What does it take for a company to survive and even thrive for more than one or two or five centuries?
In The Living Company, Arie de Geus and his colleagues analyzed companies that were older (more than 150 years) and at least as large as their own company, Royal Dutch/Shell, from around the globe. Based on their analysis, they discovered that these long-lived companies have four things in common. Specifically, they:
1. “… were sensitive to their environment. …they remained in harmony with the world around them.”
2. “…cohesive, with a strong sense of unity.”
3. “…were tolerant. …particularly tolerant of activities on the margin….”
4. “…were conservative in financing. They were frugal and did not risk their capital gratuitously.”
At the core of these four factors are the people who created, sustained and re-created the long-lived companies, generation after generation. The primary goal throughout each company’s history was not short-term profitability demanded by shareholders – although one could argue that the shareholders also benefited from the long-term view. Rather, they focused on measured actions aligned with the four factors that would ensure the survival of the company and, thereby, also ensure work for future generations.
According to Mr. de Geus, there are two types of companies: economic companies and a living companies. The economic company is focused on building wealth for a few in the inner most circle of the company. The living company is focused on ensuring the long-term sustainability of the company for the benefit of its employees, customers and communities. For which one would you prefer to work?
What de Geus is not saying is that the living company does not generate revenue and profit. For a living company to survive from generation to generation, it must be financially viable. As noted above, one core factor that defines a living company is “conservative in financing.” That being said, profit is not the sole or even primary goal of the company. It is a necessary result for the company to survive and thrive for the long-term.
What de Geus is saying is that an economic company’s primary focus is generating wealth for a select few within the organization. They make decisions to maximize short-term gains and are willing to take bigger risks for bigger short-term gains. They also see the people who work in the company as assets or resources, which are added or cut to achieve an expected level of profitability. In other words, people are seen as generally disposable and able to be sacrificed to make the balance sheet look better to shareholders or Wall Street analysts. (You don’t have to look too deep into media archives to find multiple examples of layoffs following an acquisition or to bolster analysts’ confidence.)
A living company can more quickly become an economic company than an economic company can become a living company. A living company requires that people trust that their leaders are looking out for them and, in turn, they look out of each other and the company. Trust and responsibility go up, down and across a living company. This level of trust takes time to build; it doesn’t take nearly as long to violate trust and turn the company into those working primarily for their own self-interest rather than the good of the company.
As neutral as Mr. de Geus tries to be in his comparison of economic companies to living companies, it doesn’t take a huge leap of logic to identify which type of company he believes to be the best.
To that point, perhaps the saddest and greatest irony is that which the economic companies want the most — short- and long-term profitability — comes when a few individuals’ self-interest isn’t the primary goal. We all do better when we all do better.