Why Corporations Must Profit Maximize

With the power that corporations have, it is no wonder that they are a talking point on ATS. However, I believe very few people understand why corporation have to profit maximise. If you have an interest in corporations, or capitalism, then this thread will provide some very useful information for you.

It is a common belief that corporations only exist to profit maximize. This is not necessarily the case. It's certainly true of corporation in the USA and UK as they operate in a neo-liberal economy, however are you aware of other forms of capitalism?

In other countries, such as Japan and Germany, corporations act more to serve other stake holder groups, not just shareholders. Employees have a much greater say in the running of the corporations, and other factors contribute towards an economy based on more stability. It is probable that most ATS users aren't familiar with this side of capitalism because they are English speaking, and much more likely to live in the UK or USA.

So why is profit maximization so important for UK and USA companies? After all, this pressure is credited for a lot of problems for the world. If we can identify why corporations feel such pressure in the UK and USA, perhaps we can address these underlying issues, and take steps towards a better world.

In Germany, there is more likely to be a shareholder that has one large part of the shares. This is good in one sense, because it means that:

1) Management's actions and strategy are more likely to be monitored and scrutinized
2) Having a person with such an interest in the corporation means they are more likely to be in it for the long term. This means that they can make investment, rather than feel the pressure to deliver as much profit now, and now only.
3) If the stock market, or the company doesn't perform well, the stock price is more likely to be maintained because there is less liquidity in the shares market.

This differs in the UK & USA

1) Ownership concentration is very low. This means that a lot of people own shares, and when they do, they don't own very much. The consequences are that the incentive for a shareholder to spend time and money on supervising the company isn't worth it. This leaves management much stronger.
2) The biggest shareholder class, i.e. the type of people that hold shares in UK & USA are institutions. This is called institutional shareholding. You may have a private pension? When you make payments, these are invested in the stock market. The problem with this is, that rarely do institutions that make these investments rarely have anything to do with monitoring the management. All the fund managers are concerned for, is the profit that they make for their clients. After all, they just want to give the best pensions to their clients.


These two factors means that in the UK and USA, corporations have to return short term profits for their shareholders. The shareholders are their number one priority. Failure to develop good profits will see their share price drop, and this means they could be taken over.

You can see that there is little stability in the UK & USA systems. Neither is there much legal framework. For instance, employees in Germany are seen more of a fixed cost, an investment. They even have seats on (one of the two) boards, and are valued in the running of the company. Compare this to the UK & USA. Employees are the first to go when times get rough. Unions and work councils are weak. They are not considered.

This is why corporations have to profit maximize, and this is why the incentive to act immorally is in place. If we could change the economy, we could change the behaviour of corporations. Hard yes? Do I have the answer? No, but it's worth of discussion.

reply to post by bowdeni


But that's called "socialism" and it scares the conservative, God-fearing, rich southern half of this country.

Basically, don't fix what isn't broken to them - well the top of their party - the bottom ladder is too dumb to understand what is going on. But that is how it is for all parties.

You have liberals yelling all sorts of ideas out that they have no idea why they support. You have conservatives freaking out about "socialism", not having a clue what they are afraid of.

The fact is, we desperately need to socialize SOME parts of the way our nation does business. People do not realize that capitalism can exist within socialism (and has been doing so for some time now).

I disagree that it's called socialism. You may a good point though referring to it. The German system is referred to as 'insider systems'.

Socialism I think is more at a governmental level. Through taxation, wealth is redistributed. However, in the system of corporate governance that I speak of, wealth isn't distributed necessarily. The representation of different stakeholder group's interest and redistribution of wealth are far different things.

The reason why the topic of socialism is a good note to make is that it cultural attitudes of different nations, that gave rise to different systems of corporate governance may be the same contributing cause to socialism occurring.

Thank you for reading and replying to my thread.