Archive for the ‘shareholders’ Category
Symantec Directors: $250,000/Year Not Enough to Log in to Annual Meeting
Filed under: accountability, boards, corporations, governance, profits, shareholders |
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The shareholders of a public company are sometimes said to own the company. That’s not literally true, for lots of reasons. (See: Do Toyota’s Shareholders Own the Company?) What shareholders really own is the right to part of a company’s profits (if any) after all of its other expenses are paid. At any rate, the fact remains that shareholders are crucially important, and they are in many ways vulnerable. The legal rights of shareholders are relatively few, and relatively weak. That’s what makes corporate governance so important. Shareholders elect the Board of Directors, and the Board of Directors is responsible for hiring the CEO and helping set the overall strategic directo of the firm. For most shareholders, there are precious few ways to interact with, let alone influence, the Board of Directors. The Annual Shareholder Meeting is critical, in that regard.
That’s what makes it so striking when any company degrades its Annual Shareholder Meeting in the way Symantic did this year by switching to an all-virtual, audio-only meeting. See this opinion piece, by Gretchen Morgenson, for the NYT: Questions, and Directors, Lost in the Ether. Check out this juicy bit:
…because the Webcast provided no video, shareholders may not have realized that several directors had not bothered to attend the meeting, even virtually. When asked about directors’ attendance, [Symantec spokeswoman] Ms. Haldeman said 8 of the 11 showed up.
Attending annual meetings seems a pretty basic requirement of a director, don’t you think? Sure, such gatherings may seem a corporate equivalent of root-canal therapy, but a duty is a duty. Directors are paid for their service, after all, sometimes very handsomely. According to Symantec’s most recent proxy materials, directors get around $250,000 a year in cash and stock.
So which directors had neither the time nor the inclination to log on to their computers last Monday to hear from the shareholders they have an obligation to represent? Ms. Haldeman refused to identify those who were AWOL.
Now, it’s worth pointing out that the 3 directors who didn’t “show up” could well have had very good reasons. But if that’s true, Symantic’s shareholders deserve to know it. The little power shareholders have can only be exercised effectively if boards of directors take their duty of accountability seriously.
Competence, Ethics & HP’s Board
Filed under: accountability, boards, corporations, governance, management, shareholders |
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A corporation’s Board of Directors has a fiduciary duty to represent the interests of the company’s shareholders. In particular, the Board does that by selecting a CEO (and sometimes by participating in selection of other members of the management team) and by helping set the company’s strategic course. The work they do is of crucial economic importance — both to investors (to whom they are directly accountable) and to the functioning of the economy more generally. But (or maybe precisely for that reason) good governance and board effectiveness are also ethical issues.
By way of illustration, take a look at the recent controversy over the departure of Mark Hurd as CEO of Hewlett-Packard.
The short version: HP’s (now former) CEO, Mark Hurd, got caught fudging his expense reports. Sexual improprieties were also implied. So, the Board fired Hurd, and payed him a huge severance package. Then just a month later he joined HP’s rival, Oracle, which was very bad news for HP. Now HP’s Board is suing Hurd. It’s a huge mess, and much of it reflects badly on HP’s Board. See, for example, Joe Nocera’s recent piece in the NYT: H.P.’s Blundering Board
The Hewlett-Packard board is back to doing what it does best: shooting itself in the foot. By filing an embarrassing lawsuit against the company’s former chief executive, Mark V. Hurd, this week — a suit that unwittingly highlights the mistakes it made in the way it let Mr. Hurd go — the H.P. board can now lay claim, officially, to the title of the Most Inept Board in America….
I’m not qualified to judge HP’s Board from a strict governance point of view. But the governance experts quoted by Nocera seem convinced that the Board is, shall we say, not exactly doing a bang-up job. What should we say about that from the point of view of ethics?
To begin, we should note that ineptness itself is not generally considered unethical. We generally are not to blame for our own weaknesses. If you’re physically clumsy, then it’s not your fault that you’re not good at juggling. If you have no mind for numbers, then it’s not your fault that you don’t excel in math.
But there are exceptions to that general rule.
In fact, there are at least two factors that can allow us to hold an individual or group responsible for ineptness. One of those is the fact of having voluntarily taken on a job that you knew would require certain talents and aptitudes. If you know you’re prone to clumsiness, you shouldn’t take a job requiring dextrous manipulation of, say, dangerous chemicals. Likewise, you shouldn’t take a position on the Board of Directors of a major corporation if you don’t have the wisdom and strategic skills such a position demands. Unfortunately, with things like wisdom there’s a difficult catch-22: some people aren’t clever enough to realize that they’re not clever enough to be on a corporate Board. (Note that I’m not accusing anyone on HP’s Board of lacking the requisite talent; I’m merely outlining the ways in which one can be held responsible for incompetence.)
