How Much Profit Is Enough?

There is an enormous noise around short-term financial metrics of listed companies. But do the directors of such companies have a legal duty to maximise short term profit for the benefit of their shareholders?

US and UK companies, seemingly at the behest of The City of London and Wall Street, appear to believe that management should aim to increase profit every year. Public company financing is of course complex but really, how much profit is ‘enough’ in a given year?

Over the last six months, American tech firms share prices have crashed and an economic slowdown has taken hold. Since July, Wall Street analysts and commentators have expressed disappointment at these companies’ slowing growth rates (so still growing then). Yet looking at their most recent financial statements (12 months revenue to 30^th September 2022 in billions of dollars), none of the big five seem in any existential financial danger:

Heaven forfend that Microsoft were ‘only’ to make $100bn next year.

In the UK and the United States, there is nothing in law to suggest business should put its shareholders ahead of all other stakeholders. Under Section 172 of the UK’s 2006 Companies Act, company directors merely have a legal duty to promote the success of their company. Specifically, directors are required “to have regard to:

• the likely consequences of any decision in the long term;
• the interests of the company’s employees;
• the need to foster the company’s business relationships with suppliers, customers and others;
• the impact of the company’s operations on the community and the environment;
• the desirability of the company maintaining a reputation for high standards of business conduct; and
• the need to act fairly as between members of the company.”

Nothing here about a legal duty to maximise profit. Promoting the success of the company clearly implies a duty to generate profit (or at least a positive cash flow) but it says nothing about ‘maximising it’ (nor by the way, of finding inventive ways to minimise tax).

Companies have evolved to identify a sense of purpose that includes social and environmental factors. But much of it seems to take place as an adjunct to the central purpose of maximising profit and doing so in the short term.

Maybe directors are afraid that shareholders will band together to fire them (an extremely rare event in the FTSE100). But maybe they can instead look to debate and communicate a different approach. It’s time to find a better way of communicating why companies do and should make profit – and be enabled to take a longer term view. Communication teams can play their part in that too. Not just as the expert communicators in organisations tasked with ensuring that stories and messages are compelling and reach the right audiences. But if truly integrated into their organisation, and given their external and internal facing role, comms are a company’s eyes, ears and conscience and therefore well placed to advocate for what an organisation can be and can achieve.