Transforming Management Theory and Practice to Focus Business and Capitalism on Value Creation
by Paul Barnett

“Growth and Inclusive Prosperity”, requires nothing less than a transformation in management theory and practice, and the next evolution of capitalism, which I call Valueism – “business and capitalism focused on value creation”. It stands in contrast to the current model which is focused more on value extraction.

A well-functioning system will recognise the link between good governance and leadership, employee engagement, productivity, growth and prosperity. And value, which does not only mean monetary value, is the golden thread that connects them all. It is the product of them all, and the means of measuring performance of each element and of the whole system.

Today, in many nations, prosperity is not inclusive. It is not shared. Great inequality persists. At the same time growth is slow, stagnant or very fragile. Many countries also speak of a “productivity crisis”. And the employee “engagement crisis” is a global phenomenon, now decades old. All these issues are interrelated parts of the current system of capitalism which has lost its legitimacy in the eyes of increasing numbers. This is reflected in the low levels of trust in business and the rise of popularist movements in politics.

Neo-liberal economic theories have been blamed. So have the ideas of individual economists, such as Milton Friedman and the concept of Maximising Shareholder Value (MSV). But, to try and identify one source of the problems is to oversimplify matters. The themes of the Drucker Forum this year recognise the problems are many and varied. They also seem to acknowledge the systemic nature of our ills.

Subi Rangan, professor of strategy at INSEAD says, “The prevailing aspiration of business is performance, while that of society is progress” and, whilst capitalism has delivered impressive results in the past, “it now seems uncontroversial that modern capitalism is in some crisis”. He goes on to say that. whilst elegant and powerful, the concept of capitalism seems “profoundly incomplete”. And he adds, “Enterprise performance without or, worse, at the expense of societal progress is unsatisfactory if not unsustainable. Still, enterprise performance has come to be regarded and taught as an obligation, while societal progress tends to be regarded as a by-product”. He then argues time is more than ripe to revisit “how enterprises might integrate performance with progress”.

Peter Drucker would surely have agreed with Rangan for he observed that the purpose of firms “must lie outside the business itself. In fact, it must lie in society since business enterprise is an organ of society”. He also saw that in a knowledge economy business would need to satisfy not only the legal owners, but also the owners of human capital, the employees, that give the organisation its wealth creating power.

The concept of Valueism is aligned with the thinking of people like Drucker and Rangan, where “value” is judged in terms of some measure of progress, rather than financial value. And, it is a judgement made by all stakeholders. Profits, whilst necessary in pursuit of progress, are recognised as nothing more than the means to the end, where the end is progress in some form.

If not only financial measures of value, what other ways should value be measured? Each firm or organisation must determine appropriate metrics based on its own business model, arrived at after consultation with stake holders, and after consideration of its purpose. And, the measures should be articulated in the form of a Value Scheme. At the societal level Gross Domestic Product (GDP) is the very unsatisfactory and controversial measure of the value the nation creates for its citizens. It is a poor measure because it is heavily focused on financial value. Better alternatives are being called for, but cannot be explored in this short article.

In this view of capitalism, the capitals (resources), are used in pursuit of progress. Monetary capital is just one of many, and those that provide it deserve a fair return. But the goal of the organisation is far bigger than the pursuit of financial returns. Some form of progress becomes the shared purpose of the business and its stakeholders, and each stakeholder also have their own additional purpose. Achievement of progress in the pursuit of purpose – personal, business and societal level – becomes the means of measuring value.

We refer to those upon whom the business depends as “stakeholders” – “a person or group that has an investment, share, or interest in a business”. It is rather abstract, and so I think we should just regard them all as investors – they all have a vested interest in the future of the firm (but some more than others). And like those we usually regard as investors, they want a return on their investment – value which may be financial and / or non-financial, such as support for personal development in the case of an employee.

Valueism looks at value creation through the lens of all stakeholders, internal and external, but the customer value lens especially. And, because the future of the business depends on each stakeholder, progress must satisfy each of them. They must consider themselves to be more prosperous as the business grows.

Management theory and practice must also move away from the obsession with performance measured in terms of productivity and financial terms, because all the research shows “when it comes to achieving sustained excellence in performance, what separates winners from losers, paradoxically, is the very focus on performance. Performance focused leaders invest heavily in those things that enable targets to be met quarter-by-quarter, year-by-year but they tend to neglect investment in company health” said Colin Price, author of Beyond Performance. In this context, “investment in company health” must mean ensuring all stakeholders feel they are achieving their purpose and are prospering on their terms. Because unless they are, they are likely to disengage and reduce performance.

Valueism practiced well creates a virtuous spiral. Take employees as one stakeholder group. If they feel that they are prospering on their own terms their purpose will be fulfilled. Consequently, they are far more likely to be engaged, motivated and productive. Currently only 13% of the global workforce are engaged according to large scale and long-term research by Gallup. This is hardly surprising since many are feeling insecure and wages for most hardly increase for employees but grow at phenomenal rates for CEOs.

“The challenges of our time” do indeed require that we “take a look at the world with new eyes” as the second plenary session of this years’ Drucker Forum suggests. Valueism serves this purpose, being a means of transforming how we look at the challenges of creating growth and inclusive prosperity. It questions prevailing management theories and the current form of capitalism. It calls for “numerator capitalism” focused on value creation, rather than “denominator capitalism” which is obsessed with cost management, performance and efficiency – often to achieve short-term results, even at the expense of future value. Valueism provides the means of overcoming the problems of the current form of capitalism and offers a positive direction of travel towards the next evolution of a system that delivers higher levels of prosperity for all.

About the author:
Paul Barnett is Founder & CEO of the Strategic Management Forum – a membership organisation that exist to advance the professional practice of strategic management.