Understanding Positive Business: Value vs. Profit

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Professor Gautam Kaul says learning about the trade-offs of business puts people on the right path in finance.

What is positive business? It’s the idea that businesses can and should create not just economic value, but also offer great places to work, be good neighbors, and help solve some of the world’s biggest challenges.

How does that apply to finance? For Michigan Ross Professor Gautam Kaul, it’s about maximizing value instead of maximizing profit.

“I think finance is the best thing ever created, because it focuses on value,” says Kaul, professor of finance & Fred M. Taylor Professor of Business Administration. “But a lot of people confuse that with profit. Value means you’re looking out for the long term, and shareholders get money after everyone has been paid in a fair and market-driven way.”

The problem comes when individual and company goals diverge. It happens more often than you think, he says, because people are unprepared for the trade-offs in business decisions. It happens in every organization, including higher education itself. That’s why he’s more concerned with preparing his students for the inevitable wrenching business decisions rather than telling them to not do bad things.

“If you’re a CEO, you’ll probably be in that position for about five years or so and you can easily start, without cheating at all, to focus more on today than the future,” he says. “You’re willing to trade the future for today, which most true owners would not do. So there’s a real tension between individual goals and company goals. It’s driven by human nature. We’re here for a short time. But when you work for a company, you need to treat its resources the way you would if you were its owner of rather than an agent.”

That means teaching students the costs and benefits of actions, and how evaluating those becomes increasingly difficult as they grow more complex. So he likes to expose them to the difficult decisions they’ll face in the business world.

Creating value also involves viewing a company from society’s point of view and not your own.

“We really don’t talk enough about the trade-offs,” Kaul says. “Value is profit forever. And profit doesn’t come from a black box. But as a manager you’ll tend to look for immediate gratification because you’re short-lived. We need to teach more about stewardship.”

Learn more about positive business and how it can benefit you and your organization at the 2019 Positive Business Conference, May 9-12 at Michigan Ross.

 

Media Contact: michiganrosspr@umich.edu