42 Degrees - Business from a different angle

A recent survey of 4,000 senior business people by management consultant McKinsey found that 86 per cent felt that business should balance high returns with contributions to the greater public good.

It's true that talk is cheap and the road to hell is paved with good intentions, but it is proof that the business community feels that profit is not the only consideration when running a business.

Yet the idea that profit is the be-all and end-all of commerce is so widespread, so deeply ingrained, that most people hardly question it. It's a notion with deep intellectual roots. Milton Friedman, possibly the most influential economist of the past half century, wrote in his famously titled 1970 New York Times article, "The Social Responsibility of Business is to Increase its Profits," that the sole purpose of business is to make money.

It is one of those ideas that underpins much of what we think we know about the way our society works and affects both the behaviour of business and the way that business is regarded by the community as a whole.

In fact you'll be hard pressed to find a text book, an accountant, economist or business person come to that, who won't tell you that the role of business is to maximise long-term profits.

But, in order to get to the long term, business has to negotiate the short term. And that's where so many exceptions to the profit rule come in. On closer examination, the idea that profits drive a business starts to look not so much like an iron law of nature as a guiding principle, something that is true under certain conditions, or even, dare one say it, a bit of a myth.

Profit isn't even an infallible measure of the health of a business. Just ask anyone who has a full order book but is approaching the end of their credit lines. They know that profit can just be a trick of accounting, whereas cash flow, controls whether you can stay in business. "Of course profit is important in measuring the health of an enterprise, but certainly in the short run, the amount of resources you have available in cash or borrowing will determine whether you can continue to trade," says Clive Lewis head of SME issues at the Institute of Chartered Accountants.

He points out that more businesses fail because they have cash flow problems than because they aren't making enough profit. "People fold their businesses because they aren't profitable. They have their business folded for them if they don't have the cash flow."

And if a business is new or is embarking on a period of growth, the level of profits may give a positively misleading picture of its health. "Many businesses aren't profitable for years after launch or expansion," says Lewis. "But you wouldn't necessarily call them unhealthy for that reason."

The performance of internet bookseller Amazon is a graphic illustration of his point. Former investment banker Jeff Bezos set up the company in 1994. But it was not to make a penny in profits for another eight years until January 2002 when it finally reported a humble net income of $5m on sales of $1.2bn. Did this lack of profits mean the business was failing? Clearly investors didn't think so. In that period shares rose from $1 to peak at $150, although they did then fall back to around $25.

In the case of Amazon the company strategy was to defer profits in favour of building volume. And there are many other situations in which businesses don't aim to maximise profits. They might instead try to maximise sales or revenues as a strategic move to discourage competitors or simply to build the prestige of senior management.

When a business is run by managers rather than principals or shareholders, it is not unheard of for the management to favour turnover rather than profits – especially if their bonuses are based on sales. And let's not even get started on nationalised industries, co-operatives and social enterprises.

Then there are legal constraints. While the law actively commands companies to pursue profit, there is often legislation which acts as a brake on that. "The law can present a dilemma to companies. There is a fiduciary duty to shareholders, but there are various restrictions on that duty. In particular, companies may have legal responsibilities to other stakeholders that are in conflict with a goal of shareholder value maximisation, as well as social responsibilities or ethical obligations," says Craig Smith, senior fellow in marketing and business ethics at the London Business School.

So the interests of employees, suppliers and the community can all be placed ahead of profit at some time or other.

And, of course, there is the question of ethics and morality in which businesses increase costs or decrease profits simply in order to do the right thing. "Evidence suggests that most business people accept that there is more to life than money. In fact money isn't even a particularly powerful motivator – just look at the motivations of somebody like Richard Branson today or the founders of many SMEs," says Smith. An ethical stance plays well with consumers and can motivate the workforce, he argues. It would certainly be nice to think so.