Corporations, Morality, and the Bottom Line

Here’s a discussion I got into on /. today. This is the post I responded to.

quote:

they are legally required to put profits for their shareholders above all other considerations

No. You’re wrong. Why do so many people think this? They are responsible to their shareholders in that they cannot willfully or illegally lose their shareholders money. They do no have to forsake their values.


No, you’re naive. The basic naivete comes from your language, in fact. “They do not have to forsake their values.” Sure, they don’t. But there’s a _lot_ of pressure to do so.

Do you really believe people think this because they are whacky? Take a look at this passage from an article from the Harvard Business School:

Generating corporate virtue

By now, the story of Malden Mills and its owner, Aaron Feuerstein, is so familiar that the company name has become a sort of shorthand for corporate benevolence. The tale briefly told: In 1995, a fire destroyed Malden Mills’ textile plant in Lawrence, an economically depressed town in northeastern Massachusetts. With an insurance settlement of close to $300 million in hand, Feuerstein could have, for example, moved operations to a country with a lower wage base, or he could have retired. Instead, he rebuilt in Lawrence and continued to pay his employees while the new plant was under construction.

“Why don’t more companies act that way?” is a common reaction when people first hear the story. It is much too simplistic to reply that Feuerstein is a better person than most. Whatever Feuerstein’s relative level of virtue, he had far fewer shareholders to answer to than the average CEO. Feuerstein’s only shareholders are himself and several members of his family, who presumably share his willingness to sacrifice profits for the sake of the employees’ wellbeing. (Feuerstein was perhaps too willing´┐ŻMalden Mills filed for bankruptcy protection last November.) The typical CEO of a publicly held corporation, by contrast, is accountable to thousands of shareholders.

My purpose here is not to denigrate the share-owned corporation, which is a fundamental building block of democratic capitalism, but to acknowledge that its legal structure imposes certain priorities on its senior leaders. If they fail to maximize earnings for shareholders, managers risk removal by the equity holders to whom they report. Worse, failure to serve shareholders’ interests puts the corporation in jeopardy of being acquired by a stronger company or losing access to capital markets. In theory at least, self-interest and self-preservation ensure that no rational executive will engage in activities that clearly erode shareholder value.

To which he responded:

quote:

At no point did you refute that it is legal to do so, you just said that there are pressures.

Of course there are pressures to gain shareholder value! That’s blatantly obvious.

The act of going public means that you give up control over your company. At any moment when the shareholders think someone else can do a better job of making them money, they kick you out, along with your executive-size salary.

The bottom line is this: you can only be charitable and giving with your OWN MONEY. You can’t donate all the shareholder’s money to your pet cause without expecting them to get a new board.

So, if you want to be a charitable business, simply keep the business private, and don’t make an IPO. Make sure any investors are in agreement with your values. I am my business, and I occasionally give my money to the PostgreSQL project (and other projects to a lesser extent).


And I responded:

I know this thread is dead already, but I just had to respond to this absurdity.

The bottom line is this: you can only be charitable and giving with your OWN MONEY. You can’t donate all the shareholder’s money to your pet cause without expecting them to get a new board.

We are talking about a corporation being morally and socially responsible. That does not mean the corporation has to “donate shareholder money,” although from the sound of it, you hold the typical (and stupid) business mentality that you can just “throw money at things” to solve problems. What I and most people who worry about this stuff are talking about are the actions the corporation takes. Will the corporation’s manufacturing practice adversely affect the environment of the surrounding community? Will closing down a factory in a small town where the company was born, only in order to move to cheaper overseas markets and save some cash, ruin the economy of that town? Is the corporation treating its employees with dignity and respect?

I’m not saying CEO Joe Schmo has to donate his shareholder’s money to Make-a-Wish. I’m saying when he makes decisions, he has to think about things OTHER than the bottom line. And that, increasingly, isn’t the case. CEOs feel pressure from their shareholders due to the legal structure of corporations, which allows a group of shareholders to remove a CEO at the slightest performance dip (when earnings go flat). And a CEO has to worry so much about keeping his own job that he doesn’t let moral and social concerns enter into his corporate decision-making.

Yes, you’re really, really naive.

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