Profit Center Ethics

Profit Center Ethics

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Profit Center Ethics

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    In This Article
    • Executive stress is difficult to overstate when there is conflict between policy restrictions, near-term performance, the long-term health of the company, and personal survival.
    • Everyone who aspires to responsibility in a complex organization must find a way to strike a balance among these issues.

    Profit center managers are frequently caught in a cruel dilemma. They are often asked to carry out policies that they strongly feel to be unwise. Yet, they know that they will be held responsible for failure, whatever the cause.

    The ethics of dissent are a very real issue in profit center management. Is the good of the corporation the overriding concern? Or is it personal survival? How far should dissent be pushed if higher authority neither wants nor accepts advice?

    What is honorable when either protest or acquiescence lead to unacceptable consequences? The situation is real even with the best of good will on all sides. Differences in perspective lead to far different projections of consequences. Clearcut orders can be followed and must be followed. But orders to a profit center are rarely clearcut just because it is a profit center. However, the manager of a profit center receives much advice that must be needed.

    By definition, a profit center is measured on results. In theory, future profit is the measure. In theory, the manager is free to follow his own judgment except within explicit specific constraints. In theory, current performance is factored by the long term benefits and the effect of corporate constraints. In fact, none of these conditions are ever wholly true.

    Characteristically, profit center managers are measured over a quite moderate time span. The penalty for unsatisfactory absolute performance over the short term is severe. But the proper balance between the known performance and potential future benefits is never clear.

    The executive stress is difficult to overstate when there is conflict between policy restrictions, near term performance, the long term good of the company and personal survival.

    Logically, a profit center should have a combination of all kinds of goals simultaneously. The management should be judged on the net results of this complex of goals. Yet, if this is done, profit is merely a derivative of the interactions of the various goals and constraints over time. It is not a prime index of current performance. It would not be the conventional profit center if it were managed this way.

    The manager's situation becomes more difficult when corporate staff becomes deeply involved. Should the manager do what is politically expedient and satisfy the preferences of staff advisors or optimize future performance for which he is held accountable? This can be an excrutiating choice.

    Corporate staff individually and collectively have their own ideas of how the business should be run. They are in a position to press those ideas hard. They can also significantly bias the evaluation of performance and the imposition of constraints. Failure to obtain their full support means being judged rigidly, even harshly, on near term results. Yet the disagreement almost always concerns the longer term consequences. The most important decisions a manager makes tend to depress short term reported performance in order to significantly improve long term results. The issue becomes “should I do what is expedient, or should I fulfill my responsibilities to the best of my ability?” Martyrs are rarely honored in business.

    In most corporations the evaluation of the profit center manager is based on current reported profit. Managers know it. Incentive compensation schemes often tend to reinforce this specific measurement over all others.

    The problems of ethics are inherently chronic. The manager's problem can be serious enough even in the absence of any constraints. The temptation is great to take the performance measurement at stated face value. It is all too easy to liquidate the future and thereby maximize apparent current performance. In all too many cases this leads to promotion, leaving the aftermath to the hapless successor.

    When the overall interests of the company impose constraints or goals that conflict with short term profit performance, the conflict of interest is compounded. Both count. A balance must be struck. Compliance with the conflicting constraints and contribution to corporate goals are apt to be evaluated in a subjective and often uncertain fashion. Political expediency becomes a necessity.

    The problem becomes even more acute when corporate management has a short term time horizon and profit center optimization requires long term investments of expense as well as capital. No manager can expect to survive who has a longer time horizon than his superiors. But neither can the business survive if the time horizon is inadequate to encompass the actions required today in order to protect the business in the future.

    The worst of all situations exists when corporate management has a different concept of the requirements for future success from the concepts of the profit center management. The differences in perspective and philosophy can apply both to the profit center itself and to the corporation as a whole.

    When any of these conditions exist, then managerial ethics become a real issue.

    There are often real tradeoffs between the personal career and the good of the company. There can be real dilemmas where only short term survival seems possible because of the tradeoffs between long term and short term performance. The conflict between expediency and responsibility can become painful.

    Regardless of ethics, everyone who aspires to responsibility in a complex organization must strike some balance. Those who are most realistic in their compromises inherit the responsibility and set the pattern for the future. That pattern may be far from the best interests of the company.

    Resolution of this conflict can occur only if three conditions are met:

    • There must be an explicit corporate strategy. To be useful, the strategy must relate administrative behavior to the allocation of resources over time. Action must be relatable to a value system that all members of management understand and accept.

    • There must be an understanding and consensus on the strategy. The consensus must include essentially everyone who is in a position to make decisions and tradeoffs that would affect implementation.

    • Profit center profit performance appraisal must encompass a time horizon equal to the strategy time horizon.

    Few multidivision corporations have a strategy that is adequate enough to spare their profit center managers the stress implicit in the ethics of dissent.

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