A second factor that can justify holding someone responsible for their own level of competence is the availability of relevant training. If they have reason to think their skills are not what they could be, and if relevant training is available, and if they have not availed themselves of it, then they are culpable for the resulting deficits. Now, being on a modern corporate Board is no trivial task. Corporate Boards are no longer the window dressing they once were. Business today is increasingly complex, and so being on a Board today requires a lot of knowledge (about business and law and regulations and so on and so on). So, there are organizations out there that are set up to provide training. (In Canada, we have this and this, for example.) Now, it’s not clear that Board training would have helped HP’s Board avoid the errors it apparently made in dealing with Hurd. Again, I’m merely trying to outline the conditions under which a lack of skill (something others have accused them of) becomes something ethically problematic.
In the end, the point is this. Modern Boards face enormous challenges. And while we most often think of corporate governance as a legal matter and as a matter of interest to shareholders, in the end it is really about making sure that the right decisions get made by the right people for the right reasons. Add to that the fact that executive decisions have the potential to have enormous impact — financial and otherwise — on people both inside and outside the corporation, and it becomes easy to see why governance must be considered an ethical issue as well.
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Note: edited on Sept 17, 2010 to correct 2 places where I had accidentally typed “BP” instead of “HP”.
BP and Corporate Social Responsibility
Filed under: consumers, corporations, CSR, energy, environment, honesty, shareholders, stakeholders |
Comments (12) I’ve long been critical of the term “CSR” — Corporate Social Responsibility. (See for example my series of blog postings culminating in my claim that “CSR is Not C-S-R”.) Too many people use the term “CSR” when they actually want to talk about basic business ethics issues like honesty or product safety or workplace health and safety — things that are not, in any clear way at least, matters of a company’s social responsibilities.
But the BP oil spill raises genuine CSR questions — it’s very much a question of corporate, social, responsibility.
BP is in the business of finding oil, refining it, and selling the gas (and propane, etc.) that results. In the course of doing business, BP interacts with a huge range of individuals and organizations, and those interactions bring with them ethical obligations. Basic ethical obligations in such a business would include things like:
a) providing customers with the product they’re expecting (rather than one adulterated with water, for example),
b) dealing honestly with suppliers,
c) ensuring reasonable levels of workplace health and safety,
d) making an honest effort to build long-term share value,
e) complying with environmental laws and industry best practices, and so on.
Most of those obligations are obligations to identifiable individuals (customers, employees, shareholders, etc.). There’s nothing really “social” about those obligations (with the possible exception of compliance with law, which might better be categorized as an obligation of corporate citizenship, or more directly an environmental obligation). And it’s entirely possible that BP, in the weeks leading up to the spill, met most of those ethical obligations. The exception, of course, is workplace health and safety — 11 workers were killed in the Deepwater Horizon blowout. But even had no one been killed or even hurt during the blowout, a question of social responsibility would remain.
So, what makes the oil spill a matter of social responsibility? Precisely the fact that the risks (and eventual negative impacts) of BP’s deep-water drilling operations are borne by society at large. The spill has resulted in enormous negative externalities — negative effects on people who weren’t involved economically with BP, and who didn’t consent (at least not directly) to bear the risks of the company’s operations.
Now, all (yes all) production processes involve externalities. All businesses emit some pollution (directly or indirectly via the things they consume) and impose some risks on non-consenting third parties. So the question of CSR has to do with the extent to which a company is responsible for those effects, and (maybe) the extent to which companies have an obligation not just to avoid social harms (or risks) but to contribute socially (beyond making a product people value). From a CSR point of view, then, the question with regard to BP is whether the risks taken were reasonable. Most of us would say “no.” But then most of us still want plentiful cheap gas.
Thus the BP oil spill provides an excellent way to illustrate the way we should understand the scope of the term “corporate social responsibility,” and how to keep that term narrow enough for it to retain some real meaning.
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p.s., here are a few relevant bits of reading:
1) Did you know that, in 2005, BP made it onto the Global 100 list of the “Most Sustainable Companies in the World”, a feat the company repeated in 2006. (And yes, that’s a reason to be skeptical about such rankings!)
2) See also this bit on Which is the Most Ethical Oil Company?
3) And finally here is BP’s own take on CSR, from 2002, see this speech: The boundaries of corporate social responsibility
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Addendum:
Here are a few books on ethics & CSR in the oil industry. No endorsement is implied.
- Drowning in Oil: BP & the Reckless Pursuit of Profit
- Corporate Social Responsibility Failures in the Oil Industry
- Price of Oil: Corporate Responsibility and Human Rights Violations in Nigeria’s Oil Producing Communities
- The Tyranny of Oil: The World’s Most Powerful Industry–and What We Must Do to Stop It
Corporations & the Right to Sue for Libel
Back in February, just after the US Supreme Court issued its Citizens United decision that essentially asserted that corporations have a right to mostly-free speech in the political realm, there was a lot of speculation about what other rights would be asserted next on behalf of corporations.
