Rate of profit as management objective in municipal companies

Abstract

PURPOSE: This paper presents research findings on the rate of profit’s centrality as a management objective and its role in municipal enterprises. The authors seek to ascertain how important the rate of profit is among other management objectives. The article also explores the potential positive and negative effects of the rate of profit as a management objective on management standards in municipal enterprises.

DESIGN/METHODOLOGY/APPROACH: The study comprises a comprehensive analysis of founding bodies’ resolutions that define their management objectives for 2017, 2020, and 2023 in 165 municipal enterprises, which represent more than 5% of all municipalities in Poland. It is important to note that since 2016, Polish local governments are legally obliged to establish management objectives for municipal enterprises. The study classified the objectives into four categories: tangible, economic, social, and other.

FINDINGS: As an economic objective, the rate of profit continues to dominate management objectives in municipal enterprises (with the exception of two sectors), although the number of tangible goals has steadily increased. Among the various forms of the rate of profit, net income was most frequently (89%) specified as a primary goal. However, the 2016 requirement of management objectives has raised issues about the centrality of rate of profit.

PRACTICAL IMPLICATIONS: The 2016 requirement intensified discussions concerning the appropriateness of setting the rate of profit as the primary goal. It has been proposed that municipal enterprises should abandon the rate of profit as their central objective and instead adopt a balanced capital management approach in which the primary management objective should be achieving an equilibrium of the various forms of capital, leading to greater efficiency and effectiveness.

ORIGINALITY/VALUE: This article offers an overview of the role and challenges associated with the rate of profit as a management goal. This article’s particular context – municipal enterprises – makes it particularly relevant for Central and Eastern European countries in which this organizational form remains prevalent.