Profit Maximisation and Wealth Creation - Article Example

Profit Maximisation and Wealth Creation Student’s Name: Instructor’s Name: Course Code: Date of Submission: Introduction Yes I do agree with Milton Friedman’s argument that, “the primary objective of the managers is to increase the wealth of the shareholders and the owners, however under certain circumstances which include adhering to business ethics and laws.” In an ideal situation what comes into the mind of the shareholder or the investor in that matter, while trying to do an investment is the value as an individual will get from such investment. The value which the shareholder is interested in can be termed as the profitability of the business. However, in trying to achieve this goal, it is recognized that in any industry there are various stakeholders who are key partners and can influence in one or the other the performance of the business. For example, in any business there are employees who support the operations of the business and the community in which the business operates and whose lives can be affected by the business’ value chain activities. With this in mind therefore, it emerges that as any manager struggles to maximize the company profits, he has some obligations to fulfill and the higher the ability to manage these obligation and maximize the company profits, the better (Bejou 2011). The objective of this review The purpose of this discussion is to take a critical analysis on the thesis of Milton Friedman that, “the primary objective of the managers should maximize the wealth of the shareholders and the owners of the business under the assumption that they adhere to the ethical norms and laws of doing business.” In trying to support or discern this statement, the discussion will try and give an overview of what is Friedman is referring to as ethical and the different views the contemporary managers, have towards this thesis by Friedman. The ethics and laws that Friedman is referring to are those principles and practices that the business be responsible to the society in the process of its activities. While developing this thesis, Friedman was of the view that if businesses could follow certain principles and practices, then there could be a situation where managers could engage in business vices as corruption and frauds as an effort to create for themselves some wealth. However, despite the thesis by Friedman to try and explain what the role of the business should be, many scholars and managers have come to support and object his stand citing various reasons for that. Society growth and development: While developing his thesis, Milton Friedman maintained that any business that engaged in other missions apart from maximizing the company’s was doomed to fail and further cannot be able to meet the interests of its owners, workers and the society in general. This is to say that making profits is paramount and defy of it could easily translate to business drying up for failing to meet the needs of the owners and those of other important stakeholder as employees and society where it operates (Ferrell and Ferrell 2008). Milton Friedman directly relates profits of the business to its potential to grow and meet its business obligations. Profits matter a lot for the business and for any investor who is interested in growth. For those scholars that support of the view by Friedman and that believe the primary role of the business is to maximize its profits like (Christensen and Raynor 2003, Baumol, 2004 and Baumol and Strong, 2007) are of the view that for the business to sustain its growth and ensure continue experiencing good business, creativity and innovation should be brought into business. This is to enhance the delivery of the services to its customers without compromising the available profits. With innovation and creativity in business, new products and services are likely to be developed and placed into existing and new markets to fetch more revenues and consequently help boost the company profits. On the same line, growth of the business is said to matter a lot to any business and according to Boselovic (2001), Christensen (1997) and Tiffany (2001) consistency in revenue growth in the business leads to superior performance. This will then help create value for the investors’ money and support its strategic activities. Growth is very difficult to achieve for any business because many companies are not able to make good profits. This the reason as to why therefore capital markets are insisting on growth so as to ensure that companies are able to increase the value of their shares and make good profits to meet its obligations. In general, profit making is the primary responsibility so as to help create wealth for the owners and also meet the interests of the other stakeholders. Innovation is used to help increase profits for business for sustained growth. These are all social responsibilities that the business has and have been founded on the concept corporate social responsibilities (CSR). Ethical norms and laws: According to Milton Friedman, the issue of ethical norms and laws in business might have been informed by CSR. However, this concept has stirred a lot of debate on the extent to which it should be exercised. Even though Friedman has put more emphasis on profit maximization as the core agenda for the managers and the business, his extension to cover business ethics and norms as conditions that should be fulfilled in the process of profit maximization, is to show how attention should be paid to various factors which accelerate profit maximization and can positively or negatively impacts on the business depending on how they are handled. This has concerned a lot concern among the business environment whether it actually fruitful to invest in CSR by paying attention to social demands (Wilcke 2004). Even though extensive research has been done to ascertain the relative worthiness of investing in CSR has been done, it is yet to be established its relative consequences. While different studies have revealed positive correlation between corporate social performance and corporate financial performance, others have revealed that the reverse is through and this has continued to cause an endless debate to the inclusion of CSR in business to support profit maximization for the business. While some authors like Crisp (2008) and Peinado-Vara (2006), have agreed with the idea by Friedman that primary responsibility of the managers is to increase the shareholders’ wealth by paying a particular attention to the managers and the employees stockholders, Freeman (1994) refutes this claim by stating that CSR should be applied to ensure that social performance has been adhered to so as to help business achieve legitimacy. With this regard