
The debate currently is between service to shareholders or service to stakeholders as the primary or core purpose of business. Advocates for either position line up to debate. On the shareholder side are the legacies of Ayn Rand and Milton Friedman and the devotees that continue to advocate for their philosophies. On the stakeholder side is a new generation of academic thinkers and CEOs.
The core or primary purpose of business collectively is to add value to the marketplace. Regardless of advocacy for shareholder or stakeholder primacy, when business is reduced to its essence, it must add value to the marketplace to achieve a rudimentary level of viability. The shareholder/ stakeholder debate is better framed as the better or best way for business to achieve its core purpose of adding value to the marketplace – but it is not the core purpose itself. Further, the argument may be specious as shareholder primacy and stakeholder primacy are not opposed. Many in the business community advocate for stakeholder primacy because they believe it provides a better outcome for shareholders over the long term. If this better outcome for shareholders is their primary motivation for stakeholder primacy, how is it different than shareholder primacy? Instead, it is a long-term perspective. Here, the lines get blurred.
Adding value to the marketplace can happen in many ways: Introducing a new product or service or improving an existing product or service – in essence, building a better mousetrap. Existing products and services can be brought to market at a lower price point – without a proportionate decline in quality. Any of these methods can add value to the marketplace. Adding value typically requires incremental or radical innovation, using emerging technologies, and using metrics to measure what we want to improve upon or effectively optimize. These initiatives create a new business, product, or service – and the marketplace derives benefit. This process is the core or primary purpose of business. Without it, there can be no long-term viability, regardless of a desire to serve shareholders or stakeholders.
The Core Purpose of the Company
The core purpose of an individual business or a company is often the ‘how’ it adds value to the marketplace. (We sometimes see companies with a core purpose of adding value outside of the marketplace or beyond the business ecosystem). To answer this ‘how,’ a company has its own core purpose, which states why it exists. This core purpose is a statement of the relative value the company creates. Because value is relative, it is also a statement of ‘distinction’ from competition or within its industry. This distinction can be either quantitative or qualitative. Either way, it must add value (or future value).
Identifying the core purpose of a business is typically a process of discovery. A company should look deep inside itself and understand why it exists and what its core values are. Its core purpose is separate from what it does. Usually, one cannot know what a business does from its stated core purpose. As an example, the core purpose of our company was ‘we exist to: delight customers with a uniquely superior experience.’ From this alone, one cannot know what industry or business we were in.
Another example is Apple, whose core purpose may be ‘we exist to: create innovative products that enrich people’s lives.’ Or perhaps Best Buy – ‘We exist to: enrich our customers’ lives through technology.’ In each case, the company states how it adds value to the marketplace and distinguishes itself within its industry.
A company’s core purpose is manifest in its core products and services. Purpose outside of the core is not ‘core purpose.’ The alignment of a company’s core purpose, core values, core competencies, and core products and services will optimize the value brought to the marketplace over the long term.
The Effect of Stakeholder Primacy
That stakeholder primacy is not the core purpose of business should not diminish its value or importance – especially relative to shareholder primacy. Shareholder or stakeholder prioritization is an operating philosophy or method rather than a core purpose. Companies that take the long view and build culture and infrastructure in support of stakeholders are more effective in bringing value to the marketplace over the long term. In business, we make decisions around the value propositions of trading brand and growth for profit or trading profit for brand and growth. We often have circumstances that take us in one direction or the other. For example, an immature bootstrapped, or undercapitalized company may have to trade brand and growth for profit. But over the long term, companies that invest in their stakeholders at the expense of short-term profit will tend to be healthier and more profitable.
Key to stakeholder primacy is understanding the stakeholders of a given business. Stakeholders can be internal or external to the company or the business ecosystem. Â Our view was that everybody the company interacted with was a stakeholder. These included employees, customers, vendors, landlords, regulators, and even competitors. We viewed these relationships through a ‘mutual benefit’ prism rather than as a ‘zero-sum game.’ We also considered the community a stakeholder and met our stakeholder obligation there with philanthropic, environmental, and social impact initiatives.
