Corporate Responsibility - What obligation? Maximise what?

[volatile]

http://crookedtimber.org/2008/07/25/...maximise-what/

BoingBoing just linked to an interesting little article on corporate responsibility, and the issues arising from "maximising shareholder value". I'm not enough of an economics buff to comment on this in much depth, but the author does articulate certain things that have been nagging me about corporate governance and social vs. (if indeed it is a vs.) fiduciary responsibility.

Whilst, legally, of course, "the managers of corporations have a fiduciary duty to maximize corporate profits", I find this analysis of how that maximisation might be done rather interesting. Any thoughts?

[cj.23]

double post cj x

[cj.23]

double post

cj x

[cj.23]

Very interesting. So am I getting this right, a company's primary responsibility is to provide a profit to its shareholders? It sort of makes sense ot me, but at the expense of not supplying consumers with a service they have paid for? Normally of course such an action would result in the share value falling in the long term, as customers go elsewhere.

Imagine a hypothetical water company,which owing to conditions arguably beyond its control fails to supply say 100,000 people with water for 14 days in the Summer of 2007, sparking a massive government operation to supply bottled water. Imagine 3 days in to the disaster said water company announces record profits of £300 million, and an extra dividend, and that next years profits will not be effected. Imagine they then announce despite a difficult time ahead they are making cuts in the infrastructure (the failure of which led to the disaster) which will lead to even better performance for share holders in their annual report, yet charged their customers, left without water or compensation, the full price for the 14 days without supply? And then hiked the water bills to pay for the infrastructure they are cutting back on?

Yet the consumer has no choice in their water company - there is no competition, so it has an effective monopoly in that utility. Such a vile company obviously does not exist, and if it did we might expect the government to do something, but would this be the logical result of pursuing shareholder returns at the expense of the consumer? If you have no monopolies it is no problem - but some effective monopolies remain?

cj x

[MCH]

Well there are several responsibilities.

Obviously one is to the shareholders - they are after all the ones providing the money to the corporation to operate in the first place, and the ones who control it by votes. They are, essentially, employing the company to make profits, and that is the fiduciary obligation.

Another is to the staff, and to maximise income so more can be employed and so they can be paid. They are, essentially, exchanging their own service - time and intellect - with the company's - administration, equipment, team structures, etc - for both to make a profit.

Another is to law. A social requirement between anyone, grouped or individual.

Another is to customers in order to continue being paid at all.

Monopolies in various forms skew these responsibilities by affecting the balance(s) between all of these and others.

Shareholders may vote for a change in the purely money-making balance between these responsibilities - so shareholders take precedent.

Additionally, most corporations exist with a specific aim: "to become the world leader in xxxx" or some such, with a requirement that in order to exist all the above responsibilities have to be fulfilled.

As long as being paid is tied tightly to delivering goods or services, then delivering dividends to shareholders requires delivering the goods or services the company is employed for. There's nothing inconsistent with a hospital or third world company making people better and making money for shareholders. Where this works, it makes sense to do so rather than include the overheads and relatively poor efficiencies of NGOs and similar.

[volatile]

Originally Posted by cj.23

Very interesting. So am I getting this right, a company's primary responsibility is to provide a profit to its shareholders?

Someone more qualified to say would need to confirm, but that's my understanding of the basic rule for publicly-traded companies...

I've worked for and with a number of large corporations and seen a huge amount of short-termism in the name of big profits sooner. I'm now working in universities and with the increase in management structures and business-type approaches to running academic institutions, there's a similar move towards profits now against stability later (though not, of course, because of the shareholders).

There are some interesting comments on the story both at the blog itself and at BoingBoing where I originally came across the article.

[balrog666]

Originally Posted by cj.23

Very interesting. So am I getting this right, a company's primary responsibility is to provide a profit to its shareholders? It sort of makes sense ot me, but at the expense of not supplying consumers with a service they have paid for? Normally of course such an action would result in the share value falling in the long term, as customers go elsewhere.
[snip]
cj x

Yes.

