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Business performance is often perceived as having no societal impact. It seems to be a strictly financial matter and to concern only its shareholders, and nobody else, and as such is even morally suspect for some. We are happy for the company that has good results, and we may suspect that is at done at the expense of society. Yet, the performance of businesses, and more generally that of organizations, is a major societal issue, an observation made by Peter Drucker, and still relevant today.
The change from pluralism to the state
Drucker observed, for six hundred years, from the thirteenth century, that the political history of the West was largely that of a constant effort to dismantle the pluralism and decentralization inherited from the Middle Ages. By the mid-nineteenth century, this had largely been accomplished. There was then only one center of power in society – the state. But just as pluralism seemed to have been abolished, the large organization, especially large commercial enterprises, emerged as a new and autonomous center of power in society. This challenge to power has been strongly resisted, both intellectually and politically, from Plato’s credo that there should be only one center of power and one organization, rather than a pluralism of competing and autonomous organizations with no need to share a common purpose.
The impact of the organization in society
The large organization has major societal importance. One of the characteristics of modern society is that it affects every aspect of our lives, every day. You buy your bread from a baker, but however small he may be, he supplies himself with flour via a complex organization linking farmers, millers, and distributors, as well as oven manufacturers and so on. The baker’s delivery vehicle is produced by a large multinational. Hence the “small” local trader is a visible node in a huge, largely invisible network, with nodes in other countries. The baker depends on the performance of other large organizations to ensure his own.
The necessary autonomy of the organizations
The organization is the outcome of innovative entrepreneurs who invented new products or services. It is the tool they created to provide products efficiently and sustainably.
Organizations do not exist for themselves. They are means: each one exists to accomplish a social task: producing cars, caring for the sick, etc.
For Drucker, the characteristic that allows organizations to accomplish this social task is that each one is autonomous and specialized, guided only by its own purpose, its own values, and its own objectives. Each one invents a specific way to respond to the challenge that motivated its creation. This specificity produces its unique organizational identity, which becomes the basis from which the company faces the successive challenges it encounters – growth, crises, uncertainty, disruptions, etc.
The organization exists to satisfy the needs of society
Unlike a biological species, an organization does not only wish to survive. It must accomplish its purpose, i.e. a specific contribution to society. The test of its success is therefore always outside, in relation to a third party. An organization that does not satisfy its customers, disappoints its investors or scandalizes citizens, will not succeed. The company is therefore linked to the society in which it exists. Without a societal contribution, the organization has no meaning, or existence.
The success of the organization, therefore, lies in the satisfaction of needs. Drucker observed, that historically, these needs have been satisfied because they were considered not as societal objectives but as entrepreneurial opportunities. Opportunity seeking, in other words, is the ethic of the entrepreneurial organization. According to Drucker, organizations do not act socially responsibly when they deal with social problems outside their field. They act in a socially responsible way when they satisfy identified needs in society by focusing on their own specific work and transform some of society’s needs into their own achievements to satisfy them.
The societal importance of organizations’ performance
For a pluralistic society to function, its autonomous institutions must perform well. For Drucker, the key to the performance of an organization is its focus on a specific task. In the case of private enterprise, performance is typically defined in relation to the cost of capital: if a business generates profits in excess of its cost of capital it creates value. If it does not then it destroys value. It is under this constraint, a survival condition, that the business defines its performance objectives. It will be stronger if it clearly defines its objectives and how to reach them. The more specific an objective, the more easily it can be measured. An organization that defines its objectives in vague terms struggles to measure its performance, which is often the case in the non-profit sector, for example.
For Drucker, contrary to Milton Friedman, economic performance is not the only responsibility of a business, but it is the primary one, and the sine qua non condition of its existence. Through its performance, the business can sustainably provide products and services that meet people’s needs. Performance is therefore ethical: it is the service that the organization renders to society through the achievement of the objectives it has freely set. It is therefore on this achievement that the organization is judged, and it is this achievement that justifies the autonomy granted to it. Performance is therefore the responsibility of the organization, and the key to its legitimacy. There is a sort of “deal” between society and the organization, in the sense that: “I grant you autonomy but there must be results!” In other words, with great power (autonomy), comes great responsibility (performance).
Lack of performance is anti-social
Conversely, a non-performing organization is anti-social; it lives at the expense of society. A business passes on the cost of this non-performance to its shareholders, but also to society as a whole: it pays less social contributions and less taxes. If it must lay off employees, social costs are borne by society. Moreover, it penalizes other organization, by putting its suppliers or competitors in difficulty by cutting prices. Overall, it wastes society’s scarce resources.
Economic performance is not the sole responsibility of a business, any more than educational performance is the sole responsibility of a school or health care the sole responsibility of a hospital. But it is the basis without which it cannot assume any other responsibility, especially social responsibility: without performance, an organization cannot be a good employer, a good citizen, or a good taxpayer. Far from being a strictly economic issue, and in a way secondary, the performance of the organization is therefore essential to the functioning of a pluralist society.
About the Author:
Philippe Silberzahn is a professor at EMLYON Business School in France and a recognized expert in innovation and entrepreneurship. As a consultant, keynote speaker and management educator, he works with the leadership teams of large organizations engaged in transformation efforts when confronted to uncertainty and disruptions in their markets.