What do you think should be the highest or ultimate goal of every company or organization?
To generate profit?
To expand their reach?
To overtake their competitors?
There’s actually nothing wrong with having these goals in a firm. After all, one puts up a business with a goal of wealth-creation of some sort.
However, if these goals are listed down with the wrong intentions, they could lead companies towards the wrong direction.
In fact, in the context of Return Driven Strategy (RDS), businesses should operate and strive to achieve their goals with this “ultimate goal” in mind.
Photo from Michigan State University
The Role of Ethics in Business
According to Professor Joel Litman and Dr. Mark L. Frigo in the book, “Driven,” the highest tenet of Return Driven Strategy—and what businesses should aim for—is to Ethically Maximize Wealth.
Why?
It’s because this goal provides the anchor that will help management make the right decisions as they develop and execute business strategies.
In Professor Litman and Dr. Frigo’s words:
“Strategic performance measures must be focused on maximizing financial value creation, something many companies fail to do because of misaligned compensation plans and/or misdirected motivations.”
Think about this: Performance measures can either lead to maximum wealth-creation or create perverse incentives.
Flawed financial metrics lead businesses in the wrong direction. Increases in revenues and earnings per share (EPS) are still widely reported as primary metrics of determining value creation, but when business decisions are based on those metrics, wealth-destroying activities have often resulted.
What else?
Value-destroying mergers and acquisitions can drive growth at the expense of cash flow returns.
In fact, a strategy of under investment or “harvesting” assets may increase accounting profits, but actually destroy wealth for the long term.
Hewitt Associates even found evidence in one study that companies with management compensation highly aligned with traditional metrics, like sales and EPS, appear to be the worst performers in shareholder returns.
So… what should be the solution to this?
According to Professor Litman and Dr. Frigo, companies must ensure adherence to the “ethical component” of the first tenet of business strategy.
In other words, a firm must develop and review performance measures or even “markers” that indicate when activities are moving out of bounds of expected ethical behavior.
Besides, companies that violate ethical behavior run the distinct risk of losing tremendous levels of value and even the ability to remain.
Professor Litman and Dr. Frigo say various performance measures can help track whether or not a firm is staying within the bounds of ethical behavior.
These include:
- Tracking litigation against the firm
- Monitoring trends in employee grievances
- Watching for excessive or interest from consumer activist groups
Each of these may alert management to unhealthy trends.
… but wait!
Let’s not forget that everything that happens to a firm starts internally, NOT externally.
That’s why one of the real concerns is the development of internal measures to monitor and control the financial reporting systems.
Professor Litman and Dr. Frigo state that when companies violate their trust with the investor markets through financial statement misreporting or fraud, they generate the close scrutiny and ire of the Securities and Exchange Commission (SEC) and the shareholders—with drastic consequences.
Choosing the Right Direction
According to Professor Litman and Dr. Frigo, managers who steer a firm in the wrong direction find themselves in a mire of poor financial performance with unhappy investors.
… but here’s the thing: Don’t blame it all on their steering capabilities!
The problem may not actually be in their ability to steer, but in choosing the wrong direction in the first place.
That’s why in targeting superior financial results, the first tenet of RDS—or any good business strategy—calls a company to “Ethically Maximize Wealth.”
Performance measures geared toward this goal can help drive an organization in the right direction.
… and as drivers of the business, high-performance managers ask if the right direction is set and if the performance measures really point there.
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If you’re looking to gain a better understanding of Return Driven Strategy and Career Driven Strategy, we highly recommend checking out “Driven” by Professor Litman and Dr. Frigo.
Click here to get your copy and learn how this framework can help you in your business strategies and ultimately, in ethically maximizing wealth for your firm.
About The Dynamic Marketing Communiqué’s
“Tuesdays: Return Driven Strategy”
In the book, “Driven,” authors Professor Joel Litman and Dr. Mark L. Frigo said that the goal of every long-term successful business strategy should incorporate the combined necessity of “making the world a better place” and “getting wealthy.”
That is why they created Return Driven Strategy and Career Driven Strategy—frameworks that were built to help leaders and professionals plan and evaluate businesses so they can also help others achieve their organizational goals and career goals.
The frameworks describe the plans and actions that drive returns for anyone in an organization such as independent contractors, marketers, brand managers, communicators, and other people in any field. These actions lead to the creation of wealth and value for customers, employees, shareholders, and the society.
Every Tuesday, we’ll highlight case studies, business strategies, tips, and insights related to Return Driven Strategy and Career Driven Strategy.
In planning, building, or managing brands and businesses, these strategies, case studies, and guidelines will help you choose what specific actions to take and when to take them.
Hope you find this week’s topic interesting and helpful.
Stay tuned for next Tuesday’s “Return Driven Strategy!”
Cheers,
Adrian Kyle Vergara
Content Writer
Valens Dynamic Marketing Capabilities
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