Book Excerpt: The Purpose of Business

The following is an excerpt from the book Lead by Greatness.

A business's higher purpose is to make a valuable contribution to the well-being of people.

Does a business exist to maximize the wealth of its shareholders (in which case it sees customers and employees as just a means to achieving that end), or does a business exist to serve the needs of its customers (the result of which is that investors get returns and employees have jobs)? Put more simply, is the purpose of a business to make profits, or is profit the measure and outcome of a business that is successfully and efficiently satisfying the needs of its customers?

Roger Martin, Dean of the Rotman School of Management at the University of Toronto and named by The Times of London and Forbes magazine as one of the top fifty management thinkers in the world, takes a strong view on the subject. He demonstrates the "tragic flaw" in the belief that the purpose of a corporation is to maximize shareholders' wealth. From 1976 until the end of 2008, the relentless focus on maximizing shareholder wealth delivered compound annual real returns to the shareholders of S&P 500 companies of 5.9 percent. This, Martin argues, is a poor comparison to the 7.6 percent annual returns delivered between 1933 and 1976, when shareholder wealth was not the focus of corporations in the U.S.

So what is a corporation's purpose if not to make money? A business's higher purpose is to make a contribution to the well-being of people, the value of which yields an acceptable return on investment. Contribution is the purpose; profit is the outcome; it is the measure of the corporation's success.

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