Introductory

Elements
 THE CONCEPT OF BUSINESS

a privately-owned commercial enterprise

State-owned enterprises are not businesses! The profit they make
if any is administrated by the government and local administration
in order to achieve certain social and political objectives.

whose intrinsic purpose is to make a profit for

its owners
Individuals and organizations that make products and / or render
services for other reasons than profit are working, but not doing
business.

by means of legally selling on the free market

products and services
Profit means money, but making money does not always mean doing
business. Selling an inherited house or grandma's silver and
grandpa's stamp collection could make one very rich, but as a lucky
guy, not as a business person.

designed to satisfy socially accepted human

needs
Drug dealing, smuggling or prostitution are very profitable activities,
but they are illegal businesses, because they harm a lot of people.
 PROFIT

Two
open 1. Is profit the sole and
questions
about ultimate purpose of
profit: any business?
 DODGE v. FORD MOTOR COMPANY

In 1916, a stockholder of Ford Motor Company, named

Dodge, sued the company because the top managers
decided to distribute as dividends a very small part of
the profit made in 1915, preferring to reinvest a huge
fraction of profit, to achieve some humanitarian
objectives of Mr. Henry Ford, the founder of the
company.
My ambition is to employ still more
men, to spread the benefits of this
industrial system to the greatest
possible number, to help them build up
their lives and their homes. To do this we
are putting the greatest share of our
profits back in the business.

With regard to dividends, the

company paid sixty per cent,
on its capitalization of two
million dollars, leaving
$58,000,000 to reinvest for
the growth of the company.
The Court recognized the managements right to spend for
humanitarian purposes, but only occasionally and in
favour of its own employees or other groups directly
involved in the companys activities, but not managers
right to use the shareholders money to reach social or
humanitarian purposes as long term and abstract goals of
the company.

A business corporation is organized and carried on

primarily for the profit of the stockholders. The powers of
the directors are to be employed for that end. The
discretion of directors is to be exercised in the choice of
means to attain that end, and does not extend to a change
in the end itself, to the reduction of profits, or to the non
distribution of profits among stockholders in order to
devote them to other purposes.
 A. P. SMITH MANUFACTURING CO.
v. BARLOW
The A. P. Smith Manufacturing Company was incorporated in
1896 and is engaged in the manufacture and sale of valves, fire
hydrants, and special equipment, mainly for water and gas
industries. Its plant is located in East Orange and Bloomfield
and it has approximately 300 employees.

On July 24, 1951, the board of directors adopted a resolution

that set forth that it was in the corporations best interests to
join with others in the 1951 Annual Giving to Princeton
University, and appropriated the sum of $1,500 to be
transferred by the corporations treasurer to the university as
a contribution towards its maintenance. This action was
questioned by stockholders, and one of them, a certain
Barlow, sued the company.
Mr. Hubert OBrien, the president of the company, testified
that he considered the contribution to be a sound investment,
that the public expects corporations to aid philanthropic and
benevolent institutions, that they obtain goodwill in the
community by so doing, and that their charitable donations
create favourable environment for their business operations.
In addition, he expressed the thought that in contributing to
liberal arts institutions, corporations were
furthering their self-interest in assuring the
free flow of properly trained personnel for
administrative and other corporate
employment.
Mr. Frank W. Abrams, Chairman of the board of the
Standard Oil Company of New Jersey, testified that
corporations are expected to acknowledge their public
responsibilities in support of the essential elements of our
free enterprise system. He indicated that it was not good
business to disappoint this reasonable and justified public
expectation, nor was it good business for corporations to
take substantial benefits from their membership in the
economic community while avoiding the normally accepted
obligations of citizenship in the social community.
Mr. Irving S. Olds, former Chairman of the board of the
United States Steel Corporation, pointed out that
corporations have a self-interest in the maintenance of
liberal education as the bulwark of good government. He
stated that, Capitalism and free enterprise owe their
survival in no small degree to the existence of our private,
independent universities, and that if American business
does not aid in their maintenance it is not properly
protecting the long-range interest of its stockholders, its
employees, and its customers.
. . . just as the conditions prevailing when corporations were
originally created required that they serve public as well as
private interests, modern conditions require that corporations
acknowledge and discharge social as well as private
responsibilities as members of the communities within which
they operate. Within this broad concept, there is no difficulty in
sustaining, as incidental to their proper objects and in aid of the
public welfare, the power of corporations to contribute corporate
funds within reasonable limits in support of academic
institutions. But even if we confine ourselves to the terms of the
common-law rule in its application to current conditions, such
expenditures may likewise readily be justified as being for the
benefit of the corporation; indeed, if need be the matter may be
viewed strictly in terms of actual survive of the corporation in a
free enterprise system.
 The answer depends on the broadness of our perspective.
YES
From a narrow viewpoint, focused on
a single business, the answer is
affirmative. Each single business (X)
is founded by its owners, who put at
risk their capital, as a system of
resources (workers and managers,
facilities, technology, raw materials,
utilities, etc.) ment to make a profit for
the investors.
society -
X economic
environment,
offering business
opportunities
Business needs society as
means to make profit its
intrinsic purpose.
NO
Enlarging our perspective, so that to
encompass the social and economic
system, the right answer is negative.
There are businesses (X, Y, Z) insofar
as they function as efficient means to
fulfill the needs and wants of the
people. Profit is a deserved reward for
those who can satisfy the social
demand.
society -
system of X
Y
needs and wants,
demanding products
Z
and services, offered
by businesses
Society needs businesses as
means to satisfy human needs
the purpose of market economy.
PROFIT

