What is Value Creation and the new Purpose of a Company?

0
51 views

Share on LinkedIn

My friend, Dr. Eddie Pinto, who is one of the best medical doctors I know, knowledgeable, up-to-date, caring and concerned about patients wrote to me:

#Valuecreation has been happening for 15 years in medicine. It screws the doctor and patient and limits care, makes it more expensive and enriches only the large university groups and insurance companies. We need to thank the globalist Obama!

https://www.kevinmd.com/blog/2019/03/how-big-medicine-is-hurting-patients-and-putting-small-practices-out-of-business.html



I wrote back:

Eddie, #ValueCreation is a good thing. But whom are we #creatingvalue for….if for Big Medicine, Insurers and suppliers, then we are in the old world of value creation, which means increasing shareholder wealth. Our definition of Value creation is creating value for the customer, the employee, and the independent doctor, maybe all doctors and for society. There is a big difference, and we can make a difference if we follow value creation in the way mentioned above, that is focusing on customers, employees and society.

Recently the Business Roundtable, the association of the largest companies in the US signed on to the new purpose of a company: To create value for all stakeholders, starting with customers, employees, partners, and society. 181 leaders from Amazon, Google, Microsoft, among others signed off on this purpose, outdating the 1997 purpose Eddie was bemoaning (creating shareholder wealth). The number 1 purpose is #creatingcustomervalue!

There are four real dangers in preventing this from happening:

  1. Companies and their leaders are just mouthing something nice. Why was this not done before?
  2. There is so much pressure from the stock market and the shareholders, forcing quarterly results to be more important than long-term wealth, and not understanding that creating value for all stakeholders creates greater shareholder wealth.
  3. They have the mistaken view that creating value for other stakeholders is expensive and costly. Doing the right things, and preventing poor information and communication is value starvation and should be avoided (Take for example, most companies allow one-way communication, the company can communicate with you. But try communicating with someone of responsibility in the company. Even his name is a guarded secret). We have great ways of teaching how to create value, from a customer strategy to customer centric circles, from measuring Customer value and understanding why customers buy to using existing resources in the company like quality control to focus on creating value.
  4. The biggest danger is those consultants who will jump onto the value creation bandwagon without understanding the meaning of value creation. Watch out for these people.

This is what caused Eddie to worry about #valuecreation.

Today in the Sunday Times of India, Namrata Singh wrote about the Purpose+Profit: Capitalism is getting a Makeover. This is one of the first articles in India after the Business Roundtable declaration of August 19, 2019 on the new purpose of the company. The article talks about Conscious Capitalism, but does not mention two giants, Raj Sisodia and John Mackey the former owner of Whole Foods. Conscious capitalism started over a decade ago.



Nick Gillespie in Capitalism in 2018 wrote in his article called ‘John Mackey and Conscious Capitalism Have Won the Battle of Ideas With Everyone but Libertarians’:

“Thirteen years ago in the pages of Reason, John Mackey, co-founder and CEO of Whole Foods Market, debated Milton Friedman, the Nobel-winning economist famous for declaring that “the social responsibility of business is to increase its profits,” and T.J. Rodgers, the CEO of Cypress Semiconductor who was (rightly!) famous for publicly telling buttinsky activist-investor nuns that they had no understanding of how to create jobs (the Catholic schoolboy in me still thanks Rodgers every night during my evening prayers).”

Mackey argued an early version of a business philosophy that he would later codify in a 2013 book, Conscious Capitalism, and a non-profit organization of the same name. Contrary to Freidman’s Ahab-like focus on shareholder value, Mackey said,

“The enlightened corporation should try to create value for all of its constituencies. From an investor’s perspective, the purpose of the business is to maximize profits. But that is not the purpose for other stakeholders—for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.”

#ValueCreation can only be understood when one sees the definition:

#ValueCreation is executing pro-active, conscious, inspired or imaginative and even normal actions that increase the overall good and well-being, and the worth of ideas, goods, services, people or institutions including society, and all stakeholders (like employees, customers, partners, shareholders and society), and value waiting to happen. This leads to better gains or benefits for Customers and all stakeholders, including enhanced returns on investment.

That is why our parents teach us to be good kids and to do good. But this is soon overtaken by the goal of making a living, of being successful.



The role of an executive is to create Value, and not just be a good administrator and an efficiency expert. The executive has to go beyond being a functional manager to being a Value Creator, and avoid destroying Value. To teach this role the MBA program has to shift from bringing out good efficiency experts and administrators to bringing out value creators; to shift from an MBA to Masters of #ValueCreation.

This is the start of making the Purpose of a company really to create value.

LEAVE A REPLY

Please enter your comment!
Please enter your name here