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Domingo, 25 de Febrero del 2018

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» Are You Dreaming about Money or Purpose?


Most modern smartphones fit in your pocket and yet contain materials and inventions from around the world.  The rare earth minerals were likely mined in China.  Your phone´s transistors were originally invented at Bell Labs in 1947 (USA), the battery by Allesandro Volta in 1791 (Italy), the camera by Louis-Jacques-Mandé Daguerre in 1839 (France) and the LED by Oleg Losev in 1927 (Russia).  This is just a fraction of the mass intellect that your phone represents.  Very few people in this world have the knowledge and capacity to actually build a smartphone from scratch.  Now consider your car, house, clothes and food.  Each of the objects around us represent the collective work of thousands if not millions of people. 

Money allows us to exchange our work for the work of others and corporations offer us a vehicle to collectively create a product or service that is useful to the world.  The word “corporation” derives from corpus in Latin, meaning “body” or “body of people.”  While the most basic forms of corporate entities date back to the Roman Empire, the modern equivalent began to surface in 1600, with the founding of the British East India Company.

The East India Company grew from a tiny operation run out of the house of its governor, Sir Thomas Smythe, to a global powerhouse for more than 250 years, dominating trade to Asia.  With a private army larger than many nations (200,000 men), the EIC conquered Bengal (part of modern day India), ruling over 90MM Indians and controlled the opium trade to China.

Less than a year before his death in 1865 and ten years before the dissolution of the East India Company, Abraham Lincoln, the American president, wrote in a letter to Col. William F. Elkins:

“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country… corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.”  

Just six years later, America would enter its famous Gilded Age in which the infamous Robber Barons like J.P. Morgan, Andrew Carnegie and John D. Rockefeller would fulfill America´s sixteenth president´s prediction.  Lincoln´s words seem all too true even now, some 150 years later when 63% of the top 175 economic entities in 2011 were corporations.

Corporations in and of themselves are neither good nor bad, but unfortunately, during the past 50 years, a cancer has been growing in the business world.  In 1962, Noble Prize winning Economist Milton Friedman introduced the Shareholder Value Theory in his book “Capitalism and Freedom.” The theory was later popularized in his 1970 NY Times Magazine article, “The Social Responsibility of Business is to Increase its Profits.”  The basic premise is that company executives are agents of the owners of the company, the shareholders, and as such must do everything in their power to maximize the returns on investment.  Friedman stated, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.” 

As Freidman´s theory gained traction, CEOs began to receive large amounts of stock to couple their interests with those of the shareholders.  Consequently, executive compensation skyrocketed all the while company returns slowed.  In his book, Fixing the Game, Roger Martin writes “between 1960 and 1980, CEO compensation per dollar of net income earned for the 365 biggest publicly traded American companies fell by 33 percent. CEOs earned more for their shareholders for steadily less and less relative compensation. By contrast, in the decade from 1980 to 1990, CEO compensation per dollar of net earnings produced doubled. From 1990 to 2000 it quadrupled.”  Deloitte found that between 1965-2009, the rate of return of invested capital of US firms actually declined by a staggering three quarters. 

Return of invested capital has declined, while corporate scandals have increased.  Today´s employees yearn for more than just a paycheck; in fact Gallup found that 70% of American employees are not engaged at work.  This results in a $450-550 billion loss of productivity.  What´s the answer?  Well, it starts with purpose.  Raising Earning Per Share is not purpose.  Purpose is curing cancer or inventing a new form of transportation.  Steve Jobs, Co-Founder of Apple, famously said, “We´re here to put a dent in the universe.”  Where are the visionaries?  Elon Musk, Founder of Paypal, Tesla and Space X is dreaming about making electric cars sexy and launching a colony on Mars.  Jeff Bezos, Founder of Amazon, is dreaming about using drones to deliver Amazon packages to customers.  The CEOs of most publically traded companies are dreaming about raising Earnings Per Share next quarter.  Where are all the dreamers?

Joel Montgomery 
The Secret Sauce Project - Discovering the secrets of values-based businesses
www.joelrmontgomery.com | +1 973.752.6289

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