The "Profit First" Fallacy

Benito Teehankee

September 6, 2011

Managing For Society, The Manila Times

A well-known business leader was interviewed about his thoughts on corporate social responsibility. He advocates CSR, he explained. But his basic argument is this: “You have to first do well before you can do good.” In other words, “Profit first!”.

This argument is an unfortunate but popular fallacy. Its conclusion simply does not logically follow from its premises. It can be shown that, first, not being profitable does not prevent a company from doing good and that, second, not being profitable does not justify a company’s bad practice.

Let's define terms. There are two kinds of good things that companies can do. Let’s call these basic good things and the optional good things. The basic good things must be done by companies from Day One, such as being a law-abiding corporate citizen, delivering socially useful products and services, and treating customers, employees and suppliers fairly. Business is ethically responsible for doing these basic good things.

The optional good thing that companies can do is called philanthropy. These include charitable acts that companies may choose to do when their resources allow them to or when they are moved to do them by the concern of their managers. These include community donations, outreach, and disaster relief, among others. These are good but optional things that companies may do.

Now comes the confusion: Business leaders argue that doing well must precede doing good. While this may be true in the case of philanthropy, it clearly cannot be true for the basic good things.

Why is this argument fallacious? First, profit can be achieved only after a period of time; it is not instantaneous. It is elementary that investments take time to achieve positive returns. Sales may also take time to reach a volume high enough to cover fixed costs. Is the company justified in violating the law, selling harmful products or treating employees unfairly in the meantime? The clear answer is “No” since this would be absurd.

A common area where the fallacy is often invoked is in labor practices. More and more companies are using contractual workers for essential jobs of a continuing nature. The reason often given is that regularizing employees is expensive and the company cannot afford it right away. But underinvestment in employee compensation is not a sound business strategy. How can a company attract, motivate and retain the right people who will deliver quality goods or service if it cannot even give a secure job?

The reasoning is bad enough to begin with but it gets worse. Many companies who contractualize because they cannot “afford” to give regular jobs yet turn a profit eventually. But guess what? They now decide that the profit is not enough and it makes sense to continue contractualizing to ensure even higher profits in the future.

When has the company earned enough profit anyway so that it can begin to do what is good? Unfortunately for some companies, doing the good things after earning “enough” profit never comes. What we have seen in these companies is the opposite: as companies become more profitable, they in fact contractualize more. What was first justified as a practice necessary for the company’s economic survival becomes a “best practice” for maximizing profit at the employees’ expense. The “profit first” argument has turned to the practice of “profit first and only.” The other name for this is greed.

“Profit first” is a fallacy that needs to be rejected by every reasonable business leader. Aiming to do well before doing good is morally unacceptable. While philanthropy may be postponed, companies must do good from the beginning and work hard to eventually do well. It is simply good business.

The author is the Chairman of the Management and Organization Department of the Ramon V. del Rosario College of Business. He may be emailed at benito.teehankee@dlsu.edu.ph. The views expressed above are the author’s and do not necessarily reflect the official position of De La Salle University, its faculty and administrators.