Why are companies seeking higher profit margins?

Here is Brad DeLong's excellent discussion...

This is one of the great unresolved questions in the economic history of America in the twentieth century. There are, broadly speaking, three interpretations of what went on:

The first is the interpretation of a whole bunch of finance economists starting from Adolf Berle and Gardiner Means writing in the 1930s, and including my brother-in-law Paul Mahoney. It is that a whole bunch of changes in corporate law and financial practice in the early twentieth century culminating in the New Deal shifted a great deal of practical power away from "owners" and to "managers." Shareholders collected their dividends, yes. On those rare occasions where companies wanted to issue more stock managers were very solicitous of shareholder concerns, yes. But most of the time managers did what they wanted, chose their own successors, and set corporate policy with not that much attention to maximizing company stock prices either in the short run or the long run. And shareholders couldn't do much of anything about that: it was simply too costly and too hard to stage a successful proxy fight to throw out the incumbent managers at the company annual meeting.

Now this does not mean that shareholders were "exploited." Managers did care about the level of dividends and the price of the stock--it was a big loss of face at the country club to report poor financial numbers. But managers cared about other things as well--being pillars of their community, indulging in natural benevolence toward their subordinates, and avoiding nasty headlines in the local press, among others.

Now if you're a finance economist, you see this system as "inefficient": companies are wasting a lot of money by employing too many people in jobs that are cushier than they have to be, and while this is good for the workers of the company it also raises costs and prices, and so the gains to workers are outweighed by the losses to shareholders (who collect lower dividends) and consumers (who pay higher prices). If you're John Kenneth Galbraith, you see this technostructure--this technocratic corporate elite of managerial capitalism--as broadly a good thing, because managers are interested in the fundamentals of production and human relations rather than in prettying up their numbers for Wall Street road shows.

In any event, this system comes to an end in the 1980s as Wall Street figures out how to successfully undertake hostile takeovers, and as the threat of being subject to a hostile takeover pushes even those managers who would have been very happy under the old system to pay more attention to the bottom line as a way of boosting current stock prices and making the benefits to outsiders' undertaking a hostile takeover much less.

That's the first interpretation (in its two flavors).

The second interpretation is one that has been pushed by Larry Summers and Andrei Shleifer. It notes that organizations run on patterns of long-term trust and confidence, and that it is devastating to an organization's effectiveness for those at the top to break the established implicit long-run bargains that the organization runs on. Under this interpretation, the paternalistic-employer-and-civic-booster model of the American corporation that dominated the first post-WWII decades was an effective and efficient system of corporate organization. Come the hostile takeover, however, the corporate raiders can replace the old management that had made and kept the implicit long-run bargains with new managers who have no attachment to them, and are willing to do the bidding of the shareholders and the takeover artists. This "breach of trust" moves us to a system of corporate organization that is less efficient and effective for society as a whole--workers who don't trust their bosses won't spend time learning things that are important if you work for this particular company but not in the larger job market, firms won't invest in the community in an attempt to make it a place where workers would like to stay, et cetera. But this new form does expropriate a lot of the value of the firm that was shared with workers-as-stakeholders, and transfer the value to the bosses and the shareholders.

There is also a third interpretation: that the coming of the Volcker disinflation, the dominance of central bankers, and the elevation of price stability over full employment as a goal of governance was bound to weaken American workers' power enough to make the Kodak model clearly less profitable than the more "Hard Times" alternative.

I find that I'm 30% a finance economist, 20% a Galbraithian, 20% a follower of the Summers-Shleifer "breach of trust", and 30% a believer that the high unemployment of the Volcker disinflation was the key in its shift of power away from workers.

You will observe that I give 0% weight to the hypothesis that it was a shift in culture--a rise in the belief that managers had "primary responsibility to the shareholders"--that was responsible for the very real change that you ask about. This is a professional deformation: for 27 years I have been trained to look first at changes in technologies, resources, institutions, forms of organization, and incentives, and only after all of these have failed to give answers to throw up my hands and disappear in a "blaze of amateur sociology."

How much of a difference did this shift--whatever caused it--actually make? Here's a graph from the National Income and Product Accounts: net operating surplus of private enterprises as a share of net domestic income. It shows (a) a large and steep fall in the rate of profit at the end of the 1960s, (b) a partial jump back up in the 1980s. So figure that these changes in the 1980s, whatever caused them, look to have boosted profits by about three percent of total income.

I will classify myself as 60% a finance economist, 5% a Galbraithian, 20% for "breach of trust," 5% to the Volcker disinflation, and 10% I will assign to "cultural change."  The advent of information technology matters as well, but arguably this falls under "finance economist."