The Business of Profit - Essay Example

?The Business of Profit: A Social Responsibility Matriculation number 3,672 words This piece of work in my own original work and has not been submitted elsewhere in fulfilment of the requirement of this or any other award. This paper aims to define business, its purpose in existence, and its effects on society by presenting a set of theoretical and practical situations and analyses to prove that business mainly exists for profit. Business has a big contribution to society and with it comes big responsibility as well. Milton Friedman (1970) of the New York Times Magazine stated that: ‘The primary and only responsibility of business is to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception and fraud.’ With this, comes the aim of this paper to present the definition and relationship of business and society to entrepreneurship, capitalism and profit making. In addition to this, we must establish what the rules of the game are and discuss ethics in business, including issues on deception and fraud. The Business Purpose The word business has a variety of meanings and could not simply be defined. Even in the Merriam- Webster online dictionary (2013), it has 10 possible meanings. Some of the few interesting descriptions of business include that it is a ‘purposeful activity’, ‘engaged in as a means of livelihood’, ‘transaction of an economic nature’, and ‘a serious activity requiring time and effort and usually the avoidance of distractions’. All aforementioned definitions are correct and are applicable in different business interests. Friedman (1970) mentioned that the primary purpose of business is to maximize profits. Whole Foods Market is a big natural and organic food company in the US. Its CEO, John Mackey agreed with this statement, but pointed out several good points to consider in his work in Conscious Capitalism. He introduced the purpose of business by first pointing out purposes of important profit- producing sectors in society. Doctors, for example, work to heal the sick. Teachers serve in lieu of educating the youth. Lawyers exist to advocate justice. All talk about promoting ‘public good’ and a ‘purpose beyond self- interest’, but how about business? Does it promote the same purpose? According to most economists, the purpose of business is to maximize pro?ts for the investors, but the major power in establishing business purpose lies on the entrepreneur. Mackey adds that in his experience, only a few entrepreneurs he knew engaged with a business purpose different from just ‘maximizing profit’, and reasons for choosing so were mostly personal (2007: 2). Verging into Entrepreneurship In 1987, Robert Goffee and Richard Scase defined entrepreneurs as ‘popular heroes’ since economic recovery in the 80’s was largely dependent on the ambitious efforts of fearless entrepreneurs. On the other hand, Robert D. Hisrich, PhD, Michael P. Peters, PhD, and Dean A. Shepherd, PhD provided the following definition for entrepreneurship: ‘Entrepreneurship is the process of creating something new with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, and social risks, and receiving the resulting rewards of monetary and personal satisfaction and independence’ (2005). Entrepreneurs are risk- takers and innovators who deviate from the norm of being a wage employee and verge into being ‘their own boss’. Dr. Jyotsna Sethi of Small Industries India enumerates in her work Entrepreneurs and Entrepreneurship three stages in the entrepreneurial process in with the main goal of profit generation. Income generation is the first stage, which is the simplest done, part- time engagement to supplement income. Self- employment is the second stage, which entails involvement in one’s own occupation and requires fulltime involvement. These boils down to entrepreneurship, coined as the third and ‘terminal stage’ which seeks for growth of business that never gets stuck in a trend and is always innovative. Entrepreneurs answer to the calling changes of consumer wants and needs. It takes creativity and guts to engage in any of the three processes mentioned. But there are people who take the challenge and risk for investment because they aim not just for a livelihood to support one’s everyday needs, but for looks forward to the creation of wealth that would also give contribution to economy. Let us try to understand the effect of small scale entrepreneurship first, by starting off with the changes one will experience if he plans to enter entrepreneurship and leave being a normal wage employee. Dr. Sethi of the aforementioned Small Industries India describes wage employee’s job as a routine job characterized by working for others and following instructions possibly under the government, a public or a private sector. A wage employee earns fixed amount of money which never goes negative, but this amount does not create wealth for them as well. On the other hand, the entrepreneur’s job entails being one’s own boss in a certain trade industry or service enterprise. The entrepreneur generates plans for creative activity. Their work does not secure a fixed income and can be bankrupted at times, but the generated income builds wealth and contributes to Gross Domestic Product or GDP of the country. GDP is one of the bases for economic standing, stability and growth. It is defined in Gregory Mankiw’s 2nd Edition of Principles of Macroeconomics (2005) as ‘the market value of the total quantity of final goods and services produced over the specified time period’. GDP is measured in annual terms though assessed in a quarterly basis. Entrepreneurs contribute greatly in GDP growth since they are the ones who engage in making new products that would be counted and part of an economy’s GDP. The term ‘final product’ is used to coin these products. It is not measured by the market value of all individual ingredients or resources used but rather measured including goods whose value contributes to the final product. The value of total income of all involved in the