By: Joceline
Cristie Gasmen-Mangapit
Abstract
Businesses and multinational companies aim to maximize
profit in order to expand their industries. However, a number of businesses are
making profit unethically. A firm comes into
existence with different goals. These goals may either be profit maximization
or welfare maximization. A profit-oriented firm will adopt measures that are
consistent with their aim and the same will happen to the welfare-maximizing
firms who will adopt measures that will maximize the welfare for individuals.
Some of the profit-oriented firms tend to make large profits in the short-term
unethically without thinking its long-term negative impact to the organization.
These organization and/or individuals who reap maximum benefits and profits in
the short-term, practices unethical behavior in the organization. The following
are the unethical profit maximization practices: manipulation and exploitation
of employees; unfair competitive practices; bending the company rules; lack of
transparency; unethical treatments to suppliers and customers; deceptive sales
practices; and harming the environment.
Moreover, the consequences of those
bad ethical practices in profit-making are: misappropriation of assets; civil
and criminal penalties; loss of reputation; and loss of human capital. These
consequences may result to foreclosure or bankruptcy of the business if not
well-managed and addressed. In order for the organization to be able to manage
the risk of possible unethical practices in profit-making of their businesses,
they should consider the following: customer loyalty; employee relations; avoid
negative legal consequences; favorable publicity; and access to capital.
In addition, businesses will do everything possible
to ensure there is proper market capitalization, and the available resources
are being utilized in the desired manner in order to gain more profit. In
financial management, profit maximization is the primary goal of manager in order
to fulfill short-term needs but we need also to consider long-term impacts and
possibilities. Thus, there is a need for us to strengthen the ethical decisions
we make in order to gain profit without making bad ethical practices like other
successful companies have done.
Keywords: Profit, ethics, profit maximization
Introduction
The main
objective, and indeed, the primary motivation of a business come from the need
to make profits. This is true, of course, unless one is running a non-profit
organization. In which case, the company must still make some profit, and it
could be in terms of the social health of the society they are serving. This
means no matter what, every business must have a goal, which upon achieving,
the organization can count a profit.
A profit
calculated as what remains after expenses and cost of production has been
deducted from the overall income. Expenses, in this case, include taxes. For
the case of a non-profit organization, they don’t pay taxes, and they don’t
make monetary profits, but their success is seen through the results of their
input. If, for instance, an organization is created to feed a starving
community, they profit when the community receives all the necessary items for
survival. Their focus is not on gaining monetary value but in creating a more
conducive environment for human existence.
Whatever the
case, the organization has to reap maximum benefits. And many factors determine
how a company reaches these objectives. For a start, it will depend on the size
of the company, the industry, the profit margin, and the volume of sales,
factors that vary from business to business. Business owners and managers,
regardless of their individual situations, share the desire to utilize the
available resources with optimum efficiency. They all strive to improve their
business’ performance. And for this to happen, there are two important
competing methods: profit maximization and revenue maximization.
Profit
maximizers include strategies that companies following to build more net income
as much as possible utilizing the resources and market share currently
available. In other words, the company will use every weapon in their arsenal
to reap as many profits as possible from an investment. To many, it is the goal of every
company to make profits. It is logical. However, if a company focuses only on
profit maximization, chances are they will lose on the opportunities that don’t
offer and immediate financial gain. They may, for instance, fail to establish a
good relationship with consumers, which is critical for long-term benefits.
According to
Horton (2014), there are number of factors that
play a part in making a business profitable, including expert management teams,
dedicated and productive employees, consistent consumer demand, and a careful
watch over the bottom line. In addition to these well-known business practices,
companies that implement a management philosophy that relies heavily on
business ethics are proven to be more successful than those that operate in an
unethical manner. Although it may not be the first variable considered in
analyzing the profits of a company, ethics in profit-making is an equally important catalyst to the success
of a company.
The company's ultimate goal to increase profits may
lead some businesses to profit-motivation conflicts. While many companies grow
profits ethically, others maximize profits unethically via deceptive marketing,
slashing employee expenses, lowering product quality or impacting the
environment negatively. Unethical business practices can lead to smeared public
relations and a loss of trust and respect on the part of the consumer
(Chron.com, 2020).
