The student of governance economics should recognize from the outset that the unbridled pursuit of profit in any short-run setting could be detrimental to the earning of profit in any subsequent period (each future setting is of course its own short run), or even to the survival of the enterprise in the long run. A wise manager, one whose time horizon stretches beyond the immediate circumstances, upon occasion will see the need to sub-maximize with respect to a profit objective in the short run in the interest of both survival into the long run and the possibility of maximizing profits in future short runs. We thus acknowledge the rationality of deliberate non-maximizing behavior during any particular short-term time frame if justified by long run considerations.
One approach to analyzing profit in the long-run time frame is that adopted by Brigham, Pappas, and Hirschey in the various editions of their managerial economics texts (Managerial Economics and Fundamentals of Managerial Economics, Dryden Press, Chicago). The essential notion in this approach is that the manager of the firm attempts to maximize the value of the firm in the long run. This idea than can accommodate both profit maximization and deliberate non-maximization behavior in the sequence of short-runs that constitute the long-run. This decision perspective can be represented by the present value model introduced in previous equations: PV = R1/(1+i) + R2/(1+i)2 + … + Rn/(1+i)n.
The return, R, in each of the n short runs is the profit of the period that the manager may have attempted to maximize, but may have deliberately chosen not to maximize in the interest of outcomes in other short runs and the long run. The i in each of the denominator terms is the discount rate that reflects the remoteness of outcomes expected in the future time settings. The number, n, of future short runs that comprise the long run depends on the length of the manager’s time horizon. The essential long run behavioral premise is that the manager attempts to maximize the present value of the enterprise, PV, even if non-maximizing behavior is indulged in with respect to any of the short-run profits indicated by the R symbols.
A word of caution in regard to profit may be in order for the prospective business manager. Profit, after the fact an easily measurable quantity, may be much like the more nebulous and hard-to-measure state of happiness. Personal happiness is a condition that virtually all human beings (exceptions being masochists) aspire to attain. But it often appears that if happiness per se is taken to be the object of personal pursuit, the harder one tries to achieve happiness, the more elusive it becomes. Particularly, members of a materialistic society often appear to pursue happiness by acquiring things such as bigger and nicer homes, cars, boats, condos at the beach or chalets in the mountains, etc., only to discover that once the object of desire has finally been acquired, they are in fact no happier than they were before. We philosophize to suggest that the more effective way to attain happiness is to pursue and achieve some other personally satisfying or socially beneficial end. Happiness thus would be the by-product rather than the object of pursuit, and may be achievable in greater abundance by not pursuing it than by pursuing it.
The application of this consideration to the context of governance decision making is the possibility that if profit is the object of pursuit, it may turn out to be highly elusive. On the other hand, if the enterprise management takes some other more socially redeeming goal, e.g., to provide well-designed, functional, high-quality merchandise at the lowest possible price, a larger volume of profit may result as a by-product and a reward for successful entrepreneurship then could have been achieved had profit been the primary object of pursuit. Here, the role of profit is to serve as an indicator of success in pursuing some other goal, rather than as the object of pursuit itself. Indeed, some writers have suggested that if profit is the only object of pursuit, profit will be the main product, with poor-quality and high-priced merchandise the by-product. We can only conjecture that the seeming obsession of American corporate enterprise (and the academia that attempts to explain its behavior) with short-run profit is one of the factors in the declining competitiveness of American products on world markets.
Kanji Haitani offers the following indictment of an obsession with profit maximization: what is wrong, one may ask, with trying to maximize returns on corporate assets? Is it not, after all, what the corporate business is all about– maximizing the returns on stockholders’ equity? The answers to these questions hinge on the nature of control over assets. According to the “new management principles,” corporate assets are viewed not as machines but rather as financial assets–that is, as dollars and cents. This preoccupation with tight financial controls inevitably leads to a neglect of engineering and production–the factory floor and the assembly line. Emphasis tends to shift away from research and development, innovations in products and production processes, and development of better working relations among people, to short-term cost savings. Sacrificed in this process is the long-term competitive health and vigor of the enterprise.
This series is a lot of parts that I am quasi-using pieces of for a academic research paper stance so bear with me if it gets too esoteric. Or read the other governance articles available within the SharePoint Security category within the main site (available through the parent menu).