THE instalment this week concludes the discussion that began last week. Last week four major objectives of business enterprise were explored.
The ensuing discussion concentrates mainly on the non-maximisation objectives that explain the existence of firms in any given economic system.
Managerial utility maximisation
In 1964 Oliver Williamson, a celebrated American economist, hypothesised that profit maximisation may not be the objective of managers of a joint stock organisation or company. Williamson’s argument was predicated upon a realisation that there may be a principal-agent problem between managers and owners of a business enterprise.
On the one hand, the owners of a firm may desire it to regularly make profits so that they will be assured of a dividend. On the other hand, the managers of a firm may sacrifice short-term profit maximisation to gain a larger corporation in the medium to long term.
According to managerial utility maximisation theory, managers may take decisions that prioritise their own satisfaction or utility at the expense of their principals’ profits.
Managers or agents usually pursue maximisation of their own utility given the condition that the firm generates a minimum profit demanded by the principals to maintain managers’ job security.
Managers who actively seek the maximisation of their own satisfaction usually take cognisance of monetary expenditure on staff, managerial slack and discretionary investment.
Monetary expenditure on staff is defined as the manager’s compensation package as well as spending on his or her subordinate staff in direct correlation with their numbers.
It is a fact of life that for a firm to exist in perpetuity, its managers must ensure that it is able to meet its total variable costs which primarily implies being able to pay workers a living wage. Managerial slack means additional management perquisites, also known as perks, such as expense accounts, private cars and private jets.
Discretionary investment refers to the proportion of undistributed profit available for the manager’s discretional investment or spending. Such profits may be used by the manager or managers to grow the firm in terms of market share or the range of products that the company supplies in its market.
Managerial utility maximisation, just like other maximisation theories has been challenged by non-maximisation theorists. Some economists and scholars of firm behaviour argue that there are firms in modern economic systems that do not seek to maximise anything.
Such joint stock organisations may seek to meet the minimum benchmarks of operating in a particular industry and then pursue other objectives or motives of surviving in a particular market configuration or market structure.
According to the late American Nobel Laurate Herbert Simon, some firms are actually guided by a motive that he termed satisficing which must not be confused with the term satisfying. Satisficing is a decision-making strategy or cognitive heuristic that entails searching through the available alternatives until an acceptability threshold is met.
The proposition that some firms are satisficers as opposed to being maximisers is based on Simon’s revolutionary concept of bounded rationality.
The concept of satisficing is based on a hybridisation of two terms — satisfying and suffices. Satisfying carries the connotation of attaining temporary achievement of certain goals and the term suffice means that which is enough. This implies that satisficing does not carry the idea of maximising anything.
Real world examples of firms that are satisficers are government-owned enterprises, church or faith-inspired businesses and non-governmental organisations that operate financial institutions to alleviate poverty and suffering in society.
It is quite clear that public enterprises, community-based organisations and church or faith-based firms do not seek to maximise anything, but are driven by social welfare goals as well as other non-pecuniary objectives.
Corporate social responsibility
Corporate social responsibility, which is also called corporate social integrity or investment, seems to be a major driving force in the activities of companies such as Coca-Cola, Adidas, Econet and BancABC.
Such companies sponsor education and sports. They also contribute to worthy causes like donating to charity.
Firms that embark on corporate social responsibility activities may be motivated by a desire to have a good name in society or they may be identifying with causes that engender excellence in academia, sports and other areas of endeavour in society.
It is obvious that by associating with soccer, a company such as Coca-Cola gains mileage from advertising and maintains its market share by having sports starts endorse its products.
This implies that corporate social responsibility is actually a form of investment in the intangible asset of goodwill.
Ian Ndlovu is an economist based at the National University of Science and Technology. His research interests cover business, development, economic and e-commerce issues. He writes in his personal capacity.