And, quite true, that a company without customers cannot provide any profits.

[Denver]

One interesting idea I've seen (and I believe there are some thinktanks working on this, though I don't have a link) are ideas for other kinds of balance sheets, beyond just financial ones. For example, an environmental balance sheet, showing how a company takes and gives in that realm. Or an ethical balance sheet. In theory, these would helped concerned investors better rate a company's value.

[cj.23]

Well ethical investors might like that. OK, I thought through the theory, and i can see perfectly why the legal responsibility os to deliver to shareholders - they have invested money, and are entitled to rewards, so the board must aim to maximise dividends, which si done by running a profitable business. That in turn will dependon good staff (who need good conditions) and providing an excellent service.So in theory thsi will all turn out for the best, and everyone wins, so long as customers can freely choose if they want that service.

It's not suitable for running a postal service or some other services where social utility outweights profit potential, but the market will generally provide a sound system of regulating I guess.

cj x

[Skeptic Ginger]

Originally Posted by MCH

Well there are several responsibilities.

Obviously one is to the shareholders - they are after all the ones providing the money to the corporation to operate in the first place, and the ones who control it by votes. They are, essentially, employing the company to make profits, and that is the fiduciary obligation.

Another is to the staff, and to maximise income so more can be employed and so they can be paid. They are, essentially, exchanging their own service - time and intellect - with the company's - administration, equipment, team structures, etc - for both to make a profit.

Another is to law. A social requirement between anyone, grouped or individual.

Another is to customers in order to continue being paid at all.

Monopolies in various forms skew these responsibilities by affecting the balance(s) between all of these and others.

Shareholders may vote for a change in the purely money-making balance between these responsibilities - so shareholders take precedent.

Additionally, most corporations exist with a specific aim: "to become the world leader in xxxx" or some such, with a requirement that in order to exist all the above responsibilities have to be fulfilled.

As long as being paid is tied tightly to delivering goods or services, then delivering dividends to shareholders requires delivering the goods or services the company is employed for. There's nothing inconsistent with a hospital or third world company making people better and making money for shareholders. Where this works, it makes sense to do so rather than include the overheads and relatively poor efficiencies of NGOs and similar.

I agree and you added a few more than were on my list.

:

I said something to this effect the other day. The idea profits are the operating priority seems to me to be a guilt minimizing rationalization for corporate social irresponsibility.

And I am not talking about charity or keeping employees in dead desk jobs. I am talking about ignoring human rights and dumping the cost of pollution onto other payers.

Only a few wackos would argue that corporate mandate to maximize shareholder profits included breaking the law. So why is that the magic limit on unethical corporate actions? Surely human rights and decency should be included as a limit not to be sacrificed using the greedy excuse it is the executive's mandate, not the executive's choice. That is a commonly cited but very unfortunate misuse of one's 'mandate'. It is an excuse for personal greed that needs more public attention rather having the public blindly going along with the rationalization.

[Skeptic Ginger]

The problem with claiming the law delineates what is the ethical limit of behavior is the fact we are in a global economy. All countries are not run by functioning democracies and therefore the laws in many countries are not within ethical limits.

[Skeptic Ginger]

Also, short term profits such as those that fueled the latest crisis in the financial markets obviously didn't maximize shareholder profits. People talk about governments being inefficient business entities, well how efficient was this latest round of short term greedy private business actions? Why haven't those responsible been fired? That it supposed to be one of the criticisms of government run businesses, they can't fire people.

Perhaps the Libertarians among us could point to all the fired bad managers and restructuring (without regulatory mandates) in the mortgage loan companies that haven't completely folded. I'm curious how many people/companies that includes.

[rjh01]

I have several issues with saying that companies exist to maximize returns to shareholders.
1. Is this in the short, medium or long term returns?
2. If the senior managers get most of their income from their salary where is their incentive to increase shareholder return as opposed to other goals such as job security and better salary and conditions.
3. How long has that company been in the illegal drug trade where profits can be huge? Or doing other illegal or unethical activities?
4. There is also the issue of growth of the company.
5. Then there is the feel good measures done by all humans that control the company.

