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How the structure of everyday life creates sociopathic corporate leaders

2013 November 18
by Ian Welsh

We talked about how the structure of our upbringing teaches people to be passive and choose from choices offered from them, rather than creating their own, better choices.

But that’s only part of the equation. The other question is: How is our leadership created?

For this we must look at the structure that sorts out leaders from the rest of us. Today I’ll write about corporate leadership

A corporation exists to create a profit. It has no other innate purpose, this is embedded in the law. The corporation is structured so as to remove liability for criminal acts from its owners, and, in practical terms, it also somewhat shields those who control it (its executives and corporate officers) from liability for their actions.

A competitive market is one in which profits are steadily pushed towards zero. If anyone can do what you do (freedom of entry), if there are no information barriers (patents, copyright, secrets) and there are no scale advantages others cannot also achieve, there is no reason why any product or service you create cannot be copied by someone else, who then undercuts you if collusion is not allowed.

To make consistent profits higher, then, than inflation plus the rate of growth of the economy requires that you not be in a competitive market. This is explicitly recognized in strategic thinking, that in a fair market, there are no competitive advantages, and that therefore you need to create an unfair advantage.

Anything another company does which increases their profits, no matter how unethical, if not forbidden by effective law (as opposed to theoretical, aka. unenforced law) you must also do.

What is important about this is that the drive for profits above all and the requirement to gain an unfair advantage as dictated by modern strategic thinking (there are other ways to create an advantage that aren’t unfair, but that’s not what most companies concentrate on) means that you have to do evil. If your competitors use cheap conflict metals from the Congo, the control of which is gained by mass campaigns of rape, you must do so.  If an insurance company denies healthcare to people who are desperately sick, it makes more money.  If a power company doesn’t spend money on anti-pollution equipment, or dumps untreated effluents rather than treated ones, it makes more money.  If a clothing manufacturer doesn’t spend money on safety equipment for its highly flammable factories, it makes more money.

It is also in the interest of corporations to create barriers to entry: to enforce stringent patents and copyrights; to ask regulators to say that only some banks get access to the Fed window, giving them a massive advantage over others; to buy politicians who can use public money to subsidize them or bail them out; to insist that money go to them for bailouts rather than to ordinary householders, and so on.

At the lower executive level, the more you can get out of your employees, no matter how you do it, the more likely you are to be promoted.  And fear, terror and cost-cutting, while they aren’t the only way to do this, are easier to sell to higher management and pay back faster.  When they backfire in the long run, as is often the case, well, you’ll be gone, because you’ll have been promoted.

This leads to the common observation that corporate life is about the next quarter or year, not the next decade.  What matters is how much profit you’re making now and next quarter, especially to your chances of promotion, not what will happen in the future.  Corporate capitalism is largely incapable of planning more than a few years out, certainly not decades (there are exceptions, but even those exceptions, like insurance companies, have been losing that ability.)

High compensation is also an issue.  Once you ascend to the senior corporate ranks, your bonuses are based on short term performance and are large enough that after a few years, and sometimes just one, you have enough money you’ll never have to work again.  So you don’t care about the long term, because you don’t need the company to be there long term, only to make as much money as fast as possible.

As a low ranked boss, you terrorize your employees, treat them badly in whatever way is required to make short term profits and are promoted upwards.  As a high level executive you make strategic decisions that require you to hurt people you’ve never met through pollution, failing to invest in safety, or political corruption.

The summary of all this is that the structure of your life, of incentives, in the corporate world, sorts out people who are willing to hurt other people, now and in the future, for their own benefit and to corrupt their own system of government and law for short term advantage.  If you aren’t willing to do these things, you are unlikely to rise far in a modern corporation, and almost certain not to make it to the CEO level.

It is not that there are no other ways to run economic organizations, and it is not even that these things are necessary to gain a sustained economic advantage, but these appear to our current corporate leadership to be the easiest and quickest ways to make money.  It’s simple to make the argument “if we cut wages and make people work like dogs, our profits will go up.”  It is hard to make the argument “if we raise wages and treat our people well, our profits will go up”, even though the second is true.  And much of modern economic life is a hostage situation: if company A is using metals created through the terror of mass rape, well, you’re at a disadvantage if you don’t too.

