Profit can’t be primary goal of business

“Complex goals are best achieved indirectly,” says leading British economist John Kay. Which is why the world’s richest people do not pursue money as their primary goal. Take Bill Gates and Warren Buffett. Gates’ primary interests are in computers and business, not in making money. Buffett is fabulously rich but does not lead an ostentatious lifestyle. Kay, who publishes a weekly column in the Financial Times, talks about his latest book Obliquity — How Our Goals Are Best Pursued Indirectly, in an interview to DNA.

What is obliquity?  
Obliquity is that complex goals are often best achieved indirectly. As an economist I was brought up on the idea that people went around maximising things, but actually they don’t. What people do is balance. Often, they steer like a boat along a winding river, some times you get too close to one bank and sometimes to the other and you have to move back towards the middle. That’s the kind of process of adjustment and adaptation that is necessary to either achieve personal or business success.

The happiest people are (thus) not the ones who pursue happiness, the most profitable companies are not generally the most profit-oriented and the wealthiest people are not the most materialistic. The point of this is that people are not pursuing any single thing.

Why do you say the world’s most profitable companies are not profit-oriented…   
They are not exclusively profit-oriented. Businesses that are most profitable and are able to sustain profits in the long run are actually people building great businesses and building a great relationship with customers, relationship with employees and relationship with suppliers. On the other hand, businesses that are most profit-oriented, like Enron, Bear Sterns, or for that matter Lehman Brothers, are not in the long run profitable because they are pulled apart by the greed of their own employees.

Can you give us another example?    
Take the case of ICI, which was Britain’s leading industrial company for most of the twentieth century. Their (original) purpose was about the responsible application of chemistry to business. And they did it. The company began in dyestuffs and explosives. It moved into new chemical businesses like fertilisers, petrochemicals and finally into pharmaceuticals in applying chemistry to business in different ways as the needs of the wider economy changed. In the 1990s, they very explicitly abandoned that kind of goal in favour of shareholder value. They disposed of many of their traditional businesses and bought a battery of new ones and paid too much for the businesses they bought. As the company declined rapidly, it disappeared in 2007. So the responsible application of chemistry not only created a better business than did the attempts at creating value: it also created more value. So it’s a process of adapting, a very loose general idea, to changing particular circumstances over time.

Do you see businesses doing that these days?
I see businesses being more and more engaged in a kind of very short-term targeting, managing their quarterly earnings and satisfying the stock and financial markets. So I think people are much less inclined to see business in the way that I have just described than they were 20, 30, 40 years ago. It’s a greater financial orientation and more instrumental conception of the nature of business.

Did the attitude of companies to be profit-oriented lead to the recent financial crisis?
In the financial sector, Lehman would be an archetype of this. Organisations that were not really organisations at all but were a collection of individually greedy people. The objective of making profits as an organisation is not one which is going to appeal to anyone really. People who have a profit orientation would rather make profits for themselves, which is what people in these businesses did. A corporate culture that extols greed is, in the end, unable to protect itself against its own employees. Nor does the business with such a culture attract public sympathy when things go wrong.
 
Do you think investment banks like Goldman Sachs, which were equally responsible for this greed, will continue to survive?
I think that is a complicated story. One thing that differentiated Goldman was a corporate culture that Bear Sterns and Lehman Brothers lacked. There was very little culture about Bear Sterns and Lehman, but greed. Goldman has a corporate culture even though not necessarily a very attractive one. And that’s a part of Goldman’s strength relative to the others. I think in a free market it would not survive. The truth is Goldman survives essentially because of the political clout it has developed. What has happened on Wall Street is that powerful financial institutions have accumulated a lot of wealth and used that wealth to gain political power which reinforces their initial position.

In your book you say that the richest people are not always materialistic…
The richest men in the world at the moment are Bill Gates and Warren Buffett. Gates’ first interests are in computers and business. And money is secondary to that. Buffett is a strange story because while being fabulously rich he does not lead an ostentatious lifestyle. It is rather clear that money to him is a matter of keeping score rather than something you go out and spend. And that’s not surprising. It is what makes these people very rich. They are driven by the passion for the activities they engage in. There is a large capacity for self-destruction about having greed as the primary motivation and we have seen lots of examples of that in the last few years. And that did not happen to the likes of Gates and Buffet, as greed was not their motivation to begin with.

What is the essential message that you are trying to send out through this book?
It is an attack on what I call bogus rationality. The world in which we are pretending to make decisions through a kind of formal, spelled out process, is really not the reality. It gets in the way of making good decisions and of understanding the ways in which we do and should take decisions.

What do you mean by bogus rationality?
Bogus rationality is probably best described as the kind of rationality that says this is the way we are going to make decisions in a world in which we think we know much more  than we (actually) do and believe we have much more control over it than we (actually) do. We pretend the world is like that in order to make decisions in this kind of way. And that’s what I mean by bogus rationality. It is a process which has the appearance of rationality but in the end it doesn’t. It isn’t rational.