LEADING WITH PURPOSE
THE NEW CORPORATE REALITIES
RICHARD R. ELLSWORTH
STANFORD BUSINESS BOOKS 2002
Front cover
“This thoughtful and incredibly ambitious work tackles head-on the enormously important issue of why the corporation exists. Ellsworth creates the kind of provocative framework and well-articulated set of concepts that would drive an intense and powerful classroom learning experience in courses of general management, strategic management, and business policy in business schools everywhere.”
Christopher A. Bartlett, Harvard Business School
This book explores corporate purpose – a company’s expressed overriding purpose for existing – and its effect upon strategy, executive leadership, employees, and, ultimately, on competitive performance. Sharply challenging the conventional wisdom that corporations should be dedicated to shareholder wealth creation, the author presents a compelling argument that the path to competitive advantage and outstanding long-term financial performance lies instead in a customer-focused corporate purpose.
This book is in four parts. Part I shows how corporate purpose exerts a powerful effect on strategy, management, and the meaning employees derive from their work. A customer-focused purpose harmonizes these critical factors and enables leaders to push strategic thinking deeper into the organization and at the same time to grant employees a greater degree of autonomy. In contrast, a goal of maximizing shareholder wealth sows the seeds of conflict among the market-oriented purpose, product-focused strategies, and the individual values of employees.
Part II critiques the logic of “value-based management” and the relationship of the firm to the equity markets. It explores the validity of extending traditional concepts of property rights to share ownership, concluding that the separation of stock ownership from the responsibility for, and managed control over, corporate actions makes traditional property rights arguments inapplicable to the underlying assets of a corporation.
Part III examines the functioning of corporate purpose in a global economy. When a firm operates globally, purpose needs to retain its motivational power across national boundaries, which a shareholder-focused purpose does not do.
Part IV explores the implications of corporate purpose for leaders, arguing that infusing an organization with a worthy purpose is an essential responsibility of leadership. Purpose is the foundation for the shared values that define organizational character, raise moral aspirations, and enhance performance. Drawing upon a wide range of thought from the world of business as well as from historical studies, cultural anthropology, philosophy, theology, and psychology, Leading with Purpose is sure to be an essential text as businesses move into the 21st century.
About the author
Richard R. Ellsworth is Professor of Management at the Peter F. Drucker Graduate School of Management at Claremont Graduate University. He is co-author (with Joseph L. Badarocco, Jr.) of Leadership and the Quest for Integrity.
Preface
This is a book about corporate purpose – the organization’s raison d’être – and its effect upon competitive performance, individuals, and executive leadership. It was written for practicing managers and serious students of management who seek to understand the roots of outstanding competitive performance and the leadership required to achieve it.
The concept of corporate purpose has long been central to the ideas of classic and contemporary management thinkers and scholars of leadership, such as Chester Barnard, Christopher Bartlett, Warren Bennis, James MacGregor Burns, Jim Collins, Peter Drucker, Charles Handy, Jerry Porras, Philip Selznick, and Peter Senge. However, despite its importance, corporate purpose has yet to be examined in depth. This book is designed to fill this void.
While the classic management authors generally agree that the corporation’s primary purpose is to produce goods and services, not to maximize profits, most recent authors do not argue one purpose is superior to others. This book does and provides the strategic and human reasons why – supported by examples. The book’s range is broad – spanning from purpose’s effect on the meaning derived from work, strategy, and the way of managing, to the competitive consequences of different ideologies among global competitors, to the philosophical, historical, and cultural roots and psychological effects of different purposes. This comprehensive perspective is designed to aid managers in preventing myopic thinking regarding the purpose of their corporations.
This book represents a confluence of two streams of ideas emanating from my teaching, research, and work as a corporate executive. In essence, I have been concerned about the issues addressed in this book for thirty years. From my work as a corporate treasurer and then as a general manager of a group of business units, I became increasingly aware of how divergent the worlds of the capital markets and product markets can be, and how readily management-imposed financial policies can constrain competitive strategy. From my work on executive leadership, it became clear that central to outstanding leadership is the manager’s responsibility to define the organization’s purpose in such a way as to provide direction to strategy, to bring meaning to the work of others, to infuse the organization with value, and consequently to stimulate commitment and action. From my work on capital markets, financial policies, and competitive strategy, it became evident that there is often conflict between the policies and processes that internalize a purpose of maximizing shareholder wealth and the strategic actions required to provide customers with sustained value and to achieve long-term competitive superiority. Furthermore, the globalization of business has brought intensified competition from competitors who play by very different rules. Corporate purposes vary significantly across countries as differences in the institutional structure, culture and government policies shape the relationship between financial institutions and corporations.
The concerns that have propelled this book have intensified in recent years. Today too many companies give lip service to the customers being their number one priority and employees being their most valuable asset, yet they pursue a purpose of shareholder wealth maximization that subordinates the interest of customers to those of shareholders and treats employees as expendable means to these financial ends. This organizational schizophrenia results in a purpose focused on the capital market (shareholders), which often conflicts with strategies oriented toward product markets and with employees’ values. Consequently, many people experience difficulty finding meaning in their work, and most corporations are failing to realize their potential to make people’s lives better – the lives of the people who use their products, work within their boundaries, and invest in their future. For “employees” the deep longings of the human spirit – the desire for a life rich in meaning, passion, creativity, and a sense of belonging – are being left unsatisfied. The result is a hollowness of work.
Fortunately, pathfinding American firms have shown a better way: harmony and wholeness among a firm’s customer-focused purpose, strategy, and the values of individual employees unleash considerable human energy and creativity that significantly enhance performance. Their leaders recognize the moral dimension of purpose and the need for courage to make the choices and set the priorities that create strong institutions, even when these acts run counter to prevailing conventional opinion. This book attempts to capture the essence of the thinking behind this pathbreaking way.
