Financial Times' economics columnist John Kay looks at how the world's most profitable companies are not the most aggressive in actually chasing profit

FOR MOST OF the 20th century, ICI was Britain’s largest and most successful manufacturing company. In 1990, ICI described its business purpose: “ICI aims to be the world’s leading chemical company, serving customers internationally through the innovative and responsible application of chemistry and related science. Through achievement of our aim, we will enhance the wealth and wellbeing of our shareholders, our employees, our customers and the communities which we serve and in which we operate. ICI’s business had evolved over the decades through changing interpretations of the ‘responsible application of chemistry.”

Traditional strengths in dyestuffs and explosives were translated into new chemical businesses – industrial feedstocks and agricultural fertilisers and finally, after the second World War, pharmaceuticals. But this strategic decision was slow to bring returns. The pharmaceutical division was a continuing drain on ICI resources until the discovery of beta blockers in the 1960s gave the company the first effective drug for controlling hypertension.

More discoveries followed, and in the next two decades pharmaceuticals became the growth engine of the company. The research capabilities developed in ICI provided a pool of talent from which other companies, like Glaxo and Smith-Kline French, found ideas and people. In particular, SmithKline recruited James Black, the chemist behind beta blockers, who was frustrated that ICI was emphasising profit over science.

Black went on to discover a new group of blockbusting drugs, anti-ulcerants. These transformed the profitability of, first, SmithKline and then Glaxo, whose related product Zantac was a runaway success.

ICI’s decision to enter pharmaceuticals ultimately led to the development of a British global pharmaceutical industry, perhaps the greatest achievement in postwar British business.

In 1991, a predatory takeover specialist, Hanson Trust, bought a modest stake in ICI. While the threat to the company’s independence did not last long, the effects were galvanising.

Directness was the order of the day. The company restructured its operations and floated the pharmaceutical division as a separate business, Zeneca. The rump business of ICI declared in the 1997 new mission statement: “The ICI Group’s vision is to be the industry leader in creating value for customers and shareholders through market leadership, technological edge and a world competitive cost base.”

The company embarked on an extensive programme of acquisitions and disposals that failed in every respect, including that of creating shareholder value. The share price peaked in 1997, a few months after this new strategy was announced. The decline thereafter was relentless. In 2007, ICI ceased to exist as an independent company. The responsible application of chemistry not only created a better business than did the attempts at creating value: it also created more value.

When I taught strategy at London Business School in the early 1990s, I told students that Boeing’s grip on the world civil aviation market made it the most powerful market leader in world business. Just as ICI was committed to chemistry, so Boeing was committed to aeroplanes. Bill Allen was chief executive from 1945 to 1968. The spirit of himself and his colleagues, he explained, was to “eat, breathe, and sleep the world of aeronautics”.

During Allen’s tenure, Boeing developed the 737. With almost 4,000 planes in the air, it is the most successful passenger airliner in history. But the company’s largest and riskiest project was the development of the 747 jumbo jet.

When a non-executive director asked for details of the expected return on investment, he was brushed off: some studies had been made, he was told, but the manager concerned couldn’t remember the result. By the early 1990s the company had established almost complete dominance of world civil aviation.

Boeing created the most commercially successful aircraft company not through love of profit, but through love of planes. The oblique approach to profitability delivered spectacular results.

Yet it took only 10 years for Boeing to prove me wrong inasserting that its market position in civil aviation was impregnable. A decisive shift in corporate culture followed the acquisition of the company’s chief US rival, McDonnell Douglas.

The new chief executive, Phil Condit, explained that the company’s previous preoccupation with meeting “‘technological challenges of supreme magnitude”’ would have to change. Directness would displace obliquity, it claimed: “We are going into a value-based environment where unit cost, return on investment, shareholder return are the measures by which you’ll be judged. That’s a big shift.”’

