Those Darn Activists!

If I told you about a group that claims to support individual small investors against the power of large-scale Wall Street investment firms, you could be forgiven for asking what the catch was. There was a time when cynics like me were a relatively small minority in the United States, but that time seems increasingly remote these days, and regardless of your political leanings you’re probably questioning everything that people tell you. The sad part here is that if I told you that said group is a front for the very same large companies from which it claims to be protecting small investors, you’d probably just ask if I had a point…

You can imagine my complete lack of surprise, then, upon reading a piece in the New York Times this week about the organization calling itself the Main Street Investors Coalition. Ostensibly formed to protect individual investors from the effects of activist groups putting pressure on large corporations in support of environmental, social, or financial reform causes, the Coalition claims to be in favor of profit maximization above all other motivations. They insist that the fact that this allows said large corporations to continue doing business in financially, socially, or environmentally irresponsible ways (just as they have always done) is merely a happy coincidence…

What they are failing to acknowledge is that the Main Street Investors Coalition is getting its financial backing from the National Association of Manufacturers – an industrial lobby group that includes executives from companies like Exxon Mobil, Goodyear, Dow Chemical, Cargill, Toyota and Pfizer. The main thrust of their argument is that as large investment groups like BlackRock and Vanguard are supporting causes on issues like climate change, gun control and employee diversity, they are not as focused on maximizing profits, which should be the primary concern of their customers. The Coalition has been lobbying the Federal government to increase regulation of what investment groups can put their clients’ money into, in order to limit their support for more activist firms at the expense of their members…

It probably also won’t surprise any of my readers (assuming I have readers) to learn that the Securities and Exchange Commission has opened an investigation into the Coalition’s activities, or that the Coalition leadership (and that of its supporting companies) are claiming to have done nothing wrong in the first place, either. But even if we ignore the absurdity of an industry organization pretending that legislation that shields its members from having to consider the wishes of their shareholders - who, let us remember, are the actual owners of a publicly-held company - the whole idea of restricting companies to the most profitable courses of action is asinine from a strategic position as well...

Sometimes the most profitable course of action in the short term is not the best option overall, and sometimes the actions that will profit the company directly will cause it greater indirect harm in terms of community relations, customer relations, vendor relations, health and longevity of its customers, or health of the environment in which it does business. The concept of considering the Triple Bottom Line when developing a strategy isn't exactly a new one. Moreover, it's difficult to imagine how not being able to use any strategy except "make the most money you can" would benefit anyone. Strategy is primarily about gaining a competitive advantage, and anything that interferes with that would be stupid even if it wasn't already just a ploy to protect organizations that don't want to bother about any of that pesky "political correctness" they keep hearing about...

Watch Your Mouth

After all of these years you’d expect me to have gotten used to the idea of people failing to value things they don’t understand, but it still annoys me as much as anything else. Writers deal with this almost constantly, given the vast numbers of people who seem to think that writing is the same thing as typing, but you can also find examples in business, government, academia, and even in the military. One particularly vexing version, of which you can find examples in the news on almost any weekday lately, is people who believe that speech writers aren’t necessary; that any idiot with a microphone and a podium can just spin out oratory off of the top of their head…

The truth is that even something as trivial as a ranting blog post can take hours to craft, at least if you don’t want to sound like the kind of blogger who wears their underpants on their head and believes that the World Health Organization is beaming vegan pastry recipes directly into the President’s false teeth. Great orators – and there are far fewer of these than people seem to think – can make it look like the awe-inspiring speech they are giving is just something off the top of their heads, but that’s showmanship and acting, not wordplay. Even for very smart people, just saying the first thing that comes to mind can get you in trouble faster than you would believe…

If the public sector examples of the last two years aren’t enough for you, consider the case of “Papa” John Schnatter, founder of the Papa John’s Pizza chain. Anybody who starts with a single pizza oven located in his father’s tavern and ends up with over 5,000 retail locations and corporate earnings in the $1.7 billion range (according to Forbes) can’t exactly be a blithering idiot, but you could be excused for thinking so if you’d encountered his remarks about the NFL player protest controversy, or his more recent attempts to justify them…

You can pick up the Forbes and CNBC stories about this if you want to, or go back and check the news broadcasts for the relevant days. I’m not going to say that the issue isn’t controversial, or that Schnatter doesn’t have a right to his own opinion, but I will suggest that making unscripted remarks about an emotionally-charged topic isn’t a great idea even if you do know what you’re talking about. In this particular case, there’s something particularly tone-deaf about a wealthy and powerful white man criticizing African-American athletes for staging a respectful and non-intrusive protest against institutionalized violence aimed at their community. But as bad as that was, attempting to justify your remarks by saying that Colonel Sanders used the “N” word may be even worse…

