At which point they're more interested in maximizing the value of their shares, so they can do other things.
Therefore, they specifically leave their company in charge of profit maximizers.
It just takes a subsequent decade or so for the track record of decisions to finally make that unavoidably obvious to employees and the general public.
“ He believes businesses exist to serve society and contribute back to people in the community. That they make profits are merely a side effect and that somewhere along the line the side effect became the main goal.”
I suspect those downvoting gress don't understand what he's saying at all. His claim that "sometimes", thos ein charge aren't only thinking about profit maximization is excluding the case you're describing, where "those in charge" is some combination of investors and the actual execs (specifically, in your example, "those in charge" _are_ in favor of profit maximization).
There are a fair few examples in tech where founders have managed to hold on to a disproportionate amount of control and can much more accurately said to be fully "in charge", and those are the cases gress is claiming exists.
Unless it’s some utopian value-based family company, the goal of any company will ultimately become to maximize profit and/or growth because that is what shareholders want.
Public companies that don’t maximize profits will usually be targeted by activists who will replace the board and management with people who will max profits.
Say a company exists that doesn’t aggressively pursue profits. It makes $1/year and is worth $10 per share. If it started maxing profits it could make $2/year and be worth $20/share. An activist can come in and continue to pay well above market price, knowing that once he acquires enough shares, he’ll replace the board and raise the value of the shares.
The simple logic is that almost every public company will eventually evolve to maximize profit regardless of what other social mission they advertise. The sole exception is if a founder retains control of a very large proportion of voting stock.
The real problem is that "shareholders" stopped being people and started being large funds.
When the shareholders are people with a long-term stake in the company, like the founders, they can make long-term decisions or choose not to want the absolute most profit-maximizing thing because actually they're already pretty rich and maybe some things are more important.
When they're fund managers, they want quarterly profits because that's how they get their bonus, and their fund may not even own shares in that company in a year's time.
A corporation can set any goal the founders please. Making money need not be the dominant one. Obviously making enough to stay solvent helps with longevity.
Sorry I was out all day, so couldn't respond. I was reacting to the comparison of property management company to your putative "company management company" (which eventually gets revealed as a typical public company in your essay). That was the context in which I said companies have people, and people are not housing, and your objective of an "optimal" strategy doesn't hold water.
My broader point is that companies/people (including founders) have goals, dreams, aspirations ... maximizing return on investment may not even be the biggest goal. It is a late 20th century Milton Friedmanite doctrine (which classical libertarians actually disagree with) that the only purpose of a company ought to be to maximize shareholder wealth. I mention this because you refer to "optimal" strategy, but in this case, there is no such optimal strategy, because the goals are so extremely diverse and often mutually contradictory.
Interestingly, shareholder wealth maximization (which academics are so fond of) is a proposition most real world capitalists don't actually subscribe to - witness the resistance of Jerry Yang to being absorbed. It has little do with long term shareholder wealth maximization (though he has to pretend that it is, in order to keep the lawyers at bay), and everything to do with preserving what he perceives as a unique Yahoo culture from being decimated (somewhat justified, in my opinion), even at the cost of losing substantial value as a shareholder himself. There is no right or wrong in this (I think his cause is hopeless myself), just that this is how Jerry Yang, the capitalist part owner of Yahoo, operates.
What is the goal of a company? It ultimately boils down to a religious question of "Who am I? What do I want?" which each founder (and each employee) has to ask himself/herself. DHH laid out his answer, and I bet an awful lot of founders identify with it. You have your school of thought on this, which I bet a lot of founders identify with too. But yours is not any kind of optimal extreme of DHH.
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.
This is a modern invention. Corporate charters post Renaissance did not solely focus on making money for shareholders. Go take a look at the history of the Dutch East India Company for example.
> But once a company is public, then maximising profit is really the only goal.
You may want to research the growing trend of measuring companies against their impact, sustainability, etc., as well as increasingly popular indices that track companies based on that.
The statement 'maximizing shareholders value' is meaningless without the timeframe. The correct phrasing is to 'maximize shareholders value in the long term'. The 'long term' bit is crucial, and it is not reflected in today's management incentives.
