The Perils of Focusing on Profit

Over the past 10 years, corporate America has cut back on jobs and reduced expenses in an effort to do more with less. Some economic observers believe that today’s emphasis on short-term profits and shareholder value has resulted in additional negative impacts. For example, overworked and disenfranchised employees, job and wage stagnation, smaller profit margins and a lack of innovation.

One analyst says corporate share prices would be more sustainable if companies invested more in real goods and services and less on “financial shenanigans,” such as share buybacks and stock price manipulation.

The life cycle of the corporation is changing due to many factors, including globalization, deregulation and new technology. Unfortunately, management practices have not evolved quite so fast, so many companies are trying to manage these new disrupting factors using practices of the past, which are not nearly as effective in today’s market.

Over the past 50 years, the following factors may have resulted from too much focus on corporate profits:

  • Real returns of American companies are 75 percent less than they were in 1965
  • Real economic growth has been steadily slowing over the last 50 years
  • The life expectancy of a large firm has declined from 75 years to only 10 years
  • The financial sector alone represents 7% of the U.S. economy, 25% of corporate profits and yet only 4% of jobs

However, there are companies that have adapted operations to the new world market, exhibiting more agility, innovation and creativity than ever before. Today’s “Creative Economy” is designed to deliver ongoing value to customers, which inevitably should benefit shareholders. In fact, corporate sustainability may depend on how well companies integrate both new technology and new management practices, including financial transparency, consumer-driven products and services, and a knowledgeable, engaged and scalable workforce. In other words, focus more on the task — not the reward.

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