Now, I’m not going to suggest that everyone should run all of their public remarks past their Public Relations department before speaking them; many of us don’t have a PR department, and not everyone has a spouse or a partner who can tell them when they are about to put their foot into their mouth. But, by the same token, it doesn’t take a master’s degree in Communications with a Public Relations emphasis to realize that making uninformed or casual remarks about anything as complex and emotionally charged as race relations in America is probably not something that a career in food service management would qualify you to do…

The truth is that most of us won’t ever be important enough that our remarks will be noted by millions of people, let alone result in a multi-billion dollar loss in our stock price and get our sponsorship deals with the NFL and Major League Baseball cancelled. All I’m saying is that if you are in a position where a poorly-chosen, carelessly-worded, or badly-informed remark can have a major negative impact on a company, a country, an international treaty organization, or the stakeholders whose jobs or lives may depend on those institutions, there’s nothing wrong with hiring someone who does have expertise in those areas to help you…

Worse Than You Thought?

There was an interesting article on the New York Times site this week about a company called Mylan, which is probably best known for the scandal that erupted last year over alleged price gouging over the emergency epinephrine injector marketed under the trade name “EpiPen.” Readers who follow such things (assuming I have readers) may recall last summer, when there was a national outcry about this product, which contains less than $1 worth of the drug, but retails for $609 for a box of two. There were various accusations, claims and counter-claims, and the sort of official corporate statements that make people who don’t know any better wonder if command economies are really so bad (spoiler alert: they are). One might reasonably assume that the company would have done something about the situation by now…

Unfortunately, that assumption does not appear to be supported by the observable evidence. According to Times columnist Charles Duhigg, the company is still charging $609 for two name-brand EpiPens, or about $370 for the generic versions. The company insists that it isn’t doing anything wrong, and when challenged on this its CEO pointed out the on-line coupon and discount programs that can bring the consumer’s cost down below $100 per package. All of this appears to be correct, or at least Mr. Duhigg was able to confirm it when he looked up the offers in question. The real question seems to be why this situation is still going on a year after it made national headlines? Did the company restore its prices to the infuriating levels once the public outrage died down? Actually, it’s worse than that…

According to the linked article, the company has never actually lowered the prices on this product, although they have released the generic version and started up the discount and coupon programs over the past year. It’s probably also worth pointing out that despite the preposterous television commercial Mylan ran last year – it’s probably what drew enough attention to push the whole situation into the public consciousness in the first place – the EpiPen was never intended as anything other than an emergency measure to stop a life-threatening allergic reaction after everything else fails. Unless the user is extremely careless – or exceptionally unlucky – the only time they should need to buy a new EpiPen is when their current ones expire. But even considering that this isn’t a purchase anyone should have to make more than once every few years, there’s still the question of why the company hasn’t taken any real effort to lower the price. It turns out that this is also worse than you’d expect…

Put simply, all the company did was issue some ass-covering public relations measures and wait for the outrage to blow over – because that’s all it needed to do. In today’s Internet culture most people will have moved on to another scandal within a few days – which is as much a comment on the number of horrific news stories that come up these days as it is about the attention span of most people with access to multiple media. In such cases it usually helps if the outrage spreads to the shareholders of the company, or at least to the employees, but in this case both groups DID complain to senior management, only to be brushed off as part of the same stalling tactics. It’s unclear how much longer senior management and the Board of Directors a Mylan might have continued with these tactics if Federal regulators hadn’t announced that they were investigating the company for overcharging Medicaid by $1.27 billion for the aforementioned EpiPens…

Now it would appear that a group of pension fund managers, who control large blocks of Mylan stock, are planning to unseat most of the Mylan board for what their press release called “new lows in corporate stewardship.” The Times story also notes that Mylan’s chairman was paid $97 million in 2016, which was more than the salaries of the chief executives at Disney, GE and Wal-Mart combined. I can’t speak for anyone else, but I’d certainly be demanding my money back if I was one of the stockholders. And I hope somebody does, because while this may be a new low in terms of ethics and decency, unless the people who actually own these corporations (generally the stockholders) and the governments that give them money (that’s your government, folks) don’t start paying attention, and demanding better management practices, I’m reasonably sure that there will be something even worse coming along any time now…

How Would It Look?

