Why Profit Shouldn't Be Your Top Goal
By Nathan Washburn, Ph.D.
Making the bottom line your top priority may not be the best way to improve profitability. Recent research shows that CEOs who put stakeholder interests ahead of profits generate greater workforce engagement — and thus deliver superior financial results as a secondary benefit. This stakeholder approach runs counter to traditional economic models, which teach managers to focus on profit maximization. Proponents of the traditional model argue that putting anything ahead of profits leads to mismanagement of company assets and should be construed as unethical.
On the other hand, proponents of the stakeholder perspective argue that managers must consider employees, customers, supply chain partners and local communities in their decisions. Researchers on both sides of the debate attempt to demonstrate through logic or empirical evidence that executives who apply their values make better decisions. But values do more than influence decision making, and CEOs are more than just decision makers. They are also leaders, which means they have power to influence the attitudes and feelings of subordinates.
When executives develop and espouse certain value sets, this influences not only their decision making but also the willingness of subordinates to follow their lead. Survey data from executives and their subordinates at 520 firms in 17 countries show that CEOs who espouse traditional economic values often come across as ruthless and autocratic. Employees resent this leadership style and withhold their best efforts, which hurts the bottom line.
But when CEOs make it a priority to balance the concerns of customers, employees and other stakeholders while also taking environmental impact into account, employees perceive their leaders as visionary and participatory. They report a greater willingness to exert extra effort, which improves company performance.
The research, conducted with Thunderbird Professor Mary Sully de Luque, Arizona State University Professor David A. Waldman and University of Pennsylvania Professor Robert J. House, underscores the risk of single-mindedly pursuing profit.
Nathan T. Washburn, Ph.D., is an assistant professor of management at Thunderbird School of Global Management in Glendale, Arizona.
This research is featured in the December 2009 issue of Harvard Business Review (Vol. 87, Issue 12, Page 23). A longer version appears in the December 2008 issue of Administrative Science Quarterly (Vol. 53, Issue 4, Pages 626-654). The paper, “Unrequited Profit: How Stakeholder and Economic Values Relate to Subordinates’ Perceptions of Leadership and Firm Performance,” was the second runner-up to the 2008 organizational management paper of the year from the Academy of Management, the world’s top professional association for management scholars.