I just had a brief back and forth with Whole Foods honcho John Mackie about this Walter Williams column in which the economist (whose work I typically enjoy, by the by) excoriates “weak-kneed CEOs” who “capitulate” to anti-capitalist NGOs by agreeing to carry “fair trade” products when, as the Milton Friedman line has it, a corporation’s only “social responsibility”is to maximize shareholder value. Mackie thought that, given the extraordinary success of the company, he knew a thing or two about maximizing shareholder value, and that there was nothing wrong with a company achieving various other values—in particular when, far from “capitulating” to outside groups, they’re satisfying their own customers‘ preference for those kinds of products. I had a few thoughts as well.
Increasingly, we live in an economy driven by semiotic consumption. So, for instance, I’m not just buying a pair of Nikes, if by that we mean a particular pair of shoes that have nice ankle support or whatever other intrinsic properties. I’m also buying what the Swoosh means, or what a Diesel logo means, or what a hybrid Prius means, etc. If commodity “value” on the consumer end can have this character, why not shareholder “value”?
The “value” of a given stock portfolio is already dependent on a subjective risk profile. The same stock will be far more or less valuable to me individually depending on whether I’m a 25 year old with high tolerance for risk or a 55 year old looking for something more stable to last through retirement. Once we acknowledge “shareholder value” varies with risk profiles, why can’t it equally well value with a broader set of social value? Why is time preference on the monetary dimension the sole admissible subjective component here? People in the real world presumably have any number of reasons for holding stock—many people clearly buy shares because they believe in what a company is doing, not just because they expect it togenerate the highest returns. Plenty of people will refuse to own shares in tobacco companies or weapons manufacturers for the opposite reason.
My friend Doug Rushkoff likes to criticize corporations by means of a computer science analogy—they’re running strings of pernicious “code,” in the form of their constitutive rules and institutions—and by this he means (as I understand him) precisely the lexical priority given in law to maximizing monetary value. I think that was the upshot of a mostly silly-sounding documentary from last year called “The Corporation“(which I didn’t see). The idea in both cases, though, was that the fiduciary responsibility to maximize shareholder value—defined in a narrow monetary sense—obligated management to do things they weren’t particularly happy about, which probably most shareholders wouldn’t much care for either. But given that shareholder micromanagement isn’t really a live option, you’ve got this narrow conception of fiduciary responsibility that foreloses the possibility of management acting on their sense of non-monetary values shareholders might hold.
I don’t know any clean way around that, because as soon as you admit a semiotic component to shareholder value (and therefore fiduciary obligations) you open the door to highly impressionistic (and potentially exploitative) interpretations by management of what, precisely, their responsibility is. And one can imagine some kind of contractual way around this, perhaps, but it does seem to get awfully messy. Still, something worth thinking about: How to create stockholder/firm relationships that capture non-monetary values without requiring shareholders to approve by vote any deviation from the default of revenue maximization at all costs.
8 responses so far ↓
1 joe o // Feb 25, 2005 at 5:44 pm
I’m reading “Collapse” by Jared Diamond. He has an interesting section contrasting different oil company operations and actually has a lot of praise for some oil company’s ecological practices. He describes how Cheveron’s good practices at some sites have gotten them preferences for bids at other locations. Oil companies also have incentives to have ecological practices better than that required by the local goverments due to the long term nature of oil extraction. Better to use best practices from the start than to be shut down or kicked out. I thought that was just some shit they put in their ads.
One thing I don’t understand is why companies that have non-monetary values can have a lower P/E ratio. Wall street is down on Costco for its good labour practices. I could understand penalizing Costco for any lower profits, but why penalize on the P/E ratio.
2 fling93 // Feb 25, 2005 at 7:50 pm
I think a problem with this is that shareholder value isn’t just what current shareholder’s value, but what potential shareholders will value. And figuring out what that is beyond future cash flows is too hard.
But maybe the Internet can help, somehow.
3 Mike Hoffman // Feb 25, 2005 at 8:42 pm
What you’re rehashing is an old argument about responsibilities towards stakeholders of a corporation. If you’re interested in learning more, pick up any classic business ethics text.
