When looking at economic growth for an organization, I must strongly disagree that there are unquestionable social benefits. Maybe for the shareholders, but definitely not for stakeholders, society, and the environment. I even question if John Locke would agree with this statement today. Can we still consider that nature on its own has no value to society, as Locke states in his Second Treatise? In the same sense, can we not see that a functioning, fair society has immense value to an organization?

In my previous reflections on growth, I repeatedly compared it to an organism, and in my last one, I even stated that growth is part of the journey and is as natural as birth and death. I previously established that I agree with the “Grow or Die” imperative and that leaders must be able to adapt to the changing environment so the organization can keep growing. I also agree with Penrose that although small firms are meant to flourish and become larger companies, some of these small companies are not meant to grow and have their function in the environment, probably in the same way unicellular organisms have their function in nature. In the case of larger corporations, I believe that the issue lies in the responsibility of the leaders toward corporate ethics and how organizations end up affecting society and the environment. After all, leaders come and go, companies, if well run, last for generations, and their impact can affect thousands if not millions of people.

When most people speak of growth in relation to a business, they refer to what Fleck calls quantitative growth. Similarly, when most people refer to the value of a company, they also limit their view to financials, mainly stock prices, which tend to be based only on dividends and equity. As Fleck expands her growth analysis to qualitative and mixed approaches, I believe we should look at company value with the same concept in mind. In my opinion, when valuing an organization, we should consider not only financials but also other key aspects that can be more related to the organization’s legitimacy. Ghoshal explains that current theories enforce management’s responsibility to maximize shareholder value. He questions the validity of the argument that shareholder value is only related to stock prices. The author rationalizes his criticism that shareholders are not actual company owners. They only own the right to receive residual cash flow. I would go further to say that shareholders are not obligated to value the company in the long run, as they can quickly sell their stocks to stop losses or to realize a profit. Therefore, if we define the value of a company by its share value only, and managers are obliged to maximize this singular aspect, their decisions will always be short-sighted.

To add to the nonsense, by offering stock options and golden parachutes to high-ranking executives, we add individual short-term interest from the managers to the value issue. Unfortunately, this was a lesson that corporate America still has to learn more about since the cases of Enron, WorldCom, Tyco, and others. Since then, top management has worked intensely to detach their compensation from individual or company results. CEOs were heavily compensated in the 2008 crash and even during the pandemic, even when companies had huge losses. In his Bloomberg article from May 5th, 2001, Anders Melin reports how over three hundred Fortune 500 companies changed their executive pay structure, and to do that, most have cut employees’ wages. In my opinion, this involves a conflict of interests and, more so, ethical issues. Therefore, it needs not to be discussed in this reflection. I bring it up to exemplify how short-term goals can be damaging for everyone, even shareholders.

In my opinion, organizations have no value without their people. As Groshal also states, the creation of value for a company comes from utilizing resources from employees and shareholders. Therefore, success should compensate both sides. Some would argue that shareholders bear all the risk. On the other hand, employees are paid for their work regardless of the result. What we tend to forget, and Groshal does a great job reminding us, is that efforts and knowledge created by the employees are retained by the company and can add to future value. Also, he says that it is much easier to trade a company’s stock than to switch jobs. I would add that in most cases for publicly traded companies, the effects of bankruptcy are much harder on the employees and society than the shareholders, as the former loses its primary source of income and society bears all the costs. Therefore, a responsible organization that cares about its legitimacy should maximize returns to both sides. This even compensation, in my opinion, would add moral value to the company and therefore increase its legitimacy.

Another aspect that I believe we should add to the equation of value is social and environmental responsibility. Fleck suggests, “We should refrain from enterprising for enterprising’s sake,” and the same is said for innovation and change. I would add that we need to look at growth with a similar lens. As growth is part of life, we should refrain from growing for size’s sake. As living organisms impact their surroundings, they also have a natural responsibility to maintain balance. As mentioned in previous reflections, careless growth can disrupt ecosystems, cause harm, and impede future self-existence. It is appalling to think that companies or even entire industries such as Big Oil knowingly caused damage to the environment. Even though it understood the repercussions, with the excuse to maximize return to its shareholders, it decided not only to hide its findings but to use its resources to shape public opinion, causing even more harm to society. Leaders in these companies have the control to make these decisions, and shareholders don’t. Therefore, it is the leadership’s responsibility to add moral value to the company. Fleck refers to this when she states that responsible leadership services pave the way to healthy organizational existence as well as social and environmental responsibility.

I don’t intend to make moral statements without acknowledging the difficulties involved in the growth process. The market pressures, the internal idiosyncrasies, and the challenges from the non-market environment can be challenging and often blinding to managers. I truly believe that we spend more time reacting than planning as individuals. But, as managers focus on finding imbalances, responding to the environment, and protecting their turf, they must be conscientious of their role and avoid the traps that cause organizations to lose sight of their greater purpose. When bringing back lessons we have learned, and how we have evolved as a society since John Locke, I believe we have understood that nature, on its own, does provide value to society even if no labor is expended on it. We must realize that the benefits of a fair and functioning society are of immense value to the market and, therefore, to each organization. As individuals, we have the responsibility to watch over our actions and be respectful of others. As corporate leaders, this responsibility is even more significant due to these organizations’ size, reach, and power. The natural outcomes of economic growth are unquestionable, but without limits, the social benefits might not be translated to progress and a good life for everyone. Collectively, leadership responsibility has to go beyond financial value and must be directed at creating total value by understanding its impact on the environment and society. A corporation’s ethical goal must be to create value for future generations while capturing the necessary value in the short term to have the means to maintain the value-creation process in perpetuity. If this sounds too utopic, we might agree that we still need to evolve as a society, that is, if we can avoid self-destruction until then.

Credit: The original work for this article was done for ADM730 – Fundamentals of Strategic Thinking @ COPPEAD – Universidade Federal do Rio de Janeiro in July 2022

References:

• Ghoshal, S. (2005) Bad Management Theories are Destroying Good Management Practice.
• Academy of Management Learning and Education, vol. 4, n. 1, p. 75-91, March 2005. Fleck, D. (2022) The Role of Growth in Fostering or Precluding Organizational Healthy
• Survival. Book Chapter 07, draft.