Accounting for true and fair and sustainable profits

Abstract The question of fair profits has been asked ever since modern finance has emerged. During the Middle Ages, it relates to the question of usury and the critical distinction between business profit-sharing and exploitative financial gains. With modern economies and the advent of classical economic theories in the 19 th century, usury was claimed to be a virtuous sin which eventually (and supposedly) profits both sinners and society. More recently, this position was reframed and reshaped through shareholder value and shareholder primacy, which uphold the allegiance of business and society to financial investors active on unfettered transnational financial markets. The North-Atlantic financial crisis of 2007–08 exposed this alleged ‘end of history for corporate law’, reopening an evergreen debate on finance and society. In this context, my contribution provides a theoretical analysis of the notion of business profits, addressing the overarching accounting instruments that the law – comprising public and private arrangements, legal rules and social norms – puts in place to define and control for those corporate profits. My analysis is organised in two parts. The first part addresses two ideal types of financial accounting design contrasting: (i) an accounting system that purports to assess shareholder wealth through a fair value accounting model; (ii) another accounting system that purports to determine satisfying corporate profits through a historical cost accounting model. The second part discusses implications for corporate fairness and sustainability according to this dualistic approach which contrasts maximising (shareholder) value and satisfying profit-sharing, the former being framed by an unsustainable multiplicative process, while the latter by a sustainable additive one. This theoretical analysis aims to shed (some) light on the functional definition of business profits and its implications for corporate management and redistributive justice. It further highlights limits and shortcomings of resource valuation and net profit determination as suitable instruments to address matters of corporate sustainability and social responsibility.