The other day I was teaching an introductory course on Sustainaibility Management to PhD students (mostly Engineers, some MBAs, some Computer Scientists). This is always an exciting experience, many different rationalities and perspectives on the issue. We discussed a case study, the sustainability report of BMW, and some important realities of corporate sustainability became clear to me.
First, for some companies, sustainability provokes some kind of “organizational schizophrenia” i.e. they refer, in the same paragraph, to sustainability and ecological awareness as well as to the overarching goal of earning profits with even the most unsustainable products. The schizophrenia is only resolved on operational levels, where a first-order logic of observed systems is employed i.e. how to reduce waste, safe energy, substitute harmful input materials and the likes. On the strategic level, however, where a second-order logic of (self-)observing systems is needed, the schizophrenia with sustainability shows. How can this be solved or better: dealt and lived with? Maybe a polyphonic organization (Kornberger et al. 2006; Andersen 2003; Hazen 1993) is needed for standing this schizophrenia. A polyphonic organization is able to cope with and react to demands from different parts of society, not only from those it primarily deals with (e.g. a company with the economy). See also my papers on the Next Organization.
Second, one student remarked, that at the end of the day BMW would need to be able to pay off all costs. (At the end of days we are all dead, paraphrasing Keynes, and if we cannot make the turn for sustainability no one will be able to pay for anything anymore!) The funny thing with sustainability is that people seem to think that in order to take it serious companies would have to become charities and give away sustainable poducts for free (or at least for less than they cost to produce). This is of course rubbish! In a sustainable economy, the minimum condititon for economic well-being of a company still holds: to maintain its ability to pay off all capital costs at all times i.e. maintain its liquidity. But not necessarily more! That is the whole issue: earning decent money to stay in businss is in line with sustainability. To have more than that is only sustainable if corporate activities stay within ecological limits. Any profit beyond that is excess profit and no one was able to tell me up until now why a return rate of 18 (the desired rate of Volkswagen by 2020) or 25% (the present target rate of Deutsche Bank) is needed to stay economically well. This really is only excess, fueled by institutionalized greed as could be exhibited in the recent financial crisis. For sustainable economics, Ghandi’s insight holds: there is enough for anyone’s need but not for anyone’s greed.
😛 ich schreib einfach mal frecherweise deutsch:
25% sind ja auf das bilanzielle eigenkapital … und jetzt mach dir mal gedanken, wenn das nur 2% der bilanzsumme ausmacht wie bei der DB, dann ist das im schnitt ein aufschlag auf die fremdkapitalkosten von ganz wenig:
sagen wir 3% sind der sichere zinssatz 3% sind das risiko also sind wir für fk bei 6% … also übersteigt der ek zinssatz den des fks um 19% … sagen wir einfach 20% also 20% auf die 2% des eks machen insgesamt also 0,4% auf die bilanzsumme … und das ist äußerst mickrig und sollte im boom schon überbleiben, weil eine finanzkriese prügelt sowas mit pech schnell ins negative 😉
grüße
simon
I will also be naughty and answer in English :p
Using a bank as an example for excess profit is always tricky, because banks supply a nominal good, not a real one. The only way to make money for a bank is not by manufacturing stuff or cutting your hair, but by making money from money. For me, that is the root of the problem, but anyway, lets get into it!
You are right that net asset only amount to about 2% of total asset, but this does not change the argument on excess profits. Deutsche Bank’s 2009 profit before taxes was at around 5 Billion Euro i.e. a return rate of about 15% on net asset. (http://www.deutsche-bank.de/de/content/company/zahlen_und_fakten.htm) And that means that DB earned 5 Billion Euro more than it needed to pay off all its capital costs. DB’s shareholders will get 75 Cent per share compared to 50 the year before, with a 10% return rate. Following this logic, a 5% return rate would still give any shareholder 25 Cent per share.
I just cannot see why this is, for DB itself, less desirable than the 15% with 75 Cent or the 25% with maybe 1.25 Euro. DB gets money from dealing with money not with its shares, it is vastly less dependent on the financial market for refinancing than companies of the real economy. The funny thing is, Deutsche Bank is making money itself anyway by lending credits and loans. To have a 25% goal is IMHO just showing off to other banks how good they are.
Anyway, the issue of excess profit is aiming at the question of “rightsizing” business and giving a corporate answer to “how much is enough”. And 25% is a very poor answer to that.
😛 das beste ist ja, das ganze ist ja nur eine scheindiskussion, weil der marginale gewinn ist das was zählt, und den durchschnitt zu betrachten sagt da ganz wenig aus 😉 wir sollten ackermann nach dem grenzgewinn befragen … weil der ist ja unter 25% wenn das der schnitt ist -> ich unterstelle fallende grenzgewinne wichtig wär jetzt praktisch der verlauf der grenzgewinne, ob der zu den 25% führt, oder ob die nur erreicht werden, da zu geringe “dienstleistungen” angeboten werden
Hm… marginal profit has to be zero in order to maximize profit and if 25% would lead to maximum profit then marginal profit would be zero by then. However, I don’t see that Deutsche Bank calculates its marginal profit and tries to “hit the right spot” with their return rate in order to maximize profits. In either way, marginal costs for financial services (their product) might be close to zero, just as for information goods like software. So if that is the case, marginal profit is the same as marginal revenue and thus maximum profit is only determined by size of market i.e. how much they can sell. The best example for “the more the better” according to economic logic. Is then the 25% the return rate within a saturated market? Don’t think that either, it is not based on any economic theory apart from being No. 1 and showing this to competitors (and maybe ward off potential “unfriendly” buyers of Deutsche Bank shares).