[Aitch]

From what I remember from my Business Studies courses (a LONG time ago), the primary goal of company directors is to stay company directors - and why not? It can be a nice life.

To do this, they have a sub-goal of keeping the share-holders happy. This is done by providing (in the UK at least) good dividends, amongst other things.

This entails further sub-goals:
1. Keeping and building the customer base, by providing a competitive service - not necessarily the best service possible.
2. Keeping the company safe - good PR, not breaking company law, or H&S law etc.

And probably others.

So there are limits to what they will do; some overstep them and they end up out of a job.

[icerat]

The bottom line is that Corporate directors of publicly held companies do have a legal responsibility to maximise profits. If shareholders believe the directors have not, they have the right to sue them for losses.

Probably the most famous case confirming this was Dodge v Ford Motor Company back in 1919. The company was making huge profits and rather than pay special dividends Henry Ford wanted to do things like drop the price of the cars, build more plants, and employ more workers at better wages.

Minority shareholders successfully sued and stopped him.

The way company directors can work around this is by claiming various actions, for example environmentalism, will increase future profits through improved reputation or efficiencies. In the past Japanese companies in particular have been well known to take the "long term" view of profits, with for example more spent on R&D, and American companies the short term view. Given the more litigious nature of American society they may well be justified in that view.

Note that privately held companies are a different kettle of fish.

[fxm]

Originally Posted by icerat

The bottom line is that Corporate directors of publicly held companies do have a legal responsibility to maximise profits. If shareholders believe the directors have not, they have the right to sue them for losses.

Probably the most famous case confirming this was Dodge v Ford Motor Company back in 1919.

Most famous, to the point of legendary. Take a look at this paper for more information.

"Maximizing profits" really is an oversimplification of corporate purpose, like "survival of the fittest" is an oversimplification of evolution.

[balrog666]

Originally Posted by cj.23

Well ethical investors might like that. OK, I thought through the theory, and i can see perfectly why the legal responsibility os to deliver to shareholders - they have invested money, and are entitled to rewards, so the board must aim to maximise dividends, which si done by running a profitable business. That in turn will dependon good staff (who need good conditions) and providing an excellent service.So in theory thsi will all turn out for the best, and everyone wins, so long as customers can freely choose if they want that service.

Yep, "doing well by doing good" has a long, long history within business models.

Originally Posted by cj.23

It's not suitable for running a postal service or some other services where social utility outweights profit potential, but the market will generally provide a sound system of regulating I guess.

cj x

You mean like UPS, Fed-Ex, DHL, and so on?

[balrog666]

Originally Posted by rjh01

I have several issues with saying that companies exist to maximize returns to shareholders.
1. Is this in the short, medium or long term returns?

Yes. But not necessarily at the same time or for all times - markets change, so companies have to change as well and learn to anticipate such changes.

Originally Posted by rjh01

2. If the senior managers get most of their income from their salary where is their incentive to increase shareholder return as opposed to other goals such as job security and better salary and conditions.

Their incentive? Stock options, bonus incentives, keeping their job.

Job security, better salaries, and better conditions for workers are not goals - they are incentives to the employees to help achieve the actual goals.

Originally Posted by rjh01

3. How long has that company been in the illegal drug trade where profits can be huge? Or doing other illegal or unethical activities?

Huh? What company? What illegal drugs?

Jeopardizing an entire company by engaging in illegal activities is not on anyone's long term business plan.

But desperate people do desperate things. And are usually punished for it by the market or regulatory authorities.

Originally Posted by rjh01

4. There is also the issue of growth of the company.

Basic capitalism is forward looking but there are always trade-offs between growth and staffing/production, market share, profit expectations, and slippery and uncertain external factors like taxes, nonsensical "green" regulations, and basic bribing/influencing of politicians and regulators.

