Why Purpose, Not Profit, Drives Today's Successful Organizations
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publish this mission statement on their web sites? If the true purpose of a business cannot be disclosed, that's a red flag. Does this obvious contradiction explain the attacks on a field to enhance capitalism going back 70 years or more?Opponents of stakeholder capitalism claim that it distracts management from their primary fiduciary responsibility to optimize returns for shareholders. They say it makes it difficult to set priorities and determine who to please, and as a result diminishes profitability. They argue that the focus on profits is not only better for shareholders but provides a guidepost against which to make tough decisions. Now that the federal government is giving business historical freedom to act, we will find out which form of capitalism is best for investors and society.
By Bruce Bolger
The Biggest Economic Questions of Our Time Are Now Being Put to the Test
The Five Myths About Stakeholder Capitalism
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Shareholder or stakeholder capitalist?
What type of organization do you want yours to be? Which would you prefer to work for, do business with, or invest in? Would it be one that prioritizes shareholders or stakeholders in their path to success? Increasingly you will be able to decide.
With the federal government stepping back on regulations across the economy, free enterprise has a once-in-a-lifetime opportunity to prove if giving business free rein will materially improve the lives of more Americans. If it fails to show signs of doing so by generating feelings of increased prosperity, the US likely will return to return to more regulations in the next term.
Many seem to forget that US capitalism was born in an era of laissez-faire government and it was only tremendous abuses and suffering that created the enormous legal, regulatory, and government apparatus today. How much of this would have been necessary had businesses focused on enhancing profits by creating rather than extracting wealth from people and the environment?
The Biggest Economic Questions of Our Time Are Now Being Put to the Test
So far, as of March 2025, lost in the discussion of the new administration’s rapid-fire actions is that for the first time capitalists are being given almost all the freedom they could ever ask for. Will it deliver the prosperity Americans voted for?
Whether free enterprise can ever profitably provide the many types of services people expect from government is one of the debates of our times and is about to get its ultimate test. So far, the theory that great wealth raises all ships remains unproven, given the growing failure to distribute wealth in the US, and no one is now claiming that extending the current tax rates will pay for themselves. If there is any hope that business can be a force for good in society, now will be the time to test that as well.
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For shareholder capitalists, it’s business as usual. Shareholder primacy remains the gold standard of business on the premise that higher profits lead to expenditures and investments that create greater prosperity for everyone. In the world of shareholder primacy, it doesn’t matter how companies make money as long as it is legal. This frees many capitalists to increase profits by extracting value from society in the form of low pay and unsafe working conditions; poor product or service quality disguised by deceptive advertising or confusing terms and conditions; slow payments to distribution and supply chain partners, and pollution or abandonment of derelict structures in local communities. All these common practices combined carry huge costs that show up in no one’s financial reports or balance sheets or in government reporting, let alone account for the negative impact on quality of life.
On the other hand, for stakeholder capitalists, purpose, goals, objectives, and values provide the North Star. This of course includes a business model that focuses on value creation to, in the terms of Professor Alex Edmans at the London Business School, “Grow the Pie.” Unless an organization intends to make a mission of addressing a social challenge and selects to become a B corporation, stakeholder capitalists contribute to a better society not by specifically addressing a social challenge but by “enhancing returns for investors only by creating value for customers, employees, distribution and supply chain partners, communities, and the environment.”
Rather than looking for ways to extract value for short-term benefit, stakeholder capitalists seek to profit by creating untapped value in their field of business. The primary mission of these organizations is on their purpose, goals, objectives, and values, not to solve a social problem; however, in their focus on value creation rather than value extraction they seek to grow rather than divide the pie. They have a mission to enhance business and yes to make money from the value they create.
Perhaps fearing the economic benefits of stakeholder capitalism, shareholder capitalists have dragged stakeholder capitalism into the anti-woke wars through five myths used as straw men.
