Code red for humanity: Will companies find their purpose?

President Biden is agreeing with UN Secretary General, Antonio Guterres, when he said that Guterres had “rightly called code red for humanity” at the UN General Assembly on September 21, 2021. The extreme weather events seen worldwide confirm the predictions of the Intergovernmental Panel on Climate Change (IPCC). In August, at the publication of the latest IPCC report, Guterres had said that “the alarm bells are deafening, and the evidence is irrefutable: greenhouse gas emissions from fossil-fuel burning and deforestation are choking our planet and putting billions of people at immediate risk. Global heating is affecting every region on Earth, with many of the changes becoming irreversible.”

The scientific evidence of the impact that human activity has on the earth’s climate has been irrefutable for a long time, but this understanding has only become the mainstream view more recently. Another related swing in understanding is underway at present: the role that companies play; and in particular, the broader understanding of what their purpose must be. This trend paralleling the climate crisis has the potential to take human understanding and intervention in another direction.

Ask the average executive or board member today, “what is the purpose of companies?” and they may most likely answer: “profit!”

The problem with that answer is not only that it can lead to lower profits even in the short and medium term, but that it is likely to make the climate, biodiversity loss, pollution, social inequity, and other current crises worse instead of contributing to much-needed solutions.

Assumptions don’t hold

A little more than 50 years ago, Milton Friedman published an essay in the New York Times magazine entitled, "The social responsibility of business is to increase its profits." He asserted that owners had profit motives that ought to be fulfilled, that business did not have a comparative advantage concerning solving social issues, and that it is wrong in principle to solve the social problems by means other than the democratic system and regulation.

The problem with this view is that experience and research have demonstrated that the assumptions on which the Friedman Doctrine rests are demonstrably inconsistent with reality and therefore speak mostly against his original arguments.

One of the assumptions of the Friedman Doctrine is that governments are functioning well enough to reflect the democratic will of the citizens. As such, he argues that it would be wrong in principle to go against the democratic will of the people, as expressed by governments through "the rules of the game" that they create, even if these irk executives. What if governments are not functioning well, which we all know is a common occurrence? What if governments are not reflecting the will of the people? Friedman offers us no help here. Indeed, it can be argued that there is opportunity for private organizations to have purpose that advances the public good, and that by exercising that deeper insight, private organizations can set purposeful, beneficial and exemplary goals.

Wellbeing is the real purpose

We can think of an organisation as a machine that a group of humans builds to address some fundamental wellbeing problem in the world. Typically, the problem is important enough to motivate people to find solutions through which the world is improved.

In order to be successful, solutions must be so efficacious and desirable that people are willing to pay for them. Solutions need to impact individuals and enhance their lives. The products and services that organizations create are tools that they provide to clients, customers, or citizens to solve their problems. Firms that produce products that are more effective at solving problems will be more successful.

Using this analogy, a product cannot be the purpose of an organization. The product is a means to an end, a tool that an organization uses to achieve its purpose, which is to create wellbeing.

Consider the example of an insurance company. It would not make sense to say that the purpose of insurance company's purpose is to sell insurance. Insurance is only a means to an end.

The insurance company's purpose is the impact it has on wellbeing when it helps its customers solve a problem of security for instance. The challenge might be framed as assisting customers to ensure that their futures are safe and secure. Insurance is a tool for achieving safety and security, but it is not safety and security itself. Insurance, in and of itself, is not the purpose. Wellbeing or peace of mind is the purpose.

Using this logic, making money or profit can never be said to be an organisation's true purpose. Profit is made when customers compensate an organization for tools it has created to achieve its true purpose. In the insurance example, customers pay premiums in exchange for the assurance that the insurance product provides them. In this sense, making money is a critical by-product of the pursuit of purpose. It is not the purpose itself.

Money, capital, is one of the essential fuels for the engine of purpose, but making money is not the purpose itself. Indeed, making money can no more be the purpose of an organization's existence than breathing air could be the purpose of human existence.

Purposeful companies are necessary to respond to code red

Companies that do not focus on the true impact that they have on people and nature, companies that are not purposeful, are adding fuel to the fire. The tide is turning. We are now all aware how precarious our Code Red for Humanity is. Citizens, consumers, governments and very soon regulators, will be demanding that companies stop fuelling the fire through the misguided and irresponsible profit-by-all-means attitude. Above all, companies must realize that their true purpose is to find profitable, sustainable solutions for the problems of people and planet that enable transformation into a net-zero, regenerative, global economy. Then, only then, might humanity have a chance.

Dr Axel Kravatzky is managing partner of Syntegra-ESG LLC, vice-chair of ISO/TC309 Governance of organizations, and the co-convenor and editor of ISO 37000 Governance of organizations – Guidance.

The views presented are those of the author and do not necessarily represent those of any of the organizations he is associated with. Comments and feedback that further the regional dialogue are welcome at axel.kravatzky@syntegra-esg.com