Originally Posted by rjh01

5. Then there is the feel good measures done by all humans that control the company.

Feel-good measures provide advertising, publicity, or other intangible rewards and so, generally, are quite easily justified.

[Francesca R]

Originally Posted by volatile

http://crookedtimber.org/2008/07/25/...maximise-what/

BoingBoing just linked to an interesting little article on corporate responsibility, and the issues arising from "maximising shareholder value". I'm not enough of an economics buff to comment on this in much depth, but the author does articulate certain things that have been nagging me about corporate governance and social vs. (if indeed it is a vs.) fiduciary responsibility.

Whilst, legally, of course, "the managers of corporations have a fiduciary duty to maximize corporate profits", I find this analysis of how that maximisation might be done rather interesting. Any thoughts?

I concur that the legal mandate of a corporation should consist of a duty to maximise shareholder value above all else, this being subservient to obeying the law in principle (although breaking the law can be seen to be logically rational if the financial consequences of doing that are expected to be higher than obeying it).

The only credible way to align this with socially responsible behaviour is to rig incentives so that socially responsible decisions are also good business decisions, and so that socially irresponsible ones are bad business decisions. Friedmanites would not tend to think any great regulation is required to do this. Others (including myself) would disagree. The attitude of the public influences what those incentives are.

It is technically impossible to mandate a company to "behave responsibly" unless there is a (relative) financial payoff IMO. In most cases there is, as long as the constructs essential for market-capitalism exist in a strong form, even in the absence of regulatory oversight. Not always by any means.

[icerat]

Originally Posted by fxm

Most famous, to the point of legendary. Take a look at this paper for more information.

Great reference fxm! Thanks! I recommend everyone read it for further insights on this topic.

[Skeptic Ginger]

Originally Posted by fxm

Most famous, to the point of legendary. Take a look at this paper for more information.

"Maximizing profits" really is an oversimplification of corporate purpose, like "survival of the fittest" is an oversimplification of evolution.

I'd like to add a little to this as well. Any future court rulings would likely take into consideration the corporate charter. It may very well be that charters need to be reworded in some cases.

Either way, the ruling appeared to have to do with employees' pay vs shareholder's profits. According to the paper cited here, the description of corporate responsibility to maximize profit was not part of the legal justification for the final ruling.

Quote:

Finally, a third limiting aspect of Dodge v. Ford as a source of legal authority on the question of corporate purpose is the important fact, noted earlier, that the Michigan Supreme Court’s statements on the topic were dicta. The actual holding in the case—that Henry Ford had breached his fiduciary duty to the Dodge brothers and that the company should pay a special dividend—was justified on entirely different and far narrower legal grounds. Those grounds were that Henry Ford, as a controlling shareholder, had breached his fiduciary duty of good faith to his minority investors.17 As the majority shareholder in the Ford Motor Company, Henry Ford stood to reap a much greater economic benefit from any dividends the company paid than John and Horace Dodge did. Ford had other economic interests, however, directly at odds with those of the Dodge brothers. First, because the Dodge brothers wished to set up their own car company to compete with Ford (as they eventually did), Ford wanted to deprive them of liquid funds for investment.18 Second, Ford wanted to buy out the Dodge brothers’ interest in the Ford Motor Company (as he eventually did) at the lowest price possible. Withholding dividends from the Dodge brothers was an excellent, if underhanded, strategy for accomplishing both objectives.19

That appears to have more to do with the ruling than some profit principle of a corporation. Henry wasn't interested in philanthropy toward his employees, Ford was trying to screw his business partners.

[balrog666]

Originally Posted by Francesca R

I concur that the legal mandate of a corporation should consist of a duty to maximise shareholder value above all else, this being subservient to obeying the law in principle (although breaking the law can be seen to be logically rational if the financial consequences of doing that are expected to be higher than obeying it).

