Most great companies are formed to meet the goals and express the values of their founders, which is not always the same as maximizing shareholder wealth. For them, profit is simply a strategic necessity rather than the supreme end point.

This may be a jolting concept, we realize. But we’re certainly not the only management writers who have come to the same conclusion. Peter F. Drucker, in his classic text, Management: Task, Responsibilities, Practices, reached the same conclusion years ago:

Business cannot be defined or explained in terms of profit... The concept of profit maximization is, in fact, meaningless... The first test of any business is not the maximization of profit, but the achievement of sufficient profit to cover the risks of economic activity.

To determine how to win, an organization must decide what will enable it to create unique value and sustainably deliver that value to customers in a way that is distinct from the firm’s competitors. Michael Porter called it competitive advantage—the specific way a firm utilizes its advantages to create superior value for a consumer or a customer and in turn, superior returns for the firm.

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 5: How It All Worked Out

“It is not a coincidence that the emphasis on financial metrics in business occurred at the same time as explosive growth in the size and remuneration of the financial sector. There were useful innovations, such as the emergence of venture capital as a means of financing start-up businesses. But the financial sector is primarily rewarded by fees from facilitating

transactions, not for the consequences of these transactions. Corporate executives engaged in a frenzy of dealmaking, buying and selling existing businesses; incentive plans encouraged actions that generated immediate revenues or cost savings, mostly with unmeasured consequences for the business in the long run. The result was the destruction of many of the great businesses which an earlier generation of less well-rewarded managers had created.

23: The Finance Curse

“But between 1981, when Welch took control at GE, and 2005, when Lampert took control of Sears, a new approach to business developed. Managers like Sir Denys Henderson and Simon Marks, Alfred Sloan and Owen Young, had seen themselves as public figures with associated responsibilities to a wide range of constituencies. The generation that succeeded them had a narrower conception of their role. A successor generation of corporate executives paid close attention to quarterly reporting and the stock price.