Milton Friedman’s 1970 article in New York Times said: “Social responsibility of a business is to increase its profits” He was mentioning the sole social responsibility of business being to increase its profits through using its resources and staying within the rules of the game. What are the rules of the game?
Firms supply goods and services with the objective of maximising shareholders’ wealth. And they will have the sort of risks associated to this objective, such as losing customer satisfaction and therefore revenue; threat of new entries, substitutes; cost structure etc. Planning is needed for short, medium and long term in order to control the risks.
It is very disappointing for most of us to see very big companies hitting the wall, giving the impression they have been doing business without understanding their business environment and without forecasting the next three to six months. Three names coming immediately to my mind are:
AIG - Eighteenth largest company in the world with 116,000 employees - swallowed $170bn of the US bailout funds so far, bringing the benefits of its survival under question.
General Motors – Second largest automaker in the world with 266,000 employees - New CEO is talking about Chapter 11 bankruptcy by 1 June 2009.
RBS –With 141,000 employees and 700 branches in UK - acquired ABN AMRO with a consortium on 9th October 2007 at record price of €70billion and spread contagious subprime mortgage assets. It still can not recover, announcing 9,000 more job cuts on Tuesday, the 7th April.
Current economic environment is witnessing new ones such as Lloyds TSB’s merger with HBOS. It doesn’t appear to be a digestible transaction as Lloyds TSB has fallen from top four ranks in terms of market capitalization in 1999 to disappearing from top fifty in 2009. Share price has fallen from 860p in 1999 to 79.50p in 2009.
I agree on the importance of regulation to avoid such big, macro failures happening again but also doubt if you can really control every firm. Firms should be able to appoint the right senior management, who can lead their companies. At least the big names like AIG, General Motors, and RBS!
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