Some time ago in this space I brought you the story of a tragic natural gas line explosion in California, and how the utility company who owned the lines had been accused of giving all of its senior management personnel lavish wages, raises and bonuses using the money that they claimed was being used to upgrade the line and improve safety measures. At the time it seemed fantastical, the stuff of Dilbert cartoons and comedy scripts about unscrupulous business leaders, more concerned with fattening their bank accounts than they were with the safety of thousands of innocent people. Now it turns out that things were actually much worse than that…

According to a story in this week’s Los Angeles Times, the utility company in our story, Pacific Gas and Electric (PG&E) had indeed requested permission from the Public Utilities Commission to use $5 million worth of ratepayer (customer) money on the gas line replacements and upgrades, as I reported in the earlier post. However, it turns out that this was the second time all of this had happened; the Company had also requested $5 million in 2007 to perform the same work, and had given it to their senior managers as wages and bonuses that time too…

The Times does not speculate on how many more times PG&E might have tried the same maneuver before they were finally caught, or whether they ever would have been had a tragic and completely preventable disaster not occurred. I believe that we are justified in asking that question under the circumstances, however; and if I was one of the people whose lives and property were placed at risk so that a bunch of very wealthy people could become a little bit wealthier, the question would be more of a lawsuit and less of a rhetorical device…

The thing that puzzles me the most about the situation is that no one inside or outside the company seems to have questioned these rather questionable decisions. Some sources have claimed that amount of the misappropriated funds goes as high as $100 million and took place over a much longer period, and the fallout from the scandal has resulted in national attention of the very worst kind, changes in Federal law governing gas pipeline safety, and indictments that could result in fines of as much as $1.4 billion, none of which even considers the ongoing civil trials for injuries, wrongful death, and destruction of private property…

Popular culture fantasies (and nightmares) aside, most companies in real life will tend to avoid wildly irresponsible actions even when the possibility of natural gas explosions isn’t present, if only to avoid being the subject of countless blogs, Internet news stories, television programs and eventually even books and movies in which the intelligence of their leadership is compared unfavorably to that of a newborn gerbil. In the case of a publicly-held or investor-owned company there is a very real chance of a stockholder’s revolt (or the equivalent) during which the entire senior management team and the Board of Directors who were supposed to be supervising them will all effective get fired, and even a private company would have to be worried about banks refusing to loan them money (because they might not be around long enough to pay it back), investors refusing to buy their bonds (ditto), or vendors refusing to sell them anything on credit (see above)…

Nor would any reasonably sane businessperson expect the sort of misbehavior PG&E has been accused of remaining confidential during the Internet age. Exposure and scandal were already a problem generations ago – look up the curious events that happened at the Watergate complex in the early 1970s, if you don’t believe me – but today it’s a virtual certainty that anything the company does will leak out eventually. The era when any company could go about its business and not care about how any of its actions would look in the media has been gone for decades, or possibly centuries, and it is far past time that managers of all types and levels stopped making choices that even a rodent born a few minutes ago would consider insane…

How Stuff Works: The Triple Bottom Line

The Triple Bottom Line is another one of those concepts that everybody has encountered at least once, in some management text or business news article, all about better ways to run your business and save the world in the process. Many, if not most, of these screeds tend to get ignored because, let’s face it, most businesspeople are more concerned about selling product, paying expenses and turning a profit than they are about warm and fuzzy concepts that people make up to fill management textbooks. What they’re ignoring the Triple Bottom Line is more than just an academic buzzword; it’s a way to accomplish multiple worthwhile things while potentially making more money than you would with a conventional approach…

Most people are already familiar with the First bottom line; it’s the one that appears at the bottom of your financial statements for the month; the amount you made or lost as the result of business operations. This is occasionally derided by the sort of idiots who believe that a world with a barter economy or a socialist utopia are actually achievable in our time, or for some reason believe that success in a commercial enterprise is somehow wrong. I have often pointed out in this space that there really isn’t anything wrong with turning a profit, providing jobs for your employees, business for your suppliers, a good return on investment for your stockholders, and offering a useful product or service for sale – all of these things help worthwhile people to have better lives and potentially better futures…

I’ve also spoken in this space about the Second bottom line, although I haven’t usually called it that. Consider for example that if our company makes money it will contribute to the local economy, both from taxes paid on income and sales, but also through the amounts it spends on goods and services and the amounts all of its employees and suppliers (and their employees) spend on goods and services. This increases the funds available to the local government, and allows for better police protection, fire service, public healthcare and education, libraries, parks, and social services, just to name a few. Some people may dismiss this as nothing more than a side effect, or complain that the business doesn’t really care about these effects, but I have to ask: if your community is gaining all of these benefits, do you really care why the people who own the company are providing them?

