Hermann Simon - No Company Ever Went Broke Turning a Profit

Im for profit maximization!

If you want to infuriate large portions of society and turn people against you, uttering that sentence is a very effective way to do it.

Few phrases are more explosively controversial than profit maximization. Some people even go berserk when they hear the word profit. During a large demonstration against the German industrial giant Bayer AG at its annual shareholders meeting on April 26, 2019, I became involved in a discussion with the protesters. When I mentioned that a company needs to earn profits in order to survive, I was aggressively taunted and berated.

This kind of aggressive reaction seems to be universal. The maximization of profitor perhaps worse, the maximization of shareholder valueis considered by many observers to be the root of all economic evils. Of course, most rank-and-file employees oppose profit maximization. But beyond that, it doesnt matter whether the listeners are teachers, doctors, lawyers, or civil servants, not to mention the critics among political scientists, sociologists, or philosophers. There isnt even general consensus in favor of the profit concept among businesspeople.

But in its essence, profit maximization is simply the antithesis of waste. One could also equate profit maximization with waste minimization. Critics claim that the maximization of profit and shareholder value is responsible for the exploitation of resources and workers, for disparities in income and assets, for the offshoring of jobs to low-wage countries, for the relocation of corporate headquarters to tax havens, and many other abuses.

These criticisms stand in stark contrast to the theoretical groundwork of microeconomics. If a company doesnt strive to achieve the highest possible profit, it faces the risk that its competition will wipe it out. To co-opt the mantra from the scientific community, the ultimate law of business is profit or perish.

Profit is the reward for undertaking business risks. Profit is what is left over after a company meets all of its contractual obligations to its employees, suppliers, banks, other creditors, and the various national, state, and local governments that levy taxes. Profit is thus a residual that belongs exclusively to the companys owners. As soon as the company has met all of its obligations to outside parties, no one else can make any additional claims.

This simple and incontrovertible definition of profit is by no means generally accepted. During his tenure as French president, Nicolas Sarkozy declared that it is unfair that shareholders and owners get to keep all of a firm's profit, and that it would be more fair for company profits to be divided into three equal parts: one for the shareholders, one for employees, and one for re-investment into the company. In Sarkozys view, it is unacceptable that the owners of a company claim all of the profits for themselves. But isnt that tantamount to saying that it is unacceptable for employees to keep their net wages for themselves and allow no other parties to lay claim to their money? Nonetheless, populist statements such as Sarkozys enjoy broad public appeal.