Strong and ethical government takes those hostage situations off the table, but when you’ve bought out government, that’s no longer possible, so  you feel compelled to do evil.

People with strong ethical foundations will eventually balk.  There will come a point where they will say “no, I’m not doing that, I’m not rewarding people who rape hundreds of thousands of people by buying their blood-drenched minerals”, and that’s the end of their promotions.

Even people with weak ethical foundations may eventually say “that’s just too much, I know these employees and they’ve been loyal to me and I’m not laying them off.”  End of that person’s career.

The end result of this is Jamie Dimon.  You wind up with people who, if they aren’t clinical sociopaths and psychopaths, act like them.  At best they care for a few people close to them, their family and friends, and they hurt everyone and anyone else around them as necessary to get ahead.  People who get off on it are probably at an advantage, taking joy in your work is a competitive advantage after all: love what you do!

This isn’t necessary, in an economy where we decide to take certain behaviours off the table by agreement, legislative or ethical.  It isn’t necessary from an ideological point of view, since there’s plenty of evidence that happy employees are more productive, and it isn’t necessary even from a theoretical point of view because even very light protection of works plus happy employees allows you to create a sustained economic advantage by just creating teams of people who are better than the opposition rather than winning because they have a positional advantage.

But it is how we’ve chosen to do things.  Our society elevates functional sociopaths and psychopaths because that is not just the behaviour we reward, it is the behaviour we demand.

43 Responses
  1. AlanR permalink
    November 18, 2013

    Enron is/was a great example of this behavior.

  2. Matt Stoller permalink
    November 18, 2013

    It’s simple to make the argument “if we cut wages and make people work like dogs, our profits will go up.” It is hard to make the argument “if we raise wages and treat our people well, our profits will go up”, even though the second is true.

    Which is the logic behind slavery.

  3. Gaianne permalink
    November 18, 2013

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

    Thanks, Ian!

    –Gaianne

  4. nihil obstet permalink
    November 18, 2013

    As a society, we have accepted that money measures the worth of the individual. However, it’s about social status as well as simply money. Few people are villains in their own minds. They don’t think they are responsible for mass campaigns of rape; they think they are savvy traders advancing economic value that keeps the rest of mankind from living in Stone Age conditions and dying young. I think Lloyd Blankfein was totally serious when he claimed to be doing “God’s work”. They don’t think they are mistreating workers; they think they are meting out the carrots and sticks that their supervisees deserve. It’s all about meritocracy, so they’re actually advancing morality by punishing the poor.

    In many, if not most, large organizations you get ahead by kissing up more than by delivering better numbers. That means that executives live their days being catered to and flattered. If they weren’t narcissists when they stepped on the first rung of the latter, they quickly become so. Their lives are about being worshiped by all around them. They’re brilliant, godly, all things good. Everyone tells them so. All the thin-skinned reactions when their fee-fees are hurt by criticism are absolutely real.

    It’s not that people decide to trade in their morals for money. It’s that they have so marinated in immorality that evil has become their good.

    If it were just “you can do better by treating people better,” there would be some hope of convincing our leaders. But how do you argue morality to people who believe “it’s your moral duty to treat people badly”?

  5. kcbill13 permalink
    November 18, 2013

    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

  6. Ian Welsh permalink
    November 18, 2013

    By law, a corporation cannot consider those things, and if taken to court, if it cannot demonstrate an ROI on those things, it can lose the court case.

    Joel Barkin, in his book the Corporation, covers the controlling precedents. There’s also a film version.

  7. ktron permalink
    November 18, 2013

    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 . . .

  8. lowfiron permalink
    November 18, 2013

    30 years ago or so a friend of mine explained to me that one principle of capitalism was to eliminate competition. It was like a epiphany! Finally it revealed the whole idea of markets and what everyone in the mix was trying to achieve.
    It might seem like a no brainer but most people do not realize this and if they do they do not realize the implications.
    I’m a carpenter, not a college grad or intellectual.

  9. Tony Wikrent permalink
    November 18, 2013

    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.

  10. Ian Welsh permalink
    November 18, 2013

    To be sure, most things have been said before, the problem is that the old forms lose their power and they must be restated in a new form.

  11. November 19, 2013

    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.

