How the structure of everyday life creates sociopathic corporate leaders

Enron is/was a great example of this behavior.

Clear and concise. Not many people are willing to talk about this.

Thanks, Ian!

–Gaianne

Ian,

Good article, thank you for that. But I am confused by:

“A corporation exists to create a profit, it has no other innate purpose, this is embedded in the law.

I thought corporate governance was a choice each corporation made, therefore treatment of stakeholders like employees and customers, and the environment itself can be priorities, even above shareholders?

I got this silly idea from an academic paper, which seemed to make sense. Is it wrong to actually govern a company with employee and customer stakeholders as an important part of the company culture?

http://finance.wharton.upenn.edu/~allenf/download/Vita/Japan-Corporate-Governance.pdf

cheers,

Bill

Great article, but:

“A corporation exists to create a profit, it has no other innate purpose, this is embedded in the law”

Could you please point to the law(s) where it is embedded? I can never find them . . .

You have excellent summary of the underlying dynamic of corporate culture – and how it inexorably elevates the worst among us to the top positions of power – gives me a handle on why I see deeply disliked Jerome Armstrong’s belief that it is possible to cooperate with libertarians. The only way to break this corporate dynamic is by imposing a strong regime of regulation – which of course would be anathema to a libertarian.

Well, the other way to break this corporate dynamic is to create (or recreate, as I think the case actually is) an ideology in which the irrational desire to do good is firmly entrenched, which Ian has written about just a couple weeks ago.

Further, it must be noted that the corporate culture was not always like this. I placed on the Wikipedia page on the economic history of the United States this quote from E.A.J. Johnson’s 1973 The Foundations of American Economic Freedom: Government and Enterprise in the Age of Washington,

The general view, discernible in contemporaneous literature, was that the responsibility of government should involve enough surveillance over the enterprise system to ensure the social usefulness of all economic activity. It is quite proper, said Bordley, for individuals to “choose for themselves” how they will apply their labor and their intelligence in production. But it does not follow from this that “legislators and men of influence” are freed from all responsibility for giving direction to the course of national economic development. They must, for instance, discountenance the production of unnecessary commodities of luxury when common sense indicates the need for food and other essentials. Lawmakers can fulfill their functions properly only when they “become benefactors to the public”; in new countries they must safeguard agriculture and commerce, encourage immigration, and promote manufactures. Admittedly, liberty “is one of the most important blessings which men possess,” but the idea that liberty is synonymous with complete freedom from restraint “is a most unwise, mistaken apprehension.” True liberty demands a system of legislation that will lead all members of society “to unite their exertions” for the public welfare. It should therefore be the policy of government to aid and foster certain activities or kinds of business that strengthen a nation, even as it should be the duty of government to repress “those fashions, habits, and practices, which tend to weaken, impoverish, and corrupt the people.”

At the beginning of the republic, and up until the Civil War, corporate charters were issued for very specific purposes — such as to build roads, canals, bridges, ports, railroads — and sometimes for these purposes had to be accomplished in very specific time frames or the charter of incorporation would lapse and the corporation would cease having a legal existence. It was not unusual for a state to revoke a corporate charter if the corporation did not fufill the purpose for which it was incorporated. For example, the Sunbury and Erie Railroad, chartered by Pennsylvania in 1837, was never able to actually begin construction, and after the state had given it an extension of time, the company was dissolved by state government fiat and its property given to the Pennsylvania Railroad. (Sunbury is located near the confluence of the north and west branches of the Susquehanna River.)

Another example: the Franklin Railroad received an unusual dual charter from Maryland and Pennsylvania in 1832, to construct a railroad from Chambersburg 27 miles south to Hagerstown. It failed soon after it opened, but was operated by the bankruptcy receiver until 1852, when the Commonwealth of Pennsylvania determined that the thin-flat, bar-rail on which the horse-drawn cars rode had become unsafe to operate on, and ordered that the company either disband, or relay the road with heavy T-rail to allow the running of steam locomotives.

In other words, corporate charters were issued to achieve some specific purpose that would advance the common good and general welfare.

I have not read Barkin, but am I correct in assuming that he identifies the specific legislation and judicial decisions that codified the idea that the sole purpose of a corporation is to “make a profit”?