The Third bottom line is all about the environment, and doing business in a way that is environmentally sensitive – or, even better, has a positive effect on the environment. The best example I’ve ever seen – the one I teach in my management classes – is a garbage-collection company that started composting the organic waste it was being paid to collect. Not only did this keep millions of tons of trash out of the landfills, it also created the world’s best organic fertilizer (that’s what compost is), which enabled local farmers to achieve better crop yields while at the same time avoiding harmful runoff from chemical fertilizer. The farmers made more money, the local water and air were cleaner, the landfills didn’t fill up as fast, and the company eventually realized they were making more money selling compost than they were being paid to collect the garbage in the first place…

Now, I realize that I’m not going to change anyone’s business philosophy, let alone strategy, with a 600-word blog post. But I have to ask you to consider a situation where people are paying you to come and haul away the raw ingredients for your most lucrative product: is that not beautiful? If you could benefit your employees, your stockholders, your community, and the whole world while making more money doing so, why would you not want to do that? The key point of the Triple Bottom Line isn’t that there is more to life than making money (although there certainly is). The point is that sometimes doing the right thing and doing the smart thing involve doing the same things, and it would be a shame to pass up a chance like that – especially since it’s probably already there, waiting for you to find it…

The Other Shoe

In yesterday’s post, I was talking about the fallout from this week’s Hobby Lobby decision, and why the whole policy that resulted in the lawsuit was a bad idea from a Management standpoint. For many years now I have maintained that any decision or policy that is ultimately against the best interests of the employees is not in the best interests of the company, at least in the long term. In a larger sense, I’m generally against policy decisions that negatively impact any of the corporation’s stakeholders unless there is some overwhelmingly important reason for doing so. Actions which are bad for the community, state or country in which the company operates in general are rarely good for the firm itself in the long run, if only in the sense of having customers who can buy your products and of not being constantly besieged by regulatory bodies, law enforcement agencies, consumer advocates, environmental groups, community leaders, civil rights lawyers, or angry mobs with torches and pitchforks. But as bad as all of that it, the Hobby Lobby decision may actually have created something even worse…

Traditionally, one of the reasons people form corporations is to protect themselves from certain types of legal liability. Incorporating the company creates the legal fiction that the company is an entity separate from the people who own it or manage it. The corporation can own property, conduct business transactions, borrow money and pay taxes; it can also be fined or sued – but the people who own it can’t be. As one of the stockholders, you can’t be personally held responsible for the actions of the corporation – which seems only reasonable, since you are only one of the hundreds or thousands of people who own it, and you didn’t personally make any of its questionable decisions. If a company in which you own shares declares bankruptcy and is sued by its creditors, the court may be able to seize the company’s assets, but they can’t take your personal funds. You can see how important this could be in the case of major product liability suits or matters of criminal malfeasance, to take only the two most obvious examples…

This legal fiction is generally called the Corporate Veil, and it is often considered one of the most important kinds of protection offered by incorporation. The problem is that the Veil is only a legal fiction; if the owners of the company do anything that even implies that the corporation is not a completely independent entity it is possible for the courts to ignore that fiction, or “pierce the Corporate Veil,” and hold the owners directly responsible for anything the company does. Common violations would include not keeping accurate records, not paying dividends to the shareholders, or intermingling the company’s assets – using corporate funds to pay for personal expenses, for example. It isn’t usually possible to pierce the Veil because the owners are clearly just using the company to further their own interests or agenda, because it is usually very difficult for hundreds or thousands of owners to agree on a personal agenda in the first place but it can happen – when a single individual or family owns the entire company, for example…

In the case of Hobby Lobby, it’s much too easy to argue that the owners of the company – who happen to be members of a single family – are using the company and its compensation packages to further their own political and/or religious agenda (to the extent that there is any difference, these days). As noted in yesterday’s post, their anti-birth control policy is not in the long-term best interests of the employees, the company or the owners themselves, but the opportunity to challenge the Affordable Care Act under a religious exemption does further both the political and religious agenda of the owners. If the court – any particular court hearing a case against the company – decides that they have broken the rules and may therefore not have the protection of the Veil, damages assessed by that court may be directed against the owners of the company. That would include any of the gender-discrimination or religious-discrimination cases starting up over this situation, by the way…

Now, I’m not going to pretend that this was the first thing that came to my mind when I heard about the Supreme Court decision last week. It wasn’t until I read the news story here and the “Friend of the Court” brief it references here that I realized that just how badly this could end for the company’s owners – and that nearly four dozen law professors from top universities thought so, too. So however much we may want to mock the owners of Hobby Lobby for the financial and public relations consequences of their actions, it would appear that the legal aspects of the situation are even worse – and that any first-year Law student could have told them how utterly stupid and ultimately self-destructive their policies were…

Have You Met Us?