production of both the final product and the intermediate goods are also included in the GDP. A lot of people are interested in putting up their own businesses but cannot do so because of different factors such as lack of educational background in business, lack of strength to engage in a huge risk, and definitely, lack of money for capital. Most of the people who have abilities to put up and run a business are mostly from the upper class section of society, commonly from a business bred family. Only a few are to be considered phenomenal entrepreneurs for rising from the ashes and suddenly making it big in an innovative industry, like Steve Jobs who had to drop out of the fancy liberal arts college Reed in Oregon, because of financial problems. Today, Steve Jobs is famous for inventing world- changing Apple products under Apple Computers; he died an icon on October 5, 2011 (Moisescot, 2012). In 1982, Jobs was featured in Time Magazine with an article on America’s computer geniuses, and with the tagline: The American Risk Takers. Surely, Jobs would not attain his status in the business world if not for taking the biggest risks life has to offer. But when it comes to business per se, not everyone goes to be as lucky as Jobs. The Capitalist World Capital is essential in the world of business and entrepreneurship. The Merriam- Webster dictionary defines it as ‘accumulated goods devoted to the production of other goods’, and ‘accumulated possessions calculated to bring in income’. Simply put, it is the starting or seed money of any business engagement (2013). The goal of every entrepreneur is not just to get back the seed money, but to make it grow more and more in every production and transaction he makes. Today’s society is facing a lot of economical struggles especially because of issues in capitalism. Let us try to understand capitalism and later discuss what problems it has caused, why it happened at what we can do about it. Ronald Edsforth defines capitalism in a number of categorical ways in his work On the Definition of Capitalism and Its Implications for the Current Global Political-Economic Crisis in 2012. In summary, he talks about capitalism as a non-structural, non-natural product of history that is a human invention. It is ‘logic capable of transforming the world and itself’, and it is neither moral nor immoral, but is considered ‘amoral’. With capitalism we can justify the claim that business’ primary ‘goal is to increase its profits’, highlighting it being ‘without deception and fraud’. But in reality, the nature of capitalism invites deception and fraud. As supported by this definition provided by Edsforth (2012): ‘Capitalist logic defines human beings, not as social beings, but rather as individuals motivated exclusively by self-interest. Capitalist rationality is premised on self-interest, not social obligations, moral commitments, or altruism’. Apparently the logic of capitalism involves ‘self-interest’, which is responsible for the many different crises in the world of business and finance today. The Inside Job: Conflict of Self- Interest and its Drastic Effect in World Economy The earlier parts of this paper tackled more on simple business, entrepreneurship and capitalist transactions, mostly among starters. But business nowadays is a lot more complicated considering the height and speed of innovation the world is currently experiencing. Business is not just trade simple trade using physical products. ‘The most important fundamental principle of capitalist logic is that anything real or imagined can be constructed as a commodity’ (Edsforth, 2012). Imagined commodity is even more complicated to deal with and to monitor, especially if ‘self-interest’ will gets in the way. In 2010, Inside Job a controversial award- winning documentary deliberately chronicled the global financial crisis in September of 2008. The film fearlessly revealed critical research data which aims to explain the reasons behind the issue, and revolves on a set of interviews with highly respected financiers, politicians, journalists and academicians who were involved in the Global Economic Crisis that shook the world in September of 2008. This is an issue important to discuss since the United States is a global power and such collapse will surely lead to putting the rest of the world into an economic disaster. As stated by Senior Economist of the Council of Economic Advisors and New York University Business School professor Nouriel Roubini, it was a “highly expensive crisis” wherein a destruction of income, equity, housing wealth and jobs took place (2010). Furthermore, it put fifty million people in the globe under poverty line. This 2008 Global Financial Crisis, according to the documentary, caused 30 million of the population to be unemployed and doubled the debt of the U.S. government (Ferguson, 2010) was growing. In the 1980s, there was the “explosion of financial industry” where all that used to work smoothly for the industry was set to take bigger risks. Investment banks went public, and people on Wall Street started becoming millionaires. This incident is described in the documentary as “out-of control”. Bringing the financial market to the public helped the industry gain more investors and transact more business, which was good for the economy. But since the deregulation of savings and loan companies allowed investors to “gamble” with their depositors’ money, things started to get dirty. A lot of investment banks failed and was forced to shut down. Taxpayers paid for the damage of one hundred twenty- four billion dollars, plus their life savings. Aside from these, may criminal activities aroused from the financial industries. Ethical issues on business had been evident especially with the involvement of government officials, financiers, politicians, journalists and even academicians. “Deregulation” is defined in the Investopedia as ‘the reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry’ (2013). Economist and appointed Chairman of America’s Central