The company put the location of its corporate headquarters up for auction and its senior executives agreed to move from Seattle, where the main production facilities were located, to Chicago. The newly focused business reviewed risky investments in new civil projects with much greater scepticism, and made a strategic decision to redirect resources towards projects for the US military that involved low financial risk. Chicago had the advantage of being nearerto Washington, where government funds were dispensed.

So Boeing’s civil order book fell behind that of Airbus, the European consortium. The aims of Airbus were not initially commercial but, by oblique chance, Europe’s champion became a profitable business.

Boeing's strategy of getting close to the Pentagon proved counter-productive: the company got rather too close and faced allegations of corruption. And what was the market's verdict on the company's performance in terms of unit cost, return on investment and shareholder return? Boeing stock, €23.72 ($32) when Condit took over, rose to €43.75 ($59) as he affirmed the commitment to shareholder value; by the time of his enforced resignation in December 2003 it had fallen to €25.21 ($34).

Condit's successors once again emphasised civil aviation. The 777 is a success, and the Dreamliner appears a better vehicle for the future than the huge Airbus 380. By 2008, Boeing had regained from Airbus its leading position in commercial aviation and the share price its earlier value. At Boeing, as at ICI, shareholder value was most effectively created when sought obliquely.

That profit-seeking paradox, like the conundrum of happiness, illustrates the power of obliquity. Comparisons of the same companies over time are echoed in contrasts between different companies in the same industries. Jim Collins and Jerry Porras undertook paired comparisons between outstanding ("visionary") companies and adequate, but less remarkable firms with similar operations. Merck and Pfizer was one such comparison.

Collins and Porras compared the philosophy of George Merck – "We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been" – with that of of John McKeen of Pfizer – "So far as humanly possible, we aim to get profit out of everything we do".

"In his 1995 annual letter to shareholders," said Collins in his book How the Mighty Fall, "Merck's chairman and chief executive, Ray Gilmartin, delineated the company's number one business objective: 'being a top-tier growth company'." The opening line of the chairman's letter in the 2000 annual report stated: "As a company, Merck is totally focused on growth".

Merck's shift to a more direct approach did not have a happy outcome. Both Merck and Pfizer would, in the late 1990s, bring to market a new class of drugs called cox-2 inhibitors. But the best route to revenue growth was to promote these drugs to a mass market for which inexpensive substitutes were equally satisfactory.

Vioxx, Merck's product, aggravated heart conditions in a small minority of these patients. The company was slow to respond to reports of adverse reactions, but finally it withdrew Vioxx from the market and faced the prospect of extensive litigation from alleged victims of its promotional campaigns. Merck fell off Fortune's list of most admired companies, on which it had occupied a prominent position for many years.

Today, the pharmaceutical company that has created most value for its shareholders is Johnson and Johnson, whose oblique "credo" was first set out in 1943 by Robert Johnson, company chairman for 30 years. "We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services," the credo begins. It ends, many lines later, "when we operate according to these principles, the stockholders should realise a fair return". Events seem to have proved Robert Johnson right.

Few companies go as far as Sony's declaration of its oblique approach to profit in its founding statement: "We shall eliminate any undue profit-seeking". But Collins and Porras paired Hewlett Packard with Texas Instruments; Procter and Gamble with Colgate; and Marriott with Howard Johnson and found the same result in each case: the company that put more emphasis on profit in its declaration of objectives was the less profitable in its financial statements.

There are many similar examples of the triumph of the oblique over the direct. Citigroup was created in 1999 as a result of the merger of Citicorp, the world's largest retail bank, with the Travelers financial group created by the ambitious Sandy Weill. The group structure featured Weill and the more cerebral John Reed of Citicorp as joint chief executives. Tension between the two men was evident from the beginning, not least in their vision of the business: "The model I have is of a global consumer company that really helps the middle class with something they haven't been served well by historically," said Reed. "That's my vision. That's my dream."

"My goal is increasing shareholder value," Sandy Weill interjected. Within a short time, Weill had displaced Reed. Then revelations of a range of improprieties at Citigroup tumbled out.