Your final question:
“I don’t know any clean way around that, because as soon as you admit a semiotic component to shareholder value (and therefore fiduciary obligations) you open the door to highly impressionistic (and potentially exploitative) interpretations by management of what, precisely, their responsibility is. And one can imagine some kind of contractual way around this, perhaps, but it does seem to get awfully messy. Still, something worth thinking about: How to create stockholder/firm relationships that capture non-monetary values without requiring shareholders to approve by vote any deviation from the default of revenue maximization at all costs.”
Companies already recognize this value and almost any major corporation contains a component directed toward charitable events and community improvement. That’s certainly nothing new. Shareholders, whether they know it or not, already support this. It’s up to law makers to create and uphold laws protecting the public from bad effects of corporations, whatever they may be. Shareholders don’t micromanage to decide profit maximizing methods – that’s what managers are for. Those managers, can be replaced by the board if the shareholders are unhappy, and the board can be consequently replaced by shareholder vote. I think you may have be misunderstanding how the system works.
From one of the previous comments:
“One thing I don’t understand is why companies that have non-monetary values can have a lower P/E ratio. Wall street is down on Costco for its good labour practices. I could understand penalizing Costco for any lower profits, but why penalize on the P/E ratio.”
The recognition of “non-monetary” values by itself has no direct correlation with a company’s P/E ratio. What drives a company’s price compared to its earnings is extremely convoluted. Are we talking about the P/E ratio in the short term or long term? I’m sure you can find an article about the significance and meaning behind P/E ratios – that could be a huge post within itself.
In response to the last comment:
“I think a problem with this is that shareholder value isn’t just what current shareholder’s value, but what potential shareholders will value. And figuring out what that is beyond future cash flows is too hard.”
A board has a fiduciary duty to current shareholders not potential sharholders. However, every shareholder, current or potential, wants their stock to be profitable over the long-run. I don’t know what you’re refering to when you say “beyond future cash-flows” – the future beyond the future? Companies and analysts make future projections based off of current information every day and market expectations are driven one way or another as a result.
“The Corporation” is definitely a movie worth seeing if you’re interested in this issue.
4 harlan // Feb 25, 2005 at 9:46 pm
How does Wall Street take into account someone like me that buys from a particular company precisely because of their business ethics? For example, I only buy fleece manufactured by Malden Mills–they treat their employees well, it’s made from recycled products, and it wears very, very well. Doesn’t that enter into the equation at all? Is there any stock value without someone buying the product?
Let me further clarify: I have not watched television in 15 years; I listen to community radio and I live in a very rural environment and rarely drive. As a result, I do not fall prey to advertising since I never see/hear it. I don’t give a rat’s rectum what label is on a product except the label that denotes that the worker has recieved an honest wage AND the product is very well made, well designed and will perform the task I want it to perform. Does Wall Street consider those values?
In the specific case of Whole Foods, many people shop there (as opposed to, say, WalMart) precisely because they carry those “fair trade” products. It’s what gives them an edge over their competitors.
It sounds to me like Mr. Williams’ economic theory does not work with Mr. Mackie’s objective reality. Could this be an anomaly signaling the need for a new pardigm?
Harlan.
5 fling93 // Feb 25, 2005 at 9:48 pm
Mike Hoffman: “A board has a fiduciary duty to current shareholders not potential sharholders.”
Increasing or maintaining the value of the stock means you have to take into account the market’s valuation of the stock. Which is what I meant by “potential shareholder’s.”
Mike Hoffman: “I don’t know what you’re refering to when you say ‘beyond future cash-flows’ – the future beyond the future?”
Oh god, that was very poorly worded. No wonder I don’t get paid to write. I meant “beyond” as “other than.” Basically, I’m saying that companies focus on maximizing future cash flows because it’s too hard to figure out what else the market might value.
I do think we need a new paradigm. I just have no idea what it might be.
6 Mike Hoffman // Feb 25, 2005 at 10:52 pm
In response to Harlan: Stakeholder considerations have always been taken into account by modern corporations and they suspect, in-turn that this will translate into competive advantage that will show on their bottom line. Marketing departments certainly take into account giving off a socially conscious brand image and how that will affect their profits.
