Putting Purpose Ahead of Profits

I liked this piece from 2012. It was about profit maximisation vs purpose maximisation, inspired by Daniel H Pink's book In  Drive: The Surprising Truth About What Motivates Us. It also tapped on the current disatisfaction about MNCs avoiding tax for the purpose of profit maximisation.

Dec 2012

I was in a bit of a dilemma recently.

Amazon was offering a 20% discount off the Kindle Fire and I thought it would make a great Christmas gift for my husband. The thing is though, I’ve been trying my best not to shop with Amazon this Christmas.

It’s not an easy thing to do, as I love shopping with Amazon and not just for books, music and film; I’ve even bought a TV and laptop from Amazon.  Aside from the convenience, it also offers some of the best prices that the stores can’t beat, and it throws in free shipping.

So why stop shopping with Amazon? Well, the online retailer has recently come under fire for reportedly not paying any corporation tax in the UK despite making over £7.6 billion in UK sales in the past three years. By channelling its sales through its Luxembourg operations, the online retailer has been paying a 5.3% average tax rate on its overseas income over the past five years, less than 25% of the average rate across its major foreign markets, Reuters reports.

Amazon is not the only multi-national who has been in the news for not paying its fair share of taxes in the UK. Starbucks, Google, and now Microsoft are also under scrutiny for their tax accounting practices aimed at minimising their taxes. Director of OECD Centre for Tax Policy and Administration Pascal Saint-Amans told the Observer that there appears to be a “large and growing gap” between where companies conduct their business – in higher tax jurisdictions – and where they record their profits – in lower tax jurisdictions.

Undoubtedly, what these companies have done is not illegal and in fact, it’s been going on for years. Cash-strapped governments are however not putting up with it anymore, as these arrangements have deprived them of hefty tax income at a crucial time when the funds are much needed for public budgets and to help save their floundering economies. Amazon has reportedly been under scrutiny from tax departments in countries including the US, UK, Germany and France over the past six years.

More crucially, consumers particularly here in Britain, are having none of it either. There have been calls to boycott these companies and on Dec 8, tax avoidance campaigners targeted over 40 UK Starbuck outlets to protest the fact that the global coffee chain reportedly paid only £8.6 million in tax over 13 years, despite recording sales of £3.1 billion in the same period. Buckling under public pressure, Starbacks has announced that it will review its tax accounting practices and pay up to £20 million more in corporation tax over the next two years.

There’s been plenty of debate over the issue and to be fair, one cannot lay the blame entirely on the companies who are after all doing what they are meant to do; maximise profits and shareholder gains. And they will use whatever means possible to stay competitive and secure the most gains for their bottom line.

Similarly as an investor and consumer, I should naturally put myself – and my bottom line – first. It’s the first instinct of homo economicus or economic human, to act rationally and with self-interest, hence my dilemma with Amazon where I find myself wrestling between my conscience and my inner bargain hunter. And boundless rationality and self-interest is at the core of capitalism, which encourages keen competition and survival of the fittest.

Meanwhile, the European Union is strongly encouraging European governments to work together to root out tax avoidance which is apparently costing them around 1 trillion euros annually. In the UK, the ‘tax gap’ between what the government expects to receive and what it actually collects is a whopping £32 billion, an amount equal to public spending on education alone.

With this huge shortfall, it is little wonder there is so much anger and frustration about these multi-nationals’ tax minimisation practices. Often overlooked when times were good, the widespread use of these practices are now being considered from a moral perspective, and corporations are being censured for not doing the right thing even as the man on the street suffers the effects of recession-hit economies.

Since the onset of the financial crisis, which many attribute to the relentless pursuit of profit maximisation, many have questioned the capitalist mantra of survival of the fittest as a measure of economic success. So is this the right approach to take if it means that underpaid taxes deprive many – particularly the weak and the underprivileged – of public services, and small local companies are being put out of business when they can’t compete with their more ‘tax-efficient’ multi-national counterparts? 

Former equity analyst turned journalist Edward Hadas once wrote in his Reuters column that excessive self-interest and destructive conflict cause problems, and that a healthy economy is built by innumerable individuals who work together, strive for excellence and try to avoid bad practices.

I for one, believe that as we work our way out of the current economic troubles, there is a valid call for a mindset change towards purpose – rather than profit – maximisation. In his book Drive: The Surprising Truth About What Motivates Us, Daniel H Pink says that purpose maximisation is becoming more prevalent as a new breed of businessperson seeks purpose with the fervour that traditional economic theory says entrepreneurs seek profit.

There is certainly call for businesses to have some sense of purpose beyond the bottom line, but purpose maximisation is not just for business leaders and decision makers. As investors, we need to demand more than just profits but also purpose from the companies we invest in, and as consumers we need to be more conscientious about who we buy from, to ensure that they operate ethically for the greater good rather than just self-interest.

In his book, Pink also describes how in early 2009 in the aftermath of the financial meltdown, a group of Harvard MBA students pledged to achieve a higher purpose than just the bottom line. He quotes student Max Anderson, who said: “My hope is that at our 25^th reunion our class will not be known for how much money we made or how much money we gave back to the school, but for how the world was made a better place as a result of our leadership.”

Let’s hope that the lessons learnt from the economic debacle of recent years will be enduring ones, and when the good times return, such fervent declarations will not end up being just lip service. 

Lim Yin Foong eventuallly bought her husband gym sessions instead, figuring that he needed them more than he needed the Kindle Fire.