Over dinner two years ago, my children were sharing with me their concerns about the state of the world, from the climate crisis to racial injustice and burgeoning economic inequality. In many ways, I believe that the idea of shareholder primacy, articulated in 1970 by Milton Friedman, is the root cause of the problems that my children were raising. It is high time to challenge the idea that making money should be the singular focus of business. Although making money is vital and a natural outcome of good management, considering profit as the sole purpose of business is wrong for four fundamental reasons:
- profit is not a good measure of economic performance;
- an exclusive focus on it is dangerous;
- this singular focus antagonizes customers and employees; and
- it is not good for the soul.
1. Profit Is Not a Good Measure of Economic Performance
Profit does not take into account the impact of a business on the rest of society. The full cost of waste or carbon footprint on the environment does not appear on a financial statement, even though it is very real and can be very painful. Food and beverage companies using single-use plastic bottles, for example, do not bear the cost of oceans being clogged up with plastic waste. The profits of businesses relying on coal as their main source of fuel do not reflect the costs they generate on human health and the environment.
In addition, financial statements do not do a good job of accounting for the signs of a healthy business, like motivated and skilled people, a company’s most important asset. Engaged employees were the engine of Best Buy’s successful turnaround and remain the number-one reason for its continued success today. Yet you cannot find them on the balance sheet. As a result, investing in people, like Walmart CEO Doug McMillon decided to do back in 2016, and like we did at Best Buy, can depress profits in the short term, whereas investments in tangible assets such as real estate or plants will be amortized over several years.
2. A Singular Focus on Profit Is Dangerous
It is an easy game to rig, and not just through accounting. I can maximize profit by underinvesting in people and other assets that directly benefit customers. It works, at least for a short time. Expenses go down, and the numbers look good for a time while the long-term health of the business suffers. The path to bankruptcy is littered with retailers that focused more on short-term profits than on investing in talent and better serving customers. Best Buy illustrates that focusing on talent and customers is what underpins sustainable success.
If you try to manage to a certain number, you also risk missing the opportunity to play offense during downturns. At the time of the 2008 Great Recession, I was at Carlson, and the hospitality industry was severely hit. I could see how the leaders in that industry, Marriott or Starwood, to name a couple, continued to invest even if it meant hurting their profits in the short term.
And managing to a number can lead to wrongdoing. A steady stream of corporate scandals through the past two decades are direct consequences of an excessive focus on numbers. The 2008 recession was the result of bad behavior on a large scale, demonstrating the danger of this approach to running a business.
3. A Singular Focus on Profit Antagonizes Customers and Employees
Consumers are smart and demanding. They want to do business with companies they respect and trust to be competent, ethical and actively improving the society around them. Consumers increasingly will turn away from companies that do not meet these standards. My children are like this. They are concerned about the forced obsolescence of the products they buy, how quickly tech companies stop supporting older products and how often some clothing retailers come up with new lines, a phenomenon known as “fast fashion.” They see these tactics as merely a profit strategy and not beneficial to them or the planet.
Employees are also pushing for social and environmental change from their employers. For example, in September 2019, Amazon employees walked out to pressure their employer to be more ambitious about reducing its carbon footprint, and no longer support politicians who deny climate change.
Even shareholders are looking beyond short-term profits and increasingly adopting the view that being a good citizen is ultimately good for business. Business leaders, nongovernmental organizations and academics surveyed by the World Economic Forum in its 2020 Global Risks Report ranked the failure to mitigate and adapt to climate change as the top threat facing the world over the next 10 years.
4. An Exclusive Focus on Profit Is Not Good for the Soul
If, when I joined Best Buy in 2012, I had told everyone at the company that our purpose was to double our earnings per share to $5, what do you think would have happened? Not much. And for good reason. When we ask Best Buy employees what drives them, no one ever says “shareholder value.” This is not why people jump out of bed in the morning. If we want employees to be more invested, we must acknowledge that their souls are not wrapped up in a stock price. Work does not have to be a chore; it is a quest for meaning. Maximizing profit does not answer that quest and therefore cannot solve the epidemic of disengagement at work. It is not what drives people to give their very best.
I am not for a second suggesting that we should ignore profits. Of course, companies must make money—or they do not survive. And there are situations where a keen focus on the bottom line is a good thing. Also, it is healthy to know how and why the business will make money.
But what is healthier still is to disavow the obsession with the bottom line. The true bottom line is this: although profit is vital, it is an outcome, not a purpose in itself.
Reprinted by permission of Harvard Business Review Press. Adapted from The Heart of Business: Leadership Principles for the Next Era of Capitalism by Hubert Joly. Copyright 2021 Hubert Joly. All rights reserved.