The only credible way to align this with socially responsible behaviour is to rig incentives so that socially responsible decisions are also good business decisions, and so that socially irresponsible ones are bad business decisions. Friedmanites would not tend to think any great regulation is required to do this. Others (including myself) would disagree. The attitude of the public influences what those incentives are.

It is technically impossible to mandate a company to "behave responsibly" unless there is a (relative) financial payoff IMO. In most cases there is, as long as the constructs essential for market-capitalism exist in a strong form, even in the absence of regulatory oversight. Not always by any means.

Ding, ding, ding! Companies, first and foremost, respond to financial incentives and disincentives. Until they become onerous; then they simply escape.

Although it escapes me how you could define, and justify, in any meaningful fashion, exactly what you mean by "behave responsibly".

[volatile]

Originally Posted by Francesca R

I concur that the legal mandate of a corporation should consist of a duty to maximise shareholder value above all else, this being subservient to obeying the law in principle (although breaking the law can be seen to be logically rational if the financial consequences of doing that are expected to be higher than obeying it).

The only credible way to align this with socially responsible behaviour is to rig incentives so that socially responsible decisions are also good business decisions, and so that socially irresponsible ones are bad business decisions. Friedmanites would not tend to think any great regulation is required to do this. Others (including myself) would disagree. The attitude of the public influences what those incentives are.

It is technically impossible to mandate a company to "behave responsibly" unless there is a (relative) financial payoff IMO. In most cases there is, as long as the constructs essential for market-capitalism exist in a strong form, even in the absence of regulatory oversight. Not always by any means.

Isn't the argument that the blog poster is making that (socially) responsible actions are (would be?) financially beneficial, but that the understanding that shareholder profits come first leads to a kind of fiscally and socially damaging short-termism? The negative effects of that type of thinking range from productivity hits at individual companies to wider effects on the economy as a whole and on the natural and social climate (as the article outlines); effects which are almost never taken into account in the boardroom (or, more usually, in the middle manager's offices).

I agree with you generally, I think, but I'd argue that companies often miss the bigger picture. When I worked on corporate environments, I certainly saw decisions being taken that would look good next April, but which would have damaging consequences five Aprils down the line.

In other words - wasn't Henry Ford right?

[volatile]

Originally Posted by balrog666

Although it escapes me how you could define, and justify, in any meaningful fashion, exactly what you mean by "behave responsibly".

You have no concept of ethics, let alone corporate ethics, at all? The phrase "responsible" doesn't have any meaning to you? Now, I realise concepts of responsibility will vary from person to person, but are you seriously saying that you cannot even conceive of what a responsible company would look like?

[Father Dagon]

I have a hunch that this is just another way for the big corporations to mess up for the medium and small corporations.

Anyone who thinks that I'm wrong?

[balrog666]

Originally Posted by volatile

You have no concept of ethics, let alone corporate ethics, at all? The phrase "responsible" doesn't have any meaning to you? Now, I realise concepts of responsibility will vary from person to person, but are you seriously saying that you cannot even conceive of what a responsible company would look like?

Quit being silly - I'm saying that your definition of "responsible" doesn't match mine or the one from any of those guys over there (pick any three out of the next 500 million).

And codifying, and enforcing, a strict definition, however you define it, will create, not universal compliance, but both a backlash from those constrained and a loosening up of standards from those who might otherwise operate more strictly.

In simpler terms, "one size fits all" doesn't and forcing people to adhere to arbitrary rules always causes unexpected and unintended consequences.

[balrog666]

Originally Posted by Father Dagon

I have a hunch that this is just another way for the big corporations to mess up for the medium and small corporations.

Anyone who thinks that I'm wrong?

Especially if they can get the do-gooder useful idiots to do their work for them. Big corporations own the lobbyists and hence, the politicians and they greatly resent the agility and acumen of smaller corporations, and, most especially that certain regulations do not apply to the smaller corporations because of their size.

[cj.23]

Originally Posted by balrog666

You mean like UPS, Fed-Ex, DHL, and so on?

