Redefining enterprise purpose makes economic sense

No enterprise is an island

In the twentieth century, the prevailing economic models focused on the enterprise in isolation. It is true that some of them extended their scope to the supply chain, but they still retained a clear enterprise centricity. Those economic models have been questioned because of their limitations. One of their fundamental flaws is that they viewed enterprises as islands. They failed to account for significant effects that become clearly noticeable when you consider the enterprise in a broader context.

An enterprise is created and lives within a society, in a cultural and political context, within an environment – and for the last two decades, in a very complex hyperconnected world. Traditional economic models contemplated some qualitative external factors, such as governmental influence, and even quantified some of them, such as the impact of certain regulation or taxes. However, many relevant effects or phenomena were disregarded as “externalities”.

“Externality” is bureaucratese for “sweep under someone else’s carpet”

An externality is a cost or benefit that impacts a party who did not choose to incur that cost or enjoy that benefit. Externalities can be negative, such as the air in a town being polluted by a nearby industry, or positive, such as someone’s fields being better pollinated by bees from near honey makers. In traditional economic models, externalities were ignored with the objective of avoiding costs – the costs of remunerating those negatively impacted (the polluted town) or those unknowingly or inevitably benefitting the enterprise (the honey makers).

Negative externalities tended to be swept under the carpet until an event, usually unexpected and sometimes catastrophic, revealed their effects: higher prevalence of respiratory or digestive diseases due to poor air or water quality; psychological and heart conditions or obesity due to sedentary and stressful work conditions; environmental disasters due to isolated events (such as oil spills) or effects accumulated for decades (toxic rivers, islands of plastic on the sea); nuclear and chemical accidents; depressed communities due to the effective monopoly or oligopoly on labor that some enterprises exerted in certain areas. When something like that happens, we rediscover that in a global world we all live on the same carpet.

Externalities boomerang on enterprises

Thinking in a simplistic way, only of first-order effects, it makes perfect sense to focus solely on maximizing enterprise profit and its value to shareholders in the short term. Someone else (often the public sector) is expected to take care of the externalities, and the enterprise can focus on its short term, isolated objectives.

Thinking in a realistic way, taking higher-order effects into account, the sole purpose of maximizing profit in the short term does not hold. The public sector cannot solve all externalities, least of all for free. Tax increases are often needed to finance the effort, and that includes corporate taxes. The environment may be damaged and depleted, providing fewer or lower quality inputs to the enterprise. The health and well-being of people can be negatively affected, and this has direct costs to the healthcare system, as well as indirect costs to businesses – those people are their employees or customers in the end.

In summary, negative externalities that are swept under the carpet do pile up and backfire. They end up creating messes with substantial negative effects, which are costly to clean. Those negative effects and unexpected costs end up impacting enterprises, damaging their short-term shareholder value ambition and, consequently, pushing them to sustain or increase negative externalities even further. A vicious cycle is created, with negative effects on both enterprises and societies.

Enterprise purpose must broaden its scope

The vicious cycle can be broken for the benefit of both the enterprise and society: enterprises only need to broaden the scope of their purpose. There are relevant stakeholders other than shareholders. There are relevant time horizons other than the short term. There are ways of approaching resource management other than “take, make, waste”.
More recent economic models (such as those of the Value Balancing Alliance) take externalities into account and broaden the scope beyond the organizations in isolation. By rethinking their purpose and adopting these advanced economic models, enterprises can better guarantee the sustainability of business, as well as increase revenues and profit in the mid and long term.

The recent Covid-19 emergency has demonstrated how, in the face of a very adverse event, enterprises have been flexible and adaptive, having the greater good in mind: enabling remote work in record time to diminish the risk of contagion, manufacturing respirators instead of their usual products to address supply chain disruptions, or sharing employees to guarantee business continuity and contain unemployment.

Enterprises have been able to broaden their scope effectively, yet for a limited time, due to a critical emergency. Now is the time for deliberate and thoughtful efforts in redefining purpose, to achieve durable and sustainable benefits for business and society.

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