What are organizations for?

The historian Ian Morris defines the social development of a society as “the bundle of technological, subsistence, organizational, and cultural accomplishments through which people feed, clothe, house, and reproduce themselves, explain the world around them, resolve disputes within their communities, extend their power at the expense of other communities, and defend themselves against others’ attempts to extend power.” One of the key components of social development, he continues, is organization (singular):

To be able to deploy energy for food, clothing, housing, reproduction, defense, and aggression, humans have to be able to organize it. Just as organisms break down without energy, societies break down without organization.

Morris measures organization by city size, but I mention it here because in thinking about organizations (plural) it’s worth starting with their ultimate purpose: to deploy society’s resources in useful ways that achieve the society’s goals.

It’s easy, when talking about the purpose of organizations, to slide directly into the shareholder primacy debate. (Here are a few links on that.) But this broader purpose is upstream of any particular corporate governance regime. The ultimate defense of organizations should make reference to the needs of society in general, however we decide to structure their obligations to particular groups of stakeholders.

This is why corporate mission statements actually are important. They might not always be accurate or specific, but asking for one is a way of posing the basic question of justification. What is the purpose of your organization? What socially useful goal have you set for yourself?

To get a bit more specific, as I wrote in a piece about shareholder value:

The right way to think about companies’ job in the economy [is] to create real economic value, not just paper value, and not just to transfer value from one group to another. The main way to create value is through innovation.

And from another piece:

Profits are supposed to be an incentive to create valuable products and new innovations, not a reward for lobbying regulators or being the first company to scale in a particular industry.

Luigi Zingales had a good quote in a paper about this:

Most firms are actively engaged in protecting their source of competitive advantage: through a mixture of innovation, lobbying, or both. As long as most of the effort is along the first dimension, there is little to be worried about. The fear of being overtaken pushes firms to innovate. What is more problematic is when a lot of effort is put into lobbying. In other words, the problem here is not temporary market power. The expectation of some temporary market power based on innovation is the driver of much innovation and progress.

When we talk about “creating value” in this context, it’s not just about financial value; it’s really shorthand for organizing resources in a useful way to achieve some social goal. An organization’s mission is supposed to be the ambition; profits are supposed to be the incentive; and, at least in a competitive market, innovation is the way you get it done.

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