In their groundbreaking book The Person and the Situation, Lee Ross and Richard E. Nisbett explain how social outcomes are more often determined by the context than the actor. Unfortunately, we have a tendency to focus on the individual and to de-emphasize the situation, limiting our ability to identify the best course of action.
The same holds true for business. Companies are more exposed than ever to change, uncertainty and economic and political feedback, and performance is increasingly modulated by non-competitive effects. It is therefore increasingly untenable to think of businesses as standalone machines to be optimized for short-term financial performance.
Instead, business leaders need to think about the company and the context at the same time: controlling what they can but also understanding the complex interplay between companies, economies, and societies and nudging what is influenceable but neither fully predictable nor controllable.
Companies must be beneficial to the broader systems of which they are a part
Companies are not isolated entities but are embedded in “nested complex adaptive systems”: multi-level, interconnected, dynamic systems in which local interactions can give rise to unpredictable global effects and vice versa. Companies are part of industries and business systems that are embedded in local and national economies, which in turn are interwoven with societies.
The backlash against global economic integration, one of the major drivers of growth, is an example of an inter-system feedback effect. Its effects could even be compounded by the emerging backlash against technology, another major potential growth driver, motivated by fear of its impact on employment and equality.
To survive and thrive under such uncertainties, corporate executives should expand their focus beyond merely managing their own companies and consider the impact of their strategies and actions on broader systems. To survive in the long-term, companies must fulfil a purpose – the intersection of a vocation and an external need – which serves the larger system. Failure to do so puts them at risk of being gradually starved of the support they need from other system participants.
This requires a departure from the simpler, insular models that underpin traditional management thinking, dominated in recent years by the idea of maximizing total shareholder returns (TSR). Such a philosophy is arguably appropriate to a situation where two conditions hold: firstly, where there are minimal consequences from business affecting broader systems beyond the company; and secondly, where the game is established enough that the emphasis on exploiting it makes sense, but not so mature that the exploration of new possibilities has become critical. Incumbent companies might temporarily do well focusing on optimizing current performance and distributing cash to shareholders but will need to invest in creating future growth options to sustain this performance.
Clearly, these conditions do not hold today. As a consequence, companies cannot just rely on a traditional, “mechanical” approach to management, which seeks to direct a company toward desired outcomes by engineering internal processes and controlling the behavior of its various components; they must also learn to think biologically, acknowledging the uncertainty and complexity of business systems and how interactions between agents can reshape them.
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The case for such a shift in thinking was anticipated by Aristotle who distinguished between two types of economics. First, there is Chrematistike, or wealth maximization as an end in itself, without constraint. Aristotle posited that Chrematistike is flawed as a model and likely to undermine society if not bounded and directed by a higher purpose. He suggested that a better model is Oikonomia, literally the art of managing a household, where financial considerations are subordinate to the higher purpose of family welfare. Companies pursuing an Oikonomia-like philosophy have a clearly articulated purpose and are able to benefit the system overall more effectively than companies simply focusing on Chrematistike or TSR maximization.
Aristotle meets AI
To test this thesis, we need a way to go beyond corporations’ projected images or symbolic actions and measure the essential character of companies. This can be assessed from the language a corporation uses thanks to Natural Language Processing (NLP) technology.
Using an NLP algorithm trained on close to 100,000 company documents covering the period from 2005-2016, we assessed how oriented companies were towards TSR maximization (Chrematistike) vs purpose (Oikonomia). While corporate language overall remains dominated by finance, our research shows that corporations differ markedly in their orientations. Some repeatedly and consistently put more emphasis on integrity, culture, mutualism and contribution – ideas associated with Oikonomia. As the chart below shows, these companies paradoxically tend to have better long-term financial performance than short-term maximizers. In other words, direct pursuit of financial performance may be an ineffective way of achieving it. Our findings have profound consequences for how we define the objectives of corporations.
Six imperatives for thinking biologically
Business leaders need to rewrite their company agenda based on the principles of biological management. They need to not merely focus on the company, the resources it controls and its immediate competitors, suppliers and customers. Instead, they need to broaden their perspective and define new priorities in which to effectively participate, contribute to and shape their extended systems. To achieve this, they should:
- Observe and understand the broader system. Leaders need to picture their businesses in the context of a wider system that includes consumers, partners, institutions and policy-makers. This means understanding the key players and their interests and mapping out the important relationships among them.
- Clearly define a purpose, the higher goal which the company serves. This should be at the intersection between a need in the world, a distinctive aspiration and the ability to deliver it.
- Balance focus on short-term results with a focus on the future. The present value of growth options (PVGO) and investment levels for corporations have both fallen in recent years. This implies an insufficient exploration of future opportunities, particularly by large companies, which makes them vulnerable to the success trap. One example: the Intel Inside campaign. Before Intel, chip manufacturers marketed to their direct users — design engineers at computer manufacturers — but as the market matured, chips were in danger of becoming commoditized. By finding an indirect but more powerful leverage point — the end consumer — Intel was able to change the role that chip manufacturers play in the IT value chain and assume a leadership role in the industry.
- Orchestrate collaboration in the system. Leading in a system requires striking a balance between the often conflicting needs of companies and the broader system in which they are embedded. To do so, leaders must foster trust and collaboration among a system’s participants. For example, larger companies might cultivate ecosystems which create demand for the services of new and small companies. This would not only increase total employment levels but could also be a source of diverse, new ideas, thus generating positive consequences for system participants.
- Foresee and manage system-wide risks. Many corporate risks present themselves to the entire system rather than to individual companies. To manage these risks, leaders must be able to detect potential threats to the system’s health and have the courage to preemptively address and avert them. This means they need to play the role of antennae to detect changing political, social and technological signals, as well as that of ambassador and leader to shape systems.
- Communicate a new compelling narrative for globalization, technology and for business overall, which inspires confidence in a shared future. Narratives can shape perceptions and political reality, which, in turn, can shape economic reality. Business leaders have the opportunity to take an active stance and shape collective understanding. In the face of popular backlash, companies should communicate a narrative demonstrating the human future of business and technology, and how they are contributors rather than obstacles to this.
Changing mentality to acknowledge the realities of nested complex adaptive systems is a challenging task. Some leaders, especially in younger companies, already appear to be trying to build this new paradigm. Established companies now face the challenge and opportunity of extending their own longevity and growth prospects by doing the same.