This paper will give a stringent analysis of the various unethical practices
in making profit and the effects that they have on the organization and society.
The paper will bring in ideas, information, and examples of unethical business
practices in major organizations.
Profit defined
Profit describes the financial benefit realized when revenue
generated from a business activity exceeds the expenses, costs, and taxes involved
in sustaining the activity in question. Any profits earned funnel back to
business owners, who choose to either pocket the cash or reinvest it back into
the business. Profit is calculated as total revenue less total
expenses.
Profit
is the money a business pulls in after accounting for all expenses. Whether
it's a lemonade stand or a publicly-traded multinational company, the primary
goal of any business is to earn money, therefore a business performance is
based on profitability, in its various forms.
Some
analysts are interested in top-line profitability, whereas others are
interested in profitability before taxes and other expenses. Still others are
only concerned with profitability after all expenses have been paid.
The
three major types of profit are gross profit, operating profit, and net
profit--all of which can be found on the income statement. Each profit type
gives analysts more information about a company's performance, especially when
it's compared to other competitors and time periods (Kenton, 2020).
Profit Maximization Defined
In economics, every company, small or
large, seeks to make a profit. They will do everything possible to ensure there
is proper market capitalization, and the available resources are being utilized
in the desired manner. In this case, profit maximization can be defined in
terms of short-run or long-run processes through which a firm sets its price,
input, and output levels that bring in the highest profits. And mainstream view
normal theorizes the firm as profit maximization.
Understanding profit maximization may
not be as straightforward as we may have imagined. It is a subject that takes
different forms with a number of perspectives. And this is why there are many
approaches that one can use to determine this issue. For instance, considering
that profit is equal to revenue less cost, the business can draw a graph, where
revenue and cost variable stand as the extent of output than produces a maximum
difference.
Or, taking that there are known
specific functional forms for the output of revenue and cost, one can apply
calculus to bring out maximum profits based on how far the output goes. The
third approach includes using equations of marginal revenue and marginal cost;
in which case, the first order for maximization is equal to the two variables,
if marginal revenue and minimal costs are available as functions where output
is involved.
Furthermore, Another method would
include the firm having input cost functions to determine the price of getting
any amount of outputs, as opposed to a function allocation production for each
possible output level. In this case, the function works hand in hand with
production functions, and the reveal the output results are a combination of
the output process. Here, a person can maximize profit in relation to input
using calculus. The input cost and production functions are used to determine
the outcome.
We have already seen how profit
maximizers differ from revenue maximizers in the previous section. If a firm
operates in a greatly competitive market, its revenue will be equal to its
market price multiplied by the number of products made and sold. But in the
case of a monopolist market, the level of output is calculated simultaneously
with the selling price. In this case, the revenue function considers that high
output levels demand reduced prices for consumers to get the products.
Limitations of Profit Maximization
Long-Term Sustainable Goals. Profit maximization might be one of
the top goals of financial management but this type of practice doesn’t imply
that short-term profit increases will help produce long-term sustainable goals
for the company. While profit maximization in financial management has the
potential to bring in extra money in the short-term, long-term earning could be
drastically diminished.
On
the Other hand, lowering production quality for the sake of increased profits
will hurt your brand, upset customers, and allow competitors to steal your
business. For instance, if your organization decides to unload all available
inventory to a demanding client, you’re only alienating loyal clients who would
have spent more over time. When it comes to profit maximization in financial
management, it’s important to understand if your short-term profit maximization
efforts will lead to long-term sustainable goals.
Product
Quality. Another
limitation of profit maximization in financial management is the potential to
decrease product quality. Earning higher profits might be one of the goals of
financial management but cutting corners, using lower quality materials, and
sacrificing company values to earn a higher profit will affect the reputation
of the company and potentially lose customers.
Furthermore,
it’s easy to force our employees to work harder without any pay raises or use
environmentally damaging products to cut corners and maximize profits but
cutting corners is the best way to ruin your brand reputation and cause the company to fail.
While profit maximization is a major goal of financial management, it’s best to
not cut corners or compromise company values to earn a few extra bucks that
could cost you your customers and business.
