We’re in the process of mid-year performance reviews here at the Equality Fund. I want to use this as an opportunity to write about purpose, measuring success and applying Goodhart’s Law to profitability as a measure of success of businesses. But first, let me share an experience I had with my daughter and the seemingly never-ending bag of Hallowe’en candies.
I dread Hallowe’en every year. More accurately, I dread the haul of chocolates, candies and treats and the incessant requests for candy every day from my ever persistent daughter. But as the years have gone on, she’s started to learn and practice the concept of waiting and savouring. She sometimes complains about her stomach hurting after eating too much candy. She’s talked about having enough candy to last until December. Today she announced she would have one candy each day. I encouraged her to write it down on the whiteboard to help her stick to her strategy.
Now, mind you, having one candy each day IS NOT the goal. The purpose here is for my daughter to eat healthy things (one could argue that the even bigger purpose is to be healthy and happy). The goals are to not have stomach aches from eating too much candy and to stretch her candy haul a few weeks longer. The strategy for achieving these goals is to allocate one candy each day. The way to measure whether she’s been successful is to track how many candies she’s had each day and compare it to the target in her strategy. She should also track how she’s feeling and how long the candy lasts.
I noticed a parallel with a process I employed with respect to the performance reviews in my workplace. I made an effort to distinguish amongst purpose, goals, tasks, and measures of success. Although I recently read a different perspective whereby goals were described as the measurable tasks that could help lead you and your strategy to success, place too much emphasis on the tasks themselves as goals and you risk losing sight of your purpose and what the big goals are. I made a point of describing the goals in words – often in a qualitative way to evoke a feeling of achievement, followed by “Success will be measured by:” The goals then have an effect of propelling us forward and helping us envisage ourselves and our team in the future. Goals lead, measures of success or tasks keep us on track.
I should also note that incentives – like extrinsic or monetary rewards – suffice for repeatable, mechanical goals, but are horrible for motivating people when it comes to creative, innovative work. Daniel Pink wrote in his book, Drive, about purpose, autonomy, and mastery as being the primary things that motivate people where critical thinking is needed. You start to see how purpose, goals, and measures of success complement and connect with each other to inspire action and accomplishment.
The traditional measures of success of business – profitability, I’m looking at you – have become goals. People think the purpose of business is to maximize profits for its owners or stakeholders. Even in the impact investing space, purpose and profit have become inextricably linked. Although the Business Roundtable has attempted to broaden the commitments to all business stakeholders including customers, employees, suppliers, the community, as well as shareholders. Businesses are a way to connect people to the essential resources they need to survive, thrive, and be happy. Profit is simply a statement of the excess of resources and energy generated over resources and energy consumed. Our accounting systems are a proxy for the allocation of resources. But it’s become so abstracted that people believe profit or accumulating assets are the goals, in and of themselves.
When profit becomes the goal, we lose sight of the purpose. We start to generate profit at whatever cost. We start to not pay people properly. We start to extract natural resources and push the cost of regenerating those resources onto someone else. We start to coerce people, with threats and violence, into handing over their land, crops, or time and labour. Profit is no longer sufficient for measuring success. In fact profit can obfuscate failures, especially when not everything – particularly costs – are not counted.
This is why being profitable is not the goal. It is only a measure of how resources are allocated. Goodhart’s Law says “When a measure becomes a target, it is no longer a good measure.” Now that profit has become a target, it is no longer a good measure of resource allocation.
The big purpose of business is really about the well-being, health and happiness of people. To achieve that, our goal is to ensure that everyone has access to the essential resources they need, a concept which I wrote about in my book, Integrated Investing. Success is measured by the extent to which resources generated exceed resources consumed. We should be mindful about how that success is realized. Is it really success if resources are extracted or distributed unequally or unfairly? Reinvigorated by a recent conversation on Twitter, we should consider tracking a measure for energy and how long resources will last. Ultimately, well-being, health and happiness would help us keep our eye on our big purpose. I see the parallels with curbing my daughter’s stomach aches and helping her savour her candies a little bit longer, and ultimately helping her be healthy and happy.
We need to remind ourselves of why we’re doing what we’re doing in the first place. We can recalibrate our goals, be clear about how success will be measured, and be mindful not to let the measure become the goal itself.