Corporate governance methods have gradually been reshaped in recent years. Societal and environmental issues have challenged the prevailing ideology of corporate governance and profit maximisation, inherited from the thinking of Milton Friedman and established as the “international standard” since the 1980s.
Emilie Poli
Professor in Management at INSEEC, ESCP Business School PhD graduate
Eymeric Guinet
Consultant at Sia Partners, co-founder of each One, ESCP MiM graduate
The French PACTE law, which entered into force in 2019, now gives legal form to this new ambition for society and to the company as a collective project. Companies may now include a “raison d’être” (purpose) in their articles of incorporation and obtain the status of “entreprise à mission” (purpose-driven company, more or less equivalent to Benefit Corporations in the US), which is enforceable in the event of a dispute. Increasingly, organisations are updating their articles to include a purpose: there are now more than 1,044 purpose-driven companies in France, up from just 15 in 2019.
This transformation comes with a reshaping of the corporate governance system, placing ‘purpose’ at the centre of decision-making.
The ‘liberated company’ concept provides an interesting and radical illustration of this form of governance. As described by ESCP Business School Professor Isaac Getz in 2009, a liberated company is committed to giving employees “complete freedom and responsibility to take actions that they, not their bosses, decide are best.” This managerial approach is based on the principles of freedom and responsibility, breaking with subordinate hierarchical relationships.
The subtitle of the first book based on this research, Freedom Inc., trumpets its promises: “Free your employees and let them lead your business to higher productivity, profits, and growth.” Professor Getz has been instrumental in the corporate liberation movement, which has involved hundreds of companies including tyre manufacturer Michelin, as well as institutions.
But, is it possible to aspire to higher profits and greater freedom? So far, no study has focused on how liberated companies purport to make these goals compatible.
Rejecting ‘profit maximisation’
One of the co-authors of this article (Eymeric Guinet) was awarded the Reinventing Work chair’s best Master thesis prize for his Master thesis based on research carried out from September 2019 to June 2020 with eleven ‘liberating leaders’ who play a key role in a company’s liberation process. They were asked to discuss the role of profit, purpose, performance and employee well-being in their organisations.
The sample of organisations for the study comprises three start-ups and eight SMEs (nine private companies and two “public-private companies”). A wide range of sectors is represented: consulting (3), industry (2), agri-food (1), cleaning (1), roadside services (1), healthcare (1), customer relations (1), and the social economy (1).
Firstly, nearly all of the ‘liberating leaders’ (10 out of 11) said that they had given up the goal of profit maximisation: “To me, a liberated company is freed from the dictatorship of profit maximisation” (Leader 1); “We’ve given up the idea of making a profit at any cost, at the expense of our values and collective mission” (Leader 7).
While the goal of profit ‘maximisation’ has been rejected, profit constraints are fully incorporated in the rationale of the liberated company. They are both accepted and standardised: “If a company doesn’t make money, it dies” (Leader 5).
The end becomes the means
These leaders are therefore willing to fund unprofitable projects if they are meaningful in terms of the company’s purpose and values, as long as the overall financial balance is not threatened. This new prioritisation, says one of the leaders interviewed, “doesn’t mean forgetting about financial results but putting them in their rightful place” (Leader 1). The rationale is therefore a reversal of the capitalist vision: the end becomes the means. Profit takes on the status of a ‘prerequisite for survival’ and serves the company’s purpose.
Yet, the quest for performance is not abandoned: since the company’s collective mission and purpose are the primary aim, this performance is simply redefined in relation to this vision.
As such, these leaders reassert the primary aim of the collective mission, whether it is to make logos, transport goods or optimise housing in a region. “The company is here to do something – it must be paid for that. And it’s the collective endeavour that has meaning.” (Leader 5).
Instead of maximising profit, they aim to “do the best job possible” (Leader 8) or “provide the best possible service” (Leader 4). The notion of overall performance emerges: incorporating the interests of stakeholders (including employees), “social and societal performance”, quality of products or services, “impact on the ecosystem” as a whole, “creating shared value” etc.
An act of faith, a bold bet or a gamble
All of the leaders interviewed were categorical on one point: giving employees greater freedom significantly increases their potential, and in turn their performances – and ultimately, the company’s economic success. In this respect, profit becomes the ‘collateral benefit’ of liberated management.
As such, there is a shift in the position profit occupies: it is no longer regarded as an objective but as a natural consequence of correctly applying the liberated company principles. “We don’t free people to become more productive, but freedom can make them more productive, there’s a difference, you see.” (Leader 1).
To date, such a causal link has not been scientifically shown to be accurate. Indeed, this fundamental uncertainty makes ‘liberation’ an “act of faith” (Leader 7), a bold bet, and even “a gamble” (Leader 9) rather than a rational decision.
A real challenge
Nevertheless, beyond these strong beliefs and clearly expressed views, the intended balance is hard to achieve in practice. Sharing power and changing the driving force of an organisation is not a simple process and the leaders interviewed describe it as a “real challenge” that “takes time”.
The issue of maturity, both individual and collective, and of support remains a strong concern among the leaders interviewed. Without these aspects, they point to cases of employees being overstretched, rejection by groups of individuals who seem to be working against the project, abuse of the freedom granted, or situations in which a lack of skills leads to failure.
All of the leaders interviewed agree that mistakes and inconsistencies are part of the process of becoming a liberated company. Free speech, openness to criticism and room for mistakes are necessary parts of this transformation and can help overcome these pitfalls.
There’s a chicken and eggs. We need to know where to put the chicken.
Economic success is therefore the desired result of a paradox: truly giving up profit maximisation is the key condition for achieving high and lasting profitability. As one of the leaders interviewed put it: “There isn’t a choice to be made between money and management style. There’s a chicken and eggs. We need to know where to put the chicken” (Leader 10).
Until now, this alternate priority and commitment were not expressed in an appropriate legal form in France. The leaders of liberated companies may well be seduced by the ‘purpose-driven company’ (entreprise à mission) status. The number of such companies is expected to continue to grow rapidly amid the overall rise of ‘post-capitalist’ thinking.
This article was originally published in French by The Conversation.
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