The Value of Business’s Extraordinary Problem-Solving Power
We are more aware than ever that globalization and its far-flung supply chains extend the consequences of business decisions well beyond the boundaries of the company that makes them. But assigning responsibility to C-suite leaders for how their decisions ripple through their entire business ecosystem is a newer concept that Judy Samuelson believes is both welcome and overdue.
Samuelson is the founder and executive director of the Aspen Institute Business and Society Program, which brings executives and academics together to align business decisions and investments with societal benefit. After years spent developing the Aspen Principles for long-term value creation, she’s summarized this work in her book The Six New Rules of Business: Creating Real Value in a Changing World.
Samuelson argues that a focus on maximizing short-term profits obscures a company’s true risks, blinds it to opportunities, and ultimately leaves it unable to optimize or even understand the long-term worth of its assets and products.
We asked Samuelson to explain what we’re missing when we talk about value – and how to encourage business leaders to think about it as more than a number on the quarterly earnings statement.
Q: Why do we need to redefine business value?
Judy Samuelson: Most of the real value of business today is intangible: employee and customer trust, employee and customer loyalty, the power of ideas, a culture of innovation and problem-solving. Those are hard to measure and compare, and they’re not captured on the balance sheet. If we don’t start to measure value in a robust way that captures the perspective of the people who carry the long-term consequences of our decisions – not only employees and customers but also our suppliers, partners, and the communities where companies operate – we’ll continue the habits and protocols that have negative consequences for everyone, the company and shareholders included.
Business has an extraordinary power and capacity to address our most complex problems, and it can be a remarkable instrument for the public good as long as we demand that it be the best it can be. Long-term value is at the center of that.
Q: Business leaders are ultimately hired to drive growth and profit. Why should they stop considering those the primary purpose of a company?
Samuelson: Growth and profit are still important. But people are talking about how a CEO is the leader of a broader community of interest and how a management team needs to be able to think about the ecosystem of the company.
It’s not sufficient to focus just on profits and growth because these tend to be measured in ways – like the current stock price – that fail to capture the forces that are shaping a company’s survival over time: its ability to operate where it wants, to find and retain talent, to access resources, and so forth. So top management and boards need to be, and are, stepping back and taking the broader view.
Q: What has been the biggest barrier to moving business leaders beyond a singular focus on maximizing profits and growth?
Samuelson: In part, it’s what we pay CEOs to do. Public companies have organized the fundamental metrics for CEO pay around total shareholder return. Someone who’s being paid to keep the stock price high has a literal vested interest in doing whatever has a direct impact on that. But there’s also the matter of what business leaders are taught to do and what boards and corporate counsel expect them to do: prioritize earnings. We need to design incentives to nudge them toward a broader view of value.
Executives have lots of reasons to close the gaps between their stated intentions to have a positive societal impact and the actual results of their business models, but they’re rarely persuaded by data or a business case. More often, it’s a realization that they need to behave differently.
For example, when Lee Scott was CEO of Walmart, the company was getting a lot of negative attention for the social and environmental consequences of a business model that focused on the lowest possible prices. Scott realized he had to counter the idea that Walmart took more from host communities, suppliers, and employees than it gave. When Hurricane Katrina happened, he sent dozens of Walmart trucks with emergency supplies to New Orleans and encouraged local managers to give away inventory to neighbors in need.
The resulting wave of positive feedback made him realize that the only way to change the way you’re seen is by changing how you lead. So he started the company’s internal sustainability initiative as a way to take leadership on higher product and environmental standards. And that’s creating long-term value, not just in intangibles like loyalty and reputation but also social, environmental, and financial benefits. It’s a fundamental and ongoing shift in the company’s mindset.
Q: You point out that making the new rules of value creation a mainstream approach to leadership depends on business schools teaching tomorrow’s business leaders to think about more than the bottom line. You also note that there’s still a lot of resistance to this idea in academia. How do you see things changing?
Samuelson: Every business school in the country, and maybe in the world, has something on its Web site about the role of business leadership in tackling societal challenges as a way to attract students who want to change the world through business. But students enter wanting to learn how to do that and exit as profit maximizers because they’re being taught to pursue certainty in the short term instead of learning to navigate complexities and long-term possibilities.
The technical aspects of how business is taught have not yet caught up to those more future-oriented leadership questions. Fortunately, the modern business school is one of the most multidisciplinary parts of academia. It includes business, economics, finance, psychology – so I do think academia will catch up.
If we can break down those internal siloes, we can start guiding tomorrow’s MBAs away from the idea that there is only one right answer in any given situation. And that starts opening them up to all the conversations we need to be having about what value really is and how to make sure companies generate it – not just for shareholders but for the society where companies get their resources and customers.
Instead of focusing on profits and share price as the most useful metrics of success, tomorrow’s business leaders will be able to widen their worldviews to include the roles and relationships between and among markets, employees, communities, and governments. And they’ll learn to synchronize the tools for diagnosing and fixing problems inside their businesses with the best leverage points for large-scale, systemic change.