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Why corporations should continue to think only about profit

Carl W. Smith, a former Professor of Economics North Carolina state University and a Bloomberg View columnist, toldwhy corporations need to continue to think only about profit.

Recently, the CEO of JPMorgan Chase & Co. James Dimon said he’s not going to put in the forefront increasing stock prices and encourages other corporate leaders to follow his example. In solidarity with them another 180 CEOs.

Together, they proposed the concept according to which companies like JPMorgan should be responsible not only to employees, customers and shareholders, but to all society. Sounds pretty progressive. And if the goal of diamon is to be progressive and thus improve the image of JPMorgan, it is a wise move.

If he really meant what he said, with it something not so. In the best case, the embodiment of the idea of the Daimon will be a waste of effort, time and money, at worst it will harm investors and employees, and society.

A new approach was painted in a one-page document “regulations on the order of the Corporation”, which was released by the nonprofit organization Business Roundtable. Described the concept to some extent runs counter to the famous statement by economist Milton Friedman that social responsibility needs to generate a profit. Although there is check what you said Nobel laureate.

In that essay, Friedman published in 1970, does not mention the value of the shares, he’s only talking about profit (or in the case of non — profit organizations- the amount of public goods).

The fact that corporate executives can (and they often do) increase the value of the shares using a variety of manipulation: end accounting, shifting the focus from tail risks, putting pressure on the financial media, manipulating with the estimates of revenue and overall making decisions that appear attractive in the short term, but conceal the long-term risks.

As he wrote to Friedman, such actions demonstrate that the leaders ignore the social responsibility, because it is often a question about the deception of those who trust companies with their money. Even a white lie is a crime against social responsibility.

As an example, we can recall General Electric and its legendary CEO Jack Welch. For 20 years he manipulated with data on earnings, end with accounts highly profitable division of GE Capital in the parent company. Because of this, it looked like profit grew at a moderate pace, although in reality performance is strongly bounced from quarter to quarter.

Shareholders appreciated a stable and predictable revenues from GE and the company became one of the most expensive American corporations. Media also took the bait and turned Welch into a star. Employees and customers of the Corporation again only won because of the stability allowed us to avoid sudden layoffs or raising prices.

Those affected, so is the society. Because Welch decided that American heavy industry can still generate stable and predictable income, but only if managers prudently invest in technology and adopt their stated management philosophy of the company.

But it wasn’t. Moreover, the faith in this belief gave rise to unjustified arrogance and turned so that competition from China is beginning to threaten American producers.

Friedman understood that a competitive market will give more information about the ideal investment, management strategies and the future of the economy as a whole. Much more than could give one, even a very talented CEO. But this is true only in the case where the market participants have reliable information on which to build.

Dimon, who, incidentally, is Chairman of the Board of Directors of the Business Roundtable, decided to oppose the overemphasis on the value of the shares to the detriment of long-term profits. In this respect, the initiative looks quite healthy and is not contrary to the warnings of Friedman.

But, it seems, in fact, Dimon was talking about something more ambitious. In his annual letter to shareholders, published in April, a top Manager listed several important social problems, including ineffective education, a significant workforce reduction and weak state funding. Outwardly, his assessment of the situation seems plausible, and perhaps it is even true.

But there is no reason to believe that he (like any other CEO) has a clear understanding of the issues beyond his professional activities.

As for education, here the Daimon complains that poor urban schools condemn children to poverty. “We know what to do,” says daymon and talks about the need to introduce vocational training and to connect corporations to the formation of school curricula.

But studies of the effectiveness of the training revealed quite controversial results: on the one hand, such education is beneficial to students, focused on certain disciplines, but on the other — complicates the adaptation to changes in the labour market.

It’s not about to criticize Daimon, whose concerns seems to be quite sincere. It is important to understand that an integrated approach to economic and social systems may be in conflict with all that usually helps to succeed in business.

Attempts to persuade managers to think more about the public welfare, and not about how to make a profit might seem like a good strategy. But this approach can lead to counterproductive public policy, the practice of blaming each other and the complete absence of any responsibility for the result. Milton Friedman realized this 50 years ago, but modern top-managers are for some reason ignored his discovery.

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