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View Diary: Abbreviated Pundit Round-up (57 comments)

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  •  Corporate responsibilities and counting beans. (8+ / 0-)

    With respect, there are some misstatements in the diary's lede. From the diary:

    That oft-stated truism that corporations have an obligation only to their shareholders, and are breaking the law if they don't do everything to maximize profit? Yeah, that's not true. Never was. Until a few decades ago, many corporations -- including Perfect Zero G.E. -- put making their shareholders rich at the bottom of their list of priorities, well behind contributing to their communities and providing fair salaries for their employees. What changed wasn't the law. It was corporate culture.
    True, corporate culture has changed a great deal in the past several decades. Sometime in the 1970's, it became de rigueur to place shareowner interests above and beyond everything else. That luring notion and the easy maths that could prove profit in - or Not - displaced the typical mantra of caring for communities, treating employees fairly, etc.

    But it isn't either/or. It's a deliberate choice of an extreme - the decision to rely on certain numbers. If you adopt counting beans as the direct measure of your work, your business decisions get reduced to beans. The reality that your employee turnover increases, or the community gets soaked in more effluent faster, or your local manager's budget no longer has room for contributions to the charity drive, doesn't compute ... and almost by definition, cannot compete with a numbers-oriented fixation on budgets and the bottom line. Or better said, to the top line of salary and return to owners. (Sure, the numbers will show the results of those bean-budget driven decisions, but that'll be years away, or in the law department budget, or the actions of  "those damn regulators." I.e. not as readily manageable.)

    Most important, it wasn't that shareowners were ever "at the bottom of their list of priorities." It's just that your bottom line was impacted by hiring well and reaching customers better and bragging about your company to others. That affected the bottom line, too, but in less immediately measurable ways.

    Another problem with the diarist's conclusion is the statement that a business breaks the law if it doesn't do everything to maximize profit. Forgive me, but hogwash.

    The law gives management a huge amount of discretion to run the business. (An opportunistic corporate raider or dissident board member might object, but they're not using the law.) There are many ways to maximize profit, not the least of which are short- and long-term tradeoffs, extra investment in safe machinery and worker training, deliberately not reducing the alcoholic content of your bourbon because customers reacted adversely.

    The diarist's end conclusion is bang on, however, We have seen a culture change. Many businesses have decided they'll measure one main thing, they have the numbers to prove it in and they drive their business's decisions accordingly.

    What you value, you measure. And in business, you get what you measure.

    2014 IS COMING. Build up the Senate. Win back the House : 17 seats. Plus!

    by TRPChicago on Sun May 26, 2013 at 05:35:36 AM PDT

    •  Yup. (5+ / 0-)

      I've seen recent examples in the form of companies pulling customer support services back into the US from India.

      Some companies have found the non-payrolls costs to exceed the payroll savings.

      Pissing off customers, Surprise! Surprise!, can be bad for the bottom line.

      LG: You know what? You got spunk. MR: Well, Yes... LG: I hate spunk!

      by dinotrac on Sun May 26, 2013 at 06:05:59 AM PDT

      [ Parent ]

    •  Check again (7+ / 0-)

      I said that the idea that maximizing profits is required by law is not true. As for corporate shareholder attention, check out this 1943 Credo from Johnson & Johnson.

      After customers, employees, management, and communities...

      Our fifth and last responsibility is to our stockholders. Business must make a sound profit. Reserves must be created, research must be carried on, adventurous programs developed, and mistakes paid for. Adverse times must be provided for, adequate taxes paid, new machines purchased, new plants built, new products launched, and new sales plans developed. We must experiment with new ideas. When these things have been done the stockholder should receive a fair return. We are determined with the help of God’s grace to fulfill these obligations to the best of our ability.
      •  Right, about your statement of the law. But ... (0+ / 0-)

        As for the J&J credo, I worked for a very much larger company who had that kind of credo up through the 70's.

        The order of the goals is just optics. Profit is always at the top of the list, because without it, there's no business. It's the extent of profit weighed against other things the business stands for, too. It's that smart businesses knew that many things conduced to profits over time.

        2014 IS COMING. Build up the Senate. Win back the House : 17 seats. Plus!

        by TRPChicago on Sun May 26, 2013 at 06:48:12 AM PDT

        [ Parent ]

      •  What is required by law (0+ / 0-)

        is fiduciary responsibility, in which a corporate Board of Directors has a legal responsibility to manage the stockholders' assets in the company.  In today's world, that responsibility has come to be interpreted as ensuring a reasonable rate of return on investment, comparable to or better than the average rate of return in the market.

        I'm not certain about the case law, but I do believe shareholders have an actionable claim if the board's decisions, on workers' salaries or environmental protection for example, have a negative impact on profitability -- when those decisions are not mandated by law.

        When the union's inspiration /Through the workers' blood shall run /There can be no power greater /Anywhere beneath the sun /Solidarity Forever!

        by litho on Sun May 26, 2013 at 07:01:54 AM PDT

        [ Parent ]

        •  I doubt it, except in the extreme case, but ... (0+ / 0-)

          ... your point is a very important one, both as for what the corporate law is and what wise policy would say it should be.

          Management cannot act in ways obviously inimical to share holder interests, and return on their investment is a key measure over time. And Yes, the Board has a fiduciary duty to share owners, but i think it's not as specific as you would have it.

          My understanding - based on some, albeit limited and dated, experience - is that corporate law does not impose specific requirements on RoR, and certainly not that any particular corporation must meet or exceed an average market return or the board and/or management violates its fiduciary duty.

          Yes, there probably would be legit cases where a board squandered corporate assets, exceeded the charter, tolerated repeat violations of state corporation statutes, etc. but the board doesn't make day-to-day operational decisions and is expected only to keep informed about major ones. I don't think a good faith choosing of a particular path to profitability or maximizing ROR is actionable.

          2014 IS COMING. Build up the Senate. Win back the House : 17 seats. Plus!

          by TRPChicago on Sun May 26, 2013 at 09:45:02 AM PDT

          [ Parent ]

        •  True, but (0+ / 0-)

          a claim for breach of duty based on excessive worker benefits would have little appeal, even in Delaware.  Indeed, in light of Chancery's desire to defer to boards on colossal exec salaries and parachutes, it wouldn't look so sweet to find liability for subsidized lunchrooms.

          In any event, under the business judgment rule, it is very easy to justify pro-worker/pro-environment policies as providing a stable workforce, strengthening the brand, etc.  That is why corporations are able to make charitable contributions, which otherwise might be seen as waste.

      •  well (0+ / 0-)

        Dodge v. Form Motor Company:

        Basically, corporations do have to try to maximize shareholder assets.

        However, those running the corporation have very broad latitude to exercise their own judgment about how that is done.  If, in their opinion, building goodwill by helping the community is the way to do it, then they can do that.

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