The question of how far out of touch the average CEO is from his or her front-line personnel isn’t exactly a new one; people have been talking about this since the early days of the Industrial Revolution – which is to say, for as long as there have been CEOs or large corporations for them to be CEO of. Not surprisingly, this has become a more contentious topic as the gap in salary between senior management and line personnel has widened. In the days when the CEO made a dozen times what a line supervisor took home, and perhaps 30 times what the lowest-level worker made, it might have seemed reasonable to assume that the employees in question had at least some common frame of reference, but with CEO salaries ranging as high as thousands of times what the workers make it has become hard to imagine why an executive being paid hundreds of millions a year would know anything about the lives of minimum-wage employees. None of which makes the CEO of CKE Restaurants saying that his company’s fast food managers prefer “stature” to overtime pay any less fatuous, of course…

If you missed it you can pick up the story of HuffingtonPost, but the basic facts are clear enough. Andy Puzder, the CEO of the company that owns the Hardee’s and Carl’s Jr. chains not only said it, but took to the Op-Ed page of the Wall Street Journal to proclaim that the Obama Administration’s efforts to raise the salary threshold above which supervisory personnel can be declared “Exempt” and forced to work overtime for no additional compensation would constitute “demoting entry-level managers to glorified crew members by replacing their incentive to get results with an incentive to log more hours.” He then goes on to say that “What they lose in overtime pay they gain in the stature and sense of accomplishment that comes from being a salaried manager.” It’s enough to make you question whether Mr. Puzder has ever served as a supervisor in a fast-food operation, and if so, on what planet that restaurant was located…

Most of the people who work minimum-wage jobs in America are not doing so for the sense of personal achievement and/or self-sufficiency to be had by being gainfully employed; they’re doing so in order to pay the rent, feed their family and avoid becoming homeless. By the same token, most first-line supervisors are not performing their basic management responsibilities because of stature or a sense of accomplishment; they’re doing it because of (marginally) better working conditions and (slightly) higher pay. In fact, it’s not at all uncommon for senior hourly personnel to refuse promotion because it would result in an effectively lower salary – especially in situations where their hourly position is protected by a collective bargaining agreement and the lowest tier of management is not. Or, perhaps more to the point, when the actual work duties are almost identical but the position requires longer hours at lower pay and no overtime – which is commonly the case in both retail and food service…

Now, I’m not suggesting that Mr. Puzder doesn’t feel a sense of accomplishment and enjoy his stature as CEO; with a salary listed at $4.48 million and thousands of people who must comply with his orders or risk immediate termination. I’m not even suggesting that Mr. Puzder doesn’t work long hours himself; I’m quite sure that being the CEO of a company that size does require a fair number of long working days. But I have worked as the first-level supervisor in both of those industries, and I can tell you that there is all of the difference in the world between working in a beautiful, clean executive office where your largest hazard is a paper cut and working in a hot, greasy fast-food kitchen where your biggest hazards are third-degree burns from boiling oil and being shot to death in an armed robbery. Especially when the pay differential is between $2,153.84 per hour for the CEO and $9.81 per hour for the fast-food supervisor…

Without additional research I can’t be certain if Mr. Puzder was ever a fast-food restaurant employee or not. But I’d really like to ask him if he has ever met any…

The Ethics of Spite

In yesterday’s post I noted that it appears McDonald’s has allowed its collective animosity for rival company Burger King goad it into severing ties with a supplier with whom it has done business for over four decades – Heinz company, which once supplied McDonald’s locations with ketchup. It isn’t clear from the news stories, or from the other information about this action that are available online, whether there is some larger strategic move in play, whether McDonald’s strategic planning staff had already identified opportunities available in changing ketchup suppliers before the new CEO of Heinz was appointed, or if this really is just a spiteful reaction right out of a schoolyard squabble. What matters from our standpoint is whether an ethical company could countenance such a decision in the first place. I thought we should take a closer look…

We should begin by noting that procurement decisions like this one are usually made on the basis of complex calculations dealing not only with current conditions, but also with projected conditions in the future and assumptions regarding the most profitable choices available. If the decision to drop Heinz in favor of other suppliers turns out to be incorrect that is a matter for the usual mechanisms of corporate governance to handle, and if the decision turns out to be a truly incompetent move that creates actual financial damage to the stockholders there are a variety of legal remedies already in place. We should also note that if such a move were to be made for nefarious reasons there are already laws in place under which the perpetrators could and probably would be charged. For our purposes, we can assume that the decision we are discussing isn’t being driven by incompetence or malfeasance; what we must ask is what motives are actually driving it…

