Why is profit maximization not an adequate goal for a firm?

Profit maximization is often viewed as an inadequate goal for a firm because it does not comprehensively account for the riskiness and timing of returns. While striving for profits is an essential aspect of a business's success, focusing solely on maximizing profits can lead to decisions that overlook important financial considerations, such as the volatility of earnings and the time value of money.

For instance, a company might achieve higher profits in the short term through risky investments or by cutting costs in ways that could harm long-term sustainability, such as reducing product quality or customer service. Additionally, profit maximization often disregards how profits are realized over time; a dollar earned today is worth more than a dollar earned in the future due to factors like inflation and investment potential. Consequently, a profit-maximization approach may encourage tactics that yield immediate gains without ensuring stability or growth in the future, which is crucial for long-term success.

In contrast, focusing on a broader objective like shareholder wealth maximization considers both the value created for the shareholders and the risks associated with different strategies, leading to more sustainable and responsible business practices. This comprehensive view tends to better align with the interests of stakeholders, promoting a balance between profitability and responsible management over time.