In 1970, the Nobel prize winner Milton Friedman shared his belief that ‘there is one and one only social responsibility of business: to use its resources to engage in activities designed to increase its profit.’ This idea was built on in 1976 by two finance professors who proposed that there was an inherent conflict with business between the executives and the shareholders and proposed that to solve the problem, the goals of executive and shareholder should be aligned by compensating the executive through shares in the company. How depressing!
In his fascinating book Fixing The Game, Roger Martin explains how the practical application of this theory not only led to the current crisis in customer relationships, but also the financial meltdowns of the last decade, from Enron to sub prime to LIBOR fixing. It shifts the CEO’s attention away from the real market of customers, products and services towards the expectations of traders and analysts. In our industry, when the American Lawyer in 1985 began to publish profits per partner and began to compare and judge every law firm by the profits paid to its partners, a managing partner became immediately focused on delivering more profit than his peer competitors to his or her equity partners. If he didn’t, he or she faced losing his best lawyers. The hours demanded of all its lawyers (and in particular its younger lawyers) as a result has every year for 20 years or so increased. Where is the client in this?
Focusing on maximising shareholder value or equity partner returns brings the CEO or the Managing Partner into direct conflict of interest with its clients, since it is not possible to fully satisfy both the real market and the expectation market at the same time. I can’t seek to create products and services and invest real time to delight my client while trying to maximise my profit over the next 3 months.
Faced with a choice , the managing partner takes the easy way out and focuses on immediate profit rather than to create genuinely brilliant experiences for the client. As a result no one ever challenges how things are done , or how things could be done or how they could be improved.
The inevitable consequence is at customers , clients , partners , employees and the shareholders lose out. Ethics and values evaporate and the long term health of the organisation is sacrificed for short term gains. The moral authority of the business diminishes with each passing year , as customers , clients , employees and average citizens grow increasingly appalled by the behaviour of business (and lawyers) and the abundant greed of its leaders.
I look forward to learning and sharing with you at our Oxford Symposium and over the coming year the many ways that we can challenge, evolve, invest in our clients and ourselves and perhaps, just perhaps, at the same time… change our industry.
PS our hall of fame this week is taken from one of our gunnercookies ( https://www.youtube.com/watch?v=_PVjcIO4MT4 )
PPS this weeks iNspire charity is Henshaws, an amazing charity that supports anyone with sight loss . Sarah Cooke would love to hear from you if you would like to know more about them .
Part three in our C*SR series: ‘Everyone can be great because everyone can serve’ – Martin Luther King There are 165,000 charities in this country and at present, over 71% of charitable funding goes…Continue reading