The goal of corporations is to maximise profits for investors.
This concept has directed and justified the behaviour of corporations for centuries. But is it sensible, is it right, is it useful?
Profit is a holy cow of the Capitalist economic system. It is the fuel that drives the market engine.
Capitalism focuses on the creation and accumulation of capital through profits derived from trade. The Free Market System focuses on the freedom of individuals to trade with each other. Both favour private property, open competition, and minimal regulation, and rely on the price mechanism.
Profits provide the incentive for investment. Non-shareholders are specifically excluded from a share of profits. Shareholders control corporations. They have a perverse incentive to maximise the profits which accrue only to them, through the appointment of managers whose main aim is to maximise profits. Not surprisingly, these perverse incentives lead to perverse outcomes.
The 21st century has seen the rise of several mega-corporations with unprecedented control over health, energy, the flow of information, money and goods. These corporations have been very profitable, and have made many investors stupendously rich. They tend to make large annual profits. But have they increased the sum total of human prosperity? In their quest for profit, do they undertake evil acts to the detriment of society? How do you reconcile the freedom to trade with accountability for the consequences of that trade?
Merck discouraged the use of Ivermectin, an effective treatment for Covid but no longer profitable to Merck, in favour of high profit drugs such as Molnupiravir and Remdesivir, with known serious side-effects. Pfizer aggressively promoted their highly profitable mRNA vaccine, despite dangerous reports from their testing process.There are thousands of similar stories.
Most companies and corporations do not make high profits. The average profit margin for American corporations is around 5%, for those that make any profit at all. Corporations making low profits may be even more desperate to increase profits than wealthier ones. However, I would contend that companies make high profits mostly because of 3 factors
Reduced competition, possibly through monopolistic practices (Banks, oil companies)
Regulatory capture - they manipulate politicians and legislatures to their advantage (Pharmaceutical companies)
Better products and processes (Tesla and Apple)
What can be done to reduce the perverse incentives of shareholder profit? In most countries high wealth is heavily taxed, but the richest are most adept at avoiding taxes. In many countries, the rich provide considerable philanthropy, mostly aimed at the poor of third world countries. Wealth tends to be distributed and reduced across generations of the same family, but not if the family is careful. I have no quarrel with the acquisition of wealth through legal means, only with the perverse incentives that the profit motive gives rise to.
I propose a new goal for corporations. It is based in part on ideas suggested by Klaus Schwab in his recently published book “Stakeholder Capitalism”.
The goal of corporations is to maximise shareholders.
Annual profits above a specific percentage (say 10%) would be used to buy and distribute shares to stakeholders in the corporation. Stakeholders are individuals whose actions contribute to the corporate profit, but do not receive that profit. This would be employees, suppliers, customers, agents, retirees, charities. A company would establish a register of stakeholders, just like the shareholders register. Each year an allocation of shares would be made to these stakeholders funded by the profit in excess of 10%. Various criteria for allocation would be established, such as years of service, previous receipts, age, etc.
I believe that the incentive to accumulate excessive profit for the benefit of just a few would be diluted by this approach. I believe that an increase in shareholders amongst stakeholders would be beneficial to the corporation, as more individuals would be motivated by the success of the corporation. I believe this would be beneficial to the prosperity of the community in which the corporation operates. Like Maggie Thatcher, I believe a share-owning population is superior to a population dependent on government largesse.
How would this new goal be implemented? While some may feel tempted to enact laws to enforce this approach, I believe that would be counter-productive. Let individual corporations freely choose to adopt this approach because it is the right thing to do, because it may result in increased revenue, and because of peer pressure from the public. For example, many corporations adopt counter-productive policies for the alleviation of global warming, because of the public pressure to do so.
Let us remove the excuse of maximising profits from our business language.
The goal of corporations is to maximise profits (return on investments) for investors.
a legal business entity that is owned by its shareholder(s). It possesses many of the same rights as an individual. The corporation is liable for the actions and finances of the business – the shareholders are not.
Make as large as possible.
the excess of returns over expenditure, after taxation
Individuals or corporations that make money available to a corporation in expectation of a profit.
What Is profit (Return On Investment)?
Getting more than you put in?
Is this physically possible? Seems to contradict 1st law of thermodynamics (Energy cannot be created or destroyed).
Is this morally acceptable?
Financially, where does the increase in value of investment come from? Is new money created, or is it taken from a 3rd party.
Re-arranging stuff to be more efficient or useful (intellectual investment).
Turning seed and soil into food.
Mixing labour with nature to achieve growth.
What is the goal of most individuals? To maximise return on investment? To survive and reproduce? To make a mark on history? Examples
if you invest resources in children, they will pay back your investment in old age (perhaps)
no physical component, ephemeral
hard to measure, hard to quantify
Investing in friends for profit is regarded negatively
While desirable, probably not profitable
Profitable investments provide satisfaction, security, comfort, retirement
Only 10% appear to achieve this goal. (Independent retirement stats)
Dependent on previous successful investments, inheritance, chance
Subject to risk of loss
Who dies with the most toys wins
Useful - housing, transport, food, entertainment
The role of profits
Profits provide the incentive for investment
Investment is linked to growth
Growth is linked to increase in prosperity (Happiness and contentment arising from financial success) for shareholders
Growth may occur at the expense of non-shareholders
The search for growth may exceed good judgement and ethical limits
Weapons industry stimulating demand by promoting conflicts
Pharmaceutical industry stimulating demand for dodgy drugs
Advertising industry stimulating fake demand for non-useful products
Banking industry selling known dodgy assets
Industries suppressing competitive inventions or patents
Alternatives to profit motive
Non-profits, who invariably get their funding from for-profit companies
Questions and observations
With massive reductions in competition in many industries due to consolidation and mergers, the US economy has become profit inefficient, with record profits occurring in recent years. This creates a deadweight loss to the economy.
Critics of the profit motive contend that companies disregard morals or public safety in the pursuit of profits
Competition is the key tool by which markets overcome the individual firm's profit maximization incentive. In the absence of meaningful competition, profit may be unrestricted
Profit is the reward for business success.
is the quest for profit a perverse incentive with a frequent bad outcome? Should laissez-faire apply? Do people have a right to spend their money as they see fit? Corporations do not use coercion to achieve profit. They engage in willing buyer/willing seller transactions.Do corporations have no option but to maximise profits? If they don’t make a profit, they go out of business. Is there a model which would provide reasonable alternatives to the maximise profits paradigm.
As an individual, is your goal to maximise profits? Is this not akin to maximising food consumption, or sexual activity, or wealth accumulation. Does wealth accumulation justify lying, shady practices, harm to others. Why then do we give corporations a free pass for profit.