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Firms are in business for a simple reason To make money Traditional economic theory suggests that firms make their decisions on supply and output on the basis of profit maximisation However many Economists and managerial Scientists in our days question that the sole aim of a firm is the maximisation of profits The most serious critique on the theory of the firm comes from those who question whether firms even make an effort to maximise their profits A firm especially a large corporation is not a single decision-maker but a collection of people within it This implies that in order to understand the decision-making process within firms we have to analyse who controls the firm and what their interests are The fact that most large companies are not run by the their owners is often brought forward to support this claim A large corporation typically is owned by thousands of shareholders most of whom have nothing to do with the business decisions Those decisions are made by a professional management team appointed by a salaried board of directors In most cases these managers will not own stock in the company which may lead to strongly differing goals of owners and managers Since ownership gives a person a claim on the profit of the firm the greater the firms profit the higher the owners income Hence the owners goal will be profit maximisation When managers salary stays unaffected by higher profits they may pursue other goals to raise their personal utility This behaviour strikes the critical observer regularly when for example reading or watching the financial media Managers there often rather mention the rises in sales or the growth of their company rather then the profits Some economists like Begg 1996 argued that managers have an incentive to promote growth as managers of larger companies usually get higher salaries Others like Williamson 1964 suggested that managers derive further utility from perquisites
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