Employee
Training. A
great way to reach profit
maximization in financial management is
to cut employee training or the research and development budget. While this
will reduce operating expenses, and maximize short-term profits, it will not
help the company reach any long-term sustainable goals and could even
potentially cause employees harm. Employee training is essential for any
company looking to maintain long-term profits while creating happy employees.
Without a satisfied workforce, your company will fail and any corners you cut
to maximize profits will not have been worth it.
In
addition, there are many goals of financial
management with
profit maximization being a top priority. It’s important to understand, though,
that only focusing on maximizing profits will create business turmoil and could
do drastic harm to employees, customers, and the business as a whole. The best
way to successfully reach profit maximization in financial management is to
focus more on company integrity and long-term, sustainable goals. Short-term
goals are a great way to meet long-term goals, but only if they have the
company’s future in mind (Hamilton, 2018).
Unethical Practices in Making Profit
Manipulation and Exploitation of Employees. Employees are
very essential stakeholders in any company because they determine the level of
productivity of the company. However, some managers take advantage of
defenseless employees to exploit them in one way or another. The vulnerable
employees have no choice but to be submissive.
Some unethical practices that harm the employers include low
wages and unsafe working environment. Some employers have made it a routine to
have their private cloakrooms while the other employees use unsanitary
cloakrooms. Essentially, any practices that make the employees uncomfortable in
the work place are unethical, as they do not comply with the federal working
standards.
Unfair Competitive Practices. All business people aim at gaining a
competitive advantage over their competitors to win the trust of many
customers. Companies would spend millions of dollars to employ strategies that
would enable them to enhance their sales. However, there are those business
people who opt to employ unfair and unethical business practices that result
into unfair competitive practices.
Bending the Company Rules. In many companies, employees are obliged
to submit to their supervisors and managers. They have to obey the authority
and perform all their commands. In fact, junior employees have a tendency of
alleging to their supervisors in every aspect. Therefore, regardless of how
wrong an instruction is, the junior employees are sometimes obliged to abide by
the rules of their supervisors and managers.
It is noteworthy that performing unethical practices in the work
environment is wrong regardless of where the orders came from. Some junior
employees are obliged to withhold information regarding the unethical practices
of their bosses for the fear of intimidation, which that is also unethical.
Lack of Transparency. Companies are always obliged to portray transparency in all
their activities. However, cases have occurred where company executives hide
some controversial information from the most important stakeholders of the
company. Some companies will present false statements to the investors to
clarify why they cannot afford to pay the dividends.
Whenever the investors resolve to have the company investigated,
the company managers and other executives resist the investigations. The
executives of some companies have taken advantage of humble investors to
mishandle their propriety. Some executives are even sued for creating false
financial statements to deceive the investors.
Moreover, company executives evade form paying the taxes using
the false statements. Cases have occurred where auditors are bribed to certify
false financial statements so that powerful companies can evade from paying the
rightful amounts of taxes to the government.
Unethical Treatments to Suppliers and Customers. Every business must have
suppliers of raw materials and customers who purchase their finished products.
Essentially, the relationship between the company, its suppliers, and its
customers ought to have mutual benefits. However, some businesses are too
greedy to allow the other parties to enjoy some good profits.
Some companies pay their suppliers so low, such that the
suppliers lack the value of the efforts that they input in their work. As if
that is not enough, some companies go ahead to produce low quality or unsafe
products.
In case the company faces strict regulations in the country of
production, the unsafe products are shipped into third world nations. This very
sad incidence affects innocent individuals who purchase such products
unknowingly. Some companies are used to offering the intermediaries with
kickbacks so that they can continue purchasing their products.
Deceptive Sales Practices. Companies’ sales managers are obligated to
try all possible ways of making massive sales. However, that does not mean that
the companies should involve themselves in deceptive sales practices. In the
GlaxoSmithKline case, the company promoted its unapproved antidepressants for
human consumption (Thomas & Schmidt, 2012).
The
unethical business practice clearly indicated that the executives of the
company were extremely selfish. No amount of fine can compensate for the
unethical practice of selling unapproved drugs to humans. Further, the company
distorted the data of a diabetic drug that recorded very high sales, and it
marketed other drugs improperly.
Once consumers know that a company employs
unethical business practice in their operations, the effects are inerasable. A
company like GlaxoSmithKline that has had some good reputation for many years
can have its brand name torn down because of a single unethical incident.