By 2002, a shaken Weill would be asserting that "we must be conscious of a broader purpose than simply delivering profits'. Soon after, Weill himself was out of office, replaced by the lawyer Chuck Prince, with a brief to restore Citigroup's reputation. But allegations of wrongdoing kept coming, to be followed by business disasters. As the credit expansion reached its apogee in 2007, Prince would tell the Financial Times: 'So long as the music is playing, you have to get up and dance. We're still dancing.' A month later, the music stopped. Prince lost his job, and by 2008 Citigroup was surviving on life support from the US taxpayer. The merger had in less than a decade destroyed almost all the shareholder value in Citicorp.

The modern philosopher Alasdair MacIntyre contrasts the business of fishing – a fishing crew may be organised and understood as a purely technical and economic means to a productive end, whose aim is only or overridingly to satisfy as profitably as possible some market's demand for fish. Not only the skills, but also the qualities of character valued by those who manage the organisation, will be those well designed to achieve a high level of profitability. And each individual at work as a member of such a fishing crew will value those qualities of character in her or himself or in others which are apt to produce a high level of reward for her or himself.

That is the sort of crew in which Sandy Weill would be comfortable, at least so long as he was captain. But MacIntyre admires the practice of fishing.

Consider by contrast a crew whose members may well have initially joined for the sake of their wage or other share of the catch, but who have acquired an understanding of and devotion to excellence in fishing and to excellence in playing one's part as a member of such a crew. So the interdependence of the members of a fishing crew in respect of skills, the achievement of goods and the acquisition of virtues will extend to an interdependence of the families of crew members and perhaps beyond them to the whole society.

For MacIntyre it appears self-evident that the first crew will catch more fish. But is he right? Or are the complex objectives of a business organisation better achieved by an equivalently complex process of balancing incomparable and incommensurable underlying values and goals? As so often, we have a Harvard Business School case to help us. The Prelude Corporation, once the largest lobster producer in North America, sought to bring the techniques of modern management to the fishing industry. The case cites its president, Joseph S Gaziano: "The fishing industry now is just like the automobile industry was 60 years ago – 100 companies are going to come and go, but we'll be the General Motors. The technology and money required to fish offshore are so great that the little guy can't make out."

Soon after the case was written the Prelude Corporation became insolvent. It did so, moreover, for entirely explicable reasons – which emerge from MacIntyre's account. You don't make fish, you hunt it. Your success depends on the flair, skills and initiative of people who cannot be effectively supervised.

The product of people who feel genuine commitment, who "have acquired from the rest of the crew an understanding of and devotion to excellence in fishing" exceeds that achieved when the "only aim is overridingly to satisfy as profitably as possible some market's desire for fish". That is why MacIntyre's second crew is still fishing while his first is not.

George Merck and Robert Johnson created great businesses which, in consequence, made remarkable amounts of money for their shareholders. ICI and Boeing were more successful as profit-making companies when they "served customers internationally through the responsible application of chemistry" or "ate, breathed and slept the world of aeronautics" than when they tried to "maximise value for our shareholders" or "go into a value based environment".

The last word should go to Jack Welch, chief executive of General Electric from 1981 to 2000. Welch was not just America's most admired businessman but a darling of Wall Street. The rise in the market capitalisation of GE during Welch's tenure represented the greatest creation of shareholder value ever. Ten years into retirement, he told the FT: "Shareholder value is the dumbest idea in the world". Elaborating his thought to Business Week a few days later, he explained: "The job of a leader and his or her team is to deliver to commitments in the short term while investing in the long-term health of the business . . ."

Employees will benefit from job security and better rewards. Customers will benefit from better products or services. Communities will benefit because successful companies and their employees give back. And shareholders will benefit because they can count on companies who will deliver on both their short-term commitments and long-term vision. The route to profit was an oblique one.

Extract from Obliquityby John Kay. Published by Profile Books, £10 (€11.20)