And profit maximizing in the mid or long term can sometimes require moves that reduce profit in the short term, such as R&D expenditure. Sometimes shareholders will seek a CEO that can solve a pending existential problem rather than maximize short-term profit.
Hmm but if we make businesses do something that is not the most short-term profitable choice, then the shareholders may not be able to extract maximum value!
Because maximizing ROI hurts their business long term? Only CEO's on a short stint of 2-3 years, with compensation based on stock market valuations go for maximizing ROI...
Reducing R&D investment is maximizing ROI in a way...
I wouldn't say that the problem is "maximizing profits" per se. The problem is the focus on "maximizing profits in the short term".
Which brings us to another problem: that predicting the effects of a business decision on profits in the short term is easy enough, while predicting it in the long term is much more difficult (even impossible, depending on how you define "predicting").
Simplifying, for the long term you need vision, leadership and entrepreneurs. For the short term you need formulas, management and MBAs. Quite often the two needs clash with each other.
A century ago there was a lack of management skills and applying them brought big results. Now we are probably (well) past the point of diminishing returns - even negative returns in the long run, and what is missing is vision, both at the corporate AND at the political level.
Successful and well-regarded companies will indeed arithmetically maximize profits if they're around in the long term while they are likely to see short term profiteers fail. Maximizing profits entails rather more than making a quick buck.
"Maximum profitability" still needs a timeframe to judge against. Maximum in the next quarter? Next year? Next decade? Maximizing in short term may harm or prohibit maximizing profits in long term, which would be just as bad (or worse) for shareholders.
Many shareholders (of medium to large-cap, publicly traded companies) seem to only be interested in short-term gains, not longer term. Some claim to be interested in longer-term profits and business sustainability, but they don't seem to act like it.
The market does not seem to be good at optimizing for long-term outcomes, bluntly.
I feel like one reason might be prioritizing short term profit over long term profit. I read a lot that it's about profit maximization - but I think that's not necessarily true. Facebook for example, is likely hurting itself right now and will become irrelevant in the long term and loose their business. Execs care about quarterly growth more than growth over the next few years.
Partly, the emphasis on extreme short term gains, in turn accentuated by short term trading (options) and HFTs disincentivizes any management actions that try to optimize for the long term.
The CEO will be under tremendous pressure if he/she tries to optimize for a 1 year timeframe (for example) as opposed to quarter-by-quarter. I wish boards can come up with a compensation structure for execs which optimizes for long term.
A CEO's/company's job is to maximize instantaneous shareholder value. Anything else is a waste of time, since investors are assumed to take long-term vs short-term risk preference into their own hands. The company is essentially a machine that investors can dip into and dip out of at any time, so it doesn't make sense to make decisions to move the stock price over a pre-planned certain time horizon. The reason companies invest in any long-term projects at all is because the net present value of those projects affects the stock price.
Producing a return doesn’t imply maximizing that return. Short-term profit maximization may actually be detrimental to long-term success. People also buy stocks because they believe in what the company does in terms of meaningfulness, and that meaningfulness tends to decline when trying to maximize profits.
It's only a recent notion that profit maximization is a company's sole purpose, and what that means differs a great deal based on whether you're trying to maximize short-term profits vs long-term. The longer term you get, the more you have to consider things that are beyond the scope of immediate profit maximization.
Historically there are many examples of companies that have considered their shareholders, employees, and communities as part of their duties. A famous example being Ford, but many companies consider a broader purpose beyond profits, and say so in their annual filings as to what types of investors they want and what to expect.
And to get technical, companies have a duty to their shareholders, not profits, because shareholders have the ability to fire the leadership of the company. It so happens that most shareholders primarily want profits, but this isn't universal.
You can also see examples of having legal responsibility be beyond just shareholders, such as in the bylaws added by B-corps which allow carve-outs for different bottom lines. There's a lot going on in the space.
I also wouldn't assume that if you fail to solely pursue profits, that you will therefore be signing your death sentence. That's both an assumption of efficient markets (they aren't), and that a given industry is always going to reward a business that seeks the most profit. Profit does help companies acquire or beat others, but the pursuit of profit is something that customers and shareholders may not always reward in a given industry.
It’s not about short term vs long term profit. Even when a company is far sighted enough to care about long term profit, every step they take in the short term is in furtherance of that goal.
Yet the timeline upon which they are to do this is unclear. Investors want to maximize for a decade, temporary holders want to maximize the quarter. The point Christensen makes is that short term maximization does not always lead to long term maximization. One thus must blame the shareholders themselves for not acting as investors, but rather as speculators, frequently not even participating in board elections, allowing the CEO to pack the board with allies, just waiting for a bump in the share price so that they can exit their position.
A lot of large problems tend to stem from picking short term strategies. A relentless focus on quarterly profits likely causes more issues than prioritizing investors though the two are related.
I always see this claim that companies have to try and maximize profits. Where does that originate? I see many companies like Costco take long term paths to sustainable growth and success without trying to wring every penny of profit out of the business. In my opinion customer satisfaction, quality products, and employee growth and retention are far more beneficial goals than short term profit taking.
I mean, as a shareholder, I think you'd be more concerned with the long term value of the company rather than short term results.
As an example, if the CEO has an earnings per share target which is only met using all spare capital for buybacks then that may be rational for the CEO, but I think that a lot of investors would prefer less buybacks if it supports longer (10+ years growth). But most CEO's will be gone by then, and their comp methods predispose them to take the short-term bump rather than invest for longer term gains.
Like, I agree that this is a difficult problem to solve, but we are definitely not near a local or global maximum so its probably worth trying radically different approaches.
That depends on where you're standing and what your timeframe is. Which, by itself, is enough to put the boot to the aforementioned pernicious lie: it's impossible to "maximize profit" for the shareholders, because the shareholders aren't unified in purpose.
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