Yes, all highly profitable - and taking market share in the UK from the State post office which is required to deliver to any mainland address at the same cost, regardless of actual cost of delivery. Parcels are profitable - stamped letters are not - so for over a century the Royal Mail used profits from the former business to cover the latter. Also the state service must provide service to rural districts, which generally are not covered as much by private companies. Hence the disaster befalling the UK post office, as the market driven private companies have snapped up the profitable aspects of the business, leaving the unprofitable but necessary mail delivery to the Royal Mail and hence taxpayer subsidzation. Have a quick look on BBC news for many stories and two recent reports on this issue. I assume the US mail suffers from the same problem?

I suspect railway networks face similar problems, and privatisation certainly spelled the end of many rural bus services, which had a social utility far outweighing their profitability, as so often is the case with public transport.
cj x

[Skeptic Ginger]

Balrog you have such tunnel vision. The world can only be one way, greedy with tough cupcakes, everyone for themselves. How is it you not only think this is the way things work, you seem to take great joy in that belief. Thank goodness you are wrong.

Ben & Jerry's Redux

Quote:

When Unilever went 'soft' on Ben & Jerry's social mission, they also turned their backs on one of their own core competencies: branding. They jeopardized the soul of Ben & Jerry's brand. So, CEO Freese's decision to embark on a $5 million dollar campaign to save small family farms is both good corporate social policy and good corporate economic policy. It is Ben & Jerry's redux -- a return to what the company stands for.

If a company's social responsibleness can also be a selling point for it's products, then you get the best of both worlds. And this is an increasingly popular business branding practice. For example these concepts are steadily growing, some are old, some are new.

Companies and climate change

Quote:

The army of corporate greens is growing fast. Late last year HSBC became the first big bank to announce that it was carbon-neutral, joining other financial institutions, including Swiss Re, a reinsurer, and Goldman Sachs, an investment bank, in waging war on climate-warming gases (of which carbon dioxide is the main culprit). Last year General Electric (GE), an industrial powerhouse, launched its “Ecomagination” strategy, aiming to cut its output of greenhouse gases and to invest heavily in clean (ie, carbon-free) technologies. In October Wal-Mart announced a series of environmental schemes, including doubling the fuel-efficiency of its fleet of vehicles within a decade. Tesco and Sainsbury, two of Britain's biggest retailers, are competing fiercely to be the greenest. And on June 7th some leading British bosses lobbied Tony Blair for a more ambitious policy on climate change, even if that involves harsher regulation. …

Carbon Neutral Business Ad Campaign

Carbon Offset' Business Takes Root

EcoBusinessLinks - Green Directory


Fair Trade Certified

Quote:

The Fair Trade Certified™ Label guarantees consumers that strict economic, social and environmental criteria were met in the production and trade of an agricultural product. Fair Trade Certification is currently available in the U.S. for coffee, tea and herbs, cocoa and chocolate, fresh fruit, flowers, sugar, rice, and vanilla. TransFair USA licenses companies to display the Fair Trade Certified label on products that meet strict international Fair Trade standards.

Fair Trade Federation


The Eco-Mall

The Seventh Generation

Price Sensitivity of Environmentally-Friendly Products

Green Seal


Then there are all the 'buy recycled' campaigns which are increasingly successful.

Treecycle Recycled Paper - Eco-Friendly Office and Cleaning Products - Biodegradable Food Service


And there have been a number of very successful boycotts over the years from California grapes to divesting in apartheid S. Africa. Those actions proved that maximizing profits are not always done by trashing human rights and totally disregarding the environment.

[Father Dagon]

Originally Posted by balrog666

Especially if they can get the do-gooder useful idiots to do their work for them. Big corporations own the lobbyists and hence, the politicians and they greatly resent the agility and acumen of smaller corporations, and, most especially that certain regulations do not apply to the smaller corporations because of their size.

