Thursday, 4 August 2011

Tempering The Pursuit of Profit

Organisations of all kind whether for profit or not-for-profit need to generate enough revenue to survive. Entrepreneurial spirit and profit motive are integral to the successful conduct of any business anywhere. Any entity which aims to succeed in the longer term will need to be aware of the various threats and challenges to its viability and adapt its behaviour accordingly. In summary, it needs to balance risk and reward.

Business risk comes in many forms. A new business is a high-risk exercise in itself. Investment decisions of new product or entry into a new market will need to take into account achieving a profitable rate of return, over time. Some organisations face special challenges when operating in markets or market sectors that need to be identified, understood and assessed. These are strategic and operational issues which an organisation's management must address as part of responsible business planning.

In the external environment comes other threats and challenges. The law and other form of regulation for example imposes a wide and growing range of compliance obligations on organisations. There is an increasing awareness of the wider group of stakeholders. These include target market of consumers, the media and the general public.

The global banking crisis demonstrated the effect of failing to reconcile the management of operational and reputational risk. Serious errors were made in assessing and managing inherent risk in a number of financial institutions. Mismanagement of credit appraisal and operational risk was compounded by policies on incentives and remuneration, which directly encouraged excessive risk leading to commercially disastrous consequences.

Bad publicity was generated by some institutions after they had been bailed out by the taxpaying public by awarding enormous bonuses to some of their staff. This questions not only their handling of reputational risk but also with companies’ responsibility to act in the best long-term interest of their shareholders and their stakeholders. The crisis has raised the key issue of what ethical principles can play in acting as responsible constraints on decision making in the commercial world.

The theories, practice and inter-relationship of risk, ethics and governance and how these can be harness by businesses to improve stakeholder value is very important. There are clear limits what regulation can do. They need to be accompanied by a genuine commitment of ethical behaviour by businesses, starting from the top. Compliance with regulation is important only to the extent that companies are willing to go beyond it if they see the bottom line benefit of ethical corporate approach. It is encouraging to see a growing evidence of link between ethical behaviour and business success. Companies that have a narrow and short-term view of shareholder value need to be aware that in today's regulatory, political and business environment such an approach will come under increasing strain.

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