This perspective of stakeholder primacy relative to core purpose does not refute or diminish its value. However, it frames the benefit as essential for optimizing value within a company’s core purpose – but is not the core purpose in and of itself.
Higher Purpose of the Company
Higher purpose is different from core purpose because it adds value outside of the marketplace for the core products and services of the company. Higher purpose is the portion of stakeholder primacy outside the business ecosystem. Higher purpose is where we can utilize the resources and profits of the company to serve a purpose beyond the core. Here, an organization can give back through corporate social responsibility (CSR). The more effectively a company or business realizes its core purpose (how it adds value to the marketplace,) the more able it is to fulfill a meaningful higher purpose.
Conversely, convincing research shows that companies that engage in higher purpose can better realize their core purpose through stronger branding, better employee engagement, lower turnover, and ultimately more profitability. In this sense, the relationship between core purpose and higher purpose can be cyclical and interdependent. The relationship between Core Purpose and Higher Purpose is similar to David Brooks’ ‘Second Mountain.’ Here, the first mountain is the business’s core purpose – the ability to add value to the marketplace. There can be no long-term viability without this. The more effective a company is in realizing the potential of its core purpose, the more it can contribute to its higher purpose. The viability derived from adding value to the marketplace can be used to build the second mountain – adding value outside the marketplace for core products and services.
An example of this may be Patagonia. Their core purpose is ‘to build the best product, cause no unnecessary harm, use business to protect nature, and not be bound by convention.’ This core purpose is how they add value to the marketplace. Their higher purpose is to save the planet – primarily through climate change philanthropy and activism. The more effective they are in realizing their core purpose, the more resources they have for serving their higher purpose.
When Core Purpose and Higher Purpose Are the Same
When a business exists to serve the community or for social impact and establishes a product or service specifically for this purpose, the distinction between core purpose and higher purpose becomes murky. This dearth of clarity can occur when a company’s core product or service serves a higher purpose – in which case, we might say that core purpose and higher purpose are the same – or that higher purpose becomes irrelevant because they are the same. We often see this conflation in NPOs and ‘B’ Corporations.
More complicated is when a company has a stated core purpose that is separate and apart from its core products and core services. This structure defies the prior definition of core purpose being the ‘how’ a company adds value to the marketplace. Here a core product or service is subordinated to the higher purpose and exists only to fulfill that same higher purpose. An example of this may be Greyston Bakeries. Their core purpose is to “create meaningful job opportunities for those who have experienced barriers to employment.” They make and sell high-quality baked goods to fulfill this purpose. They would say they “exist to create meaningful job opportunities for those who have experienced barriers to employment,” – meeting the definition of core purpose. However, their marketplace is the market for baked goods, not employment. They cannot succeed in their core Purpose of creating employment unless they add value to the marketplace by making a product that people want – delicious brownies. So, this model doesn’t refute the notion of business’s core purpose as adding value to the marketplace – they can add value to the marketplace without employing those with barriers. But they cannot create jobs for those with barriers without adding value to the marketplace.
The disconnect is that their individual company’s core purpose is different from ‘how’ they add value to the marketplace. It is an element of adding value – consumers may buy their products because the mission moves them. However, if the product did not add value by being high quality and tasting great, it is unlikely that sentiment for the mission would be enough for financial viability. Knowing this, Greyston makes a great product that people want.
While the core purpose of a company (the reason it exists) is generally how it adds value to the marketplace, there are many examples of companies (like Greyston) whose market viability is a means to their higher purpose, which also is their core purpose. When the core purpose is the higher purpose, adding value outside of the business ecosystem serves as the core purpose, while adding value to the marketplace (within the business ecosystem) becomes the means to achieving it.
Conclusion
Understanding its purpose and values, and being able to clearly communicate purpose and values across the organization is at the heart of organizational health. Organizational leaders and employees’ subordination of ego and individualism to the greater purpose of the organization within a framework of clearly communicated values is how an organization can move from destructive unhealthy conflict to constructive healthy conflict. It is here, with healthy conflict, devoid of ego and connected to purpose, that team members can work well together.