The Five Myths About Stakeholder Capitalism
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Because stakeholder capitalism is non-partisan and requires no legislative action or taxation, it is difficult to discern why anyone would object to encouraging businesses to enhance returns for investors only by creating value for customers, employees, distribution and supply chain partners, communities, and the environment. What people seem to be objecting to is not the true definition of stakeholder capitalism, but rather the virtue-signaling and greenwashing communications effort that hijacked a little-known concept for marketing purposes.
As a result, five myths have arisen about stakeholder capitalism as a result of becoming conflated with greenwashing and virtue-signaling.
Myth 1. Stakeholder capitalism is a product of the Business Roundtable and World Economic Forum elites.
The concept of stakeholder capitalism got hijacked when the term became associated with proclamations from the Business Roundtable, World Economic Forum and others starting most notably with the August 2019 Business Roundtable updated statement on the purpose of an organization to address the needs of all stakeholders.
Some opponents argue that stakeholder capitalism is in fact a front for a cabal of globalists who seek to surreptitiously force organizations to adapt to their “woke” vision of environmental and social regulations, including forced donations or investments in causes that divert money due to shareholders. On the left, the movement is criticized as being hypocritical virtue-signaling. No one bothered to do their homework on the history of the field.
The theory and practice of what today is increasingly called stakeholder capitalism actually arose out of the work of management consultant Peter Drucker in the 1940s, W. Edwards Deming in the 1950s, and the Stanford Research Institute in the 1960s, long before the concept of ESG (environmental, social, governance.) Some date it to earlier concepts, including the management practices of John D. Rockefeller, whose company never experienced a strike during times of labor struggles, and who made enormous investments in society that live on to this day in the form of universities, medical centers, state and national parks, and so much more. When, in 1971, the World Economic Forum was formed, no one paid much attention to its founding stated principle: “The purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonize the different interests of the stakeholders.”
Nor did the foundational book on stakeholder theory, Strategic Management: A Stakeholder Approach, gain much public attention when published in 1984, even though it helped give birth to a growing society of professors interested in the subject. The related concept of ESG (environmental, social governance) was actually coined by over a dozen leading financial firms in 2005 for the United Nations on how to enhance capitalism in a report called “Who Cares Wins.” Apparently, opponents have focused on the term “cares” while overlooking the word “wins” when claiming that ESG is woke.
The anti-woke critics indeed were right about virtual signaling and greenwashing, but that has nothing to do with stakeholder capitalism. It simply reaffirms that the concept is so popular, organizations will lie about it.
Myth 2. Profit is the ultimate purpose of an organization. Shareholder capitalists argue that profits should be a primary consideration when making
critical decisions but that in fact is often not the case in shareholder capitalism. Great capitalists put purpose, goals, and objectives first, knowing that unless they fulfill their purpose, goals and objectives, and values, there will be fewer profits and greater risks.- Contrary to popular notions, shareholder capitalists bury huge amounts of efficiencies into their financials in terms of disengaged customers, employees, distribution and supply chain partners, communities and hidden environmental or related risks. Nearly 50% of an organization’s expenses, their people and marketing, receive very little serious analytic analysis of the impact of engagement versus disengagement. Many companies make highly questionable investments in corporate jets, amenities, advertising locations, trade shows and meetings, mergers and acquisitions with surprisingly little analytics, or tolerate management disfunction for the sake of peace. Ironically, focusing on profits can create terrible mistakes, like firing a highly paid salesperson handling 40% of major accounts or cancelling a channel engagement strategy pivotal to market share.
- Purpose and drive foster the innovation that yields profits: money does not create profits, people and their accomplishments do. Great organizations build into their business models profitable returns, but their singular focus is on fulfilling the purpose, goals, objectives, and values that create the profits. It is the quality and services of an organization and the value it creates for customers and other stakeholders that produces the profits. Paid in capital provides the fuel but not the engine. Only through people can capital create returns.
- Hugely successful companies prioritize their purpose, not profits, including Amazon, Salesforce, and ASML (the Dutch chip production innovator), all of whom took about a decade to start generating profits. To this day, great companies every year risk cash that could safely go to investors for innovations or acquisitions that may or may not succeed.
