Are family businesses about purpose, or profit?

VW went for profit and forgot about purpose. Photo by Matt Cardy/Getty Images News / Getty Images

VW went for profit and forgot about purpose. Photo by Matt Cardy/Getty Images News / Getty Images

Here’s an interesting question - what’s more important to a family running a business - profit, or purpose? Most would say purpose. Profit is easy to understand, but what is purpose in business? The question arises from a new study from the Harvard Business Review and professional services group EY.

Called “A Business Case for Purpose”, the research found that those companies that were driven by purpose have a distinct competitive advantage over those driven by profit.

As is often the case with management consultancy-type prose, the report doesn’t necessarily make it easy to understand what purpose is. It defines it as: “an aspirational reason for being which inspires and provides a call to action for an organization and its partners and stakeholders and provides benefit to local and global society.” Whatever that means.

Nevertheless, there is a serious point here about purpose in business and its application. Probably the best way to understand it is to take a quote in the report from Michael Beer, a Harvard Business School professor. He says: “There is an increasing awareness that the purpose of a company has to be beyond shareholder value, and that this is not something that will cost your business but something that will enhance your business.”

The going “beyond shareholder value” is something familiar to family businesses, and is probably best summed up as stakeholder values. So, purpose in business is the consideration of stakeholders, not just shareholders. When businesses don’t just think about shareholder value, but think about their staff, customers and community as well, that’s when they get purpose. It’s also when they get a distinct competitive advantage over those firms just driven by shareholder value/profit.

Family Capital has spoken to hundreds of family businesses and most of them place stakeholder values at the top of their reason for doing business - it’s what gives them purpose. Of course, not all of them do, and to understand the purpose side in business, it’s also a good idea to understand the other side - when profit takes over at a company. A good example of this is the recent emissions scandal involving the car manufacturer VW. The car company became driven by performance targets over any other consideration and is today paying the consequences. Profits came first, and purpose lost out.

This was also the case for the Brazilian family business Odebrecht. Indeed, the construction and engineering group presents a good case study of how quickly things can take a turn for the worse when profits take over purpose. For much of Odebrecht's history, purpose was uppermost. Indeed, in 2010, Odebrecht won arguably the most prestigious global family business prize - the IMD/Lombard Odier award. The judges at the time said: “the jury chose the Odebrecht Group due to its shared philosophical approach that guides all of the group's activities and the cultural and ethical values on which such activities are based.”

Five years later many are beginning to question Odebrecht’s ethical values. Last year, it’s chief executive Marcelo Odebrecht was arrested by the Brazilian authorities and charged with money laundering, corruption and organised crime. Of course, Marcelo is yet to be found guilty. But earlier this week, the family business Marcelo use to run - he recently stepped down as CEO - was one on a list of the ten most controversial companies in the world compiled by the business group RepRisk. Also on the list was VW.

Clearly, not all family businesses place purpose above profit. They, like any other business, can become too obsessed with shareholder value even when they talk about the importance of long-term values and good corporate ethics. Purpose is what all businesses say they strive to achieve, but it’s a difficult thing to achieve and to keep that commitment over many years.

In many cases, family businesses, through their commitment to stakeholders, have the upper-hand when it comes to purpose, but, as the examples above show, they cannot afford to be complacent.