  12. Take the red pill permalink
    November 19, 2013

    A number of readers have asked in the comments for a reference to support your claim that: “A corporation exists to create a profit, it has no other innate purpose, this is embedded in the law” and you have pointed to Professor Bakan’s book “The Corporation.”

    Professor Lynn Stout from Cornell begs to differ. She says:

    “Even today it remains very difficult for dispersed shareholders in a public corporation to remove an incumbent board. And shareholders are only likely to recover damages from directors in lawsuits involving breach of the duty of loyalty, meaning the directors were essentially stealing from the firm. Provided directors don’t use their corporate powers to enrich themselves, a key legal doctrine called the “business judgment rule” otherwise protects them from liability.

    The business judgment rule ensures that, contrary to popular belief, the managers of public companies have no enforceable legal duty to maximize shareholder value. Certainly they can choose to maximize profits; but they can also choose to pursue any other objective that is not unlawful, including taking care of employees and suppliers, pleasing customers, benefiting the community and the broader society, and preserving and protecting the corporate entity itself. Shareholder primacy is a managerial choice – not a legal requirement.”

    This quote is from an article in the European Financial Review.
    http://www.europeanfinancialreview.com/?p=6482
    Her argument is developed at length in her book (ISBN-10: 1605098132). In the final chapter she quotes Keynes: “Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist.” and goes on the conclude that: “Shareholder value ideology shows all the signs of a defunct economist’s idea. It is inconsistent with American corporate law; misstates the economic structure of public companies; and lacks persuasive empirical support.”

  13. November 19, 2013

    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.

  14. November 19, 2013

    By the way TW, thanks for that link to TINS on Tyler Cowen. I reblogged it at one of my current bloggy gigs with due credit.

  15. Ian Welsh permalink
    November 19, 2013

    Enough, for those who want it, here are the precedents on a corporations duty to maximize shareholder returns:

    http://www.professorbainbridge.com/professorbainbridgecom/2012/05/case-law-on-the-fiduciary-duty-of-directors-to-maximize-the-wealth-of-corporate-shareholders.html

  16. BlizzardOfOz permalink
    November 19, 2013

    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.

    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”.

  17. November 19, 2013

    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.”

  18. Ian Welsh permalink
    November 19, 2013

    From Ian’s link:

    “In any event, Dodge’s theory of shareholder wealth maximization has been widely accepted by courts over an extended period of time. Almost three quarters of a century after Dodge, the Delaware chancery court similarly opined: “It is the obligation of directors to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders.”

    Sigh. Have you people ever worked in a major corporation? Any altruism is a fig leaf, PR, for greed in the vast majority.

  19. November 19, 2013

    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/

  20. November 19, 2013

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1013744

    The abstract for the cited 2008 paper from Prof Stout

  21. Ian Welsh permalink
    November 19, 2013

    Ok, let’s posit you’re right, in what way would that make the general argument of my blog post wrong?

  22. November 19, 2013

    I agree with the general thrust of your article. I nitpick over that one (not minor) point only because it is a pernicious myth.

  23. November 20, 2013

    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”.

  24. markfromireland permalink
    November 20, 2013

    @ ktron November 18, 2013

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

    That’s because you’re looking in the wrong place. It’s case law driven starting with Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. Sup Ct. 1919)

    A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of the means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.

    There’s a heap of other judgements some of the best known include:

    Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182–83 (Del, 1986)

    board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.

    and of course the famous Craigslist case:

    eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010)

    Directors for a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistently with the directors’ fiduciary duty under Delaware law.

    You won’t find what you’re looking for in legislation first because you need to look at case law and secondly because the legislation typically contains innocuous sounding provisions specifying that directors have a fiduciary duty to shareholders. [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).

    For obvious reasons the Delaware courts are the ones to watch see for example Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. Super. 1985), Sanders v. Wang, 1999 WL 1044880 (Del. Ch. Nov. 8, 1999), and as you can see from the date the very recent Pfeiffer v. Leedle, C.A. No. 7831-VCP (Del. Ch. Nov. 8, 2013).]

    mfi

  25. Ian Welsh permalink
    November 20, 2013

    Thanks MFI.