Bank, the Federal Reserve Alan Greenspan pushed through with deregulation of financial markets as it was started in Donald Regan’s term. The documentary shows exposes on how deregulation has benefited Greenspan through on-the-side jobs and dealing with bankers and financial lobbyists. Then President Bill Clinton appointees, Treasury Secretaries Larry Summers and Robert Rubin, were also featured to have earned millions of dollars for supporting protecting deregulation laws. Financial economists believed the theory that innovations in marketing such as internet stocks and derivatives will build safer markets but it actually did not, for it made unstable markets. What it build for the people in the finance industry are penthouses, mansions, jet planes and more extravagant properties for the people in the financial sector. And while their pockets were being poured with gold because of the innovations and some bonuses or rewards for what was claimed as good work on the side. The fast money grew into a monopoly of conflict of self-interest, whereas investment banks promoted companies, products, and stock shares that they knew would fail. It was a complete act of deception and fraud. For example, rating agencies Moody’s, Standard and Poor and Fitch have, in one way or another, overlooked the welfare of small scale investors and pursued with programs and decisions that would only benefit their companies. Rating agencies, for example, had been giving the highest rate of triple A to assets which in a short period of time, came to closure or bankruptcy. Triple A rated assets were supposed to be as safe as government security. It was later found out that the more Triple A ratings these agencies gave, the more money they earn. They were paid to give high ratings. Ratings were small investors’ basis of whether or not to invest on a certain business deal, in housing loan for example. Their failures to give quality ratings have caused millions of small scale investors a lot of money. What’s worse is, upon investigation for accountability in the disaster these rating companies have cause, no single rating agency accepted fault for the matter. They claimed their ratings as their “opinions only” and it is up to the small scale investors to accept their opinions. Meaning to say, whatever decision or purchase had been made, whether it was a good deal or not, or whether it was for the welfare of any certain investor or not, it was out of their concern as rating agency. At that very point the interest of the bigger scale in economy was disregarded, and financial economists saw past through their responsibility of properly rating and monitoring newly rising markets. They did not consider how this would soon affect the people of the state, and the economy of the U.S. and of that of the global economy, respectively. Innovation and technology has paved the way for a lot of advancement in different fields. It is so helpful and it makes life easy for most of us. The last thing we should learn from innovation and technology greed and abuse. The aforementioned information based from the documentary Inside Job are just some of the many other disappointing realities that happen and could still happen in the business sector. Banking on Good Will The controversy exposed in the documentary Inside Job involved the major institutions like the Securities and Exchange Commission, the Commodity Futures and Trading Commission, the Federal Agency which was created during the time of depression to regulate investment banking and even Congress. Exposes also featured financial institutions such as powerful investment banks such as Goldman Sachs, Morgan Stanley, Leman Brothers, Merill Lynch and Bear Stearns, financial conglomerates such as Citigroup and JP Morgan, security insurance companies AIG, MBIA, AMBAC (2010). This controversy has left a bad reputation for these highly respected institutions. But in one of the poorest countries in the country, Bangladesh, two banks gained respect for their banking innovation programs that resulted to alleviating poverty in the country. These banks are Grameen Bank and Bangladesh Rural Advancement Committee or BRAC. Bangladesh is described as ‘the cradle of micro-credit movement.’ This movement started in the 1997 with Grameen Bank and BRAC as the main source of inspiration since they have the best known and biggest number of clients in micro- credit institution. There are 16 million micro-credit clients in Bangladesh wherein more than 2.3 million are with Grameen Bank and more than 2.7 million are with BRAC (Develtere & Huybrechts, 2002: 1). Director of Global Education Dr. Susan Bliss defines micro- credit in her work Small Loans, Big Dreams ‘the name given to small loans made to poor people who are regarded as bad financial risks, by conventional banks, as they have insufficient savings or assets to obtain a loan’. The term ‘micro’, since it takes care of small size loans in shorter repayment periods wherein clients are small entrepreneurs and low-income households. Micro-credit is flexible and easy to understand, plus they have regulations on loans. Usually, clients get loans for income generation, enterprise development, and social, heath, and educational services for the community (2005: 2-3). Greeman Bank founder, Professor Mohammad Yumus established the bank with the purpose of helping the poor. He believed in a ‘minimalist philosophy’ where the poor’s condition may be improved by micro- credit provisions. Since the poor has no bankable asset, Greeman Bank established a scheme wherein payment from the poor loaners will surely be collected through ‘social collateral’. Greeman Bank focused on a group mechanism in banking. The process is described as follows: ‘Members, most of them women, are part of a group of five. When the first loan is made to one woman, the next member of the group will only receive a loan if the first is able to meet a regular repayment scheme and so on. In this way, the entire group takes responsibility for the repayment’ (Develtere & Huybrechts, 2002: 4). This process is considered the most promising scheme wherein repayment rate been maintained at 90%. Aside from this scheme that benefits poor clients because of micro- credit, Grameen Bank also offers training programs to educate their clients. The bank even employed members in the head office giving everybody opportunity to become shareholder of the bank. On the other hand, the Bangladesh Rural Advancement Committee also known as BRAC was first established as a ‘support and rehabilitation programme’ during the time of famine in the 1970s. With its purpose branching out to being relief organisation, it decided to extend its services by giving attention to providing education and skills training in their services. Eventually, micro-credit they also adopted micro-credit with the same process Greeman Bank uses. Both groups have displayed success in alleviating poverty in their country, by putting the interest of their clients first hand. Greeman Bank was well- praised for its successful group mechanics on micro-credit; while BRAC emerged in skills training they provide their client members. Aside from both aforementioned qualities, ‘strong decentralisation, combined with an extensive information and communication system as the source of success’ greatly contributed to this banking success of the two institutions. The scheme promotes honesty, integrity and client interest more than anything (Develtere & Huybrechts: 2002, 4). Earnings Management and Corporate Social Responsibility The examples given in the documentary Inside Job (2010) is an example of earning management. Earning Management is characterized by manipulating financial reports that are supposed to ‘distinguish poor performance and to facilitate shareholder financial decision’. It is an act made by some managers which make the reports appear more desirable than real results, ‘without violating generally accepted accounting principles’ (Prior et al, 2008: 160). This manipulation of data was discussed in the Inside Job and like what was shown in the film, the work of Diego Prior, Jordi Surroca and Josep Tribo (2008) in Are Socially Responsible Managers Really Ethical? Exploring the Relationship Between Earnings Management and Corporate Social Responsibility further discusses how earning management ‘misleads stakeholders about the underlying economic performance of the company’. Even worse, this study tells us how some managers use activities displaying Corporate Social Responsibility or CSR as its influencing and convincing mechanism to make more stakeholders believe in an apparent act of deception and fraud that earnings management is. CSR include ‘adopting progressive human resources practices, achieving improved environmentally-friendly ratings through recycling and pollution abatement, or by advancing the goals of community organizations’ and any other activity incorporating social aspects into products and manufacturing processes (Prior et al, 2008:162). With the discussion of how CSR activities are used to enhance credibility of companies who are actually conducting earnings management, we can say that philanthropy done by businesses or financial institutions are not always after the aim of answering to social responsibility. Furthermore, we can assume that no matter how affective an act of helping the poor is, like in the case of Greeman Bank and BRAC for example, still, the primary goal was to produce and maximize profit from all clients possible. These support Milton Friedman (1970) claim that ‘the primary and only responsibility of business is to use its resources and engage in activities designed to increase its profits’. But in a world governed by money it is definitely a struggle to keep business and financial institutions out of deception and fraud. It has also been discussed that the purpose of a specific business, aside from ‘maximizing profits’, is actually dependent on the decision of the entrepreneur. It is important to always be grounded on the aim of earning livelihood and creating wealth without stepping on other people’s chance to grow as well. Self- interest is inevitable in the world of business but it is important to ensure that the interest of clients, stakeholders, and other business sectors are in a reliable state. Ethics in business and finance is important, even though it was considered to be amoral. One decision may influence another and one mistake may make the whole financial kingdom fall down. There is a clear connection from one dime to another, and for that, responsibility should be taken seriously and protected. In the 2008 Centennial Global Business Summit in Harvard Business School, Bertrand P. Collomb pointed out that ‘Business will have to earn a license to operate by demonstrating a positive impact on society’. In this paper it is pointed out that in this ‘demonstration of positive impact’, businesses should attain their goal of ‘maximizing profit’ but at the same time stay transparent and genuine in terms of acting towards social responsibility. Bibliography Bliss, Dr. Susan. (2005) MICROCREDIT - SMALL LOANS-BIG DREAMS, (Online) Available from: http://www.ptc.nsw.edu.au/SiteMedia/w3svc361/Uploads/Documents/ 24.%20MICROCREDIT.pdf (Accessed 19th April 2013). “Business”. Merriam- Webster online dictionary, (Online) Available from: http://www.merriam- webster.com/dictionary/business (Accessed 19th April 2013). “Capitalism”. 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(2013) Steve Jobs Long Bio, (Online) Available from: http://allaboutstevejobs.com/bio/longbio/longbio_01.php (Accessed 19th April 2013). Prior, Diego, Surroca, Jordi & Tribo, Josep A. (2008) Are Socially Responsible Managers Really Ethical? Exploring the Relationship Between Earnings Management and Corporate Social Responsibility . Volume 16 Number 3. Blackwell Publishing Ltd. (Print) Sethi Dr. Jyotsna. Entrepreneurs and Entrepreneurship, (Online) Available from: http://www.du.ac.in/fileadmin/DU/Academics/course_material/EP_01.pdf (Accessed 19th April 2013). Read More