2. How large should

be the profit?
 PROFIT
maximum
The supporters of the
narrow, micro-level
perspective logically claim
that a good, competent and
competitive management
should aim at maximizing
the company's profit (using
methods permitted by the
law), since this is the best
way to satisfy the owners'
interests.
reasonable
The supporters of the large,
macro-level perspective
ideologically rather than
logically claim that a good,
competent and responsible
management should aim at
the best fulfillment of the
social needs and wants,
since this is the best way to
satisfy the consumers'
interests. As a deserved
reward for economic
performance, profit should
be 'reasonable'.
 PROFIT
It's easy to define clearly
what maximum profit
means, and to
understand the objective
logic of maximizing
profit.
Business persons are
not greedy, but rational
self-motivated people.
Trying to maximize their
profit, they strive to
serve the best the public
interest.
It's extremely difficult to
define clearly what a
reasonable profit
means, and to support
with objective reasons
why, when and how
profit should not be
maximized.
Business persons are
greedy, selfish and
irresponsible people.
Obsessed with
maximizing their profit,
they don't give a damn
about the public interest.
 PROFIT IN PHARMACEUTICAL INDUSTRY

Drug companies in the US are granted a patent on any new pharmaceutical

drug they develop, which gives them a monopoly on that drug for 20 years.
Not surprisingly, high monopoly profits, well beyond the average rate of
profits in other industries, are characteristic of the pharmaceutical industry.

In a study published in 2013, Public Citizens

Congress Watch noted that in 2012 average profits
17%
for drug companies in the Fortune 500 were 17% of
revenues whereas average profits for Fortune 500
companies in all other industries were 3% of
revenues. 3%

Drug companies median profit on revenues

Period compared to all other industries in the Fortune 500

1970s and 1980s double

1990s 4 times
today 8 times
 PROFIT IN PHARMACEUTICAL INDUSTRY

Drug companies say they need these profits to cover the costs
of research for new drugs.
research 14%

profits for shareholders 17%

advertising and administration 31%

A 2004 study of drug costs showed that prescription drugs have

markups of 5,000%, 30,000% and 50,000% over the cost of their
ingredients.

Drug Ingredients cost / 100 tablets Selling price

Norvasc 14 cents $ 220

Prozac 11 cents $ 247

Tenormin 13 cents $ 104

Xanax 3 cents $ 136

 HOME DEPOT: GOOD ETHICS
OR SHREWD BUSINESS?

When weather forecasters predicted that Hurricane Andrew

would strike Miami area with full force, customers rushed to
stock up on plywood and other building materials. That
weekend the 19 Home Depot stores in southern Florida sold
more 4-foot-by-8-foot sheets of exterior plywood than they
usually sell in two weeks. On August 24, 1992, the hurricane
struck, destroying or damaging more than 75,000 homes, and
in the wake of the devastation, individual price gougers were
able to sell basics like water and food as well as building
materials at wildly inflated prices.
But not Home Depot. The chains stores initially kept prices on
plywood at pre-hurricane levels, and when wholesale prices rose
on average 28 percent, the company announced that it would sell
plywood, roofing materials, and plastic sheeting at cost and take
no profit on the sales. It did limit quantities, however, to prevent
price gougers from reselling the goods at higher prices. In
addition, Home Depot successfully negotiated with its suppliers
of plywood, including Georgia-Pacific, the nations largest
plywood producer, to roll back prices to pre-hurricane levels.
Georgia-Pacific, like Home Depot, has a large presence in Florida;
the company runs 16 mills and distribution centres in the state
and owns 500,000 acres of timberland.
Although prices increased early in anticipation of Hurricane
Andrew, Home Depot was still able, with the cooperation of
suppliers, to sell half-inch plywood sheets for $10.15 after
the hurricane, compared with a price of $8.65 before,
thereby limiting the increase to less than 18 percent. Home
Depot executives explained their decision as an act of good
ethics by not profiting from human misery. Others contend,
however, that the company made a shrewd business
decision.