Therefore, companies that are practicing deceptive and unethical sales
practices should know that their practices would tore the company down in a
matter of seconds.
Harming the Environment. All companies ought to
adhere to the pollution norms set by the government. Moreover, the companies
should adhere to the corporate social responsibility policy that obliges
companies to honor the surrounding environment and the people in it. However,
cases have occurred where companies are involved in unethical behaviors that
harm the environment.
Some companies release chemical pollutants into the air or into
water bodies. Such companies do not care about the repercussions of their ill
deeds. The companies release toxics that harm the lives of the living things
around their locality.
They evade the expenses that are associated with the treatment
of toxics before they are released into the environment. This sad incidence
clearly indicates that the greedy executives of such companies care less about
those individuals and other living things that are affected in one way or
another (Ivy.Panda, 2019).
Consequences of Bad Ethical Practices in Profit-Making
According to Freedman (2018), Unethical practices in
profit-making motivated by bonus incentives, pressure to obtain financing or a
desire to appear successful are not always illegal, but they almost always have
an adverse effect on your business. The common theme of these practices is that
they sacrifice the short-term gain of apparent financial viability for
long-term negative consequences.
Misappropriation
of Assets. A business owner might think he's only
using his own assets when he takes business goods for personal use, such as a
ream of copy paper or a pizza at the end of the night, but an employee might
see things differently. The employee may see the use or appropriation of
business goods for personal needs as a benefit of being an employee. Before
long, the employee who witnessed the owner's borrowing has become a borrower
himself and others are seeing this employee's behavior as acceptable.
Civil
and Criminal Penalties. If company management is unethical to
the point of financial fraud, the company could be subject to civil and
criminal penalties. For publicly traded companies, the Sarbanes-Oxley Act
prescribes fines and prison time for knowingly falsifying financial
information. Further, investors of the company may be able to successfully sue
the company and its owners for civil damages to cover their losses. Small-business
owners should exercise caution, as not understanding accounting practices and
standards is not a defense for fraudulent reporting. If a reasonable person
believes a manger should have known about fraud in the business, this may be
enough to allow the jury to side with the plaintiff.
Loss of
Reputation. If you operate your small business in
an unethical manner, word will eventually get out. This is especially true for
small businesses in tight-knit communities. In general, customers would rather shop
at businesses that operate ethically, take care of their employees and support
their communities. If your company does not operate ethically, this can affect
the willingness of customers and suppliers to conduct business with you. Over
time, this may destroy your business.
Loss of
Human Capital. Many
good employees do not want to work for a company that is unethical. Accounting
professional standards require that accounting work is performed ethically and
with integrity. If you pressure company accountants to behave unethically,
these accountants can't uphold the standards of their profession, and they
might risk loss of their license or credentials. Reputable accountants will not
work for an employer who expects unethical behavior.
Ethical Considerations in Making Profit
According to Hill
(2020) society sets standards for what is considered right versus wrong
behavior -- referred to as ethics. Ethical considerations by business people
sometimes involve a conflict between doing the right thing and making a choice
that results in more sales. Small business owners find that building a
reputation for consistently ethical behavior can have positive long-run effects
on the company’s performance.
Customer Loyalty. Treating customers fairly and delivering on promises made
by sales and customer service people increase the probability that customers
will do business with the company in the future. Customer loyalty has a
positive effect on profitability, because there is no incremental marketing
cost to doing business with a customer you already have. Finding new customers
and convincing them to buy from you does require marketing expenditures.
Companies with high customer satisfaction benefit from word-of-mouth marketing.
Existing customers share their positive experience with friends, family and
colleagues. These endorsements for the organization can result in new customers
- help the organization make money.
Employee Relations. Employees expect that the business owner will treat them in
an ethical manner. They might be promised, for example, that additional staff
will be hired to relieve them of a workload that is too high. If the owner
doesn’t follow through on the promise, the employees will lose respect for the
owner and may conclude they were deliberately misled. Morale and eventually
productivity can decline. One demoralizing ethical lapse is a supervisor taking
credit for an employee’s superb idea that helps the company generate revenues
or cut costs. The employee may not bother to contribute his ideas in the
future. The company’s financial success depends on retaining the brightest,
most talented people and keeping them motivated. If an employee concludes the
owner or other members of the management team do not behave ethically, she may
elect to leave. Recruiting new employees requires an expenditure of time and
often money.
