Profit from Purpose instead of Profit as Purpose.

This article was originally published on LinkedIn on May 11th, 2015, but if anything it is even more relevant now than it was, almost four years ago.

Do you know what is your company’s purpose? Does it even have a purpose? I know, it seems like a silly question… But, does it?

A purpose is something inspirational that can drive the work of people. It is something that they can pursue and towards which they will strive to do their best work.

Let’s say you are the in the business of making reading lamps, for example, your stated purpose might be…

- We create beautiful lamps with superb quality.

It might not be fancy, but it is clear and easy for everyone to understand and relate to. We want to make great looking lamps and we want them to be of very good quality. This is a purpose that is easy for people to understand and relate to.

Today, regardless of what they state, most companies have a single purpose: profit. Over time companies have confused their purpose with their financial goals, forgetting that profit should stem from executing well its purpose.

Everywhere you go, be it in the US, Europe, Brazil or elsewhere, you see the same situation and confusion. Executives tell the same story of strategic planning meetings and retreats where they discuss how to achieve the projected financial results, instead of how they will do a better job towards fulfilling the company’s stated purpose. In fact, regularly this purpose isn’t even remembered during discussions, except perhaps in so far as they serve to determine specific markets the company operates in.

Does this sound familiar to you?

It seems that with the passage of time, profit became the purpose of almost all companies. Different people describe it in different ways, but they all end up being the same. One of the most common ways to put it is “create shareholder value”. Shareholder value is, regularly, interpreted as referring to the current value of the stock or the dividends that might be paid at the end of the quarter or fiscal year. It always seems strange to me that it is presumed that the shareholder has no long-range plans for the stock. That the shareholder couldn’t care less if the company is healthy five or ten years from now, as long as this quarter’s goals are met.

Of course, that is exactly the case for many investors, but it is not so for all of them. Some may believe that the company’s long term prospects are more important either because they identify with the company’s stated purpose, or just because they are following a longer ranged investment strategy.

Most companies today are still stuck in Previous Century Thinking, which leads them to incentivize Executives and Managers to achieve specific goals by offering them financial rewards. These rewards are generally in the form of cash bonuses or stock options, both of which will result in immediate gains for the person, regardless of the long-term impact on the company. If asked directly, 90% or more will tell you that they would put the company’s interests first and not hesitate to take a path that might result in them taking a loss, but reality would probably disagree. Is this because they are bad people? No, this is a natural reaction to the goal that was specifically set for them.

These executives were not working with the purpose of creating a great product, or a great experience for their clients. They were probably working towards the goal of meeting revenue increase or cost reduction targets.

When you tell a person that the purpose of their work is to create shareholder value, it is not something that they are likely to relate to, unless they are shareholders themselves.

Can you seriously conceive of the following scenario?

A worker considers, “I hope I can complete this product soon so that I can help make a lot of money for the shareholders of my company”? He goes on to work long hours, day after day until the product is released.

It is at this point that a savvy executive might jump in and say, “it is obvious that no one expects people to be motivated by creating wealth for a faceless group”. “That is precisely why companies offer financial rewards for meeting specific goals. If you help the company reach a certain profit level, you will receive a certain cash bonus.”

“We expect to motivate people to receive their own bonuses, that is how they will do their best work”, the executive complements.

While this last option sounds much more logical, it suffers from a fatal flaw. Repeated scientific studies done over the past 40 years, by well-recognized institutions such as the universities of Princeton, Carnegie Mellon, and Chicago, among others, have demonstrated that such extrinsic financial incentives are actually counterproductive when applied to problem-solving and creative work. Most work done, today is already or moving towards being of this kind, and handled by smart-creative people.

It has been consistently demonstrated that people offered conditional financial rewards have, on average, a significant decrease in performance. One particularly unhealthy side effect of such extra compensation is that they focus the person on meeting the specific condition or conditions that will trigger his or her bonus, regardless of their overall effect on the company. In fact it is not rare for people to learn how to game the system and focus exclusively on how to manipulate it in order to receive as large a bonus as possible in a given situation.

“The only thing we could say for sure back then was that much of what the two of us had learned in the 20th century was wrong, and that it was time to start over.” — from ‘How Google Works,’ by Eric Schmidt and Jonathan Rosenberg

There is, however, a growing gap between what Science has demonstrated to be true and what is considered sound business practice. This situation seems to stem from several factors such as perceived security in following the practices that were previously used by well thought of executives and not standing out as for speaking against them. There is also the fact that these practices have worked in the past, and still do, just not in all situations. Reality changed substantially since these practices were introduced and thus the conditions in which they do not work have become prevalent.

Over the course of the 18 months, I have spent researching and writing a new book, I have had the opportunity to discuss practices and theories with CEOs, CIOs, VPs, consultants and visionaries. From people that are still struggling to get their startups off the ground to people that have built billion dollar companies. Every one of them that has taken the time to carefully consider how businesses can improve the way they work, instead of merely recycling the overused and abused carrot and stick dogma knows that a new wave of change is inevitable and is upon us.

Is your organization ready for this change?

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