This week, 200 large US companies published a document in which they say that profit in a business organisation is not everything or the reason why that organisation exists. They said that businesses also need to consider the impact they have on the environment, client satisfaction and the way their employees are treated. There is a life beyond the profit motive.
With a dose of cynicism, I say: “Big deal”. They are several decades too late with this statement. Decades ago, Peter Drucker (the management guru to whose readings I was introduced as a student of economics in the 1970s) stated that the purpose of a business is to create and keep a customer. It needs to make a profit to remain in operation to continue meeting that customer’s needs.
Unfortunately, that statement was lost with the passage of time and the dogma of private enterprise was that profit is the reason why a business exists and the primary objective for any business enterprise is to create value for its shareholders, at any cost.
The economic liberalism of the last decades has been based on this dogma. Now this is being put into question. And it is being put into question not by small companies but by giants such Amazon, JP Morgan and General Motors.
They claim that it is important to create long-term shareholder value but, in order to do this, profit should not be the only objective. Other objectives need to include, as already mentioned, the protection of the environment, customer satisfaction, relations with suppliers and the conditions of work of employees.
Discussion on this point had started a few years ago, with the onset of the international financial crisis of 2008 and the subsequent economic recession. It was recognised then that the greed generated by the profit motive was such that businesses went too far. Reckless investments, mis-selling of financial products, lack of adequate controls, lack of respect for regulations and other factors all contributed to the crisis.
Society is now fed up of having to pay for the misbehaviour of businesses, while the few have become even richer at the expense of the rest
At that time, because the primary and only objective was the profit motive and the bottom line had to be safeguarded at all costs, businesses were not too bothered to reduce their employment and send staff home, or to shift their operations to countries where environmental protection or labour legislation were less rigid.
An initial response to this, by the business sector itself, was to create products such as ethical investment funds or promote sustainable finance. The debate is now also catching the attention of large global businesses, which explains the statement issued this week.
Some may see this as a political move to serve as a counterbalance against populist governments or resurging left-wing parties. These large global businesses seem to be positioning themselves in such a way that they become involved in the decisions that governments may take against them, especially in relation to taxation and the environment.
This may be the case. However, even outside the sphere of the populist parties, there is still a very significant concern that such businesses have seemed not to care at all about the impact of their decisions. So they have been subjected to accusations related to child labour, having inhumane working conditions, cheating customers, harming the environment, tax evasion, etc.
Whether businesses will eventually make a paradigm shift in their thinking and go beyond the profit motive remains to be seen. My feeling is that society in general is expecting them to. Society is now fed up of having to pay for the misbehaviour (to use a euphemistic term) of businesses, while the few have become even richer at the expense of the rest.