Avoid Negative Legal
Consequences. Serious ethical lapses include behavior
such as selling a product the business owner knows to be unsafe, or knowingly
polluting the water or air in violation of government regulations. Companies
that get caught doing these things can suffer negative financial consequences,
such as being subject to litigation or fines. The company’s image may be
damaged to an extent that it loses customers who seek out more ethical
companies from which to buy.
Favorable Publicity. Ethical lapses that result in litigation will cause bad
publicity for the company, but presenting an image to the marketplace of
adhering to the highest ethical standards can result in the company receiving
good press coverage. This can bring in new customers and is in effect free
advertising. Receiving accolades, such as being named one of the best places to
work or one of the most ethical companies, can help recruit the top talent to
join your organization.
Access to Capital. When making decisions about whether to put money into a
company, venture capitalists and angel investors evaluate the integrity and
honesty of the management team. Investors may go so far as screening companies based
on ethical principles, and the social and environmental responsibility they
exhibit. Investors don’t want to deal with situations where the business owner
lied to them about the company’s prospects for growth or hid potential problems
from them. The owner’s high ethical standards make it easier for him to obtain
financing.
The Essence of
Goodwill in Making Profit
The
positive feeling stakeholders have for any particular company is
called goodwill, which is an important component of almost any business
entity, even though it is not directly attributable to the company’s assets and
liabilities. Among other intangible assets, goodwill might include the worth of
a business’s reputation, the value of its brand name, the intellectual capital
and attitude of its workforce, and the loyalty of its established customer
base. Even being socially responsible generates goodwill. The ethical behavior
of managers will have a positive influence on the value of each of those
components. Goodwill cannot be earned or created in a short time, but it can be
the key to success and profitability.
A
company’s name, its corporate logo, and its trademark will necessarily increase
in value as stakeholders view that company in a more favorable light. A good
reputation is essential for success in the modern business world, and with
information about the company and its actions readily available via mass media
and the Internet (e.g., on public rating sites such as Yelp), management’s
values are always subject to scrutiny and open debate. These values affect the
environment outside and inside the company. The corporate culture, for
instance, consists of shared beliefs, values, and behaviors that create the
internal or organizational context within which managers and employees
interact. Practicing ethical behavior at all levels—from CEO to upper and
middle management to general employees—helps cultivate an ethical corporate
Positive goodwill generated by ethical business practices, in turn, generates
long-term business success. As recent studies have shown, the most ethical and
enlightened companies in the United States consistently outperform their competitors (Byars
& Stanberry, 2018).
Conclusion
Indeed,
unethical business practices harm a series of people, whereas; only a few
greedy incumbents enjoy the fruits of their ill deeds. Essentially, if the
global economy is to be on the safe side, companies must adopt ethical business
practices. Business executives must ensure that their businesses spend their
investors’ monies in worthwhile projects.
Moreover, they
should ensure that the investors obtain their dividends in time. As discussed,
some vulnerable employees suffer in silence, and it is upon the business
managers to ensure that they treat all their employees equally. The managers
have a responsibility of offering a favorable working environment for all their
employees.
Furthermore,
they have to ensure that the employees’ salaries are disbursed at the right
time. In the case of customers, the involved stakeholders of the company must
ensure that the customers obtain quality products and services. Business
managers should never take advantage of their might to disadvantage their
competitors. In addition, company managers should understand that the
government depends on taxes to develop the nations.
Therefore,
company executives are obliged to ensure that the company pays taxes
exclusively. Finally, companies are requested to have a corporate social
responsibility. Polluting the environment should be outdated, as companies
ought to employ practices that are environmentally friendly.
Implementing a sound ethical policy at a company ensures a positive impact
on all stakeholders, from investors to
employees to consumers. Companies that lay the framework for business ethics in
all facets of operations are more likely to become and remain profitable
than those that conduct business in an unethical manner.
Thus, viewed from the proper long-term perspective, conducting
profit-making ethically is a wise business decision that generates goodwill for
the company among stakeholders, contributes to a positive corporate culture,
and ultimately supports profitability.
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