In defence of profits

By David Hughes

First published in the MRC’s Watercooler newsletter. Sign up to our mailing list to receive Watercooler directly in your inbox.

I understand some of the populist outrage over corporate profits in Australia. But do we really want to live in a country where profit is routinely demonised?

That's why it was refreshing to see the new head of the Business Council of Australia offer a calm and rational defence of profitable business this week.  Business leaders should be out selling the economic benefits their organisations provide (which is a far more appropriate use of their position than lecturing Australians on social causes that are often unrelated to their core activity). 

Here are some facts on why we need profitable businesses in Australia. 86% of Australians work in the private sector and the $153 billion paid in company tax represents 25% of our federal budget. 

Australian businesses however are not as profitable as many of our competitors which should concern us for a few reasons.

When profit margins drop below 5% companies have to start laying off workers. According to the ABS, company gross operating profits are down 5.4% for the year to December 2023.

More importantly, when businesses profit — we all benefit. Our 17 million superannuation account holders are one of the biggest beneficiaries of corporate profits. This is an obvious point that is often glossed over. And, despite their clever marketing, it is not the Industry Super funds themselves who deliver retirement windfalls — it all comes back to the success of the private companies they invest in. 

While our first instinct may be outrage when we hear an astronomical figure for CBA’s yearly profit, we can stop to think about the families and retirees who get a share through their investments. Last year CBA reported a profit of $10.2b and 12 million super fund members received a combined $2.4 billion in earnings on their CBA shares (yet most wouldn't have even known they had a stake in the company). 

If we look at just one fund, Australian Super, they have around $7b worth of members' money invested in CBA. This one fund also owns 6% of Woolworths and sizeable stakes in BHP and Woodside Energy. Across the board, superannuation funds own 30% of our banking sector where members get a share in the profits. 

Recently, BHP chair Mike Henry offered a simple defence of the important role his company plays:  “BHP makes up roughly 10 per cent of the ASX, so on average we’re going to find that circa 10 per cent of retirement savings are BHP shares. We paid about 10 per cent of all corporate tax in Australia in the course of the past year, so it’s in all of our interests that the sector and company remain competitive."

And back to CBA, let's also consider that healthy profits give them the confidence to retain and better support their 50,000 employees. Which in the long run, is of greater significance than the headline pay packet of the CEO which always gets more attention.  

In recent times, our Government has been growing the size of the public service by over 10,000 people a year at the same time we have been experiencing declines in productivity across our economy. As an employer, we can be sure that the Commonwealth Bank is better at delivering productivity gains than the Commonwealth Government (although this is a concept our current Prime Minister may still struggle to accept given he actually fought against moves by Hawke and Keating to privatise the Bank). 

Obviously, we shouldn’t gloss over the failures of our big businesses and big banks. Specifically, the failures that led to a banking royal commission and the need for tighter regulation. And on occasion, large profits can point to a lack of competition.  Yet there seems to be a persistent view in some political and media circles that all profit is bad. This view cannot go unchecked. 

Profit is the mechanism that drives market economies. More than that, it is the incentive (and reward) for risk taking and it drives entrepreneurialism.  It also gives businesses the confidence to retain staff and employ more Australians. 

In recent times, many big businesses have focused their advocacy on the pursuit of social change. This has come at the expense of business defending their own right to exist, grow and turn a profit. It is time for them to get back to basics and remind us why strong and profitable business is good for the country.