Purpose of an Organization

W. Edwards Deming described the purpose of an organization in New Economics, on page 51, as:

The aim proposed here for any organization is for everybody to gain – stockholders, employees, suppliers, customers, community, the environment – over the long term.

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.”

22 thoughts on “Purpose of an Organization

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  16. Lauren

    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.

    Reply
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  19. Carrie Foster

    In Shaping the Future research the CIPD found that “feelings towards profit-related purpose are generally negative, with employees saying it makes them feel demotivated and less committed to their organisation. Nonetheless, just under a third feel that focusing on investors is the right thing to do in the long run. It seems in order to produce a motivated and committed workforce, the main purpose needs to have a social basis to it – profit does not seem to ‘kick start’ the workforce.” (CIPD, Shared Purpose: The Golden Thread, 2010) The research is worth a read.

    Reply
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