I think I have developed at least one good insight into why Corporations Act like Assholes. Since this is my first stab, let me clear away some of the low-hanging fruit: People are assholes, and when placed into large groups, the assholeness is magnified or at least unsurpressed. (Agreed. That actually answers almost every question.) Also easy to argue that assholes often climb to the top of the asshole pile to wield control of giant asshole robots to fuck over other people. (In this case, the metaphor is that the giant asshole robot is a corporation and that we are the denizens of the asshole pile.) This time: I'm going to blame the banks. And not necessarily just...banks…but the whole financial system. And I'm not going to blame them for the financial meltdown or anything like that here (though I do, for the record), but instead blame them for the broader failures in corporate citizenship (non-asshole version).
We have a broken system of corporate finance which means we have a very broken system of corporate governance which in turn means we have a very broken culture of socially conscious businesses. The gut conclusion is obvious - businesses don't give a shit about people, but that conclusion is neither useful nor does it have power since companies are made of people and most of us spend our lives working for them. The systemic case, which I am going to try and flesh out on my own and a little here, is much more powerful…though I hope it doesn't involve too many steps. In one sentence: Financial intermediation of virtually all public investment capital by profit-driven entities creates an unsatiable appetite for the continual growth of a corporate profits, which in turn forces management for all companies to take unreasonable risks and measures that result in large externalities borne by society at large.
Step 1) Corporations are owned by shareholders who have the power to control management.
I'm gonna start with the whole idea of public financial markets, which in its simplest form is allowing large numbers of people to own small pieces of a company with control over how the company management and thus the company behaves. That is how companies are, in theory, supposed to be good actors in this world. If a company does wrong, then the shareholders can punish the management. If your management has bungled its operations and has destroyed the Gulf Coast for the next generation, then you F them in the A with a BRD. The obvious rejoinder is that most shareholders either don't give a shit about voting their shares or they don't have any interests in buying a company other than profit. I concede these points and note that if these are the outcomes, then at least we can point to the collective indifference and selfishness of humanity and consider that deeper problem. To my mind, however, the central point is that the human analysis of owning a company is a multifaceted one. Most of my friends will not buy Big Oil shares outright. Others will never buy Smith and Wesson shares. And many people will buy Apple and Google and wind and solar power shares with the hope that they're helping provide capital for these businesses. In other words, people want a return on their money, but I hope and believe that they would prefer to get it honestly and not by foisting off all of the costs and externalities of their returns on the rest of society.
Step 2) Normal people are too busy or too confused to be shareholders.
For most people, shares are just a way to get a return on the money they've earned. I make 100 bucks, I would like to just stick it somewhere and make 5 dollars by merely sitting there. So I put it in the stock market - that is, I want to buy ownership stakes in companies and grow when they grow. And in order for people to be allowed to buy ownership stakes, the companies have to comply with thousands of byzantine disclosure requirements to sell their shares to the public. But no one understands these disclosures and nobody reads them. I make my living writing these disclosures and still have close to zero knowledge about how these laws work and what businesses I should invest in. No one's really able to understand these investment decisions. These companies have grown so large and have so many disclosures and are so complexly governed with obfuscation and opacity at every turn that we're basically at their whim. No normal shareholders have any real control.
Step 3) Financial Intermediation.
So what do we do about this inability to be shareholders? We Talk to Chuck. We send all of our money to financial institutions to manage. Since we don't really know what they are going to do with the money, we simply ask for the most productive, highest return activities - that is, we give our money to someone who will do *something* with it, and then they will give us that money back plus a bit. Nowhere in our mind do we think about owning companies. Nowhere do we feel remotely culpable for owning companies. More importantly, the investment decisions made by these financial institutions are emphatically not multifaceted. They are businesses with a single motive to make the highest possible returns. There are no other factors involved. I can no longer find the number, but financial institutions, that is, hedge funds, banks, investment banks, private equity funds, pension funds, etc. now own huge swaths of public companies on behalf of the rest of us, who ask them to take care our investments for us. In either case, it's safe to say that pretty much the only shareholders actively involved in governance and management issues are these financial institutions.
Step 4) Single Minded Shareholders = Win or Die = Corporate Assholes
So how does this lead to a more dangerous world? Just think: With banks and hedge funds and mutual funds in the driver's seat, all of the votes, all of the corporate governance, everything about the internal structure of a company is about the pursuit of increasing returns on investment. It is not about someone considering their ownership of a company, it is about a 28 year-old banker trying to see how he can get a 15% return on his choice to invest in a company and net himself a $20 million dollar bonus that year. So executives who deviate from iron-fisted pursuits of profit will face their wrath. Fuck that guy who decided to keep on a large workforce in a market downturn, because he is going to fuck up the bonus I get from investing in his company. Ouster. Companies who have steady income and steady revenue and stable operations who make useful products, who make reliable products, who treat their employees well are not all that useful to these hedge fund managers. While I might be content owning a share in Toothpicks R' Us and getting a stable moderately sized dividend every year from the consistent sales of toothpicks, Goldman will not be content. Morgan Stanley wants growth. Hedge Fundoucher needs growth. Management will be ousted unless it increases its profits and grows and grows and continues to grow. So Toothpicks is forced to find ways to make more money. The ways they can do it are not hard to imagine. Less inspections. "Refurbished" wood laced with arsenic. Firing workers. Shutting down anti-splinter polishers. Mechanizing production. Outsourcing to China. Cutting corners. Stonewalling complaints. In other words, acting like Assholes.
The central point is this: How can companies expect to constantly and continually *grow* and *keep growing* year after year? How many more air-conditioners does the world need each year? How much Coca-Cola can the world consume? How can manufacturing shoelaces lead to double digit growth? Or…more chillingly…by what means are hospitals supposed to deliver 6% growth to their investors year after year? (The answer is actually to target diabetes and obesity and age-related treatments.) Or...more dangerously…how are news and media companies supposed to grow the size of the company and the revenue year after year? (The answer appears to be Fox and CNN.) Family run newspapers and companies don't work this way. Growth is preferable, but it is not indispensable and it should not become the universal business model. There are business owners are perfectly happy to make staplers or grow pumpkins, cover their costs and then take home a salary and a healthy profit. And this should be encouraged…but the financing system, as it stands, places all control over these companies in the hands of those with the intention of only providing capital to those companies who seek growth over all things.
When this becomes the only consideration, then the only way to go is to take massive risks. And, as we are learning, when companies take massive risks, whether by banks, oil companies, car companies or what have you…the costs are not borne by the companies and the costs are not borne by those making the decisions. Instead, the costs are borne by everyone else. We are forced to bail them out. We must clean up the oil slicks. We must bear the loss of life from faulty car designs. We must heal from the exploding dildos. And the executives walk away, it's all upside for them - there are no clawbacks for bad performance. It's either a hundred million to win or 10 million to lose. And the banks have made their money too. They take fees for picking stocks, fees for upward growth, fees for underwriting stock and bonuses for picking good companies and even bonuses for picking companies that explode in the long run, leaving their customers holding the bag. On all sides, most people lose while the wealthy either get wealth or get wealthier.
Um. So basically the financial system streamlines and intensifies the profit and growth pressure placed on management of public companies, leading to the taking of bigger and bigger risks, the costs of which are eventually borne by society at large and the shareholders. I'm not sure if there's going to be a part 2…but that's a start. The solution remains entirely unclear to me because I do not reject free market forces as a force for good.
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