Finally, forgive me, but I have to note that this corrupting process of the worst rising to the top is explained by Veblen in his discussion of pecuniary culture. Though I think we have given it a modern twist in the past half century with organized crime going legit. Much of the early funding for leveraged buyouts and the mergers and acquisitions of the 1960s “go-go years” came from laundered hot money. And it only got worse in the 1980s and 1990s. I wrote about this in May: Penny Pritzker as an example of the criminality of our elites.

Finally, I was glad to see today thereisnospoon write on DailyKos The glorious, dystopian future envisioned by our libertarian masters, taking Tyler Cowen to task for welcoming a possible future in which 15% of the population “succeeds” and the rest must learn to get by on what they are provided by whatever welfare system society devises.

As Steven Kotler and Peter Diamandis outline in their book of last year, Abundance: The Future Is Better Than You Think, humanity has recently reached a point where our technological capabilities are growing exponentially (the best known example is Moore’s Law that the number of transistors we can put on integrated circuits doubles approximately every two years). We CAN have cheap, abundant energy. We CAN have cheap, abundant food.  We CAN have cheap, abundant clean water.  We CAN have cheap, abundant education.  We CAN have cheap, abundant medical care (one of my favorite examples is a paper-based device for testing and screening bodily fluids that was designed using nano-technology, and which gives anyone the ability to screen for over 100 diseases using something the size of a cell phone).

There is enough solar energy hitting one square kilometer of desert in Africa to replace 1.5 million barrels of oil. All we need to do is build the new industrial economies to harvest and harness this energy. The only things holding are back are old thinking in the Malthusian mold that denies the possibility technological solutions; and the problem of paying for what we need to do. And to pay for what we need to do, we simply need to stop the speculators and usurers of Wall Street, the City of London, and the futures pits of Chicago, from misusing some $5 trillion in financing each and every day.

So, what future do you want to build? One in which we spend $100 trillion over the next decade or two to give everybody on the planet freedom from starvation, poverty, and illness? Or one in which financial elites are allowed to play games with $5 trillion ever day? I do not think that any partnership with libertarians is possible, because they will always defend the “right” to speculate and engage in usury.

kebill13: I think you confuse purpose with method. The purpose of a corporation is to create profit, and there is nothing wrong with that; nothing wrong or evil about that being its sole purpose. Making “treatment of stakeholders like employees and customers, and the environment itself” priorities in corporate governance are choices which need not interfere with that purpose, and can even enhance it. They are, however, not ends in themselves, at least not for corporations, merely considerations of methods employed in pursuit of the central purpose.

A corporation is not evil merely because it pursues profit; it becomes evil when it uses evil methods to pursue profit. Unfortunately, that describes today’s corporations almost universally.

You have excellent summary of the underlying dynamic of corporate culture – and how it inexorably elevates the worst among us to the top positions of power – gives me a handle on why I see deeply disliked Jerome Armstrong’s belief that it is possible to cooperate with libertarians. The only way to break this corporate dynamic is by imposing a strong regime of regulation – which of course would be anathema to a libertarian.

Yes, exactly. American libertarianism is more or less a fabrication of plutocrats to create a kind of economically safe idealism in order to channel a certain segment of the disaffected.

From Ian’s linked article:

As the law evolved, corporate altruism began to be seen as proper so long as it was likely to provide direct benefits to the corporation and its shareholders. Applying the business judgment rule, moreover, many courts essentially presumed that an altruistic decision was in the corporation’s best interests.

…

To be sure, a few cases posit that directors need not treat shareholder wealth maximization as their sole guiding star. A. P. Smith Manufacturing Co. v. Barlow, the most frequently cited example, upheld a corporate charitable donation on the ground, inter alia, that “modern conditions require that corporations acknowledge and discharge social as well as private responsibilities as members of the communities within which they operate.”

The case still most often used in law schools to illustrate a director’s obligation is Dodge v. Ford Motor (1919)—even though an important 2008 paper by Lynn A. Stout explains that it’s bad law, now largely ignored by the courts. It has been cited in only one decision by Delaware courts in the past 30 years

– U.S. corporate law does not, and never has, required directors of public corporations to maximize shareholder value. Most are formed “to conduct or promote any lawful business or purposes.”

