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W. Edwards Deming described the purpose of an organization in New Economics, on page 51, as:
Like so much of what Deming said that makes sense to me. It is my sense the “conventional wisdom” would state something more along the lines of the purpose of a company is to make money. I do not agree. Rewarding the owners is important, but other stakeholders should be included in the purpose.
Even with a strictly legal argument it is not true that a company exists only to make money. The company enters into legal obligations to employees, suppliers, customers and communities.
Conventional wisdom agrees that a company must comply with the law. Many of those laws are requirements society has put in place to ensure that companies focus on obligations to their customers, community, suppliers and the environment (over the long term).
Some might chose to view those legal requirements as only a means to make money. That a company exists to make money and that so long as a law doesn’t require something else, any decision should be based only on long term financial benefit. I do not agree. The laws are a manifestation of the belief of the society that other important considerations exists that must be considered.
In the early stages of capitalism the business world was largely seen as amoral. That is no longer the case (again as I see “conventional wisdom”). Most, though not all, believe that companies have moral obligations to the environment, community, customers and employees. Many of these obligations have been turned into laws (just as there are laws that require the interests of the shareholders to be cared for).
Those laws set the minimum legal limit that must be met. And they seem to pretty clearly express the decision society has made that companies exist within a society and have a larger purpose than making money for the owners. One benefit of companies is that they reward those who invested in them. They also provide jobs to employees and products and services to customers.
How those interests are balanced is not such an easy issue to address. I think Deming’s quote is a good starting point for discussion. Right now we have the balance pretty heavily in favor of the owners (and making profit). I personally, think it makes sense to have that as a very important factor, though I favor increasing the focus on some other factors than is the current normal practice. Most importantly, I believe we need to increase the importance of the purpose of providing good jobs for employees.
The marketplace does a pretty good job of asserting the importance of customers and suppliers. Even so, regulation and law enforcement are necessary actors in those instances where the free market is insufficient.
The changes in the world are making it very difficult for the community interests to be respected. And I think that this trend with likely increase. I plan to think more about what this will mean going forward.
There is an important difference between those that see the only true purpose of a company is making money and those that see a variety of purposes that must be balanced. I hope we can move the conventional wisdom to a more balanced view of the importance of the various stakeholders (even my spell-checker wanted to change this to stockholders) from what I see now as the current unhealthy focus.
There are some thoughts on these ideas in the Deming Electronic Network thread on “What is the purpose of a commercial firm.” One opinion expressed there is that: “There is but one purpose of a commercial firm and one only; to make money. All other things are secondary.”
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June 25th, 2006 at 5:27 pm
Deming did acknowledge that the United States government was not designed to be as efficient as possible. From page 198 of Out of the Crisis “Government service is to be judged on equity as well as on efficiency.”…
July 6th, 2006 at 7:24 pm
Dr. Deming acknowledged the wisdom of the American style of government (with checks and balances and fairly complex process for creating legislation) even though parts of that system intentionally makes change difficult. My recollection is that he understood the wisdom in designing the system in this way to optimize long term benefits to the whole society, even though that creates sub optimization of certain aspects of the system…
August 19th, 2006 at 6:12 pm
Fortune recently published an article talking about the “new rules” for management using Jack Welch (GE six sigma) as the focus of the old rules. It seems to me there is nothing new here (once again)…
May 17th, 2007 at 5:29 pm
[...] “At Whole Foods, we measure our success by how much value we can create for all six of our most important stakeholders: customers, team members (employees), investors, vendors, communities, and the environment.” [...]
May 24th, 2007 at 6:53 am
This is also an example of a company with a higher purpose that makes a good deal of money. Google definitely understands the concept of eliminating waste…
May 29th, 2007 at 9:01 am
[...] “The notion that managers must above all appease investors drives behavior that focuses exclusively on quarterly results.” [...]
June 3rd, 2007 at 10:35 am
Layoffs are a failure of management. If the company has not been executing a long term strategy to respect people and manage the system to continually improve, manage for the long term, working with suppliers… it might be they have created an impossibly failed organization that cannot succeed in its current form. And so yes it might be possible that layoffs are required…
June 11th, 2007 at 12:21 pm
I continue to tilt at the robber barron CEO pay packages. Hopefully, at some point, the people approving these obscene pay packages can be shamed into stopping or replaced by people with some sense of decency…
June 18th, 2007 at 8:39 am
[...] everything they must do or prefer to be at the beach some days…) within the context of the best overall management system for the organization (improving employee satisfaction is part of the …. So ideally the organization would be providing all employees excellent coaching opportunities, all [...]
July 5th, 2007 at 6:57 pm
“I am happy to invest in companies where all stakeholders are winning – I think that is a great long term strategy…”
November 7th, 2007 at 9:19 pm
“Human beings are much bigger than just making money. So I said, to be true to the human nature, we should include at least one more type of business, business to do good to people…”
January 30th, 2008 at 8:56 pm
“The Toyota family, very strongly, still has their name on the building and [have] a big influence in the company. The original founding [principal] of the company was to enrich society.”
February 24th, 2008 at 8:56 am
I see Toyota as the best example of a Deming company. Dr. Deming did not propose a cookbook to follow. Instead he proposed a theory that requires learning and application within the specific institution…
February 26th, 2008 at 8:44 am
“When Bill Gates suggested recently that corporations should sacrifice profits to the public welfare, practicing what he called “creative capitalism,” he wasn’t the first robber baron with the idea. Henry Ford made a similar proposal in 1916…”
May 25th, 2008 at 11:30 pm
[...] a big step for many organizations. And to manage your organization with the understanding that the organization’s purpose should be to benefit the various stakeholders (shareholders, customer… and [...]
July 11th, 2008 at 3:51 am
Just a philosophical view on this if you like, as the last sentence really struck a chord with me.
“One opinion expressed there is that: “There is but one purpose of a commercial firm and one only; to make money. All other things are secondary.”
To me, this is the dark ages statement of the modern age. Keeping common sense, everyone knows that money is making the world go round. But it is the complete lack of concern for everything else that is precisely what is making it fall apart.
People who understand this need to stand up and explain it to the people who can’t understand that value. Imagine the possibilities for the planet if we had worked in unison with a common goal of improvement, to benefit the planet and the people who live on it. We could have moved ahead in leaps and bounds, have access to more knowledge, great technological advancements, be strangers to poverty, and experience life where people had a greater social conscience because of it.
Instead we have to live with a system where people are exploited, companies are greedy, everyone is fighting for their own square foot of land and the amount of work that must be done to maintain it makes us slaves to our society and drains people of hope a better world because we are so tired from all the pressure.
The people who understand the greater picture here and believe in it are the ones who will need to fight for it – whatever level they find themselves in at a company. The more people that provide a valid arguement, not to force but to educate, the more companies that will become involved, the more that this will become a universally accepted norm, changing the dark ages mentality and moving forward. It’s clear that this is already starting to happen now, but we shouldn’t get comfortable and more can be done.
I started at the bottom of an ASX listed company and now manage sustainability for it – so I know that views can be changed if we make an effort.
Yes, an idealistic post perhaps but the big thing is getting through to people, and making it universally accepted.
Hope this inspires.
November 28th, 2008 at 10:31 pm
You cannot expect to achieve success by adopting an individual component of an interdependent system of management…