Business is not about making money

Bear Stearns, a US financial services firm, reputedly had a sign in its lobby which said: “We make nothing but money.” The firm is no longer in business.

Henry Ford is quoted as saying that “A business that makes nothing but money is a poor business.” Yet financialization gripped much of the corporate world over the last several decades. Even as the perils of such an approach have become more prominent.

The travails that have enveloped Boeing are now well known. They are so disturbing that they don’t bear rehashing. The reason, as one wag put it, is that senior management changed their focus from excellence in aircraft engineering to concentrate on financial engineering. The results have been over 300 deaths, an erosion of trust in the company, loss of market share, and dire financial performance.

Qantas , in an effort to boost its bottom line, took to selling tickets on flights it never had any intention of flying.

Back in the UK, Thames Water prioritized paying out billions in dividends and taking on billions in debt rather than investing in providing services and infrastructure for its customers. As a result, it has consistently failed to provide service quality as required by regulation and faces large additional fines that add to its financial woes. Today, it is not clear whether a utility providing an essential service to 16 million customers can survive in its current form. Nor who will end up carrying the accumulated costs of years of poor management and financialization.

Financialization has gripped corporate management and was given rocket boosters by the relatively recent practice of linking executive compensation to short term stock price performance - one of the more corrosive practices ever to be implemented.

Financialization has also gripped those who purport to be able to tell us which companies are great companies.

According to Wikipedia: “In 2005–2007, Bear Stearns was recognized as the "Most Admired" securities firm in?Fortune's?"America's Most Admired Companies" survey, and second overall in the securities firm section.The annual survey is a prestigious ranking of employee talent, quality of risk management and business innovation. This was the second time in three years that Bear Stearns had achieved this "top" distinction.”

In 2008, Bear Stearns was swallowed up by the financial crisis. No longer most admired, I guess.

Well managed businesses understand that making money is not the objective of business. Business exists to provide products and services that improve people’s lives. And that has to be done well so that, as a result, businesses can turn a profit, survive, re-invest, thrive, grow and provide a decent return to investors. As my long-time friend Lynn W. Phillips, PhD. puts it, business is ‘a value delivery system’ – focused primarily on delivering, profitably, compelling customer value propositions.

A senior executive at a major pharmaceutical company once said to me: “We’re not in the business of making money. We’re in the business of making medicines that make people better. And if we do that well, then we should make money.”

Once, all of that didn’t seem much more than common sense. The best businesses have maintained this focus. It is no accident that 苹果 management reserves its most spectacular, widely publicized and broadcast events to showcase new products and services not for their financial presentations to Wall Street analysts. The latter, of course, have to happen. But there is a difference between building presentations about financial performance on a solid base of products and services rather than making them the main event – even at the cost of eroding the products and services that the business provides.

In our new world, business leaders require an even broader focus on what being a ‘value delivery system’ entails. They must cater to many more stakeholders than previously. They are expected to deliver value across many more parameters including their environmental and social impacts. The tramlines within which they can reasonably operate become ever narrower. Increased relevance of political issues create further challenges.

This makes delivering such broad value ever more challenging and requiring ever more management attention and appropriate prioritisation if managing a complex business is not to become well-nigh impossible. As both the breadth and speed of change accelerate, some will find it hard to cope. There will be those who fall back on ‘managing the numbers’ hoping to be able to eke out a solid financial performance for whatever time remains of their tenure while passing any accumulated issues on to their successors. They fall back on the outdated playbook that served them well in the past.

Yet the best management teams are adapting well. And at a speed that may have previously been unimaginable. They have realised that the senior management perspective needs to change from what started to become the norm since the emergence of the financialization playground in the 1980s. They are also innovating organisational approaches that are more appropriate for the fast-moving, highly volatile 21st century business climate.

For investors, all this requires navigating a paradox: those businesses whose management spends much of its time promising to generate outstanding financial returns for shareholders are the businesses that will most likely fail. Their stocks may make good fodder for short-term trading. But make sure to get out in time.