Is Profit The Ultimate Measure of Business Success?
by Stacey Barr |Many leaders still believe that profit – or financial performance – is the ultimate measure of business success. But at what expense?
My eyes were opened to consequences beyond animal suffering when I read about the mass-production farming of chickens, in “The Ethics of What We Eat” by Peter Singer and Jim Mason. To maximise profits, these companies maximise the number of birds per square foot of space. In many operations, chickens get about the size of an A4 sheet of paper to live their lives in. Aside from the birds’ suffering, there are some very significant costs to local communities and ecologies.
The ammonia from the chickens’ waste products makes going outside unbearable when the wind blows in a specific direction. The ammonia causes irritation and health problems to people. When the waste products are flushed from the factory floor, they run off into nearby streams and waterways, and kill the aquatic life. These are the costs that don’t make it into the companies’ financial statements. these are the costs that communities and the environment pay (now and in the future) to subsidise the companies’ profits.
It’s not just the for-profit sector.
Even in public and non-profit organisations, making financial performance the ultimate measure of success can cause problems (but probably less so than in for-profit companies). Rather than profit, budget performance and revenue generation can blinker the organisation to the needs of other important stakeholders.
But recently there is far more pressure to change this practice of putting financial performance at the top of the KPI priority list. ESG (environmental, social and governance) performance is a topic that’s becoming more popular. And it can bring a more holistic and true balance to the measures that define ultimate business performance, in all sectors.
The problem is ‘dollar addiction’.
For too long, it’s been accepted as normal and right to put financial performance at the top of the scorecard, and focus performance dashboards around the financial KPIs. And that drives behaviour. Behaviour that has consequences which don’t appear on the balance sheet.
I’m not alone in this belief. Matt Tenney agrees that profit is not the ultimate measure of success in his TEDx talk, Why The Best Leaders Make Love The Top Priority. And Fran Tarkenton, former American quarterback and author of The Power of Failure, says it like this:
“Profit isn’t and shouldn’t be the mission of business. The mission of business is to help people. To help your customers, your co-workers, your employees, and your partners. Success is not a number – it’s not X dollars or Y customers – it’s a measurement of VALUE.“
But we have a long way to go.
From an environmental perspective, there are still many companies that don’t take responsibility for the life-cycle of the products they make, as it does affect profit. Electronic appliances, like toasters and video players and outdated laptop computers, often aren’t able to be recycled. And no-one wants to reuse them when they can buy the latest and greatest for next to nothing. So they become land fill.
From a social perspective, that habit of calling employees ‘our greatest asset’ smacks of a company that treats people like equipment or property: maximise the return on investment. Get as much productivity as possible for the least amount of financial reward. Child and slave labour in industries like coffee and diamonds are of course the extremes of this view, but it’s still an attitude that many familiar companies and organisations have of the people who contribute their time, skill and effort.
From a governance perspective, there are still many organisational leaders who are rewarded for short-term targets with (often obscenely) high financial bonuses. This short-termism does not create value. It borrows value from the future, and from other stakeholders in the business’s operating environment. And it doesn’t pay it back.
ESG is one antidote to ‘dollar addiction’.
If human endeavours like business don’t exist to make the world a better place, can we really judge them as successful? How can people enjoy the rewards of high profits when others have had to suffer to make those profits possible?
We really need to move away from a singular focus and single measures of success. Surely a truly balanced scorecard is one where the perspectives of every stakeholder affected by a company define success? ESG thinking can inform strategy design, to create true balance in the definition of organisational success.
And that truly balanced strategic direction can guide what the organisation measures, monitors and manages to pursue that success. There is plenty of guidance for how to measure ESG performance. And there is plenty of guidance for how to meaningfully measure non-financial or intangible performance, in general.
Is your strategy based on just one or two stakeholders’ values? Who or what else is affected by your business? As a starting point, think about shareholders, customers, employees, suppliers or partners, local communities and the environment.
