I heard a CEO say the other day that “Charity is not a business model”. I’m not so sure that’s the case, but it got me thinking. And researching. It turns out that companies (and their executives) are not legally bound to maximize shareholder profits, as many people (including myself, until now) think. Businesses can form to, and focus on, maximize any collection criteria they want.
Maximizing shareholder profit and nothing else can have a substantial negative imact on the company in the long term, because doing so is often at the expense of valuable employees, the quality of the product, and legal risks. Take for exmple the recent revelation that VW was incorrectly reporting the emissions of their cars in their favor. It was a deliberate attempt to make more money, with little regard for the legal risks, the customers, and certainly not the environment.
I found an interesting article about this in the Washington Post. It talks about how IBM’s focus on maximizing EPS (Earnings Per Share) has changed over the years, and the impact on the employees and its reputation.
There are companies that have a HUGE focus on charity as part of their business model. For instance, Toms gives shoes to the needy for each pair bought. They do the same for eyeglasses and other products they sell.
There’s a whole range of values a company choose to maximize. Of course if the companies are public, the shareholders better have that same focus, but you shouldn’t automatically assume their goal is to maximize their monetary return, either. A company may choose to include any goal in their values, including
- Mimizing environmental impact (or maximizing environmental impact, for that matter)
- Treating workers fairly (salaries, benefits, career path, training, working conditions)
- Customer experience (like Zappos)
- Improving the local or global community
- Providing services or products for disenfranchised customers
Certainly the majority of companies will continue to have shareholder EPS as their top goal, but that’s a choice, not the law.