Big corporations can also afford to have whole departments that only wards off and dodges regulations, laws and taxes. And the regulations that kicks in after a certain size is an impediment to the growth of the economy. Say that a corporation with at least 20 employees has to file extensive reports about the gender equality, or the lack of it 4 times a year. But if the corporation doesn't get ridiculous high profits, it can only afford to have a separate dodge department if it also can afford at least 50 employees.

So for a corporation with only 19 employees it's far wide a gap to bridge in just one leap...

[Francesca R]

Originally Posted by balrog666

Although it escapes me how you could define, and justify, in any meaningful fashion, exactly what you mean by "behave responsibly".

That too. Society can bash together loose definitions though (and does)

[Francesca R]

Originally Posted by skeptigirl

I said something to this effect the other day. The idea profits are the operating priority seems to me to be a guilt minimizing rationalization for corporate social irresponsibility.

Companies do not feel guilt. They do not "feel" anything. No particular rationalisation is necessary there.

Quote:

Only a few wackos would argue that corporate mandate to maximize shareholder profits included breaking the law.

Ad-hom noted, but that is what it does in effect--just not "officially". And I can argue it just fine. Try me.

Quote:

So why is that the magic limit on unethical corporate actions?

Companies do not have ethics, unless appearing to have them (with no actual sincerity) produces financial benefits.

Quote:

Surely human rights and decency should be included as a limit not to be sacrificed using the greedy excuse it is the executive's mandate

Yes but the law is the only realistic way to do this, and the law needs to have sharp enough teeth to be able to enforce itself.

Originally Posted by skeptigirl

Also, short term profits such as those that fueled the latest crisis in the financial markets obviously didn't maximize shareholder profits.

Agreed. Companies can screw up.

Quote:

People talk about governments being inefficient business entities, well how efficient was this latest round of short term greedy private business actions? Why haven't those responsible been fired?

Plenty of people have been fired. Layoffs as % of workforce in the financial sector have been larger than in the economy as a whole--particularly in the US. (I am not likely to bother looking up the data should you disagree with this)

[Darat]

Originally Posted by Francesca R

I concur that the legal mandate of a corporation should consist of a duty to maximise shareholder value above all else, this being subservient to obeying the law in principle (although breaking the law can be seen to be logically rational if the financial consequences of doing that are expected to be higher than obeying it).

...snip...

This is why for the most case it should be a criminal matter when a corporation breaks the law by its actions; otherwise company directors will consider if say the maximum fine (that would follow a breach of a regulation) is a cost worth paying for the potential "upside".

Strictly speaking this is an area where the owners of the company should also be having a huge influence and ensuring that directors that allow such decisions to be made are removed. Unfortunately the link between shareholders and companies these days is often via people who also believe that a breach should be judged purely on what it does to the bottom line.

Originally Posted by volatile

Isn't the argument that the blog poster is making that (socially) responsible actions are (would be?) financially beneficial, but that the understanding that shareholder profits come first leads to a kind of fiscally and socially damaging short-termism? The negative effects of that type of thinking range from productivity hits at individual companies to wider effects on the economy as a whole and on the natural and social climate (as the article outlines); effects which are almost never taken into account in the boardroom (or, more usually, in the middle manager's offices).

...snip...

From my own personal experience (I have been a director of a plc in the UK) I have to say I agree with this view, the only thing that matters is making sure that the bottom line is in line with what "the market" is predicting.

Originally Posted by volatile

I agree with you generally, I think, but I'd argue that companies often miss the bigger picture. When I worked on corporate environments, I certainly saw decisions being taken that would look good next April, but which would have damaging consequences five Aprils down the line.

In other words - wasn't Henry Ford right?

Five years down the line? Bah if you can get a board to think a week beyond the next financial reporting period you're doing well!

[Darat]

Originally Posted by Francesca R

...snip...

Ad-hom noted, but that is what it does in effect--just not "officially". And I can argue it just fine. Try me.

...snip...

I have to agree with you, the only time that I've ever seen or heard "breaking the law" being considered by a board in terms of anything bar financial repercussions was when it might result in criminal action directly against the directors.

