Saturday, March 08, 2008

One of the things I keep trying to get myself to do is write about big, hidden issues that most people don't recognize. I'm weird, after all, so I see the weird stuff that some other folks might miss.

One of the biggest issues we face is a set of ideas promulgated by the laissez faire capitalist wannabes. Adam Smith had this wonderful theory that the free market could regulate itself, and it might be able to, if there was unlimited capital and unlimited markets.

For example, if a person starts a factory that has dangerous conditions for the workers, sure, the workers will find another place to work... if there's another, safer factory hiring workers. And if the market is supporting the second factory's higher costs (because safety measures cost time and money). And if the second factory is paying a living wage. And so on....

Adam Smith's dream world might work in theory, but as everyone should know, most of the time that someone says "in theory," it's because they can't say "in reality". In the real world, completely unregulated capitalism creates a situation where (economic) might makes right, and I hope I don't have to explain that this is the antithesis of every moral system worthy of the name.

So, after a rambling introduction, let me start with one of my boring essays on a principle that I think merits thinking about :-).

One of the hidden issues that's surfaced within my lifetime is a sensible-sounding one. It's the idea that a corporation has a duty to its shareholders to maximize profits. How could you argue with that? After all, the stockholders are the bosses, right?

No. A corporation's officers are in charge of the corporation. The stockholders might have the right to fire the officers, but until they do, the officers remain in charge. A stockholder might also be an officer, of course, but it's the position as an officer that grants control, not the ownership of stock.

So what are stockholders? Well, buying stock in a company is a purchase of a share of future profits and, if the corporation dissolves, a share of the remaining assets after all debts are settled. It also generally gives you voting rights to determine the officers of the company, but not direct control over the company itself.

So where does this canard come from, that the shareholders are the bosses? Well, there's two places it comes from, and both are based in self interest, not duty.

First, if holders of a majority of voting stock don't like how the officers are running the corporation, they'll vote in new officers. So the officers, out of a desire to keep their jobs, might choose to do things to keep the holders of a majority of the shares happy.

Second, stock represents a share in future profits; if there are lower future profits, obviously, the stock is worth less. Chasing higher profits will increase the stock valuation, and attract more buyers who want a share of those increasing profits. But again, this is clearly self interest, not a moral duty.

So why do so many people pretend that corporations have some duty to their shareholders?

Well, first, there are some duties that corporations have. A corporation that misrepresents its financial position or its future intentions, or that engages in certain egregious breaches of shareholder trust (say, selling a very profitable branch to a member of the board of directors at a loss) can be the target of legal action. None of those duties include "maximizing profits".

No, the place where I recall the story first being told was back in the early 80s, when there were some mass layoffs occurring. People were angry that big corporations were shedding workers like they were stained clothing, and the companies wanted a nice soundbite to try to deflect the anger, so they came up with one. "Our duty is to our shareholders," they said. "We have a responsibility to cut expenses and maximize profits."

So, you see, people were angry that the greedy corporations were firing loyal employees out of greed, but the corporations said, no, no, no, they were doing it out of duty. But as you see, what they really meant was, they were, in fact, doing it out of greed.

There's a bit more to it than this, of course. If there are multiple competitors in a business field, and one starts cutting or offshoring workers, or making shoddier, but cheaper products, etc., the others will be afraid that if they don't follow suit, the one company will gain a competitive advantage. If one company ends up with an advantage, others can end up out of business, or bought out. But this still doesn't establish a duty... it's still a matter of self interest.

Now, let's be clear. There's nothing wrong with self interest in a lot of situations. If I try to buy something, both the seller and I are operating out of self interest, and unless I'm being cheated or coerced, it's a good thing. The trouble comes in when folks try to represent self interest as a duty. For example, President Bush keeps pretending that his wholesale violations of FISA must be kept secret, that he has a duty to the American people. Well, that's doubly disgusting. He has a duty to obey and uphold the law, and to see that those who violate the law are punished. He doesn't have a duty to keep his lawbreaking secret. But alas, he does have a responsibility to keep important things secret, so his base is happily declaring that keeping his lawbreaking secret is proper.

Oh, did I fall into a rant? Sorry about that.

But it shows the point I'm driving at. Just because something serves self interest doesn't make it good, and claiming that one is serving a higher duty to excuse ugly behavior is an especially horrible form of dishonesty.

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