A friend, who’s the MD of a tech company, is in the good habit of engaging regularly with his staff. In collecting feedback from a recent staff meeting, ready for the next, he saw that several senior engineers wanted to know what was meant by profit, and why did the company seem to care so much about it.
That they asked these questions was no surprise as most people don’t seem to know (and still less care) much about business. What disturbed me more was that my friend felt that he had to answer the question indirectly. The questions themselves reveal an ignorance of basic business reality, and his approach showed that he sensed that profit is a rather suspect motivation.
The audience had all:
- been through a decade of compulsory education
- elected to spend a further five or more years in full-time study
- obtained a degree
- embarked as engineers in a very sophisticated business.
That they could do all this and still know little about the nuts and bolts of a capitalist society could explain why the UK has been in relative economic decline throughout my lifetime.
There are two main reasons anyone would start a business instead of just getting a job, and profit is at the root of one of them.
§ Reason 1. Go your own way rather than someone else’s. Then, assuming you succeed, you get the warm fuzzy feeling that comes from everything associated with success, including having created a lot of jobs for other people.
§ Reason 2. Have a stab at getting more wealthy than you ever could as an employee. Bill Gates did not start Microsoft so he could afford to fix problems in Africa. First he got wealthy, then – following a long line of philanthropists before him – he figured out a good use for the money. And yes, he gets to decide where and when it’s spent.
The business path is lined with risks. If you start a business and it consistently makes losses, eventually you lose your shirt! (I.e. your house and/or your family and/or your reputation and/or your self-esteem etc…)
Thus a business must make a profit and, when it does, there are choices to be made. Some of the profits:
- go into growing the business (e.g. R&D, new equipment, additional sales staff)
- are held in reserve
- are used for rewarding and motivating people in the here and now, including the business owners.
Who gets to decide where the balance is struck? The owners (see Reason 1).
Most of this applies mainly to privately held companies. After a company gives up its independence (e.g. by floating, or seeking venture capital) then the strategic decisions must be endorsed by the majority of the shareholders and cannot simply be taken by the original owner(s). How that works cannot be described so simplistically, but the principles involved remain essentially the same.
I believe that the core curriculum in our schools should place far greater emphasis on basic business education, so that everyone who winds up in a company’s engine-room at least understands why they (and it) are there.
Beyond that, when you get into how capitalism works, you’re getting into the realm of politics. That – rather like religion – involves beliefs and emotions, but before anyone goes too far down any particular path, it can surely only be a good thing if they are armed with some basic facts.
That the maintenance and protection of our society’s standard of living puts us at odds with other societies seems to be axiomatic (although most people seem never to have considered the idea). How we go about these economic battles is decided by politics and philosophy, but surely the troops must understand the terrain upon which they’re struggling. Clearly they cannot, so long as they don’t know why companies need to make profits.