What is a ‘top company’?

Last week I received a copy of the most recent list of the ‘Top 100 Northern Ireland Companies’ – but its title prompted me to wonder: What is a ‘top company’?  writes Prof Simon Bridge

The publication itself states that the list is ‘a record of the most successful companies in Northern Ireland’ and that this is ‘mainly measured by level of pre-tax profits’ (in the last filing year). But who has decided that recent profit should be the main criterion for success?

I remember hearing the explanation that ‘an enterprise is a goal-realisation device’ – so is success for businesses the achievement of the owners’ goals? Research suggests that, even in the case of technology businesses (where money might be supposed to be the key motive) wealth attainment was near the bottom of their founders’ value measures. Also researchers have found that and successful entrepreneurs often felt a need to ‘give back’ to communities, employees, customers and other stakeholders – and the pursuit of non-pecuniary benefits has led to a higher probability of business survival. So, should ‘top’ companies be the most profitable or the instead the most successful – and success can be different things for different businesses.

The link between businesses and profit is often not as direct as might be supposed. While it might seem that, to make more profit, a business should try to grow bigger, there is evidence that growth can paradoxically limit the life of a business – as Geoffrey West explains in his book Scale. Therefore profit-driven attempts to grow a business might have the effect of reducing its sustainability (never mind the sustainability of the wider world). Further, in his book Obliquity, John Kay suggests that in business ‘many goals are more likely to be achieved when pursued indirectly’ and ‘the most profitable businesses are often not the most profit oriented’. In elaborating on this he points out that:

‘Businesses do not maximise anything. The most successful business leaders like Marks or Walton or Gates pursued the unquantifiable, but entirely meaningful, objective of building a great business. A great business is very good at doing the things we expect a business to do – rewarding its investors, providing satisfying employment, offering goods and services of good quality at reasonable prices, fulfilling a role in the community – and to fail in any of these is, in the long run, to fail in all of them.’

I accept that there is a widely shared view that the purpose of businesses is to make profits – and has that come from people like Milton Friedman who, in an article in the New York Times Magazine declared that ‘the social responsibility of business is to increase its profits’. But actually the article was about large corporations whose shareholders may have expected the directors they appoint to maximise their financial returns – and most businesses are not large investor driven corporations.

Nevertheless are we in danger of unthinkingly accepting the focus on profit and is that reinforced by publications like the ‘Top Companies’ list? Compilers of such lists need to use clear and relatively accessible metrics, but does their use of those metrics then help to perpetuate a mistaken, misleading and possibly damaging view of business? Indeed Goodhart‘s law suggests that a highlighted metric can become the perceived target – and then ceases to be a useful measure. If there a conventional wisdom that businesses should be trying to maximise their profits, do things like this list reinforce that, even if unintentionally?

Businesses need to make money in order to survive but should they survive in order to make money? We need to eat in order to live but that does not mean that we should live in order to eat. Is the underlying problem, when assessing success, that businesses are not the right focus – because they are just devices of their owners? Should the focus instead be the people involved in business and their success, individually or collectively? What do they want their businesses to do and what for them will be success? Non-pecuniary aims may not be as easy to measure but they are still the aims and trying to maximise profit can actually harm then. Yes, we want a stronger economy, but is that best achieved obliquely and will a direct focus of the profitability of the businesses within it actually have a contrary effect?

Milton Friedman, Article in the New York Times Magazine, 13 September 1970

John Kay, Obliquity (London: Profile Books, 2010)

Geoffrey West, Scale, (London: Wiedenfield & Nicholson, 2017)

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