By Murray Voth

In the final installlment in his three-part series on the building blocks of a successful business, RPM Training founder Murray Voth discusses the third element: creating wealth for shareholders.

Read Part #1: The Client HERE, and Part #2: The Employees HERE

The ultimate result of the purpose of a business cycle is that the needs of the shareholders are met. The shareholders need a return on the money, time, and risk they have invested in this business. 

One could legitimately say that the purpose of a business is to create money (wealth), but I would say that wealth is the result of fulfilling the purpose of the business.

Many of us small business owners don’t really think of our businesses as a way of creating wealth. We see it as a replacement for a job, which we hope will come with a little more money and a little more flexibility than working for someone else. At best, we think of our business as a way to generate enough money to save for retirement.

Many small business owners seem to think that profit is a dirty word; I see multiple posts a month in automotive shop owner forums online that open with the phrase, “not trying to get rich, but…” Part of what I think is happening is that we see some larger corporations treat their employees and/or their customers badly and seem to focus only on profit at the expense of ethics, morality, the environment, or the community in which they operate. It seems like those companies profit off our backs, and we want no part of that.

In his book The Infinite Game, Simon Sinek addresses these concerns in a way that really resonates for me. He speaks of companies that operate with a “finite mindset.” That usually means trying to reach quarterly profit targets at whatever cost. This finite mindset generally benefits the shareholders at the expense of their customers and employees. Yet, these companies do not usually last very long in the grand scheme of things.

An “infinite mindset,” by contrast, ensures the longevity of the company. To quote Sinek’s book: “Businesses that play the Infinite Game must have three pillars: 1) advance a higher cause, 2) protect employees, customers, and the environment, and 3) generate profits to continue its success for as long as possible.”

Simon also references Milton Friedman’s theory of economics, which states that gearing the sole purpose of a business towards making profits for shareholders has resulted in short-termist practices – such as annual layoffs – that harm the organization, its people, and the community. An infinite-minded leader must consider both shareholders and employees as contributors. While the former contributes resources, the latter invests time and energy. Both must be justly rewarded.

Simon feels that after Friedman’s theory began to take hold in the 1970s, companies did not last as long as they used to. He cites a reference from McKinsey and Company that indicates this.

“Disruption and innovation means [the] average lifespan of companies is shrinking and this calls for change in strategies, organizational models and courageous leadership… If you were listed in the S&P 500 in 1935, the life span of a company was 90 years. Today, it is 18 years. Every two weeks a company is going off that system.” – McKinsey & Company Managing Director, Dominic Barton.

While Barton identifies disruption and innovation as key factors in the longevity of a company, the focus on short-term profits has also been a major contributor to the trend of shortened life cycles of companies. Both Sinek and Barton call for courageous leadership, and I think that is the key to creating a profitable company that will last a long time.

Courageous leadership means facing off against current economic and political practices that do damage to their customers, employees and the community they operate in. Courageous leaders understand that they are balancing four stakeholders at all times: the customer, the employee, the shareholder, and the greater community.

Now that we have addressed some of the negative perceptions of wealth and profit, I am hoping that the business owners reading this will be inspired to pursue the following purpose with confidence, moral clarity, and an understanding that wealth benefits all of the stakeholders.

I believe that the purpose of a business is to create value for clients that translates into wealth for its shareholders, while creating meaningful, secure, and well-paid employment for its people. It is a tough balancing act – but a worthwhile endeavour.

Read Part #1: The Client HERE, and Part #2: The Employees HERE

This article also appeared in the February/March print edition of Indie Garage. Read the digital flipbook version HERE