What is the Purpose of Business?

My leadership posts are written primarily to those of you I know and trust, who make a difference as you live out values consistent with what builds great companies and great countries.  As our world continues to change, so do the accompanying challenges. It behooves us all to dig seriously into accepted assumptions, asking what is still relevant and what is not. As a truth seeker, I ask questions - and am always open to new ways of thinking.  Today I’m writing a leadership post that starts with what I call, “First Things.”  If you don’t get the “First Things” right, then you have embarked on a course that ultimately leads you off track.

Peter Drucker said, “the purpose of business is to create and keep a customer.”  I buy this for what it is but today it is just not enough........

It’s a great place to start but business leaders need to rise to a higher level of thinking.  For historical context, Drucker was writing to counter Milton Freedman who in 1970 said the purpose of business was to generate profits for shareholders.  Freedman, at the time, was highly concerned with the meddling of big business in government policy.  Drucker rightly brought us back to what enables profits: a happy, loyal customer.  

However, as we evolve into a global world of interconnected people, the purpose of business is also making a shift, creating a higher responsibility for a business leader. Today the purpose of business is to create and keep customers AND to do so in responsible ways for all stakeholders.  It is a both/and: a moral imperative and a strategic imperative to expand our vision for long term global success. 

How we lead businesses and organizations will define America and will define modern capitalism. We as business leaders need to reimagine our future and understand that our role in business is as critical as any scientist’s role in modern medicine. We as business and organizational leaders are major drivers in defining the culture and  ethos of our country.  

 Photo of Doug Rauch, Past President of Trader Joe's

Photo of Doug Rauch, Past President of Trader Joe's

Last week I heard Doug Rauch, the former president of Trader Joe’s for 14 years, speak at an event about Conscious Capitalism, of which Doug is now the CEO. This non-profit helps like-minded people transform the way business gets done. Here is what the Conscious Capitalism website says about profit:

“We need red blood cells to live (the same way a business needs profits to live), but the purpose of life is more than to make red blood cells (the same way the purpose of business is more than simply to generate profits).” 

While making money is essential for the vitality and sustainability of a business, it is not the only or even the most important reason a business exists. Conscious business focuses on purpose which ultimately can lead to more profits. 

I see an entire movement building in America and around the world, especially with millennials, of people who are asking the question, “How do we work in business to both serve customers AND serve all of our other stakeholders so as to build a lasting legacy?”  As Doug Rauch went on to say, “Employees, customers and others trust and even love companies that have an inspiring purpose, one they can identify with and personally adopt.” 

As knowledge customers in our new connection economy engage in making choices, we are indeed choosing to buy from companies that inspire us.  Not only do we want a great product or great service at a great price, we want to know the company we are buying from is one that thinks about the impact they are having in the world. For example, if a company uses cheap child labor, I don’t care how inexpensive the product is, I’m not going to feel good about paying for it. In contrast, Trader Joe’s was built on the foundation of healthy and tasty products that guarantee customer satisfaction and Trader Joe’s supports investments in employees and trusted trade partners. I’ve never gone into a Trader Joe’s and not felt good walking out the door.  

Tim Cook, the CEO of Apple, earlier this week, when asked about designing functionality of the iPhone for the blind, said to a conservative activist investor group who was challenging him about the importance of driving profits, “When we work on making our devices accessible to the blind, I don't consider the bloody ROI.”  Tim was angry, which is very unusual in his investor meetings.  Tim understands deeply what a new leader knows in this transparent, connection economy: that some things are just morally right to do and in the long run if you don’t it, it can cost you your culture and your company.  

As leaders we are on a journey to build great companies with a lasting legacy.  We are building purpose for our companies that inspires all stakeholders.  If you identify yourself as one grappling with how to build a lasting legacy, then you and I are on the same page. If you disagree, I’d love to hear your comments. I personally think we are on the cusp of a cultural shift in business, driven by the new social transparency of all decisions a company makes. It requires a new way to drive long term profits. It starts with the right mind set of the leader and the right governance structure that will support the leader. We can all be a part of the journey and learn a great deal along the way. In the end, we will build great value, not only in our company, but in the trust people are willing to extend to modern capitalism.