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Recommended: Ethics and values in business

The implied justification for the statement “However much we might regret the effect of our actions on the welfare of employees, or the effect on the environment, or the impact on our reputation, our obligation is to maximise returns to our shareholders” (Kay, 1998) is the economic theory of profit maximization. Economists such as Freidman argue that the only responsibility of businesses is to make as much money as possible for shareholders (Friedmen, 1970). He argues that any other objective is not only unwise but could be akin to socialist actions and should have no place in the function of the business world (Friedmen, 1970). The recent bank collapses in the UK and US as well as large scale catastrophes such as the BP Deep Water Horizon gulf coast oil spill has brought increased focus on the macroeconomic impact such failures have on stakeholders. This has led many to question what the primary objective of businesses should be and what would offer the most benefit to both shareholders and stakeholders.

This paper will demonstrate that companies seeking profit as their primary objective do not necessarily become profitable. Furthermore shareholders will receive a greater benefit from a business that chooses to focus on creating a valuable company offering a more dynamic, robust and an inclusive approach in shaping a competitive strategy. And finally, given that profit maximization does not prescribe a path to profits, firms could elect to take an approach to aim for an acceptable level of profits which could allow businesses to objectively evaluate trade-offs between multiple objectives.

2 MARKET ENVIRONMENT AND THE PARADOX OF PROFIT MAXIMIZATION
A notable argument against profit maximization being the primary goal of a ...

... middle of paper ...

...14. BP views higher Oil Spill Costs as Profits Decline. [Online]
Available at: http://www.marketwatch.com/story/bp-views-higher-oil-spill-costs-as-profit-declines-2013-07-30
[Accessed 11 June 2014].
MECKLING, M. C. J. a. W. H., 1976. THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE. Journal of Financial Economics 3, Volume 3, pp. 305-360.
Shearn, I. T., 2014. ExxonMobil’s New Guinea Nightmare. [Online]
Available at: http://www.thenation.com/article/179618/exxonmobils-new-guinea-nightmare?page=0,3
[Accessed 09 June 2014].
Vickers, J., 1985. Delegation and the Theory of the Firm. The Economic Journal, pp. 138-147.
WERDIGIER, C. K. a. J., 2012. New York Times: BP Profits and Plans. [Online]
Available at: http://www.nytimes.com/2012/02/08/business/global/bp-reports-stronger-q4-earnings-in-2011.html?pagewanted=all
[Accessed 11 June 2014].

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