– Shareholders are neither owners, nor principals, nor residual claimants. Directors have primacy. The “business judgement” rule gives them tremendous latitude with regard to claims on the corporation, including decisions that reduce share price.

– Shareholder primacy rules do not produce superior results. They lead to short-termism, externalization of costs and a tragedy of the commons.

http://blogs.law.harvard.edu/corpgov/2012/06/26/the-shareholder-value-myth/#more-29776

http://corpgov.net/2012/06/review-the-shareholder-value-myth/

And American “liberalism” isn’t? Give me a break.

You might ask why establishment liberals reserve a certain level of shrieking hysteria exclusively for libertarianism. I think it is because libertarians threaten to peel off some of the left, whom establishment liberals aim to herd within their identity-politics plantation. You may disagree with libertarians, but they engage ideas seriously — and of course, you can’t have that, that would be “racist”.

(My bold.) Once again, the problem arises. Learn to live with identity politics. Learn to love it and learn to practice it. What you are proposing to do is to throw a good chunk of the liberal condition overboard…in order to ally with people whose political-economic philosophy is no less than a plutocratic wish-list written down.

That, as Yoda said, is why you fail. The plutocrats have a finger in all parts of the political spectrum. Your attempts to overthrow the establishment liberals don’t work, because the rest of the liberal Democratic coalition does not want to go along. They do not want to go along, because they (rightly) view American libertarianism as the enemy in its purest form. I have been arguing with convinced libertarians on the interwebs for 20 years—they are a more or less a meme-injection system that has partly succeeded in making health care about property rights and “keeping your own policy”.

@ Ian

NP.

While I think of it you might want to download Chandler’s Judgement (PDF) If only for the sometimes hilarious footnotes.

mfi

Prof Stout is a law professor and if you read the her 2008 article she does cite cases as to why Dodge does not stand for the proposition that you think it does. Dodge was about a shareholder vs shareholder dispute in a closely held corporation.

There exist cases which negate your claim.

http://www.blogtalkradio.com/virtuallyspeaking/2013/08/09/lynn-stout-the-shareholder-value-myth-1

Prof Lynn Stout, who Judge Stine quotes in his essay, which I read last night after I posted my comment. He does cite cases, but just the few mentioned by MFI and Ian above. Ebay v Newmark was weirdly similar to Dodge – a shareholder v shareholder minority oppression suit in a closely held corporation.

This has to be quick as I am about to travel.

You are assuming wrongly that I haven’t read her article I first read it about three years ago and found it unconvincing I find it even less convincing now.

I have not ignored the business judgement rule as you claim it’s boring to quote myself but here goes:

This is an ever evolving field because of what’s called the ‘business judgement rule’. The ‘business judgement rule’ is a case-law derived concept originating in Otis & Co. v. Pennsylvania R. Co., 61 F. Supp. 905 (D.C. Pa. 1945).

In Otis the plaintiff alleged that the directors had failed in their fiduciary duty to maximise the value of securities and were therefore liable for damages the court held that “mistakes or errors in the exercise of honest business judgment do not subject the officers and directors to liability for Negligence in the discharge of their appointed duties.” (Note how the underlying profit-maximisation business model is taken for granted).

Strine does indeed quote Stout this is what he says:

Now, how any loan tranche dependent on subprime loans could be rated triple A—the very best—is difficult for a definitionally disciplined mind to grasp, but men and women of finance, making bets largely with other people’s money, did not hesitate over the linguistic or even financial illogic of such labeling. Nor mind you, did very real risk indicators give them pause, such as the need for the American credit card industry to secure the passage of a bill making it harder for their increasingly defaulting clients to file for bankruptcy.[17] Nay, that bill encouraged this risk-taking as sub-prime mortgages were marketed to people on the idea that the new mortgage would provide cash needed to pay off credit card debt, buy a new big screen TV, and come with a great feature—no need to pay principal for five years at a time of unprecedentedly low interest rates.[18] This was the real blue-chip stuff, the obvious triple A. But on top of it was built an Everest of money, much of it backed in the end by AIG, which at one point was contractually responsible for $2.7 trillion in potential risk.[19]