  26. markfromireland permalink
    November 20, 2013

    @ JJ November 19, 2013

    To the best of my knowledge and belief a research paper published in a journal that deals with social ‘science’ and not the law is not the law of the land nor is it a legally binding precedent.

    Please show us court decisions supporting her point of view, and by ‘court’ I mean superior courts the ones that set precedents.

    Furthermore why would the Delaware courts feel the need to constantly cite something that is settled law?

    mfi

  27. markfromireland permalink
    November 20, 2013

    @ Ian

    NP.

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

    mfi

  28. markfromireland permalink
    November 20, 2013

    Whoops I meant to add a link to Chancellor Leo Strine Jr’s excellent Our Continuing Struggle With the Idea That For-Profit Corporations Seek Profit

    Two paragraphs to whet your appettite:

    Although I am sympathetic to many of the sentiments and policy concerns that motivate these dismayed reactions, I confess to being weary of the naïveté they manifest. More importantly, the continued failure of our societies to be clear-eyed about the role of the for-profit corporation endangers the public interest. Instead of recognizing that for-profit corporations will seek profit for their stockholders using all legal means available, we imbue these corporations with a personality and assume they are moral beings capable of being “better” in the long-run than the lowest common denominator. We act as if entities in which only capital has a vote will somehow be able to deny the stockholders their desires, when a choice has to be made between profit for those who control the board’s reelection prospects and positive outcomes for the employees and communities who do not.

    In this Essay, I identify some recent instances that reflect our continued inability to view the for-profit corporation with a gimlet eye. These examples track recurrent patterns. I begin with a couple stories in the headlines of corporate greed at BP in connection with the Deepwater disaster in the Gulf of Mexico and at the U.S. banks that were bailed out by the federal government. I then proceed to less obvious stories where courts have affirmed the preeminence of stockholders in the for-profit corporation, the first in an older case challenging Henry Ford’s stated preference for employees over stockholders and the second in a recent one challenging Craigslist’s attempt to protect its online community from stockholders selling in a takeover. Next, I consider how stockholders have fared in other capitalist countries, looking at Kraft’s successful takeover of Cadbury in the United Kingdom and BHP Billiton’s failed bid to acquire the Potash Corporation of Saskatchewan. In the end, policy makers should not delude themselves about the corporation’s ability to police itself; government still has a critical role in setting the rules of the game.

    For those wondering who the hell Leo E Strine. Jr is he’s this chap:

    Chancellor Leo E. Strine, Jr.

    The Honorable Leo E. Strine, Jr. was confirmed as Chancellor of the Court of Chancery on June 22, 2011, having previously served as a Vice Chancellor since 1998. Chancellor Strine also has long-standing positions as the Austin Wakeman Scott Lecturer in Law at the Harvard Law School, Senior Fellow at the Harvard Program of Corporate Governance, and Adjunct Professor of Law at the University of Pennsylvania and Vanderbilt University Law Schools. He also serves as the Special Judicial Consultant to the Corporate Laws Committee of the American Bar Association. Before joining the Court of Chancery, Chancellor Strine was Counsel to Governor Thomas R. Carper. Before his position with Governor Carper, Chancellor Strine served as a corporate litigator at Skadden, Arps, Slate, Meagher & Flom and as law clerk to Judge Walter K. Stapleton of the U.S. Court of Appeals for the Third Circuit and Chief Judge John F. Gerry of the U.S. District Court for the District of New Jersey.

    Chancellor Strine graduated magna cum laude from the University of Pennsylvania Law School, and received his Bachelor’s Degree summa cum laude from the University of Delaware. He was selected as a Harry S Truman Scholar and a Crown Fellow of the Aspen Institute.

    Faced with a choice of believing what the Judge says is the law of the land and the principles to be observed in implementing it and interpreting it and what somebody who isn’t the Judge says I’m going to plump for believing the Judge on every occasion. It’s that ‘reality based’ thing dontcherknow 🙂

    mfi

  29. November 21, 2013

    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.

  30. November 21, 2013

    Unocal Corp. v. Mesa Petroleum Co

    the Court opined that the corporate board had “a fundamental duty
    and obligation to protect the corporate enterprise, which includes stockholders”—
    a formulation that clearly implies the two are not identical—and then
    went on to state that in evaluating the interests of “the corporate enterprise”
    directors could consider “the impact on ‘constituencies’ other than shareholders
    (i.e., creditors, customers, employees, and perhaps even the
    community generally.”

