Profit is not the aim of business; virtue is

According to a new book, if you provide excellent customer service, the profits will follow

Stuart Watkins says it rarely works the other way around.

There are usually two types of business titles, and most bookstores have a section dedicated to them. Flexagility: The Secret of Delighting Customers and Raking in Enormous Profits is one of the many books with titles like this one. They can be found at the self-help area of airport bookstalls. Titles like Fleeced, Poisoned, and Spied Upon explain how capitalism is causing inequality, harming people's health, and destroying the environment. People who appreciate confirmation of their preconceived notions are the target audience for books in this category. These words are taken from The Corporation in the 21st Century: Why (Almost) Everything We Are Told About Business, written by economist John Kay, which does not fit into either of these categories. According to Kay's introduction, it is meant for those who would not typically read a business book but who would benefit from an "intellectually serious, even sometimes challenging, approach" to the topic. They may even be persuaded that a career in business offers benefits beyond monetary compensation. Kay accomplishes his goal. As stated by Ed Smith in a New Statesman review, the outcome might be a book devoid of a theory. However, the statement "because it has wisdom instead of theory" is not a critique.

People need medicine.

Profits are not the reason. The modern business corporation has had an odd history and destiny. Companies have provided goods and a standard of living, without which our lives would be in financial and cultural poverty, according to Kay. However, the majority of thoughtful and intelligent people have a bad opinion of business, particularly large business. The oddest thing is that 21st-century business actually "invite that negativity" when describing and conceptualizing itself. Marxists and their contemporary left-wing descendants view businesses as the arena of class conflict, where exploited workers toil for profit and enrich themselves at the hands of ruthless capitalists who own and control company assets. Other than adding "and a good thing, too," conservative economists and thinkers haven't done much to refute or change that viewpoint. The details of economists vision and theories have varied, but all basically see business as an economically efficient arrangement for minimising inputs in terms of labour and resources, and maximising outputs in terms of goods and profits. Leaders in business have embraced the description and responded appropriately to their own misfortune.

In his 448-page book, Kay begins with a case study from the pharmaceutical industry and goes on to include numerous examples from other industries. Early in the 20th century, traditional medical procedures that depended on snake oil and folk knowledge were gradually being replaced by the development of scientific medicine. When penicillin's antibacterial qualities were first discovered in 1928, neither the government nor industry showed much interest in it until World War II focused attention on it. George Merck, the president of the company that still bears his name, was a supporter of Howard Florey and Ernst Chain at Oxford University who were working to synthesize the antibiotic. One of the first businesses to recognize and capitalize on pharmacology's transformative potential was Merck. Merck's eldest son, George, transformed the company into a research-focused enterprise, and since 1927, it has been listed on the New York Stock Exchange. Merck's 1950 statement to medical students, "We try never to forget that medicine is for the people," summed up the company's mission. It's not for financial gain. The profits come next, and they have always been there if we have that in mind. They have grown larger the more vividly we have recalled it. Merck topped Fortune magazine's list of the most admired companies for a long time.

Increasing revenue at all costs.

This was the guiding principle of all such businesses, as the early history of the industry would tend to confirm. However, things changed when Wall Street pushed pharmaceutical companies to show that they were dedicated to protecting shareholder value. The motto of Merck's Pfizer counterpart was somewhat different: "We strive to make a profit from everything we do, to the extent that it is humanly possible." According to Jim Collins' 1994 business classic Built To Last, companies like Merck performed better than their peers when measured solely by stock returns. Until Merck stumbled, that is. It became "totally focused on growth" instead, giving in to the logic of profit-maximizing, and as a result, it became the main character in Collins' 2009 book How the Mighty Fall. In 2004 Merck was forced to discontinue a pain reliever due to accusations and legal action after marketing the medication to a large number of patients who might have been better off taking aspirin rather than the small percentage who would benefit from it.

Undoubtedly, there are numerous more heinous instances of misconduct driven by greed that are not limited to the pharmaceutical sector. Kay, however, makes the point that this brief history is dismal and representative of contemporary business. Millions of lives could be saved and nearly everyone's quality of life could be enhanced by its products. Its earnings have the potential to generate significant profits for investors, including retirement funds, and finance new research. The earnings could be used to fund extensive, worldwide philanthropy. But a shift to maximizing profits at all costs, along with the inevitable misconduct that follows, leads to a decline and explains why the public began to distrust large corporations.