As Professor Lynn Stout has recently pointed out, there was an even bigger warning sign. In 2008, the $67 trillion credit default swap market was made up almost exclusively of credit default swaps written on mortgage-backed bonds in a market in which the total value of all underlying asset-backed and corporate bonds in the United States that year was a mere $15 trillion.[20] Rank speculation was thus the rule, not the exception.[21]

In hindsight, this is the kind of stuff Planters® honey roasts and sells in a can. There were many who knew enough financial history to be very nervous about a system that combined core banking with speculative trading, that hid greatly relaxed capital requirements, and that allowed outright speculative gambling in the form of unregulated credit default swaps.[22] In the typical credit default swap, a kind of insurance contract, the party providing the insurance neither had to have an insurable interest in the matter[23] nor, more importantly, sufficient capital to make good on the insurance protection it had sold. As it turns out, AIG’s riskiest insurance operation was its writing of trillions of credit default swaps, contracts it was not capitalized to fulfill and which were outside the province of state regulators. Similarly absurd was the idea that swap protection was purchased from hedge funds,[24] whose only obligation to make good was to issue capital calls to its investors. Good luck with that.

I’ve bolded the paragraph in question and put into it’s context. Note that Strine was not quoting Stout’s opinions on the law.

I note further that contrary to your claim that :

the good judge doesn’t cite any laws or cases.

That the good judge does cite laws and cases get your facts right.

There exist cases which negate your claim.

Cite them. And by citing I do not mean quoting what somebody else wrote about them as you have done above I mean quote the judgement itself. Back up your assertion with verifiable citations from case law please.

You ignore the state of Delaware law.

I’ve cited cases dating from after Stout’s article was published including one that is a few days old and you say that I am ignoring the state of Delaware law do you not feel you are being more than somewhat disingenuous?

And for the record the blog you quote, the one which purports to have “a vast supply of copyable case briefs and legal outlines for law students and legal professionals “ does not support the claim you make for it. On the contrary, I’ve bolded the relevant part of their conclusion:

-Poison pills are respected so long as boards are found to be acting in good faith and in accordance with their fiduciary duties and management is acting with discretion

mfi

PS: I make the above request subject to the proviso that any response from JJ includes a substantial proportion of verifiable citations from case law.

mfi

Yes “-Poison pills are respected so long as boards are found to be acting in good faith and in accordance with their fiduciary duties and management is acting with discretion” – and the board has the BENEFIT OF THE DOUBT AS TO WHETHER THEY ARE ACTING WITHIN THEIR FIDUCIARY DUTIES.

No your posts contain links to other peoples’ interpretations not to case law. Back your arguments up with reference to the law not what other people say it is with reference to the legislation and to judgements from courts competent to set precedents clarifying the law.

I doubt you will do this because so far all you’ve done is quote other peoples’ stuff and make assertions.

“When the law is on your side hammer on the law, when the facts are on your side hammer on the facts. When neither the law nor the facts are on your side hammer on the table.”

So far all you’ve done is hammer on the table. That’s because both the law and the facts are against you which is why I’m hammering on the law and Ian has been hammering on the facts.

I look forward to coming back to this when I get return and seeing if you manage to cite any cases from the relevant courts.

mfi

Not sure is the title “Structure(s) o everyday life” is a deliberate nod to Fernand Braudel’s book of the same title. Either way, it’s well worth a reading for macroeconomic history we have too little of in american thought.
Anyway, we know the current system demands and rewards sociopathic “leaders” who succeed mainly in hjjacking resources and power to their tiny bandit cohort to the detriment of the rest of society and depletion of the commonwealth. They have pursued this project so assidiously and infused the entire populace with a venal, distorted theory of social law which holds that only acquisition, appropriation and accumulation are legitimate economic behaviors. At the same time, they have largely succesfully instilled a vicious hatred against any collective or individualindividual action by working or poor people in their self-interest. So, we have the daily spectacle, endlessly repeated of our fellow citizens, of every class, railing about the deplorable state of welfare cheats “defrauding” the gubmint of $10 in extra food stamps, but shrug at the deadly crimes perptrated by ruling elites because that’s “just business.”

Which brings us to your debate about legal responsibilities of corporations. Whether the law is settled or not on the issue of shareholder interests, we can probably agree it’s a dangerous trend taken to dangerous extremes in the US. The law may quibble, but the issue and the remedy (if not the path to reach it( is clear.