therefore, it can be argued to be the point where Friedman’s claim although focused, fails to attend to major issues surrounding CSR and include the activities committed to ensuring the wellbeing of the society in which the business operates. Pressure has been mounting in major companies to pay more attention to issues related to CSR given today’s political and social environment. The most recent example has been that involving Oxfam and the GlaxoSmithKline (GSK). GSK was called by Oxfam to come forward to more in terms of CSR by donating part of its revenues to Least Developed Countries (LDCs) so as to support the Global Health Fund. The response by Garnier the director of GSK was that they the company already new what it is responsibility was not cater for the reach but also give priority to countries that are in need and that will be done in response to renewing its pledge that it had made earlier. This kind of pressure by other companies is what is happening in the world of corporate in terms of CSR and more especially when the company is known to be making huge profits. For instance, GSK is the leading Pharmaceutical Company globally in terms of making profits. What this depicts is that as much as profits remain paramount and primary responsibility for many of the organizations, CSR is also inevitable as the company owe something to the society where it operates (Ferrell and Ferrell 2008). CSR and compassion: According Milton Friedman (1970), the primary responsibility of the managers of any given company is to maximize wealth creation for the shareholders as long law and ethics are followed. Given the fact that Friedman has not taken much consideration to explaining the limits of the companies in terms of responsibilities, many companies and investors, have gone step further to interpret his theory so as to suit their own needs. Companies for example have engaged in speculation and other unfair business deals such as corruption and frauds which can be considered illegal in order to satisfy their greedy interests. This is because they think that Friedman has not comprehensively covered what should entail ethics and social responsibility. But as a matter of fact, social responsibility is a very wide concept that can be covered under one theory like Fried’s and that the social responsibilities for companies vary across industries and societies (Wilcke 2004). With this regard therefore, it can be noted that it is not easy to tell what should be entailed in social responsibility. Compassion therefore has come as a concept to explain that causing positive impact to the community should be the primary role to generating profits for the shareholders. The acceptance of the concept of CSR, then it means that human presence is added to the process of setting various objectives of the business. A company that practice CSR is the one that makes sure that as it continues to make profits, it obeys prevailing laws and business ethics alongside ensuring being good corporate citizen. However, research has shown that CSR cannot be defined in common terms and that has different foundations. Further, many companies have been noted to be boasting that they are CSR compliant something they are not (Bejou 2011). With this therefore, it is evident that the business should not be obliged to do something that is out of context. CSR is seen as something that is mechanistic and that has been developed in such away that it is rigid and it is not easy distinguish between what should be an obligation and a choice. This therefore has made CSR not to cause the intended impact in the society. It is with this regard that compassion is emerging as the best approach to dealing with social responsibilities while making profits and maximizing profits for the shareholders. Compassion in simple terms can be termed as act of showing concerns about what kind of impact a company’s to the other party or the society in general. In other words, companies operating under compassion have the responsibility to make major footprints in the communities in which they operate in. in other words compassionate companies should cause positive change to the communities. The following values have been considered important for the compassionate companies and all are very important for any company to adhere to while trying to maximize profits and create more wealth for the shareholders: adhering to high levels of integrity, supporting human rights and welfare of other stakeholders such as shareholders, customers, employees, women and children, fighting world social ills such as poverty, disasters and diseases, building community infrastructure, supporting freedom, upholding best workplace principles, supporting and good management principles, excellence in corporate governance and social performance (Crisp 2008). Several companies have demonstrated how managers can ensure that investments are compassionates and good examples include the Ford Motor Company, PepsiCo, Aeropostale, Inc., Green Mountain Coffee Roasters, Inc. (GMCR), Target, Costco Wholesale and AT&T. AT&T for instance is recognized for demonstrating different values of compassion such as community development, valuing people, fighting environmental pollution, leading in creativity and innovation and connecting people and different business. For example in 2009, the company was noted to have invested $100 million to study the problem leading high rates of school dropouts in the united and investment of $565 million replace 15,000 of their vehicles to those that use alternative fuels so as to help safeguard and protect the environment from level of burning fuels (Ahlstrom 2010). These responsibilities and more cannot be identified and charged to respective companies or activities. It is therefore to the discretion of a given company to act responsibly as it seeks to create more profits, and any defy to that will lead to the deterioration of the environment in which the business operates and consequently impact negatively on their profits (Ferrell and Ferrell 2008). Profit maximization and social performance: According to Bryan and Jose de (2006), there are those companies that have chosen to take Milton Friedman’s thesis a bit serious and they have set their objectives into two broader categories namely: profit maximization and social performance. In this kind of situation different cases such as altruism and coerced egoism as well as strategy have been used as microeconomic tools to determine the likely social output of each case. Even though the argument by Friedman that “the primary responsibility of any business is to try and maximize its profits and create more wealth for it is shareholders while operating with the required bounds of the law” has been seen to be discouraging to many