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Director: Stacey Barr
A significant point and could possibly be an eye opener to many. However, looking at the practical side of this issue, it is only natural that success is measured by the profits or revenue in some cases. Even as individuals we measure our success by the amount of money we earn and the materialistic things we possess as compared to others. Think of it this way. Its the easiest and most convenient way to measure. Acceptable, understood well and achievable. Why would I not use that as the basis. The real step towards changing this aspect is 1. awareness, 2. a quantifiable approach to parameters other than profit 3. An overall buy in by the management to push this as a performance indicator and 4. How to account for it and gain stakeholder (shareholders, customers, employees, suppliers or partners, local communities and the environment.) confidence.
I agree, and while it’s difficult and slow to turn a moving ship or a fast train, from away from its course, I think there is a growing understanding that the style of thinking that supports short term profits (apparently) precludes a sustainable and equitable lifestyle for most of us in the long term.
Glad to see you take a little time out to address an increasingly important social issue.
This is great to read… The challenge is how do we help people to see purpose beyond profit, Another way this gets expressed is doing whatever the customer wants… this leads to just as many problems… how do you help people see the value of values beyond their own world view… particularly when those at the top think they have to know and become entrenched…
The article ceratinly raises a very pertinent question each executive, irrespective of the field of his /her endeavors, MUST repeatedly ask to the self.
As it is too much of obsession with material pleasures sets in a process of rapid decline in the ability of these gains to satisfy the needs. More and more of such tangible rewards yield increasingly less satisfaction.
This decline in the satisfaction mostly likely unleashes a highly undesirable lust for the ends, at the cost of the means.
However, there are executives who go all the way to meet their own convictions.The case of Mrs. Indira Nooyi, CEO of Pepsico, gamefully battling redefining the recipes pf Pepsico’s prodcuts so as to be healthier,too merits attention, even at cost of loss of short-term populaity on bourses.
More than 20 years ago I watched a BBC documentary about the mis treatment of chickens. I was so shocked I stopped eating chicken. The other piece of information I found disturbing was that a “normal” chicken takes about 78 days to reach adolescence. Factory chickens are “encouraged” to grow and this is almost halved.
I personally see no harm in making profit and I find the notion of “not for profit” difficult because when a business wants to attract the best people and have influence that business needs to be viable.
It’s a bit if a dilema. I fully agree that it is not all about profit and certainly not at the expense of conditions for animals and people.
This article drew such an interesting response, both offline and online. Someone even unsubscribed from my newsletter, saying it was “more than I could take”!!
Hard questions like these need debate: if profit isn’t the ultimate indicator of success, then what is? We all know and see and feel the soul-destroying damage that a singular and obsessive focus on the bottom line has had and is having in our world.
I’ll write about alternatives in the near future. But please go right ahead and share your own ideas too!
Thanks for reading, thanks for taking time out to respond.
Hi, Stacey:
You are probably already familiar with this, but your article made me think about the “Gross Happiness Index” championed by the Royal Government of Bhutan
http://www.grossnationalhappiness.com/index/
Oxfam has a similar effort: http://www.guardian.co.uk/society/2012/apr/24/oxfam-humankind-index-measure-wellbeing?newsfeed=true
Dear Stacey
Thank you for sharing your concern. I am in agreement with your views and the referring to employees as “assets” lends credence to the saying “what he think is what he says and what he says is what he does”. Thank you for the reminder to be humane and to value our fellowmen and that we are stewards of our living environment
Regards.
Danien
Greetings. This is a subject that simply wouldn’t go away as it draws attention to our deepest moral feelings that remind us of our humanity. It begs the question; “after a huge profit, what next?”
It is presently convenient to express performance using profit levels but beyond this there is much more that stakeholders are looking for. For these a large number of relevant non-financial KPIs have been developed by practitioners which naturally includes our very own Stacey.
It is no longer tenable to use profit alone as the ultimate measure of business success. It is only a component in the holistic appreciation of what business success really is.
Your argument about rewarding only profit or growth is similar to what Jason Hickel says in “Less is More”