If, for example, members of the management team have reason to believe that their supplier’s new CEO is incompetent, irresponsible, negligent, or otherwise likely to commit acts that will threaten their own operations, then refusing to do business with that supplier would be entirely in keeping with their responsibility to their own shareholders. In the case of an executive who has for some years served as the CEO of a rival firm, the suspicion that such an individual would retain feelings of animosity from his previous position and thus not deal honestly or equitably with the company is probably baroque, but certainly understandable. If previous direct dealings with that executive, either as the CEO of the rival company or in some other capacity, have led management to have doubts about that individual, that concern would also be appropriate. Nor can we completely discount the possibility of animosity based on personality conflicts, interpersonal relationships or social interactions between this new CEO and members of the management team; however unfortunate this might be…

The truth is that however much we might prefer to believe that companies are run on a scientific basis by professionals trained in the finer points of both management science and also in the finer points of their specific industries, companies are still run by human beings, with all of the intellectual and emotional frailty that implies. It is quite possible that business dealings with someone with whom our company has been directly competing for an extended period will carry additional risks, either because that person does in fact harbor animosity towards us, or because we may be unable to suppress such feelings on our side. But absent some concrete evidence of that risk, can we reasonably act on that possibility, knowing that if we do so we run the risk of depriving our shareholders of the best return on their investment, costing employees of our existing supplier their jobs, and potentially damaging the economy of the states or countries where those companies do business?

Or, to put it another way, can we accept the possibility of causing all of this harm in order to protect ourselves from a threat that may or may not even exist? Alternately, can we accept the consequences of failing to take precautions if the threat does exist? How do we determine the course of action that will do the most good for the most people over the longest time while maintaining our primary mission of running our own company to the benefit of the shareholders who own it?

It’s worth thinking about…

The Ethics of Business Activism

On Monday I brought you the case of the Dick’s Sporting Goods chain, and their efforts to do the right thing in the current debate about “assault-type” rifles – or at least to conform to public opinion about guns that look somewhat like ones that have been used for criminal purposes in recent memory. As I noted in that post, there is no legal obligation for Dick’s to do this; current Federal gun laws permit ownership of semi-automatic rifles with magazines of ten rounds or less, and Dick’s has all of the required permits and authorizations to carry and sell such weapons. A much better question is whether Dick’s management team has a fiduciary responsibility to its ownership NOT to do something like this – and where those obligations come into conflict…

Consider, for a moment, that the job of any management team is to increase stockholder value, usually by making the company more profitable through higher sales, greater efficiency or what have you. If they fail to do so, they are violating the spirit of their agreement with the owners, if not in fact violating actual laws regarding management of a company. Dick’s is not in the business of changing the world through better gun control laws and more responsible gun ownership; they are in the business of selling sporting goods, which includes hunting and target shooting guns, ammunition and equipment. The desire to prevent mass shooting incidents, while laudable, is not really part of their mission…

If the gun control issue is too oblique, we could consider the tobacco industry as a similar case. No one who isn’t an industry flak (and not many of those, anymore) is going to deny that smoking is bad for you. But processing and selling it isn’t illegal, whereas the companies that do this provide thousands of jobs and billions in tax revenue, as well as income for the people who own their stock. Declaring that a specific category of product is bad for you, and that therefore they’re not going to produce or sell it any longer, would probably be in the public interest – except for the fact that other companies would be happy to make up the difference in production, resulting in no net change for the public and business losses for the company making that declaration…

By the same token, no one has empowered Dick’s Sporting Goods to determine what guns should or should not be available to the citizens of any particular city or state, any more than any tobacco company has been given the right to decide what products their customers should be allowed to have. No one is likely to dispute that public relations is important, that being seen as good corporate citizens is critical to a company’s image, or that taking actions in the public interest will improve a company’s working conditions in terms of public acceptance. At the same time, people have enough trouble with the “Nanny State” effects of elected officials trying to control their lives for their own good; they’re even less likely to appreciate such efforts from private companies…

All of which leads me to the question: should Dick’s (or any other private company) attempt to restrict the sales and distribution of potentially dangerous products, even if those products are completely legal? Should they attempt to consider the overall welfare of their customers and the community when deciding what product mix to carry in their stores? If this results in lower profits, and a corresponding loss of income to their stockholders, is this still an acceptable choice? What if it results in major losses for the company, putting employees out of work, and negatively impacting the firms that supply those (questionable) products to Dick’s in the first place? If their well-meaning attempts to promote the welfare of the public cause greater damage (in terms of unemployment, lost assets, hunger, foreclosures, or what have you) than the original product would have done, can we still justify such a choice? Or should the company carry whatever products the appropriate Federal, state and local authorities allow them to carry, and just let their customers make their own purchase decisions?

