Leaders talk about their fiduciary responsibility to maximize profits for the business owners (shareholders). This is largely true, but in my opinion, incorrect.
From my point of view, their fiduciary responsibility is to maximize profits based on their clearly defined business strategy. This sounds the same but it isn’t. Not even close. Let’s consider some examples. (But before we do, I need to offer the full disclosure that my understanding of general business strategy far exceeds my specific investment knowledge. I’m approaching this from a business philosophy perspective NOT a business law perspective.)
A conservative investment company with a strategy that prizes long-term soundness above rapid growth has a responsibility to make different decisions and take different actions than an investment company that is trying to grow as fast as possible. I’m not suggesting that one strategy is better than the other – both have their place – but a leader that went for the quick buck at the expense of the long-term for the company seeking soundness would be just as remiss as a leader at the high-growth company who delayed growth when there were still funds available for expansion.
It was years before Amazon.com made a profit because they were aggressively seeking market share to position themselves for maximum profits in the future. Does this mean that top leadership was liable to shareholders. No. They had a clearly defined strategy and aggressively pursued it. In the early days, no one bought shares because of the steady consistent profits Amazon was making (it wasn’t). Rather, they invested voluntarily and eagerly because of the company’s future profit potential based on their strategy.
Some people invest in utility companies. It’s an unsexy, flannel nightgown of investments, BUT people do it because utilities tend to turn consistent and stable profits year after year. Investors aren’t expecting (or even wanting) maximum profits this quarter. They are seeking reasonable profits from now through eternity.
Again, companies have a fiduciary responsibility to maximize profits based on their clearly defined business strategy. The problems come when they: 1) don’t have a well-defined strategy; or 2) try to maximize both short and long term profits. Without a well-defined strategy they will just do a bunch of stuff and hope they are profitable. This is like trying to lose weight without any particular ideas about, say, nutrition and exercise. Trying to maximize both short and long term profits is like going on a crash diet for the rest of your life.
Different investors have different investment strategies (gasp!) and are investing for different outcomes (double gasp!). No company has the responsibility to be all things to all investors – it’s folly to attempt it. Every company has the responsibility to be clear about their strategy and stick to it so that investors can choose and invest in the companies that best fit their needs.
Reblogged this on fool with a plan and commented:
from the archives: you job is to maximize profits… sorta