Newswise — Leading a public company since the late 1980s has been pretty easy in terms of understanding the “rules of the game.” That’s because the purpose of business has been so clear: just create shareholder value, as evidenced by ever-increasing quarterly earnings.
The Purpose of Business
It was in 1970 that Milton Friedman publicly espoused this sole purpose of business as part of his personal philosophy. His position directly contravened the prevailing business philosophy among major corporate leaders during the Great Prosperity, the economic era that characterized the late 1940s until the mid-1970s: that corporations have duties not just to shareholders, but also to society and their workers.
It’s important to note that the Great Prosperity is the only time in U.S. history that the capitalist economic system produced significant income growth for all income levels. It was in fact an era of shared prosperity. This has not been the case since Friedman’s philosophy became widely adopted.
Taking up Friedman’s arguments, economists and business school professors such as Michael C. Jensen and William H. Meckling encouraged corporate takeovers of noncomplying businesses and advocated executive stock options to align the interests of executives and shareholders. Wall Street jumped in the game by pressuring corporations to continuously grow quarter over quarter, leading business executives to myopically and maniacally focus on short-term earnings and use various accounting and financial engineering techniques to meet any shortfalls.
From Academic Lips to Corporate Ears
That in turn led to a belief in the corporate community that all growth is good and that businesses either “grow or die.” So, for over 35 years, the number one rule for leaders has been: Create shareholder value by growing quarterly earnings continuously, and you will be well-rewarded through stock options. You can do that through any legal means, such as closing facilities, offshoring, outsourcing, hiring independent contractors instead of employees, reducing employee benefits, using tax havens, liberalizing credit terms, channel stuffing, delaying research and innovation investments, and serial acquisitions.
That corporate leaders are generally rewarded by only one metric — the continuous production of quarterly earnings irrespective of the impact on workers or society — is a big change from the business philosophies underlying the Great Prosperity. My research published in Smart Growth (Columbia Business School Press, 2010) demonstrated that these so-called business growth “rules”: — all growth is good, businesses grow or die and businesses can and should grow in a quarterly fashion — are not based in science and are only half-truths at best.
I was one of the fortunate people to be raised in during the Great Prosperity, when business was a primary vehicle for achieving the American Dream. Through business, as an employee one could build a better life for oneself and one’s family. For most people, that’s not true today. Instead of shared prosperity, we have the highest levels of income inequality since the Gilded Age, and upward social mobility is nearly nonexistent if you’re born poor.
Over 2000 years of history is clear: These conditions are not sustainable. Furthermore, technology is highly likely to exacerbate the current condition. As a result, the “Why” of business will become front and center in our society.
The Technology Age
The Industrial Revolution is over. The Digital Revolution and Smart Machine Age are upon us. Over the next two decades, technology will radically change how we live and how we work. To survive, every business will have to transform itself into a technology-enabled, high-performance, highly adaptive and agile learning organization. Every business will have to implement structures and leadership models designed to optimize the integration of technological performance and human cognitive and emotional performance.
We are on the edge of a technology tsunami generated by advances in artificial intelligence (broadly defined); the Internet of Things; big data; nanotechnology; biological, genetic and “cyborg” engineering; virtual and augmented reality; additive distributed manufacturing; and other technologies. Very soon, most businesses will be staffed by some combination of humans, smart robots and AI systems. For the most part, humans will only be needed for work that technology can’t do well: higher-order thinking involving lots of unknowns and data gaps, creative and imaginative thinking, and the delivery of services that require deep emotional engagement with other human beings.
Techno-optimists predict that all of this will lead to an Age of Abundance in which life’s necessities will be widely available at very low costs to most people. But this so-called Age of Abundance will also lead to an Age of Scarcity — that of work as we know it today.
The best research in the field comes from Oxford University, which indicates a high probability over the next 16 years that 47 percent of the jobs in the United States will be automated. Predicted job automation numbers for China, India, and OECD member countries as a whole are 77 percent, 69 percent, and 57 percent respectively. Artificial intelligence will likely automate tens of millions of U.S. service and professional jobs and more than one billion jobs globally. This will severely stress social and political systems and further challenge the American Dream.
Over the last two years, the consensus view among many technology experts and economists about the coming magnitude of job automation has changed from one of “don’t worry, technology will create more jobs than it displaces” to one of admission that massive job automation will indeed create major societal challenges.
Global automation will challenge a global economy built on global consumption and rising wages. The results will likely include increased income and wealth inequality and decreased upward social mobility, leading to dramatic increases in divisiveness, social strife, mass migrations and political populism that will stress democratic systems. In the United States, this will further diminish the American Dream and create existential questions for individuals concerning the meaning of life and human dignity.
In an environment of such upheaval for business, the economy and society, it’s quite possible that impacted citizens — which, in the United States, could be 80 million or more people — will demand political accountability. Further, in the next decades, big business, business leaders and business schools could well be perceived as either part of the problem or part of the solution.
What will be the “American Dream” in that environment?
What will be the “Why” of business?
Ed Hess is Professor of Business Administration and Batten Executive-in-Residence at Darden and co-author of the new book Humility Is the New Smart: Rethinking Human Excellence in the Smart Machine Age (Berrett-Koehler, 2017).
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