It’s worth thinking about…

The Ethics of Risk

In our last post we considered the case of a CEO who was fired after his attempts to hold out for a better buyout offer for his company turned into a fiasco of lost money when the value of the company itself took a nosedive before any such offer was received. I argued that this is part of the CEO’s job – and the fact that he or she may be blamed (or fired) for events that were beyond anyone’s control is part of why the person running a company is often given such an elevated salary. But this case also raises the issue of whether the CEO has a responsibility to take such risks, and whether the stockholders have any responsibility to let him or her get on with the job. I thought we should take a closer look…

On the one hand, if the CEO of a company overestimates the value – and even more so, the future potential value – of his or her company, there exists a real chance that they will pass on an offer to purchase the firm that the CEO feels does not live up to that potential, even though this is actually the best offer they will ever receive. This can result, as we saw on Friday, in the company’s stockholders firing the CEO for interfering with their best chance of cashing in on their investment. However, this is not the only possibility…

On the other hand, if the CEO underestimates the potential value of his or her company, there is a real chance that they will sell out for significantly less than the value of the company, thus cheating the stockholders out of a significant portion of the revenue they could have received from cashing in on their investment. This will, most often, also result in the CEO being fired. In fact, it can generally be assumed that any CEO actions that result in any significant loss in stockholder equity will result in the loss of the CEO’s position – because increasing stockholder equity is the book definition of the CEO position’s duties in the first place. Unfortunately, if the CEO never takes any action whatsoever, this will almost certainly lower stockholder equity in and of itself…

There’s no real question that the CEO of any company has a responsibility to make that company as successful as he or she can – a fiduciary responsibility to the stockholders, a professional responsibility to the employees, and an ethical responsibility to anyone else whose livelihood depends on the company’s continuing health (e.g. customers, vendors, community leaders, communities dependant on the company for tax revenue and so on). But if any or all of these interests can demand a specific course of action from the CEO, and then demand his or her replacement in the event of any failure to represent their specific interests, are they fulfilling their responsibility to let the CEO get on with the business of running the company?

In general, the stockholders are employing the CEO to weigh these risks and make these choices for them, and they have a right to require the CEO perform appropriately to the situation, and for the compensation they are offering. But if they are going to hold the CEO responsible for both the risks taken and the risks not taken, do they then have the responsibility to step back and let their employee get on with the job they have given him or her? Mediating between the management team and the ownership groups of a company is the primary duty of the Board of Directors, but as the elected representatives of the stockholders there are limits to how effective they can be in the face of stockholder activism. At some point we have to ask whether the owners of the company have the same responsibility to their highest-ranked employee that every other manager has to every other employee…

It’s worth thinking about…

You Pays Your Money…

I was reading an article on the Business Insider website this week and it struck me that how you viewed the events the author was talking about would depend very much on your point of view. If you don’t want to hit the link, they’re talking about a CEO who turned down an offer to buy out his company – an Internet start-up video-sharing service – for $100 million USD, only to then see his company’s business taper off, its market value drop, and then get fired by his board. The author is looking at this from a position sympathetic to the CEO, discussing how upsetting these events are to all entrepreneurial business people (all Business Insiders in general, one assumes), and how awful it must be for the CEO in the story to have had all of this happen to him. When I read the story, my immediate reaction was that the CEO had a $100 million offer in hand, gambled on being able to get $365 million instead, and lost, taking most of the stockholders’ equity out in a flash…

Now, one could legitimately point out that a lot of new Internet services have sold for a lot more than the $100 million offer over the past few years – notably the photo-sharing service called Instagram, which is essentially the still-picture equivalent of the video-sharing service in our story. It would certainly be foolish to sell an asset worth in excess of $360 million for only $100 million, and you would probably expect a CEO who low-balled the sale of his company to be punished in some fashion once the news got out. People still talk about the inventors of the original DOS system selling out to Bill Gates for what was actually a quite reasonable price at the time, and just imagine what people would be saying about someone who decided to take a low-ball offer for Google or Facebook before they really took off…

On the other side of the issue, we can also point out – as the Board of Directors in our story seem to have done – that passing up a buyout offer for $100 million is still depriving the stockholders of the company of $100 million, and that taking this offer before the company’s business took its sudden decline and its price plummeted as a result would have been a better strategy. It’s not clear from the story if the CEO had any reason to believe that these things would happen, but he had to have known it was possible for the company’s overnight success to slow down or stall out, and he must also have known that gambling on the value of his company rising and losing would not sit well with the company’s owners. It’s also not clear from the story what ownership position (if any) the CEO had in the company, or if Agency Theory problems even come into this…