- Determining trade-offs. Unless an organization’s financial viability is at stake, purpose, goals, objectives, and values provide a better guidepost for decision-making than those based on profits alone. Tradeoffs that put shareholders over the need for investments in products, services, talent etc. may look good in the short run, but risk alienating customers, talent, and distribution partners, etc. with longer-term material consequences.
- Very few people work for profit alone. In fact, employee engagement surveys frequently find that purpose and meaning, aka "the why", hold a high rung on the ladder of motivation. Few great purposes are accomplished by teams of people through profit motive alone: many people want to feel some form of belonging and impact as well.
The concept of shareholder primacy is fundamentally absurd, because investors have no way of receiving optimal returns if customers, employees, suppliers, and distribution partners are ho hum. Without engaged stakeholders whose interests are harmonized with those of shareholders, there is little way investors will receive an optimal return, unless they are in some kind of inside deal and know when to cut it and run. One can buy 100 acres of land, but what comes of it is only what one makes of it. Ownership is no guarantee of returns. Only by fulfilling the purpose of the investment is there hope for returns.
Organizations that take their eye off their purpose, goals, objectives and values to focus on profit inevitably make compromises to the products, services, or people that generate the profit. Of course, most writers, athletes, musicians, lawyers, doctors, etc., have a goal to make money, but know that they must focus first on their purpose, goals, objectives, and values, or there’s little chance of achieving the success necessary to generate the profits.
The world’s most successful organizations focus first on their purpose, goals, objectives, and values knowing that otherwise they have no way of achieving optimal financial results for owners.
Myth 4. Stakeholder capitalists underperform. Shareholder capitalists point to under-performance of some ESG funds as well as outflows from the overall ESG category as proof that stakeholder capitalism is bad for business. In fact, all this proves is that stakeholder capitalism principles are so popular that they generate greenwashing and virtue signaling that are of course bad for business. Many of these funds were created based on no transparent standards validated by research and deserved to go away.
The hypothesis for stakeholder capitalism is simple: organizations that have highly engaged shareholders, customers, employees, distribution and supply chain partners, and communities whose interests are harmonized toward a clear purpose, goals, and objectives have greater chances of outperforming those that don’t. Today, there is a growing body of research from multiple sources that supports this hypothesis, including multiple stock funds and related studies demonstrating the potential for significant future equity value creation, not to mention reduced risks due to fewer legal liabilities.
Myth 5. Shareholder capitalists have a competitive edge. Shareholder capitalism is supposed to result in greater efficiency. In fact, the enormous waste of low customer and employee engagement and resulting turnover, low productivity, poor word of mouth are disclosed nowhere in financials. Accounting experts point out that 80% of an organization’s value in terms of people is buried “good will” on balance sheets, and 50% of fixed costs in the form of human capital and marketing often receive cursory analytical evaluation.
An overlooked weakness of shareholder capitalism is simple: It’s nothing to brag about. Imagine this as a mission statement:
“We are dedicated to getting rich and maximizing the returns for our shareholders.”
If you can’t hang a foundational principle in your lobby or web site, it’s probably not good for business.
Enterprise Engagement Alliance Services
Celebrating our 15th year, the Enterprise Engagement Alliance helps organizations enhance performance through:
1. Information and marketing opportunities on stakeholder management and total rewards:
- ESM Weekly on stakeholder management since 2009. Click here to subscribe; click here for media kit.
- RRN Weekly on total rewards since 1996. Click here to subscribe; click here for media kit.
- EEA YouTube channel on enterprise engagement, human capital, and total rewards since 2020
Management Academy to enhance future equity value for your organization.3. Books on implementation: Enterprise Engagement for CEOs and Enterprise Engagement: The Roadmap.
4. Advisory services and research: Strategic guidance, learning and certification on stakeholder management, measurement, metrics, and corporate sustainability reporting.
5. Permission-based targeted business development to identify and build relationships with the people most likely to buy.
Contact: Bruce Bolger at TheICEE.org; 914-591-7600, ext. 230.
