Is Profit the Ultimate Measure of Business Success?
Stacey Barr
Performance Measure & KPI Specialist ? Author of "Prove It!" & "Practical Performance Measurement" ? Creator of PuMP
Many leaders still believe that profit - or financial performance - is the ultimate measure of business success. But at what expense?
My eyes were opened to consequences beyond animal suffering when I read about the mass-production farming of chickens, in "The Ethics of What We Eat" by Peter Singer and Jim Mason. To maximise profits, these companies maximise the number of birds per square foot of space. In many operations, chickens get about the size of an A4 sheet of paper to live their lives in. Aside from the birds' suffering, there are some very significant costs to local communities and ecologies.
The ammonia from the chickens' waste products makes going outside unbearable when the wind blows in a specific direction. The ammonia causes irritation and health problems to people. When the waste products are flushed from the factory floor, they run off into nearby streams and waterways, and kill the aquatic life. These are the costs that don't make it into the companies' financial statements. these are the costs that communities and the environment pay (now and in the future) to subsidise the companies' profits.
It's not just the for-profit sector.
Even in public and non-profit organisations, making financial performance the ultimate measure of success can cause problems (but probably less so than in for-profit companies). Rather than profit, budget performance and revenue generation can blinker the organisation to the needs of other important stakeholders.
But recently there is far more pressure to change this practice of putting financial performance at the top of the KPI priority list. ESG (environmental, social and governance) performance is a topic that's becoming more popular. And it can bring a more holistic and true balance to the measures that define ultimate business performance, in all sectors.
The problem is 'dollar addiction'.
For too long, it's been accepted as normal and right to put financial performance at the top of the scorecard, and focus performance dashboards around the financial KPIs. And that drives behaviour. Behaviour that has consequences which don't appear on the balance sheet.
I'm not alone in this belief. Matt Tenney agrees that profit is not the ultimate measure of success in his TEDx talk, Why The Best Leaders Make Love The Top Priority. And Fran Tarkenton, former American quarterback and author of The Power of Failure, says it like this:
"Profit isn't and shouldn't be the mission of business. The mission of business is to help people. To help your customers, your co-workers, your employees, and your partners. Success is not a number - it's not X dollars or Y customers - it's a measurement of VALUE."
But we have a long way to go.
领英推荐
From an environmental perspective, there are still many companies that don't take responsibility for the life-cycle of the products they make, as it does affect profit. Electronic appliances, like toasters and video players and outdated laptop computers, often aren't able to be recycled. And no-one wants to reuse them when they can buy the latest and greatest for next to nothing. So they become land fill.
From a social perspective, that habit of calling employees 'our greatest asset' smacks of a company that treats people like equipment or property: maximise the return on investment. Get as much productivity as possible for the least amount of financial reward. Child and slave labour in industries like coffee and diamonds are of course the extremes of this view, but it's still an attitude that many familiar companies and organisations have of the people who contribute their time, skill and effort.
From a governance perspective, there are still many organisational leaders who are rewarded for short-term targets with (often obscenely) high financial bonuses. This short-termism does not create value. It borrows value from the future, and from other stakeholders in the business's operating environment. And it doesn't pay it back.
ESG is one antidote to 'dollar addiction'.
If human endeavours like business don't exist to make the world a better place, can we really judge them as successful? How can people enjoy the rewards of high profits when others have had to suffer to make those profits possible?
We really need to move away from a singular focus and single measures of success. Surely a truly balanced scorecard is one where the perspectives of every stakeholder affected by a company define success? ESG thinking can inform strategy design, to create true balance in the definition of organisational success.
And that truly balanced strategic direction can guide what the organisation measures, monitors and manages to pursue that success. There is plenty of guidance for how to measure ESG performance. And there is plenty of guidance for how to meaningfully measure non-financial or intangible performance, in general.
Is your strategy based on just one or two stakeholders' values? Who or what else is affected by your business? As a starting point, think about shareholders, customers, employees, suppliers or partners, local communities and the environment.
Prefer to get these weekly KPI and performance measure tips in your inbox? Sign up here.
The post “Is Profit the Ultimate Measure of Business Success?” was first published by Stacey Barr on https://staceybarr.com/measure-up.
I know how to create products that deliver real value to real users
2 年Stacey Barr >> Yes, you’re right. But also wrong - for better or worse we have a system where profit and, more important even that that, growth in profit is the ultimate measure of success. Actually, it’s more sinister than that. If you think about what money actually is (s license to Marshall labor) and then look at the rate at which the government is creating new money - which it must do to keep the system running - then we’re locked in a constant battle to redistribute power. A compsny - as currently conceived - is quite literally a construct that people can use to redistribute power - in their favour. The whole system is deeply flawed. But it’s what we’ve created…
Practice Leader at BoardWorks
2 年Too many businesses do not recognise and meet the true costs of their business model and are heavily ‘subsidised’ by the communities suffering the impact of those businesses’ externalities. In NZ intensive dairy farming as practiced over the last 30 years is a classic example of business operators privatising their profits (as traditionally measured) and socialising their costs (environmental degradation) but there are many other examples. Will ESG reporting change that? The signs are not promising. The incentives to engage in ‘greenwashing’ are high indeed while traditional accounting measures of profit prevail. That few businesses are willing (or able?) to absorb the true cost of their operations is a major challenge to political will. It’s possible there may be a publicly acceptable case to be made for continuing to prop them up. However, let’s not kid ourselves that these businesses are profitable in a net societal sense.
Data Analyst at Pantex Plant
2 年Sry I’ve not bought into ESG, if there are potential liabilities a private company may face they should accrue for them as liabilities. If they don’t properly accrue, then whoever audits their balance sheet should loudly critique them. Governments bare responsibility to set a fair playground for businesses and communities. Laws must clearly articulate liabilities companies may face so that companies can evaluate their risks and plan their business. Further the laws need to be stable because it may take years for a full return on investment. Companies exist because investors took a risk and they expect a 1) return on investment. And they continue to exist because 2) there remains a demand for their product/service and 3) their value proposition is well received by customers versus their competition. To me those are the 3 segments to monitor.