The choice that managers of public companies are facing is the well known "Consume vs. Invest". Or, in the terms of an evolutionary fitness landscape, "Exploit vs. explore".
If a manager wants to maximize his next quarter's earnings, he could stop new product development, shut down customer service and equipment maintenance departments and sell, sell, sell. He could have a short short-term spike in profitability, but in the long term the company won't survive. He has exploited his current position but has failed to explore, to look to the new opportunities and threats, and to provide for the future.
(Note: the manager could also buy a portfolio of high-yielding/high risk securities hoping that the crash will not happen before his next bonus is due. This is the same thing -- maximising short-term gains at the expense of the long-term prospects of the company).
The manager could also overexplore, that is to overinvest in customer and product development, purchase the newest equipment and end up with a croud of excited customers and an exciting new technology/product, but no liquidity left in the bank to live to see it taking over the market.
"Maximizing shareholders value" idea got a bad press, because it has become associated with the 'exploit' approach. Managers endanger the long-term prospects of the company because they can be paid well for achiving relatively short-term goals.
But the working definition should be "Maximizing shareholders value in the long term"
Let's make the law that the managers' options can only be excersized after 10 years. That'll do the trick.
> Are there examples of companies that said “this is enough money” and stopped concentrating on having ever increasing profits every quarter to satisfy VC or stock investors?
Yes, except they're most often private companies and not publicly traded. Many of these inspirational companies are family owned and operated. Eventually, however, someone will get in charge of the company who isn't satisfied with "good enough" and they'll take the company public or accept investors and choose to place profit over concerns like customer satisfaction and employee well being. In other words, eventually someone will decide, "My pocket book is more important than the community I live in."
If you want inspiration, look at the Chelsea Milling Company, makers of Jiffy mix. It's nearly 90 years old, has approximately 65 percent of the pre-mixed cornbread market in the United States, and has never had a marketing department and does not advertise.
> Very large companies, particularly public but not limited to such, start drifting toward the cheapest product they can get away with while maximizing profit. That's their obligation to share holders after all.
This is largely a myth. Corporate executives have an obligation to shareholders, but that obligation is not to maximize quarterly profits. Short term profit maximization at all costs is generally not in the interests of shareholders. If you have a reputation for selling a quality product you can capitalize on it in the short term by selling a junk product at quality prices and huge profit margins, but in any kind of a competitive market that opens you up to exactly what you would expect. Someone else comes in with a real quality product at the same price and you lose all your business to them.
The reason corporate executives do things like that isn't because they're satisfying their obligation to the shareholders -- they're doing quite the opposite. But they do it anyway because of how they're compensated. Big bonus at the end of the year if profits are up; no repercussions if it tanks the company by the end of the decade because by then you're working somewhere else.
It's important to make the distinction because the shareholders are the ones who have the power to do something about it. "Obligation to the shareholders" makes it sound like the shareholders are the beneficiaries, but they're just as much victims as the customers. Making that mistake is how they become the victims.
> Is the goal to maximize profits this quarter, or shareholder value (share price) this quarter, or over the course of a decade, or a century, or a millennium? Merely changing the answer over those four options would entail massive changes in management goals and choices.
This is the absolutely crucial core question that gets skipped over so, so often.
`why rock the boat` is spot on! Most large organisations eventually go into a mode of maximising the free cash flow for shareholders. I guess more or less this is by design. Investors, Founders and early employees take risks in short run for the rewards in the long run. A company cannot keep saying the promised green land is delayed by another 5 years.
Some criticism of CEO might be warranted. But remember that CEO compensations tied to profit after tax. I guess the only way to get back old Google is to start one!
Once number of employees hits a certain inflection point (roughly when one can't identify everyone with name), the focus for a lot of people is to keep their manager happy. Because any other goal is too abstract. Safi Bahcall's book Loonshots had some nice discussions on this point.
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.
At which point they're more interested in maximizing the value of their shares, so they can do other things.
Therefore, they specifically leave their company in charge of profit maximizers.
It just takes a subsequent decade or so for the track record of decisions to finally make that unavoidably obvious to employees and the general public.
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