Corporate folly to chase ever-increasing profits

Apr 15 2010 by Andrew Hebden, The Journal

In the latest feature in our Reputation Matters series, Andrew Hebden hears how "profit at all costs" is not necessarily a recipe for good business.

IF “BONUS” has become a dirty word over the last two years, what has the financial crisis and consequent recession done to our understanding of “profit”?

The word is derived from the Latin meaning “to make progress”, but it could be argued that business managers’ obsession with achieving ever larger profits has had an anything but progressive impact on the reputation of either themselves or their companies.

It is a feature most obviously pertinent to the banking sector, but CBI director general Richard Lambert has suggested the wider business world is not immune from such criticism either.

In a recent keynote speech in London, he analysed in detail the changing motives of big business over recent years and condemned some organisations for becoming blinkered by an obsession with delivering the maximum possible returns to shareholders.

He singles out two organisations with links to the North East to illustrate his point.

In the case of Northern Rock, for example, he describes how it decided to cash in the equity that it had built up over generations in order to maximise value for its new shareholders.

This strategy was also followed by the likes of Bradford & Bingley and Halifax, both of which were subsumed by the financial crisis once their funding models were proved flawed.

Secondly, he cites the change of strategy of ICI, which for many years had seen its ultimate goal as delivering services to customers through the “responsible application of chemistry”.

Following a hostile takeover bid in 1991, however, it declared a new mission statement, which stated its intention to become the “industry leader in creating value for customers and shareholders”.

The subsequent programme of mergers and acquisitions transformed the face of ICI and, by 2007, it had ceased to be an independent company, with the all-too-familiar consequences for areas such as Teesside.