Does business have to make a profit?

Posted on July 24 2006

The Tax Justice Network email forum has been seeing an interesting debate on tax, ethics and all such issues during which criticism arose of the profit maximising ethos taught by all universities and business schools. It was, for example, noted that:

corporate finance books proclaim that maximising shareholder wealth is the main objective of the firm.

A response was made that said:

But I thought there is nothing controversial in this. The way corporations are legally set up at present, that is indeed their function. So these books are not at fault. They are not morally dastardly in saying this, they are stating the truth.

There are two points to make. The first is that business usually claims that its sole purpose is to make profit (for which read maximising shareholder worth - although the two need not be the same thing - just to be confusing). But although UK business says objective is required by law it is not, and even under the new Companies Act will not be.

Second, and more important, though is that the particular and singular focus of profit maximisation need not be the purpose of corporations. So long as companies make cash flow surpluses any business can survive. Under modern accounting rules there is no guarantee whatsoever that profit maximising, at least in an accounting sense, will guarantee long term cash flow surpluses. So first of all, to pursue maximum profits may not be what shareholders actually require and, secondly, this suggests profit maximisation is not required as a basis for business survival, or even success.

In fact, the reality is that profit maximising is a choice. The problem with the business school claim, oft repeated by business itself, is that this choice is not recognised.

When the reality of this choice is recognised then ethics have to play a role in the issue of business management and accountancy. The reason is simple. Whilst it is claimed that businesses must maximise profit and so minimise tax bills those actions can be justified on the basis that ethics do not come into the equation since the option of choice is not available. When that is recognised as untrue, as it is, the claim that these actions are amoral is seen to be untrue. They are in fact the consequence of a moral decision, requiring the exercise of ethical judgement in accounting, business and taxation management.

Then everything changes.

All we have to do is get business schools to teach this, and get business to accept that it is true (which instinctively they know to be the case). No problem!

One final thing. This does not by the way mean (in my opinion) that the choice to pursue profit as an objective is wrong. But it has to be seen as one of a vector of aims - as that is always the actual case.

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3 Responses

  1. Dennis Howlett says:
    July 24 2006 at 1:19 pm

    This is bound to draw reaction Richard 🙂 – my 2 penn\’orth. You say:
    \”…it is claimed that businesses must maximise profit and so minimise tax bills…\” Are the two mutually inclusive? I don\’t think so. Maximising profit takes place on multiple levels – offshoring to lower cost operations, judicious organisational pruning etc. Tax is a component.

    My sense on the tax specific issue is that the current obsession with chasing low tax regimes and artificial schemes arises out a mind set that is predicated on a \’If we can get away with it we will\’ attitude that stretches back to attittudes formed in a past political era, summed up beautifully in Gord Gecko\’s immortal words (film: Wall Street) \’Greed is good.\’

    I would for instance have no problem with super profit arising out of business innovation. Is that happening? I don\’t see it, especially at the many large companies you have in your laser eyesight.

  2. Tax Research UK / Why don’t businesses profit maximise? says:
    July 25 2006 at 5:27 pm

    […] Does business have to make a profit? […]

  3. ssekamaanya says:
    October 18 2007 at 8:53 am

    i need some answers on this question.{Earning profits can’t be the objective of a business any more than eating is the objective of living.}