    Shlensky v. Wrigley (1968)

    In Shlensky, minority investors
    sued the directors of the corporation that owned the Chicago Cubs for
    refusing to install lights that would allow night baseball games to be played
    at Wrigley Field. The minority claimed that offering night games would
    make the Cubs more profitable. The corporation’s directors refused to hold
    night games, not because they disagreed with this economic assessment, but
    because they believed night games would harm the quality of life of
    residents in the neighborhoods surrounding Wrigley Field. The court
    upheld the directors’ decision, reasoning—as the directors themselves had
    not—that a decline in the quality of life in the local neighborhoods might in
    the long run hurt property values around Wrigley Field, harming shareholders’
    economic interests.

    Revlon appears, on first inspection, to affirm the notion that maximizing
    shareholder wealth is the corporation’s proper purpose. In the years
    following the Revlon decision, however, the Delaware Court has systematically
    cut back on the situations in which Revlon supposedly applies, to the
    point where any board that wants to avoid being subject to Revlon duties
    now can easily arrange this. The case has become nearly a dead letter.
    Accordingly, while the Delaware Supreme Court has not explicitly repudiated
    Revlon (at least not yet), for practical purposes the case is largely
    irrelevant to modern corporate law and practice. (Stout at 1204 (2002))

    — from Prof Stout’s 2008 paper linked above
    Seriously – read it before you spout this all too commonly held misconception.

    And dear MFI – the good judge doesn’t cite any laws or cases. Also – corporate law is a state by state patchwork. Furthermore – read the Stout article – Columbia law prof. who does cite Delaware court opinions.

  31. November 21, 2013

    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.

  32. November 21, 2013

    Air Products v Air Gas
    http://www.lawschoolcasebriefs.net/2011/11/air-products-and-chemicals-inc-v-airgas.html

    The board can prevent a takeover by shareholders and maintain a long-term management theory.

    You ignore the business judgment rule in your analysis. You ignore the state of Delaware law.

  33. markfromireland permalink
    November 21, 2013

    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

  34. markfromireland permalink
    November 21, 2013

    Ian,

    I’m not going to be in a position to reply further for a while as I’m traveling to the ME in a few hours and will be working all the hours God sends mostly AFK when I get there. When I get back my two new sons will be moving in with me for the trial period before the court issues the final declaration of adoption. I expect them take up a lot of my free time albeit in a far more enjoyable and rewarding way than I expect from my trip.

    Nevertheless this is an important issue. I think it essential that people interested in the realities of how corporations behave understand how the legal framework used to justify their behaviour is evolving. Is there a way of keeping this posting open for comments or would you consider reopening it when I get back?

    TIA

    mfi

  35. markfromireland permalink
    November 21, 2013

    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

  36. November 21, 2013

    Dude – my posts contain citations to authority, FFS. Furthermore, I posted a link to an article by Prof Stout who is quoted by Judge Stine!

  37. November 21, 2013

    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.

  38. November 21, 2013

    At any rate – the proposition that a corporation must/is legally required to pursue profit above all else is misstating the law.

  39. markfromireland permalink
    November 21, 2013

    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

  40. markfromireland permalink
    November 21, 2013

    At any rate – the proposition that a corporation must/is legally required to pursue profit above all else is misstating the law.

    Support it with reference to the legislation and to case law. Based on the quality of your reasoning and the authorities you’ve quoted I do not accept your unsupported assertions.

    mfi

  41. Ian Welsh permalink
    November 21, 2013

    Glad to hear you went ahead. I can always reopen comments if necessary.

  42. Pelham permalink
    November 22, 2013

    I’m told that sociopaths are about four times as common in corporate executive ranks as in the general population, so what you say rings true. These are the people with the natural competitive advantage of enjoying their awful work.

    But, as with most high-functioning sociopaths and psychopaths, they’ve also learned to exhibit endearing albeit superficial personal qualities. Hence they can pay lip service to all sorts of enlightened management theories while being ruthless in fact.

  43. cripes permalink
    November 23, 2013

    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.

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