I received a very thought provoking comment recently on my post, ‘Will we set our own boundaries?’ The comment questioned whether financial profit is what drives businesses to operate irresponsibly and if so, whether we should set boundaries on profit. Could we create a more sustainable economy if every business operated as a non-profit organisation? Could it be that only a non-profit could ever be considered a truly sustainable business? Now here’s an interesting thought experiment!
As with most things in this newsletter, I don't claim to know the answer. What I can do is try to offer some interesting questions and perspectives to help us explore this topic. So where should we begin?
Let’s start by defining profit
The simple definition of profit appears to be an “advantageous gain from an activity”. Looking at it more specifically in commercial terms, Investopedia defines profit as “a benefit realized when the amount of revenue gained from an activity exceeds the expenses, costs and taxes needed to sustain the activity”.
Hence the term ‘profit and loss’. Profit simply means that you earned more money than you spent. It's almost impossible to perfectly operate as a non-profit in a literal sense, by making exactly the same amount of money as you spend. The difference between making a profit and making a loss is precisely two pence. In reality, most organisations don't make a profit every year, but they aim to ensure that the good years outweigh the bad years. If they don't, they'll run out of money and be forced to cease operating.
Interestingly, this is even true of non-profit companies and charities. They still seek to make a financial surplus each year in order to maintain healthy finances.
It would seem that if taken literally, a profit or surplus is simply the logical means by which bankruptcy is avoided.
If only it was that simple
Where this all gets a bit murky is in how we actually define the costs of our businesses, and therefore what we count as profit.
Hypothetically, if I was a sole trader making candles, I would need to sell my candles for more than they cost me to make. My own time would not be considered a cost because I wouldn’t earn a fixed salary. My earnings would simply be the profits from selling my candles. If I could sell my candles for more than they cost me, I could take home some money to pay my rent and put food on the table. As someone who has started more than one business in my life, I know this reality only too well. If we strip it back, profit is simply the means by which we all earn a living.
On the other hand, that’s not what most people refer to as profit. When we look at modern corporate profits, they are the profits after everyone involved has been paid. These profits are usually either kept as reserves for when the company is not profitable, reinvested in the business or distributed to shareholders. It’s the distribution to shareholders that is generally seen as problematic.
There are many different types of shareholders, ranging from company founders, to employees, to investors, to anyone who bought a slice of the profits on the stock market. This last group includes individual investors, banks, governments, billionaires and even, wait for it… charities!
The motives and power of these shareholders can vary drastically but they all have one thing in common. They are all hoping that the company will generate enough profit that some of it can be shared with them. It would seem that any business with external shareholders has a conflict of interest, between prioritising the needs of the people affected by the business and the need to pay money to those outside shareholders.
Purpose before profit
Operating businesses as non-profits could go some way to solving this conflict of interests, since non-profit organisations technically can’t pay out profits to shareholders.
I have a reasonable degree of experience working with non-profits. Many of our clients at Wholegrain Digital are charities or non-profit organisations, I have been a trustee of a charity and I previously co-founded a non-profit company. This experience has shown me that most, though not all, non-profit organisations are founded and run with a purpose to do something positive for society or the environment. This generally forms a key part of why they decided to operate as a non-profit in the first place.
On the other hand, they are generally non-profits because they have a responsible approach, not the other way around. If businesses that did not have a responsible approach were forced to operate as non-profits, there would be little stopping them from continuing operating in a way that is bad for both people and the planet. Furthermore, there would still be loopholes that allow them to extract financial value from the business and put it into private hands.
It's ridiculously easy to reduce or eliminate a company's profits on paper, while extracting value through the side door. This is one of the ways that unscrupulous companies avoid paying taxes and hide wealth. Furthermore, non-profits often play a key role in extracting, hiding and even generating that wealth. What is promoted as philanthropy is often carefully disguised tax avoidance, corporate lobbying and PR.
So non-profit companies in general probably are more responsible, but if the people behind them don’t have a responsible mindset, then this won’t necessarily be the case. Likewise, a for-profit company could be run in a very responsible way if that’s the priority of the people in charge and they are not beholden to outside shareholders who only care about making money for themselves.
The root of the problem
Perhaps the real problem is not profit, but greed.
Greed, I believe, is at the root of not just irresponsible corporate behaviour but also individual consumption, the marketing industry that drives that consumption, government corruption and the inflationary monetary system that our entire economy operates on. I think human greed is one of the key barriers to truly sustainable business.
That’s probably another topic for another day, but it’s certainly worth contemplating how greed plays a role in all aspects of our economy, how that affects our businesses, and what our own personal relationship is with it. If nothing else, hopefully we can align our own business practices with our own values, whether we operate for-profit or not.
In the meantime, I’d love to hear your thoughts about whether profits are the cause of unsustainable business practices, on LinkedIn or in the comments below.
P.S. If you like Oxymoron, you might also like Curiously Green, the newsletter about digital sustainability that I publish together with my colleagues over at Wholegrain Digital.
Profit is not always the enemy. I remember reading about the founders of Ben & Jerry's explaining how the more profit they make, the more good they can accomplish. Greed is definitely the issue in my opinion. Profit is the incentive to build and grow your business and hopefully do good in whichever way you define it (which is a whole other conversation!).
Great article - very thought provoking! I have read that maybe our innate human psychology that values 'status' is what is actually behind our motivation for consumption. This is, as I understand, widely seen in other apes and could explain some of our human tendencies for greed and "getting ahead of others". That said, I believe there have been and, in some more remote parts of the world, continue to be communities of indigenous communities that demonstrate many generations of living sustainably with their ecosystem - see https://unesdoc.unesco.org/ark:/48223/pf0000245623. So it is at least re-assuring to know that we are capable of doing this! I guess the question is whether there's a way to apply the sustainability principles adopted by these communities to those of the wider world without major drops in living standards? To go further, is it actually possible to create truly sustainable societies with standards of living that are comparable with much of the western world right now? Given our underlying dependency on fossil fuels to enable and underpin the wealthly economies, I remain sceptical.
I have read 2 other really interesting papers on this recently - Is Sustainable Capitalism Possible? (https://www.sciencedirect.com/science/article/pii/S1877042810011547?ref=pdf_download&fr=RR-2&rr=78a093ccbab223e3) and The role of psychology in building a more sustainable society (https://blogs.lse.ac.uk/psychologylse/2021/05/17/the-role-of-psychology-in-building-a-more-sustainable-society/). Obviously these are just 2 articles in a sea of research that has been going on for decades.
To get a sense of how early European settlers saw the 'New World' and the natural riches they could exploit, a process that has been going on for centuries and continues to this day, I recommend Annie Proulx's new book Barkskins - https://www.theguardian.com/books/2016/jun/19/barkskins-annie-proulx-review. It's a bit of a monster read but provides a sound historical context to this whole debate.