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Value Creation Blog

The Ugly Side Of Maximizing Profits - Op Ed

Posted by Josh Patrick

soapbox2This post is my opinion and does not reflect the opinion of NFPSI or any other members of Stage 2 Planning Partners. If you think this post is another rant, you would be correct.

I write about the importance of profits before cash. You might think that I’m in the group that maximizing profits is all that’s important for a business.

Actually, I’m not. I do think that businesses need to cover their cost of capital. I also think that businesses have a social responsibility to go past just making money. There is a very ugly underside of business that has developed in the US since 1980.

What it used to be.

If you owned or managed a business between 1920 and 1980 there was a compact between you and your stakeholders. You probably would be concerned about your employees, the local community, your customers, your suppliers, and even the government.

Yes, you would focus on profits. At the same time the focus on profits would not be at the exclusion of the other stakeholders mentioned above. This seems to have fallen by the wayside with public companies and that’s too bad.

What we have now.

You hear it on the financial news all of the time, a corporation’s job is to maximize value for shareholders.

Let’s examine this statement for a minute. If maximizing shareholder value means having the CEO make 340 times the average workers salary, we’re doing it right. If maximizing shareholder value means shipping jobs offshore to save a few cents here and there, yup we’ve got it right on the money. If maximizing shareholder value means demanding your suppliers set up shop in China is the right thing to do, then what am I whining about?

I think Milton Friedman had it wrong. A corporation has lots of jobs besides just seeing how much money it can make. Peter Drucker had it right. The job of a corporation is to satisfy a customer’s need.

Why this is not sustainable.

Maximizing shareholder value has been an excuse for bad behavior by public companies. It’s allowed the managers of these companies to hide behind activities that cause serious harm to the stakeholders of the company.

Yes, Globalization makes sense. Yes, having government regulations that are thoughtful makes sense. At the same time all companies need to take into account the lives and communities it affects with decisions they make. It can’t just simply be, we’re doing this to maximize shareholder value. That doesn’t work now and it really never worked.

The difference between public and private companies.

I find that private companies still have the same values that public companies did up until about 1980. My observation is that owners of private companies care about their reputation in the community. They care about how their suppliers are treated and want to see the best for their employees.

I often have conversations with owners of companies about taking care of themselves. I usually get responses that they won’t take care of themselves without taking care of their employees. It’s too bad it’s a rare event for the same conversation to come from CEO’s of public companies.

Why this is important now.

We’re in danger of having a disaffected generation come to the conclusion that it’s all about them and not about their community. When leaders become self-centered it’s hard for others to not do so as well.

We never really listen to what people say, we watch what they do. In the case of our leaders today, watching is painful. It’s certainly not the path we took to become a great nation and role model for others to aspire. Unless we stop and take stock, we’re on a slippery slope that won’t end well.

What are your thoughts about this? Do you think corporations should just maximize profits?

There are lots of myths in the world about business owners. I wrote a special report on the 7 Myths of the Private Business Owner. You might find this report an interesting extension of this blog post.

7 myths of the private business owner

Topics: cultural change, Personal Responsibility, Change

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