businesses and society because of the impact that the business can have to the community, some research has shown that some positive financial impact can be created from corporate social and environmental performance even though this cannot convince Friedman and colleagues (Shaw 2009). What this means is that in some cases, social performance can be positively correlated with financial performance in some cases even though inn some cases, it might not be consistent with profit maximization as well wealth creation for the shareholders. However, unlike many of the authors, Jensen (2002) takes rather a different view and seems to concur with Friedman who indicates that in many occasions it is impossible to ensure maximization in more than two dimensions. This can only be possible where the involved dimensions are monotones one another. What this means therefore in the case of profit maximization is that social performance maximization cannot be possible. This is because one dimension is likely to suffer at the expense of the other. Further, the existence of the trade-offs between the profit maximization and social performance is the cause of the imbalance in maximizing both dimensions. For example when trying to maximize the company profits and create more wealth for the shareholders, the most likely scenario is that some restrictions may be set as to how much should be spent in social performance and consequently social responsibilities and activities may compromised to some extent. This is where the three cases of altruism, coerced egoist and strategy comes into play. In the case of altruism, individuals tend to receive utility for consuming both what belongs to oneself and for others. This can be elaborated in the case of social responsibility and corporate citizenship (Van Beurden & Gossling 2008). On the other hand, in the case of coerced egoist, the primary objective of the agent is profit maximization irrespective of what the impact to the business is. In this case the investor can take all resources including land, labor and capital in order to support his activities towards realizing his stated goals and objects. This can be demonstrated in a case where the company may doing a mining in an area and causing a lot of damage to the environment without doing anything to rebuild the affected places. Finally, the case of strategic happens when one decides to make a social investment because he knows that there are attached benefits such as good reputation, extra premium, differentiated products as well as development of highly qualified personnel that can help the business make huge profits (Craig 2003). What this means therefore is that social performance comes as secondary objective and in many occasions investors decide to engage social performance because they are aware that the move will help improve the performance of the business by increasing revenues and profits to improve on the wealth of the shareholders (Cosans 2009). In general the thesis by Milton Friedman (1970) has been very instrumental in shaping the world of business more especially with regard to profit maximization and adherence to laws and business ethics, it is emerging that there are those individuals who hold the view that Friedman’s thesis is against the free market economy. For example according to Wilcke (1984) who is the proposer of the new ethical standard, is of the view that organizations be it small or big, should be allowed to commit themselves to the free market by relying solely on the choices made by the customers based on ethical ideas. With this kind of situation, the business profits will begin to change based on the public perception that goes along to charge businesses based on their social behaviors. This will then further force the businesses to develop ethical models that will help themselves survive in the competitive environment. However, this model to my view could only work well where all businesses are refrained from exploiting public resources for personal good. In general what this means is that, the need to create more profits will definitely compelled to engage in social activities that will translate to performance and consequently compliance to social responsibilities (Husted & de Jesus 2006). Conclusion The purpose of this article was to discuss the thesis by Milton Friedman that, “the primary role for the managers of the company is to maximize profits and create more wealth for the stakeholders.” However, even though this has emerged to be true, the question that is being asked by many is, what are the ethical norms and laws as referred by Friedman that should be adhered to while maximizing profits and creating more wealth for the shareholders? As businesses seek to grow, unethical practices such as corruption, frauds and speculations are likely to be used to maximize profits. Further, such social responsibilities as economic growth and development, CSR, compassion and social performance are secondary to profit maximization and more often than not, it is expected that many organizations engage in these social responsibilities because they believe that in one way or the other, they will be able to maximize their profits. In general, Friedman is thesis is considered a force against free market economy. References Ahlstrom, D. (2010). ‘Innovation and Growth: How Business Contributes to Society’, Academy of Management, August, pp 11-24. Bejou, D. (2011). ‘Compassion as the New Philosophy of Business’, Journal of Relationship Marketing, issue 10, pp 1-6. Cosans, C. (2009). ‘Does Milton Friedman Support a Vigorous Business Ethics?’ Journal of Business Ethics, issue 87, pp 391-399. Craig, N. (2003). ‘Corporate Social Responsibility: Whether or How?’ California Management Review, vol. 45, no. 4, summer, pp 52-76. Crisp, R. (2008). Compassion and beyond. Ethic Theory and Moral Practice, 11, 233–246. Ferrell, O., and Ferrell, L. (2008). Business Ethics: Ethical Decision Making and Cases, 7th Edition (Houghton Mifflin, Boston) Husted, B., & de Jesus Salazar, J. (2006). ‘Taking Friedman Seriously: Maximising Profits and Social Performance’, Journal of Management Studies, 43:1, pp 76-91. Peinado-Vara, E. (2006). ‘Corporate Social Responsibility in Latin America’, The Journal of Corporate Citizenship 21(1), 61–69. Shaw, W. (2009). ‘Marxism, Business Ethics, and Corporate Social Responsibility’, Journal of Business Ethics, 86, pp 565-576. Van Beurden, P., & Gossling, T. (2008). ‘The Worth of Values – A Literature Review on the Relation between Corporate Social and Financial Performance’, Journal of Business Ethics, 82, pp 407-424. Wilcke, R. (2004). ‘An Appropriate Ethical Model for Business and a Critique of Milton Friedman’s Thesis’, The Independent Review, volume IX, no. 2, Fall, pp 187-209. Read More