Corporate ethics

[dougo]

In a discussion at lunch today, luckylefty quipped that Google's motto should be changed to "Don't be evil (except as required to maximize shareholder value)." I've heard this notion before, that a public company is legally required to do whatever is necessary to maximize its profits, and could be sued by its shareholders for not doing so. This reminded me of a quote I ran across recently by costikyan (from a couple years ago, in the context of computer game companies and the overabundance of licensed games):

Tom Peters, the business guru, echoes the sentiment: No successful business exists to produce a profit. Yes, you need to produce a profit; in a capitalist system (and thank god we have one), profit is the condition of survival. But profit isn't the goal; no one other than the stockholders get excited at that. A corporation is one way or organizating a group of people to strive toward an objective—but that objective, the vision they share, is always, for successful businesses, something other than mere profit.

It seems unlikely to me that a corporation does not have the freedom to reject certain highly profitable avenues if it chooses—pornography is one of the most lucrative industries these days, so can shareholders sue Google for not launching Google Smut? Or is the only defense that it might tarnish their public image enough to hurt the rest of their business model?

Comments

[mshonle.livejournal.com]

I think it's dangerous to expect corporations to do anything *other* than make the shareholders happy. For example, suppose we all had a big love fest and agreed that corporations should also care about certain human welfare aesthetics. What would happen? Well, they'd start to take that role, but some would do it poorly. Then, institutions which *should* care about these other nice things would weaken and dissolve away, because "corporations are supposed to do that."

Life is much simpler, and it's in every respect better for all of these other goals, if we assume corporations are only concerned about profits.

Where does this lead us? Well, we'll say "corporations aren't going to care about the environment, so let's create pollution contracts" or "let's create these regulations to protect it." Typically, when you set yourself up to get something (from either corporations or the government) you'll get the worst one that meets the requirements. Thus, it's better for planning if you assume it will always be the worst.

But you also need to think about why investors buy stocks in different sectors. I invest in everything in the economy. I don't focus only on one of technology, energy, healthcare, real estate, finance, services, consumer goods, utilities or industrial materials.. I focus on *all* of them. It's called diversification. If energy goes up, I get a nice profit. But if it goes up too far, I'll re-balance it into all of the other investment sectors, so I won't be outweighed in it. Then, if energy goes down, at least it wouldn't have been my whole portfolio.

That's probably one reason companies set up charters, to signal to investors what kind of investment they are really making. It's not really a question at all that X is more profitable, because it isn't always. It's more about following what was planned, and the investment getting priced accordingly by the market. Because, suppose X always was more profitable: then people would be willing to pay more for shares in it. More expensive shares reduce your returns, so it actually becomes less profitable to investors.

So, no, that isn't Google's only defense. It wasn't in their charter to be that, and shareholders didn't expect it. In fact, shareholders would probably be miffed if Google ever tried to do that. (Though, porn is not a good example for Google, it probably gets a large percentage of its visits from people searching for it.)

BTW...

[mshonle.livejournal.com]

And the stockholders *are* the corporation. Provided they agree to vote the right way, they can do whatever they want. Many stocks (perhaps the majority?) are held in retirement and pension accounts of ordinary Americans.

[mshonle.livejournal.com]

As for licensed games, that was probably the result of people wanting to enter into a market where they had no real talents, or, "execution abilities."

They were trying to diversify. Some came out ahead from the deal. Others lost from the deal. To execute well, you need a keen understanding of what you're doing, and to have some kind of passion for it. But just look at boy bands or Garfield or other things that make lots of money: there's no real integrity there, but, by golly, it's something that people want and are willing to pay for, so who are we to stand in their way? These companies only profit because there are people who are interested in consuming what they produce. (Exception: when companies profit because they can convince politicians to give them the money for nothing.)

[mshonle.livejournal.com]

I would only add to that that government is essential to have around in order to protect property rights (-land, -resource, -intellectual, or otherwise). It's also good at providing public goods where there would be a free-rider problem (like education, national defense) or where it would be too risky for companies to provide the good (like funding research like string theory; it could be billions spent on something that becomes nothing at all, though it may be important).

Good point about the socially responsible investments, too. Union pension funds and church and non-profit school endowments are a significant portion of the market, which does have power.

As for my favorite financial company, I like Vanguard. Vanguard was one of the few companies not to have any legal troubles with frauding investors (frauding like Merrill Lynch did, talking up a stock while privately ridiculing it). What makes Vanguard different is that the Vanguard customers are also the Vanguard shareholders. It's practically a co-op. So the incentive always was to do what was in the customer's best interests instead of the executives.

[dougo.livejournal.com]

(I think "shareholders" and "stockholder" are synonymous, and Wikipedia seems to back me up. Maybe you meant "stakeholders"? I'm not really sure to whom you're referring in the first paragraph.)

If Google could demonstrate that going into the porn business would hurt their profits more than it would help, then clearly that would be a solid defense against doing so. But it seems unlikely that it would be a net loss, let alone that they could demonstrate it, so I don't think this should be the only reason not to do it. Like the Tom Peters quote says, profit is necessary, but maximum profit is not the ultimate objective.

And it's not even about ethics—I don't think porn is socially irresponsible, but let's consider a more neutral subject. Google is probably positioned pretty well to do Internet games (along the lines of Yahoo! Games and Microsoft Zone; they have the server and bandwidth capacity, they have the audience and advertising channels, and they have developers who are really into games (several are regular posters to Spielfrieks). But it doesn't really fit into their mission to "organize the world's information". Shouldn't they be allowed to ignore games if they want to, as long as they're profitable without them?

I agree it's really attractive to boil everything down to economics. But it seems more libertarian to view it in terms of freedom. Perhaps I'm looking at it the wrong way: if the founders of Google wanted to run a company that wasn't optimally profitable, they had the freedom to keep it a private company. But choosing to go public means that they gave up the reins of control to those who actually own the company now, i.e., the shareholders. On the other hand, it looks like the founders are still majority shareholders, so I guess this is all moot: they're not going to be suing themselves for not getting into porn.

[dougo.livejournal.com]

Oh, and I agree that consumers can favor ethical products that otherwise have a higher price. Perhaps the more important distinction is that the value of a share of stock is not solely tied to the profitability of the company, it's based on supply and demand of the shares, and hence speculation and public perception come into play.

[dougo.livejournal.com]

Insert a close parenthesis after "Microsoft Zone". I hate how comments aren't editable.