One of the key issues in Agency Theory is that while a stockholder can own stock in all of the companies he or she wants to, the CEO can (usually) only be the Chief Executive of one of them. This makes the executive less likely to take risks with the company (such as selling it and hoping you got a good price), but he or she also needs to remember that acting against the interests of the stockholders (such as refusing to see the company for $100 million just before its site traffic drops by 83%) will eventually get you fired – unless your gambles pay off…

What happened to the CEO in this story may be unfortunate, but the truth is he was gambling with other people’s money, and those people became upset with him when he lost most of it. He could have chosen to be more conservative, to counter-offer with a high sale price, or any number of other strategies, but he was in no real position to complain when the results came out. As my late mother was fond of observing: “You pays your money and you takes your chances…”

How Stuff Works: Board of Directors

I’ve been keeping an eye on the expanding compensation scandal at the Blue Cross/Blue Shield of Massachusetts, and it struck me that many of the people commenting on the story have no idea what a Board of Directors is or what it is supposed to do – and the reporters covering the story aren’t helping. Then it occurred to me that the reporters may not know either – most of my students don’t know until I explain it to them, and they’re all graduating seniors in a top business school, not political/public opinion journalists. So I thought we would continue with our occasional series on How Stuff Works, and look at what the Board at Blue Cross was supposed to do – and why they may not have done it…

In theory, any corporation (public or private) is nothing more than a group of people who have pooled their money in order to start a company. You or I don’t have the cash to start a new car company, for example, but if we get a hundred million or so of our friends together and we each put in $100, that’s $10 billion of capitalization, enough to start a new GM, for example. The problem we run into is that none of us has the time to run the company – we all have to have jobs to make the $100, and even if we didn’t, most of the people chipping in the money don’t have the experience or training to run an automobile company in the first place. So we hire a CEO to run the company for us. The problem there is that we can’t really supervise the CEO, despite the fact that he or she actually does work for us; we don’t have the time or the expertise. So what we do is hire a team of people who know about running big manufacturing companies, tell them what we want the company to accomplish, and have them tell the CEO what we want him or her to do. This team of experts is called a Board of Directors…

Right off the bat, you can see how there would be problems with this. First off, the Directors are not going to work for free, so we’re going to have to pay them. Keeping track of all of the factors involved in running a large company takes a lot of time (try it if you don’t believe me), so we’re going to have to pay them to be on the board – and experts at that level will not work for cheap. Then there’s the board independence issue – depending on who we get, the Directors may have more loyalty to the CEO than they do to the stockholders, or they may run their own companies and have reciprocal understandings with our CEO. Even if they don’t have these problems, the Directors will almost certainly have their own public relations issues, and they may have political or personal reasons for voting a specific way on certain issues…

In the case of the Blue Cross board members, the Boston Herald online is raising cane because several of the Directors who voted to give their (failed) outgoing CEO an $11 million severance package are also crusaders against rising healthcare costs – at least, publically. Certainly the Chamber of Commerce President and Union President involved have a vested interest in appearing pro-business and anti-cost. Commenters on the site (and people in Boston generally) appear to be outraged by the idea that these supposed reformers were paid large salaries (&70,000 to $80,000 per year), and made no effort to screw the outgoing CEO out of money his contract promised him. The problem is that while this may be hypocritical, it isn’t even unusual, let alone improper…

Board members may only meet four times each year, but all of them are assumed to spend weeks reading up on the issues before those meetings. The board salaries cited may seem excessive – especially when, as the article notes, they’re higher than the average person’s salary – but they’re probably not out of line for the qualifications of the people holding those posts. As to trying to deny the outgoing CEO his contractual bonus funds, the Board might have been able to win the court case – but they would also have had to risk losing it and costing the corporation three times (or perhaps more) in judgments. The suggestion that the Directors should be willing to do those jobs for free because the organization is a non-profit is equally silly; a non-profit isn’t necessarily a charity, and even if it is, the people who work for it still need to make a living. The kind of people who will serve on a board for no compensation probably aren’t the same people who know how to run a large (and complicated) organization like Blue Cross in the first place, and the kind of people who have that expertise will not work for free…

The bottom line in this case is that the Directors haven’t done anything wrong. If the people who own the company – in this case, probably the people of Massachusetts – don’t approve of the Board’s actions, they can fire the Directors and get new ones. They can also vote any of the Directors who hold public office out, and demand the resignation of anyone who holds a private position. But claiming that there has been wrongdoing in this case just proves that the people doing the complaining don’t understand How Things Work…