The Main Purpose of a Corporation Should be to Maximize Profits While Valuing Shareholders

The recent, quite significant, changes in the business world have raised the proposition that

maximizing profits and shareholder value is not as important as it once was (Denning, 2022).

This essay will evaluate the proposition made by many big corporation CEOs to not simply focus

on profits and shareholder value. It will argue that such a claim does not evaluate the

outweighing pros, considering the major benefits of focusing to increase shareholder value and

raise profits. Therefore, making it the most logical main focus of any successful business. This

essay will now outline these arguments relating to shifting focus away from shareholders and

business profits and more toward all stakeholders. It will conclude that this shift of focus can

prove to be more detrimental to a business rather than beneficial.

Corporations That Prioritize Profits Have Shown to Benefit Shareholders

Shareholders of a corporation greatly benefit from increased profits. When corporations decide

to focus on maximizing profits, the shareholders of the company ultimately benefit (Hayes,

2021). This can be seen through an increase in shareholder value–composed of increased stock

valuations and larger dividends (Hayes, 2022). Since the start of public corporations, research

has shown that when share prices are high, shareholders are “happy”, therefore more likely to

stay with a business and continue to provide funding (Murphy, 2022). However, some may

argue that this focus on profits and shareholders may be problematic in the long run since “the

more you aim to earn, the greater the level of risk you take” (Gartenstein, 2019). Although this

strategy may seem high risk and high reward, taking this risk has proven to be worthwhile since

“profit maximisation is an approach that can enable efficient and sustained business growth”
(American Express, 2021), allowing a business to expand extensively. In addition to valuing

shareholders, profit maximization creates societal benefits as well.

Focusing on Profit Maximization Results in Economic Growth for Society

Maximizing profits is beneficial for the economy. Corporations that prioritize profits provide

social upside to the global economy because “If businesses can improve the efficiency of the

factors of production, it stands to reason that they can increase production and create higher

quality goods at lower prices. Any increase in production leads to economic growth as

measured by GDP” (Ross, 2022), and an increase in production is only possible if net revenue is

increasing from boosting profits. However, some may argue that big corporations may not

choose to improve production efficiency if steady profits are rolling in since the main purpose is

not always to benefit others but to simply generate more profit. Although this could be true for

some companies, a social upside for consumers and producers is still created through the

means of consumer and producer surplus (Clyde et al., 2019). It has been shown that profit-

pushing firms, in a free and competitive marketplace, provide more jobs to the economy, while

benefiting “shareholders, workers, and managers” (Clyde et al., 2019) as well. From this

information, we can conclude that “producer surplus combined with consumer surplus

constitutes social value” (Clyde et al., 2019), providing another reason that defends profit

maximization regardless of the purpose behind it. In addition to benefiting the economy,

corporations must strive to support their owners to stay afloat in the first place.
Failing to Value Shareholders Has Caused Many Corporations to Fall

Companies that have not withheld integrity with their shareholders have declared bankruptcy.

As shareholders are the main owners of a business, it makes complete sense that a company

values them the most. Corporations that have not had the best interest at heart for their

investors have had to file for bankruptcy and shut down when things went south. A prime

example of this would be the Enron Corporation who had to declare bankruptcy in 2001. This

was due to their fraudulent accounting practices in an attempt to lure more investors to fund

their business (Bondarenko, 2022). This is just one of many examples of this occurrence in the

business world.

Focusing on Profits and Shareholders Lead to Successful Corporations

This essay explored why the main purpose of a corporation should be to maximize profits in

order to benefit its shareholders so that they can stay afloat, and benefit society as a whole. It

argued that profit maximization keeps shareholders happy, provides societal benefit, and

allows for continued funding that promotes business growth for success. As such, it can be

concluded that purpose of a corporation is to focus on shareholder value and profit

maximization. However, given that the business world is constantly changing and adapting, this

purpose could change in the future.

References

American Express. (2021, September 17). Profit Maximisation: What is it and How to Maximise

Profit for Your Business. American Express; American Express.

https://www.americanexpress.com/en-gb/business/trends-and-insights/articles/profit-

maximisation/

Bondarenko, P. (2022). Enron scandal. In Encyclopædia Britannica.

https://www.britannica.com/event/Enron-scandal

Clyde, P., Sivadasan, J., Karnani, A. G., Manchanda, P., & Narayanan, M. P. (2019). The Social

Impact of Profit-Maximizing Firms. SSRN Electronic Journal, 2.

https://doi.org/10.2139/ssrn.3284113

Denning, S. (2022, October 12). Why Maximizing Shareholder Value Is Finally Dying. Forbes.

https://www.forbes.com/sites/stevedenning/2019/08/19/why-maximizing-shareholder-

value-is-finally-dying/?sh=48e277e86746

Gartenstein, D. (2019, March 4). Advantages & Disadvantages of Profit Maximization. CHRON.

https://smallbusiness.chron.com/advantages-disadvantages-profit-maximization-

11225.html

Hayes, A. (2021, May 29). Shareholder Value: Definition, Calculation, and How to Maximize.

Investopedia. https://www.investopedia.com/terms/s/shareholder-value.asp

Hayes, A. (2022, November 22). Shareholder (Stockholder): Definition, Rights, and Types.

Investopedia. https://www.investopedia.com/terms/s/shareholder.asp
Murphy, C. (2022, September 11). Why Do Companies Care About Their Stock Prices?

Investopedia. https://www.investopedia.com/investing/why-do-companies-care-about-

their-stock-prices/

Ross, S. (2022, June 12). Why Factors of Production Are Important to Economic Activity.

Investopedia. https://www.investopedia.com/ask/answers/040715/why-are-factors-

production-important-economic-growth.asp