Part 1: The oblique world

3. The profit-seeking paradox

George Merck and Robert Johnson created great businesses which, in consequence, made remarkable amounts of money for their shareholders. ICI and Boeing were more successful as profit-making companies when they ‘served customer’s internationally through the responsible application of chemistry’ or ‘ate, breathed and slept the world of aeronautics’ than when they tried to ‘maximise value for our shareholders’ or ‘go into a value based environment’.

In my book Foundations of Corporate Success, published in 1993, I was sympathetic to the ‘nexus of contracts’ approach, believing – as I still do – that the essence of the firm was an assembly of relationships among individuals. But I did not then realise, as I now do, that the advocates of this idea visualised these relationships as transactional rather than social. A central argument of the present book is that by excessive emphasis on the transactional nature of business relationships we have undermined not only the relationship between business and society but also the effectiveness of business, even in transactional terms.

PART 2: A Brief History of Business

4: The Mechanical Firm

“A central thesis of this book is that this transactional account of business is not just repellent but mistaken. It does not describe how successful business works – or could work – in modern society. Individuals do, of course, respond to incentives, but a better description is that individuals tend to behave in line with the behaviours expected in their environment; they are led to do what the community approves, both through praise and material reward. Social aspects of work, including both relationships within the workplace and those between business and society at large, are crucial to both personal productivity and personal fulfilment.

The focus on the firm as a collection of capabilities gives a different and more illuminating perspective for understanding the extraordinary diversity of business organisations and of businesspeople over geographies and over time. The core ideas in this book – collective intelligence, radical uncertainty, disciplined pluralism, relational contracts and the mediating hierarchy – have been extensively developed and discussed by earlier writers, though much of that work has been outside the context of business organisation. The relevance of each to the argument of this book arises from a belief that in the modern world successful commercial relationships are not simply instrumental and transactional; they are social and are embedded in a wider framework of communities and teams. That transactional view was both incorrect and unattractive. This book is written in the hope that a better account of how business and its stakeholders flourish will point the way not just to a better understanding of business but to the better conduct of business itself. In a successor volume I will try to explain some of the implications of that understanding for both business policy and public

Policy.

One of its signals has been so amplified that it drowns out the others. The ‘profit motive’ isn’t something that can be ascribed to corporations — they don’t have motives. What they have is an imbalance between the two key higher-functions — here-and-now versus there-and-then. They aren’t capable of responding to signals from the long-term planning and intelligence function, because the short-term planning function has to operate under the constraints of the financial market disciplinary system. Either a corporation has a survival condition based on needing to make a monthly interest bill, or there’s an implicit threat from the financial environment that if it fails to behave in a particular way, it will be taken over by an outside entity.

If you take away that pressure, it’s quite likely that the natural equilibrium of corporate decision-making systems will be less hostile to human life. Viable systems fundamentally seek stability, not maximisation.