December 19

Code Red for Humanity – What are companies to do?

Axel Kravatzky

Humanity is at a cross-roads. Increasing emissions and ecosystem destruction continue to move the world closer to the precipice. It is critical that many companies change their misguided understanding of what their purpose as a company is if we want to slow down and even reversing the trend.

President Biden agreed 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 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 on the impact that human activity has on the earth’s climate has been irrefutable for a long time – but this understanding has become the mainstream view much more recently. Another, very related swing in understanding is underway at present: the role that companies play – and in particular, the understanding what their purpose is.

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

The problem with that answer is not only that it can lead lower profits 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.  Consider two reasons.

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 primarily 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 often 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.  However, 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.  It can be argued that these cases represent an opportunity for private organizations to have a purpose that furthers the public good.

Wellbeing is the real purpose

We can think of an organization as a machine that a group of humans get together and build to address some fundamental wellbeing problem in the world. Typically, the problem to be solved is something important enough that motivates people to find solutions through which the world is improved.

In order to be successful, solutions of companies need to solve problems so 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 like tools that they provide to clients, customers, or citizens to solve their problem. Firms produce products that better solve problems or do this more efficiently 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 solve a problem and 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 through the problem it is helping its customers solve by providing them with insurance. For instance, the problem might be framed as assisting customers to ensure that their futures are safe and secure. Insurance is a tool to achieving safety and security, but it is not safety and security itself.  Insurance, in and of itself, is not 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 are do not focus on the actual and 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 situation is. Citizens, consumers, governments and very soon regulators will be demanding that companies stop fuelling the fire through a misguided and irresponsible profit by all means attitude. However, we will only have a chance when companies realize that their true purpose is to find profitable, sustainable, solutions for the problems of people and planet that enable to transform into a net-zero, regenerative, global economy.

This article is part of the "Purpose with Profit" Column and an earlier version was published in the business section of the Newsday (Trinidad & Tobago) in September 2021.

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