The book’s central thesis is that a customer-focused corporate purpose provides the key to outstanding performance and to enhancing the lives of those the company serves and of those who serve it. This will be even truer in the intensely competitive knowledge-based markets of the future. At a time when allegiance to shareholder wealth creation is reaching fad proportions, this book provides compelling strategic, managerial, and moral arguments for moving from a shareholder-focused corporate purpose to one focused on customers.
My over twenty years of experience in teaching at the Harvard Business School and the Peter F. Drucker Graduate School of Management at Claremont Graduate University – particularly teaching executives – have reinforced these concerns. I have witnessed how these issues generate vigorous debate and deeply move people as few other management issues do. Managers resonate strongly with these ideas and conclusions, and they long to find environments in which their work can become more meaningful.
It is my hope that this book will enable readers to lead more effectively through a deepened understanding of why the substantive content of corporate purpose makes such a difference. I hope they come away with a richer appreciation of the reasons alternative formulations of purpose have significantly differing competitive impacts; with an enhanced ability to judge the merits of the arguments underlying each of these different purposes and to appreciate their historical and philosophical roots; and with the ability to constructively challenge the many unquestioned, but erroneous, conventional wisdoms supporting the current prevalent American ideology and to comprehend the often subtle link between valued purposes, meaningful work, motivation, and knowledge creation. Ultimately my hope is that as leaders readers will learn how to develop a sense of purpose within their organization that unleashes human creativity and initiative in the service of a noble cause.
The book is divided into four parts. Part I examines how the substance of an organization’s purpose makes a profound difference to a firm’s competitive performance (Chapter 1) and to the lives of people in the organization. The reasons are grounded in the meaning individuals derive from work that serves valued ends (Chapter 2) and the powerful effect of purpose on strategy (Chapter 3) and the way of managing (Chapter 4). Corporate purpose’s importance rests in the fact that it both expresses the organization’s most fundamental value – why it exists – and is the end to which strategy is directed. Furthermore, the meaning people find in serving a purpose that embodies a noble ideal increases their commitment and loyalty and, as the boundaries between the self and the cause blur, enhances knowledge creation. In a world in which the coin of competition is knowledge, this linkage has profound strategic implications.
To better understand the arguments for a purpose of shareholder wealth maximization, Part II critiques the logic of “shareholder value-based management” and the relationship of the firm to the equity markets (Chapter 5). The validity of extending traditional concepts of property rights to share ownership is explored in Chapter 6, concluding that the separation of stock ownership from the responsibility for and managerial control over corporate actions makes traditional property rights arguments inapplicable to the underlying assets of a corporation. The traditional argument for a share-holder-dominated purpose is based on the assumption it furthers individual autonomy. But in today’s corporation, individual fulfillment and the realization of the ideals of individualism are profoundly influenced by the firm’s purpose, as shown in Chapter 7. But the people whose sense of self are most affected by the corporation are the employees and customers, rather than the shareholders. Therefore, a constructive individualism rooted in a meaningful customer-focused purpose is advocated – one that enhances self-fulfillment and the creativity and initiative that are the wellsprings of innovation. By challenging many of the conventional wisdoms surrounding the shareholder wealth maximization ideology, the book aids readers in developing their own well-grounded philosophy.
Part III examines the implications of corporate purpose in a global economy, where companies must compete with firms with fundamentally different views of purpose that reflect distinct national histories and philosophical ideas. Chapter 8 explains the realities of U.S. international competitiveness, while Chapter 9 explores the cultural, historical, and philosophical roots of the ideologies that shape the purposes of companies in Germany, Japan, Korea, and other Asian countries. Globalization vastly expanded the playing field, creating a Darwinian struggle for dominance among free-market ideologies. This section helps the reader understand the essence of this struggle and the importance in a global arena of the ability of purpose to retain its significance and motivational power across national boundaries (which a shareholder-focused purpose fails to do).
Part IV explores the implications of corporate purpose for leaders, arguing in Chapter 10 that infusing an organization with a worthy purpose is an essential responsibility of leadership – an act that is at once strategic and moral. In today’s environment, it is often an act of courage. As the organization’s ultimate end value, corporate purpose provides the foundation for the shared values that define organizational character, raise moral aspirations, and enhance performance.
In addressing these issues, ideas are integrated from a wide range of thought: from strategy, management, and executive leadership to history, cultural anthropology, philosophy, theology, and psychology. These ideas are woven together with examples from leading companies to demonstrate the superior value of a customer-focused purpose.
Acknowledgments
Introduction: The New Realities of Corporate Purpose
PART I: INFLUENCES ON MEANING, STRATEGY, MANAGING, AND PERFORMANCE
Chapter 1: Purpose and Performance: Leveraging the Essence of a Corporation
Chapter 2: Corporations and Individuals: Creating Meaning and Competitiveness
Chapter 3: Strategy: Defining Corporate Mission, Priorities, and Direction
Chapter 4: Managing: Transforming Purpose into Action
PART II: CAPITAL MARKETS, PROPERTY RIGHTS, AND THE INDIVIDUAL
Chapter 5: Capital – Market Relationships: The Myths of Shareholder Wealth Maximization
Chapter 6: Property Rights: The Shareholders’ Rights and Responsibilities
Chapter 7: Individualism: America’s Competitive Advantage
PART III: COMPETING PURPOSES IN THE GLOBAL MARKETPLACE
Chapter 8: Purpose and Global Competitiveness: The Realities
Chapter 9: America’s Rivals: Changing the Rules of Competition
CONCLUSION: THE LESSONS FOR LEADERSHIP
Chapter 10: Infusing Purpose: A Moral and Strategic Responsibility of Leadership
Notes
Bibliography
Index