According to Kays' book, "by placing too much emphasis on the transactional nature of business relationships, we have undermined not only the relationship between business and society, but also the effectiveness of business, even in transactional terms." Before a shift in culture resulted in a focus on profit, Boeing was a world-renowned engineering company producing amazing products that changed the world. In the end, airplanes were dropping out of the sky. For the majority of the 20th century, General Electric was thought to be the best-run business in the United States. From the 1980s onward, the company's focus shifted brutally to "shareholder value," which ultimately caused it to fail. Value for shareholders vanished along with it. The investment bank Bear Stearns once declared, "We make nothing but money." "Ended up not even making any of that," Kay quips sardonically. Shareholders are the final beneficiaries of the "shareholder value" drive.

Making "rents" versus pursuing profits.

However, isn't the pursuit of "shareholder value" a description of what businesses actually are and should be? Aren't companies technically owned by their shareholders, and isn't it their "social responsibility," as Milton Friedman put it, to maximize profits? That perspective is just untenable, according to Kay. First off, it's difficult to determine who actually "owns" modern corporations with their intricate web of financial, contractual, and regulatory responsibilities. Even in countries that support shareholder ownership the most, like the US, it can be difficult to exercise ownership and control rights. Senior management is more likely to own a company's overall strategy in large, contemporary corporations, but even in these cases, the freedom of action and rights that come with that ownership are probably not as broad as one might think. For instance, employees will bring to work not only themselves but also knowledge, skills, and abilities that are difficult to replace or order. Apple does not manufacture its smartphones, and Amazon does not own its warehouses or the products that are stored there, so even what the company "owns" may be difficult to pinpoint.

In the modern business world, "assembling the collective knowledge of many individuals and by developing collective intelligence a problem-solving capability which distinguishes the firm from its competitors" is more important for securing success. The ability of modern corporations to harness human capabilities in a way that meets customer needs is what defines their essential role, not how much capital they can accumulate, how many assets they own, or how many workers they can "exploit" or how efficiently they do this or produce tangible goods. Because it is difficult for rivals to duplicate success in this endeavor, monopolies dominate the corporate landscape. And the "rent" that monopolies receive as payment for reaching that status is more of a return on capital or profit. Lionel Messi would make a modest living if he weren't working as a football player, as even the best players made until recently. His skills are highly sought after by contemporary football companies, which adeptly draw viewers and sponsors in cutthroat international marketplaces, allowing him to make a fortune. Economic "rent" is the term used to describe the difference.

This is something that should be applauded. Economic rent not the same thing as the rightly deplored "rent-seeking" of those who seek to appropriate some of the value created by others, by, for example, political means is "not an anomaly, but a central and valuable feature of a vibrant economy". When individuals and organizations generate revenue by improving their operations, progress is made. Machines took the place of manual labor during the industrial revolution. In its subsequent development, "collective intelligence" is replacing physical labor. Today, a successful company is characterized by "harnessing collective intelligence that isn't common property." Several contemporary success stories, including those of Apple, Amazon, Microsoft, Tesla, and SpaceX, are based more on assembling the right talent to transform what we are all accustomed to into something incredible that we can't resist than on creating something entirely new (cell phones, stores, computers, electric cars, and space rockets weren't exactly unheard of before the emergence of these companies). Successfully developing such collective intelligence requires a variety of skills, but rarely those that are obvious to the Marxist or right-wing theories of what a firm is and how it operates.

Therefore, it is not only offensive but also incorrect to give a transactional account of business. It doesn't explain how a successful business operates or might operate in today's environment. Kays hopes that a "better account of how business and its stakeholders flourish will point the way not just to a better understanding of business, but to the better conduct of business itself." A successful business relationship in the modern world is not just instrumental and transactional; it is "social and embedded in a wider framework of communities and teams." A follow-up book will address the specific implications of embracing Kays' viewpoint for public policy and business. It will be necessary for those who are curious about how Kays' account differs from the well-known struggle over stakeholder and shareholder perspectives on capitalism. Readers of all political and ideological backgrounds will find this unbiased analysis of contemporary business to be helpful in the interim, as it explains why it should be praised and why reform is sorely needed.

Paperback copies of John Kay's The Corporation in the 21st Century (Profile Books, 12.99) are currently available.