More than once, I’ve been critical of the business model that can be described as “maximizing profit at any cost, particularly when you can foist off as many costs as possible on someone or something else” [like the environment and/or public health].
This is scarcely new in the United States. For almost fifty years, big oil promoted cheap gasoline enhanced by tetraethyl lead, with adverse health impacts, particularly for the children of low income families who lived in cities filled with automotive exhaust. Big tobacco did the same with cigarettes… and still is.
For almost a century and a half, businesses just dumped wastes of all sorts into the nearest waterway, making most of the large rivers little more than toxic sewers. Even now, pesticide run-off from factory farms has created and continues to increase a massive area in the Gulf of Mexico that’s has little or no oxygen and almost no fish of any kind.
Big and small business have attempted to do the same with the minimum wage, keeping it as low as politically possible, and business continues to wonder why millions of people who have any option at all refuse to take many minimum wage jobs, even though it’s statistically and economically impossible to live on that wage in almost any city in the U.S.
But the profit/greed instinct runs strong in the human animal, as does the need to quantify how much more profit your business is making than are your competitors – or how much less, meaning that you have to cut costs to be “competitive.”
The standard measurement tool is ROI [Return on Investment]. The form is simple. Divide the gain from an investment by the amount of the initial investment. The result is ROI.
Right now, U.S. gross corporate profits, net corporate profits, and profit rates (i.e., ROI) are at an all-time high. In three industry sectors – information technology, real estate and financials – the average profit rate is above 20%. In big pharma, a Bentley University study found a gross profit margin of over 70%. But thanks to creative accounting, often high gross profits mysteriously turn into more modest numbers.
The problems involved with using ROI as a metric for business success are close to innumerable. First, how do you isolate/account for outside factors? The state of the national economy has an effect on all businesses. The same is true about state and federal laws and regulations. So does the amount and nature of competition. External economic factors also affect ROI, particularly interest and inflation rates.
Corporate internal factors also affect the return on investment. Have bad managers been replaced by good ones [and are higher salaries required by better management factored into the investment costs] or good ones by those less able?
For all these problems and difficulties, addressed time and time again in industry and scholarly articles over the past several decades, all too many corporations use simplistic or slanted versions of ROI that serve their purpose, either to boast or to show regulators how little profit they make. There are literally scores of articles on different forms of ROI, but in the end it’s all about how to maximize output from inputs and processes to keep costs low and profits high.
All that seems to matter is to meet the minimum regulatory standards, keep wages as low as practicable, products as cheap and shorted-lived as customers will tolerate, dividends or stock prices just high enough to retain investors, while maximizing ROI and upper executive pay.
Seldom does one see a different calculus, such as how can a business remain solvent, produce good products, satisfy customers, and fairly pay its employees and stockholders. It’s far simpler to trot out the single magic term – ROI – as if that explains and justifies everything.
And for U.S. business, that seems to suffice.