I am not saying all companies operate in this way but many do.

[Francesca R]

Originally Posted by volatile

Isn't the argument that the blog poster is making that (socially) responsible actions are (would be?) financially beneficial, but that the understanding that shareholder profits come first leads to a kind of fiscally and socially damaging short-termism?

The blog veers off along all sorts of directions and I don't like it much.

If a company pursues "short termism" (whatever that is . . .) and financially loses out to one which does not, then it pays for that by having left money on the table.

Yes--various forms of profits maximisation have a negative social cost. And (directed at nobody here) one who thinks otherwise is a wacko. The axiom of any transaction is "I want to sell (buy from) you the least (most) for the most (least) money". Interests are not and can not be all aligned. But equilibria can be reached.

Quote:

The negative effects of that type of thinking range from productivity hits at individual companies to wider effects on the economy as a whole and on the natural and social climate (as the article outlines); effects which are almost never taken into account in the boardroom (or, more usually, in the middle manager's offices).

If a company can push off external costs to society without reducing its gains by more--it will do so. If it ends up having to eat those costs, then it was not such a great financial decision to try.

Originally Posted by volatile

You have no concept of ethics, let alone corporate ethics, at all?

I really have never seen it argued effectively how corporations can have ethics.

[Francesca R]

Originally Posted by Darat

This is why for the most case it should be a criminal matter when a corporation breaks the law by its actions; otherwise company directors will consider if say the maximum fine (that would follow a breach of a regulation) is a cost worth paying for the potential "upside".

There has not been much success yet (anywhere) in rendering company executives criminally liable for company actions. I am not very optimistic about this.

Quote:

Strictly speaking this is an area where the owners of the company should also be having a huge influence and ensuring that directors that allow such decisions to be made are removed. Unfortunately the link between shareholders and companies these days is often via people who also believe that a breach should be judged purely on what it does to the bottom line.

My idea in this sphere from some time ago was to increase shareholders' financial liability, thus making it less of a case of "rational ignorance" to wave through what companies do with their money. I have to admit struggling with the arguments somewhat but I never saw a superior solution.

[volatile]

Originally Posted by Francesca R

I really have never seen it argued effectively how corporations can have ethics.

Really? You can't even imagine what an ethical company might look like?

[Francesca R]

Originally Posted by volatile

Really? You can't even imagine what an ethical company might look like?

I never said that. But what is your best example of an "ethical company"?

[volatile]

Originally Posted by Francesca R

I never said that. But what is your best example of an "ethical company"?

Sorry - that's how I parsed "I really have never seen it argued effectively how corporations can have ethics". Surely if you don't think corporations can have ethics at all, then you don't think a ethical company is possible.

Could you clarify what you meant?

In terms of ethical companies, I think American Apparel are approaching one (though they've resisted unionisation and their CEO is an *******, by all accounts). They are a company that at least understand the context of the society in which they're operating. They're not perfect (no-one is), but they do have a cogent set of corporate ethics that that seem to function beyond lip-service.

[Francesca R]

Originally Posted by volatile

Could you clarify what you meant?

I would rather you did since you brought up corporate ethics, and I replied (to the thread) that companies may appear to have ethics as long as it serves their financial interests, and no further.

Quote:

In terms of ethical companies, I think American Apparel are approaching one (though they've resisted unionisation and their CEO is an *******, by all accounts). They are a company that at least understand the context of the society in which they're operating. They're not perfect (no-one is), but they do have a cogent set of corporate ethics that that seem to function beyond lip-service.

Originally Posted by American Apparel site

American Apparel takes very seriously the responsibility to observe high standards of ethical conduct to protect the interests of the corporation, its shareholders, and its stakeholders. The officers and board of directors of American Apparel are dedicated to overseeing the operation of the business and affairs of the corporation to promote long-term shareholder value.
link, bold = mine

I see them pursuing their legal financial mandate above all else. Certainly no mention that "ethics" will lead to a sacrifice of this.