For instance, “In a world of resource scarcity (growing with global warming),” tweeted management consultant Dave Snowden, “I’m less sure – there needs to be a north star or two in responsibility to the planet and society.”
The idea that a corporation should have multiple primary goals has been popular ever since August 2019 when the Business Round Table backed off its support of maximizing shareholder value and declared that firms should seek to satisfy the needs of all the stakeholders.
Stakeholder capitalism is now mantra of Davos, as announced by Klaus Schwab, Founder and Executive Chairman of the World Economic Forum .
Yet if big business were to implement stakeholder capitalism, it would fail for the same reason that it failed in the mid-20th century. Its fatal flaw is that it offers nonviable guidance on what is “true north” for a corporation. When many big firms attempted to implement it for several decades in the mid 20th century, the perpetual need throughout the organization to keep balancing conflicting claims among stakeholders led to mass confusion and garbage can organizations. Having multiple top goals led to “the chaotic reality of organizational decision making in an organized anarchy.” Competing goals wandered in and out of meetings: the outcome on any particular issue depended on which particular individuals happened to be present.
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Even in the calmer times of the mid-20th century, when Drucker formulated his dictum, such internal confusion was sufficiently problematic that an alternative had to be found. The fact that many corporations chose the embarrassingly wrong alternative—maximizing shareholder value—and pursued that nonsensical objective—the world’s dumbest idea—for half a century, doesn’t mean firms have to return to a world of organized anarchy. There was always a better alternative at hand: Peter Drucker’s dictum of customer primacy.
Inside the corporation in the mid-20th century, in the absence of a single North Star, even managers became confused as to which priorities they should be pursuing. The result? The Dilbert-style manager, whose skill set and attitudes were highlighted in Abraham Zaleznik’s classic HBR article. Managers “focus attention on procedure” and not on substance. They communicate to subordinates indirectly by “signals”. And in the absence of clear goals, managers “play for time” waiting to see which way the corporate wind is blowing. The consequences were horrific.
Drucker’s dictum is even more relevant in the strenuously competitive marketplace of the 21st century, where customers have multiple options at their fingertips, and instant reliable information about those options. Today, a failure to have everyone in a firm obsessed with delivering value to customers is likely to be a fatal flaw.
Today, change is no longer incremental: it’s exponential. Multiple new technologies are upending everything—instant costless connectivity, infinite data storage, quantum computing, artificial intelligence, blockchain technology, drones, new materials, robotics, nanotechnology, 3D printing—the list goes on. Technology is not merely optimizing processes: it is crushing and recreating business models, collapsing value chains, obliterating borders between industries and even countries, and reshaping the global economy constantly. In such a competitive environment, there is no room for lack of clarity. Customer primacy is the price of survival.
What About The Environment?
Does that mean that firms should ignore the environment, their staff and other stakeholders? Obviously not. Having an engaged workforce is key to steadily creating and delivering more value to customers. And other things being equal, customers themselves will prefer dealing with firms that treat the environment right.
For example, Microsoft is not ignoring the environment: it is already carbon neutral and plans to be carbon negative by 2030. The point is that if Microsoft were not to give primacy to its customers, it might be around in 2030 to help with the environment.
Big firms do need to be concerned about their public image. Thus in 1950 a poll found 60% of Americans had a favorable opinion of large firms, but by 2017, that number had declined to 21% in a Gallup poll. Today, politician after politician promises remedial or even punitive action against big business. That was the consequence of maximizing shareholder value for half a century.
Reformers cry that firms must put “purpose before profit” and declare lofty social goals. The Financial Times has illustrated how the addition of wider social purposes risk getting us out of the frying pan of corporate greed and into the fire of corporate confusion. In a series of articles, Royal Dutch Shell, Novo Nordisk, Hitachi, Levi Strauss, Mars Inc, and Danone are cited as exemplars of firms that are trying to “combine profit with a wider purpose.”
Yet while it’s welcome that maximizing shareholder value is increasingly being recognized as—in the words of Jack Welch—”the world’s dumbest idea”— imagining that corporations might get out of their self-constructed moral doghouse by grafting preachy social purposes on top of their “one valid purpose” of creating customers may well be the second dumbest idea in the world.