The World’s Dumbest Idea

profit

When I was in law school I remember the day in my Corporate Law class where we studied the famous Henry Ford v. Dodge Brothers case (Dodge v. Ford Motor Company) that resulted in the now famous, and widely held belief, that the sole purpose of a business is to maximize value for its shareholders.

I remember thinking at the time:

That is a really silly idea.  The sole purpose?  So you’re telling me that the only purpose of having a business is to make money for the owners?  What a dumb idea.  What a disempowering way to view business. 

I kept my mouth shut (at the time). I was a second year law student who didn’t want to ruffle any feathers, and I was just in the process of forming my own opinions of the world anyway.

Well it turned out that I’m not the only one who feels this way. People much smarter than me agree.  Jack Welch (former Chairman and CEO of GE said, in 2009):

On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal… Short-term profits should be allied with an increase in the long-term value of a company

So why do I bring this up now?

For some reason I have been thinking about the purpose of business – I think perhaps as it applies to my own business.

In 2009 my wife and I became some of the very first distributors for a brand new direct sales company in Canada – Scentsy.  We liked the products, we thought they had a market, and we believed, that if we worked hard in it then we could really change our lifestyle, create life freedom and really live (instead of slaving away in jobs we didn’t like).

Well we’ve met, and far exceeded any income goal that we ever set for ourselves.  Our business has expanded globally, and we are now living exactly the life that we dreamed of five years ago.

But here’s the thing – in the process, I’ve realized that it isn’t the money that drives us.  It’s the stories.  It’s the empowerment.  It’s the creation of value for other people.

If our sole purpose in creating a business was to “maximize profit for the shareholders (ie. us)”, I would have lost motivation a long time ago.

My motivation is “maximizing empowerment” or better yet “maximizing value to customers and people who are associated in any way with our business.”

I think Peter Drucker said it best,

There is only one valid definition of business purpose: to create a customer. . . . It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. . . . The customer is the foundation of a business and keeps it in existence.

So take that Milton Friedman.

 

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