When Profits Outweigh the Penalty

If you read this blog regularly then you may remember that I recently wrote an Amazon Prime Review mentioning some of the pros and cons of the service including the instant video part of it. One thing I didn’t mention in that post is that I’m a bit of a sucker for a good documentary and while working my way through some of the ones on offer with Prime I came across one called ‘The Corporation’ which delved into the inner workings of ‘big business’.

This documentary highlighted how the structure of a company gives it an immediate dilemma, that being the need to put the interests of its shareholders before everything else. It also showed how many companies do this on a regulatory, legal, environmental and moral basis too.

Now we all know that whenever a company does something it shouldn’t, especially in a legal or regulatory capacity, there is usually some kind of penalty to pay if they get caught. But what happens when the potential profits of the wrongdoing far outweigh the potential financial penalty? Well, the fact that this so often seems to be the case goes some way to explaining the lack of social responsibility we see being displayed amongst corporations today.

The Banking Industry

Within the banking industry in recent years we seem to have had scandal after scandal. The Libor rate rigging scandal was in the news again yesterday, we’ve had the scandal of mis-sold PPI, the subprime mortgage crisis and the list goes on. All of these situations occurred because either the individual workers or the decision makers within the business obviously felt that the potential profits involved with either immoral or illegal activity far outweighed the potential fines or penalties that would be dished out if the company or individual were to get caught out. I’m guessing the banks didn’t account for a generation of people reclaiming mis-sold PPI but even so there are probably still a lot of mis-sold PPI policies out there that they haven’t had to refund, yet.

Environmental hazard

Then we have the times where the profits involved in a certain operation – an operation that may be harmful to the environment – outweigh the potential environmental cost, at least they do in the eyes of the company anyway. This could cause companies to ignore the need to be sustainable in their energy consumption for example, or perhaps lead them to dispose of waste in a less than environmentally friendly manner just because it is economically advantageous for them to do so. We can also see examples of this in the way that some companies have plundered the rainforest even though there have been significant fines handed out to others who have done this.

Health Hazard

I suppose in some areas we could throw the overall environmental cost and the potential cost to human or animal health into the same pot, but the history of corporations has thrown up much more specific cases than that. Cases where companies have known about a specific health hazard that their product or service may pose to human health but have then tried to cover it up in the pursuit of profit. Who knows which scandals are yet to be unearthed or ones we may never get to hear about. I’ve got to be honest here and say that I’m not all that sure as to how much legal repercussion there might be for company directors in cases like this, does the buck stop with the company or are the decision makers also held legally accountable in a court of law? I’m not a lawyer so I’ll have to research this a little further but perhaps you could help me out with an answer to that question.

Humanitarian Cost

Then finally we have the appalling working conditions that have been documented in some of the foreign factories of large corporations and the miniscule wages that some of the workers are being paid, all in the pursuit of bigger profits. Of course there could also be a humanitarian cost closer to home with this kind of business model as the outsourcing of work to countries where cheaper labour can be found then reduces the amount of jobs available at home, making it more difficult for families to earn a living wage.

How do the Shareholders feel?

I don’t want this post to turn into an essay so we’ll keep this brief but the documentary did also ask the question about whether the shareholders of a company would be happy to see less of a return on their investments in exchange for a company taking responsibility in some of the areas mentioned above, or would shareholders simply rather have the bigger returns?

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2 Responses to When Profits Outweigh the Penalty

  1. Great post, food for thought. From a PR and longevity standpoint, it makes more sense for shareholders to see less of a return upfront, but be socially responsible. Underhanded decisions eventually beget consequences, which are usually damaging to a business.

  2. Most people would want to have their cake and eat it, i.e. socially responsible corporations and high returns. I wouldn’t buy shares in a specific company that I don’t really agree with their practices, but then again I am buying broad based index funds, so by proxy I must own some part of some companies that I don’t. It’s a bit of a moral dilemma and a bit hypocritical, but if they asked me, I would take lower returns, as long as the overall rate of return over years was still positive.

    If you can’t be profitable and sustainable/socially responsible, you should cease trading.
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