THE BLOG
06/02/2014 05:28 pm ET | Updated Aug 02, 2014

Google, Capitalist Dilemmas and Corporate Purpose: What We Want From Business?

The first quarter of 2011 at Google was, in the words of CEO Larry Page, "tremendous." Revenues rose 27 percent and income was up 17 percent. Google earned $7.04 per share for the quarter, up from $6.06 a year earlier. However, in after-hours trading following the announcement, Google's stock price plummeted 5 percent.

Analysts didn't like what they saw: Employment costs were going up. The tech giant was proceeding with its plan to hire 6,200 new workers over the course of the year in response to strong demand for Google product and to give a 10 percent raise to all its employees.

For people who make their money trading and gambling on the direction of the stock, this was a setback. They anticipated an even greater financial return. For the rest of us, hoping to grow the economy and create jobs for our kids -- what better news could we expect?

Who wins?

I have a friend who teaches at a prominent business school who takes her students through a simple exercise each semester. Every student must register a new company, which means paying a $60 fee and describing the purpose of the enterprise on the registration form. The professor's teachable moment: Purpose is the starting point, and as the founder of the business, you get to decide.

Google's founders have been clear about the company's purpose: "to organize the world's information and make it universally accessible and useful." This purpose bleeds into the culture of the company and makes Google a pretty fun -- and lucrative -- place to work. Taking on the challenge of "organizing the world's information" while generating a healthy profit is a good story. And the lesson my faculty friend imparts is an important one: business can be about something truly important -- as well as profitable.

This lesson seems to have been lost on a generation of business graduates who have been steeped in theory and practice aligned with "shareholders first" -- or "shareholders only" -- as the central organizing principle and primary success metric of business.

Today, we are witnessing a revival of this central question in both boardrooms and classrooms. What is the purpose of business corporations and what would success look like if we attempted to measure investment decisions in a more holistic way than just through the lens of those who hold the stock today?

Clay Christensen and Derek van Bever of HBS, in a provocative new article in Harvard Business Review, "The Capitalist's Dilemma," speak powerfully to this question of measurement. The dilemma they pose is the following: The metrics we use to allocate financial capital and that are fully embedded in both classrooms and boardrooms reward "efficiency"-type innovations -- strategies that favor outsourcing "low-end disruptions" like Walmart and product substitutions that amount to selling "established products and services to the same customers at lower prices." Google is still in the "market-creating" innovation space, which is the job-creation end of the spectrum. It is exactly what we hope will be rewarded -- especially when capital is abundant like it is now. Instead, the markets continue to rely on metrics like "return on invested capital" and "IRR." These ratios may make sense when financial capital is scarce, but not when capital is abundant. That is the authors' point: using these ratios leads us to Least Common Denominator thinking. Reduce costs and the ratio goes up.

Christensen and van Bever make the case that today, long-term investors and many venture capitalists, whom society usually depends on to balance the equation and put more emphasis on the numerator, in the face of depressed financial returns and unfunded commitments are also rewarding efficiency over growth. Thus, we get stuck in the downward cycle that we experience today as a "jobless recovery."

The authors of the HBR article also courageously point a finger back at their own institution and academic colleagues who contribute to the dilemma by dividing finance from strategy: "The reality is that finance will eat strategy for breakfast any day -- financial logic will overwhelm strategic imperatives" they note, "unless we can develop approaches and models that allow each discipline to bring its best attributes to cooperative investment decision making. As long as we continue this siloed approach to the MBA curriculum and experience, our leading business schools run the risk of falling farther and farther behind the needs of sectors our graduates aspire to lead."

We are in great need of leaders in business, finance and in the classroom who will take a different path.

In late 2013, the Aspen Institute's Business & Society Program commissioned in-depth interviews with 28 leaders and educators from organizations as diverse as BlackRock, Kellogg School of Management, and LinkedIn. The researchers probed what the respondents think about this question of corporate purpose, where they derived their beliefs and what they consider the hallmarks of a successful business. Some of the participants preferred the convention of "shareholder value" as the purpose of a business corporation; most interpreted the question more broadly. All were passionate about the question. Interestingly, one finding from the research is that all seem to share the belief that the lines converge when we enable longer-term thinking.

This study on "Unpacking Purpose," released two weeks ago, is available online and will be the backbone of continued dialogue on the role of the corporation in society and how to build a business culture (values, supported by decision rules and incentive systems) aligned with the health of the system on which the business depends.

Last week, we released a companion to the "Purpose study," a paper for business faculty designed to open this dialogue in business schools as well. Among other things, "Unrealized Potential: Misconceptions about Corporate Purpose and New Opportunities for Business Education" addresses conventional myths like who owns the corporation. It illuminates some of the choices executives can make and raises questions relevant for those who will take the reins of the economy after my generation hangs up its spurs.

What is possible now? Christensen and van Bever say it beautifully: "We hope this attempt to frame the problem will inspire many of you to work with us to devise solutions to this dilemma, not just for the individual good that might result but for the long-term prosperity of us all."

Hear, hear.