Those like you that care have the option to invest in socially responsible mutual funds – See the following Morningstar article (you might have to register, which is free): http://news.morningstar.com/doc/article/0,1,110270,00.html
In answer to your question, yes, Wall Street does consider those values that you spoke of.
A problem that you’re getting at is that you can’t make a single model for social responsibility that works across every industry.
An accounting firm has different ethical boundaries to consider than Whole Foods or Starbucks.
To fling:
“Basically, I’m saying that companies focus on maximizing future cash flows because it’s too hard to figure out what else the market might value.”
I disagree. That’s why there are marketing departments that create brand images related to what people value. The easiest way to create a new paradigm is to not have it determined by the corporations but by the consumers and government. Don’t like socially irresponsible companies? Don’t use their product/service and certainly don’t buy their stock or mutual funds that contain it. If enough people feel the same way, the market will show it. Want to reward socially responsible companies? Do the opposite. There are people employed to study why and how the markets change everyday – they’ll be listening.
I think what you’re asking is how to make the world more socially conscious. I guess the first step would be to start yelling. There’s obviously no easy answer. Socially responsible investing is not anything new but certainly not the current paradigm.
7 fling93 // Feb 26, 2005 at 11:51 am
fling93: “I’m saying that companies focus on maximizing future cash flows because it’s too hard to figure out what else the market might value.”
Mike Hoffman: “I disagree. That’s why there are marketing departments that create brand images related to what people value.”
Companies create a brand images primarily to gain consumer trust. As this affects sales, a brand is considered by investors as an asset in regards to its expected effect on future cash flows. It’s my impression that most companies don’t spend nearly as much on marketing targeted to investors.
Mike Hoffman: “I think what you’re asking is how to make the world more socially conscious.”
Not necessarily. The problem is that there is a disconnect between how corporations are regarded and treated and how they behave. It’s human tendency to personify them, which might be why our laws seem to treat them like people, giving them protections (which makes no economic sense — if a company “dies”, it’s typically because it is inefficient and needs to be replaced) and a bigger voice in dictating policy than voters (which is a politician more likely to listen to: a voter or a company making a hundred-thousand-dollar campaign donation?). Of course, as entities whose sole goal is increasing shareholder value, they never act like people. So we need to change one or the other.
I don’t think socially responsible investing is the answer, because if those companies become undervalued, it will be worth it to enough investors to take advantage of that. Besides, there’s a disagreement among socially-responsible investors on whether to eschew “bad” companies, or to buy up enough shares of those companies to try and influence their boards. If you can’t even get socially-responsible investors to agree, how are you going to get the entire market?
8 Mike Hoffman // Feb 27, 2005 at 12:43 am
>”It’s my impression that most companies don’t spend nearly as much on marketing targeted to investors.”
Why would you need to market to investors? Mareting companies market to consumers to maximize revenue – the numbers will sell themselves if the company is profitable.
>”It’s human tendency to personify them, which might be why our laws seem to treat them like people…”
You would be most interested in seeing “The Corporation” that distinctly outlines the moment the Supreme Court ruled corporations to be a “legal person”.
>”Of course, as entities whose sole goal is increasing shareholder value, they never act like people. So we need to change one or the other.”
Corporations are made of people and there are many socially responsible corporations that exist today. That’s why the corporation is bound in judicial law like any other person – if one thinks a corporation’s behavior is not in society’s interest, then it is our duty to change the law. If you think our judicial system is corrupt, you’ll have to strive to change the judicial system first.
“I don’t think socially responsible investing is the answer, because if those companies become undervalued, it will be worth it to enough investors to take advantage of that.”
In some respect you’re right. Customers must be the first to take a stand. When it comes down to it, a company’s stock is rooted in its profitablity. Other factors can influence the market in the short-term but if a company continues to lose money, the stock becomes worthless.
I believe socially responsible investing to only be a part of the equation, as if that method becomes a driving market force, it will demand a premium that will drive other corporations to follow suit. If you’re a corporation that wants a “socially responsible premium” to be tacked on to their stock in the market, you’ll become socially responsible.