Support Minor Heresies

 

Magnitude 5+ Earthquakes

Entries in fiduciary responsibility (1)

Tuesday
Sep202011

The Good Corporate Citizen 

Apple Computer (Stock symbol APPL) makes a metric buttload of money. They make a gross margin of 60% on their computers, roughly five times what any other computer company makes. Their stock price is plump as a result. One of the many reasons they make this kind of money is that they have close control of their supply chain, one end of which is in China. Having 100,000 workers in one place, working for peanuts and putting in 40 hours of overtime a week results in great cost savings.

Now, I don’t want to pile on Apple over their sweatshop suppliers. The use of sweatshop labor in the electronics industry is universal. It isn’t my point. Let me illustrate my idea with a fairy tale.

Steve Jobs, the founder and CEO (now former CEO, but this is a fairy tale) looked upon the teeming masses at Foxconn and the teeming masses of unemployed people in the U.S. and had an epiphany. He went before the board of directors of Apple and said “I have had an epiphany!” The board of directors Googled the word “epiphany” and then said, “Ok Steve, did you get religion, or what? Are we going to market an iPray?”

“No,” Steve responded, “I have had an epiphany about sweat labor and U.S. unemployment. I am a compassionate man and a loyal and patriotic American. I propose that we move all our iPhone production from China to the parts of the U.S. that need jobs the most. We’ll have to knock our margin from 64% down to 50%, but we’ll still be making four times as much per computer than any other company. Then our potential domestic customer base will be expanded and the dead end of the U.S. trade deficit will be slowed.”

The board of directors of Apple paused for a moment with their mouths open and then nearly pissed themselves laughing. One of them, wiping tears from his eyes and catching his breath, managed to say, “Steve, Steve, that’s why we love you. Not just a great designer, but a great comedian. Damn, I think I pulled a muscle. 50% margin, oh god!” He collapsed in merriment.

Steve Jobs stood up, put his hands on his hips and glared at the board. “I’m serious!” he shouted. “Americans need jobs! Our trade deficit is climbing! In-sourcing is the morally right thing to do! I insist!”

The directors sobered up fast at that. They looked back and forth at each other. They exchanged significant looks, raised eyebrows, and subtle nods. Finally, one of them spoke.

“You’re serious about this, Steve? In sourcing the iPhone and accepting a 50% margin?”

“Absolutely.”

“Well, Steve, we know you’ve been ill, and you’ve been dealing with the specter of end-of-life issues, and you’ve still been working really hard. Maybe too hard. Maybe you deserve some time off.”

Do I even need to continue the story at this point? Steve gets the heave-ho, the shareholders keep the 64% margin, U.S. workers stand in the unemployment line, Foxconn employees keep their 80-hour weeks, and the Apple juggernaut rolls on.

As I said before, I don’t mean to pile on Apple, except that they have margin to spare compared to their competition. CEOs at Dell or HP would sell their mothers for even 20% margin. And maybe that’s the point.

Imagine Tony Heyward, the former CEO of BP, getting religion after the Macondo oil spill and proposing that BP go all environmental to the detriment of profit. Same result. Same result at any corporation. This is no shock to anybody.

It’s the concept of fiduciary responsibility that is the problem. Fiduciary responsibility is part of corporate law. It means that the officers of a corporation are legally obligated to maximize shareholder value, meaning stock price and dividends. It also means that corporate officers need to practice fiduciary psychopathy, the choice of corporate profit over human life and health.

Consider the infamous Ford Pinto memo, where Ford executives pointed out to the Highway Safety Administration that letting a predicted 180 people burn to death in their cars was less than half the cost of fixing the Pinto’s fuel tank problem. In the end, it turned out that the Pinto wasn’t any more dangerous than other similar vehicles, but the execs were willing to make that calculation.

Consider Kellogg, Brown, and Root, the Halliburton subsidiary and military contractor. KBR had a fuel trucking contract in Iraq and got paid by the mile. KBR managers decided to run empty trucks up and down the dangerous highways of Iraq, risking (and sometimes sacrificing) the lives of drivers and soldiers. (The soldiers called it “sailboat fuel.”) It was a singular combination of greed, fraud, cold-bloodedness, and disloyalty.

That’s wishful thinking. It wasn’t singular. It was, and is, all too common.

It is why there is no such thing as a good corporate citizen. If you get the impression that a corporation is behaving morally, it is due to one of several factors:

The corporation is too small to get away with much.

In this instance the corporation has been successfully restrained by regulation.

The interests of the corporation have momentarily aligned with those of society; a chance event.

The corporation is engaged in effective public relations.

A corporation is not just incapable of moral judgment. It is actively bent in the direction of immoral behavior. Acting morally requires some amount of self denial and self restraint, and those concepts act against shareholder value. A corporation pursues ever more resources, preferential laws, pointless subsidies, low wages, and unrestrained polluting, among many other wretched things.

I cringe when CEOs and the politicians they selected go on about lifting regulations off the backs of business. Yes, let the saber-toothed beast root about in our guts more freely. Businesses do more for us when they are properly regulated. They innovate instead of monopolizing. They create real products instead of defrauding. If you want to ponder the results of eased regulation, look no further than the derivatives market that just collapsed our economy. If you are a nostalgic type, look back to Enron or the Savings and Loan crisis of the 1980s. Bolster your blood pressure with thoughts of the speculative oil market that probably adds a 20% premium to our gasoline and heating bills.

Just don’t ever, ever, fall for the myth of the good corporate citizen.