In that regard, here’s an interesting story from the UK about the legal right of corporations to sue for libel. Writing in The Guardian, lawyer David Allen Green asks, Why should companies be allowed to sue for libel? The whole piece is very much worth reading, but here’s Green’s conclusion:
Given the range of other legal means open to companies to protect their commercial reputations, I think the right of companies to sue for libel should be severely limited, if not abolished altogether. The public interest requires nothing less.
Green suggests that those who assert the cogency of such a right likely do so on the basis of the idea that corporations are, after all, persons:
But to the conventionally minded English lawyer there is no question that companies should be able to sue for libel. After all, companies are “legal persons” – and in English law, personality goes a very long way. The view is that if “natural persons” can sue for libel then so can companies.
But it doesn’t seem to me at all obvious that personhood is the foundational notion, at least not ethically. What about something simpler, like the idea that the corporation is a valued instrument (of its owners, members, shareholders, whatever). If you libel a company (by publishing something false that damages its reputation) you do economic damage to its shareholders. But rather than having each shareholder launch a lawsuit against whomever wrote or broadcast the libelous words, it makes more sense to let the company itself sue.
Now, Green argues that companies have other effective mechanisms at their disposal, beyond libel law. And that may well be. My only point here is to argue that we don’t absolutely need to begin with the notion that a corporation is a person, in order to attribute to it certain legal rights. All we need to do is recognize that protection of the corporation is important to protecting the interests of those flesh-and-blood persons whose economic interests depend upon it.
(p.s., in the wake of Citizens United, I did a trio of blog entries on the topic. See my 1st, 2nd, and 3rd entries. A few months earlier, I had written about Why Corporations Must Be Legal Persons.)
Venture Capital: Lessons for Business Ethics (part 2)
Filed under: finance, governance, management, profits, shareholders, SME |
Comments (2) Yesterday I posted the first of two blog entries on Ethics in Venture Capital. This is the second.
I noted yesterday that the relationship between venture capital (VC) firms and entrepreneurs is fraught with ethical challenges related to bargaining, information, control, and short term-ism. Those worries tell us something about the world of venture capital; but what do they tell us about business ethics more generally?
The key lesson, I think, is one I learned from Gary Pisano’s book, Science Business, though it isn’t a major theme of that book. The lesson is this: a funding model is also typically a governance model. This insight is at a very coarse level summed up by the old aphorism that “he who pays the piper calls the tune.” In business terms, providing financing means paying the piper. Governance is about getting to call the tune.
This is closely linked to the core lesson from another favourite book of mine, Henry Hansmann’s The Ownership of Enterprise. Hansmann’s book is an attempt to explain the patterns of ownership and control we observe when we look at the range of business firms that populate a market economy. When you look around at complex organizations like modern corporations, most of them tend to be owned by shareholders but managed by professional managers. What is it that explains how pervasive that particular setup is? Lots of other models are possible — partnerships, employee co-operatives, consumer co-ops, and so on. Law and even tax policy in most modern economies both permit and sometimes even encourage these other models, yet the shareholder-driven corporation dominates in most industries. Why? To make a long story short, Hansmann’s thesis is basically that the patterns of ownership we see can best be explained in terms of different stakeholders a) interest in, and b) ability efficiently to accomplish, effective oversight of managers.
So, back to VC. When VCs invest in firms, they often essentially assume ownership: they buy an equity stake in the firm and exercise control (via Board membership, among other mechanisms). But why are VCs involved at all, rather than other sources of funding, like employees or banks or non-expert shareholders? Basically, in Hansmannian terms, because VCs are better able to a) bear the risk involved in ownership of a startup company, and b) exercise the kind of knowledgeable control over the company (via supervision & sometimes appointment of managers) to make the risky investment worthwhile. But as I noted yesterday, the specific kind of (short-term) interest that VCs have in the firms they invest in raises a special set of ethical issues that look somewhat different from the issues faced in firms funded in other ways.
The lesson: if we want to understand the ethical challenges firms face, and why they do the things they do, we need to think in a detailed way about who owns them, the goals those owners have, and the extent to which the owners are exercising effective control.
What Does BP Owe its Shareholders? Nothing.
People have generally been dismayed at the behaviour of BP execs in the wake of the disastrous oil spill. CEO Tony Hayward has been roundly criticized, both for his overall handling of the situation, and for asking dumb questions like “What the hell did we do to deserve this?” The unmistakable impression is that BP’s ‘heart’ really isn’t in it when it comes to fixing this mess, and that they’re more interested in preserving what’s left of their reputation and in protecting profits.
How, ethically, ought BP’s execs to be behaving? Where do their obligations lie? Should they be focused 100% on cleanup? Should they be trying to preserve and build shareholder value? Should they be balancing those 2 objectives?
Generally, the task of corporate managers is to build wealth for shareholders. Don’t forget, executives are hired to run a business they don’t own, so it’s not up to them to decide how to run it. The standard view is that their job is to serve the shareholders. As long as they do so in constructive ways — through innovation, efficiency, etc. — and as long as innocent bystandards aren’t hurt, such profit-seeking is in fact socially beneficial. So one way to think about business ethics is that managers are free to compete aggressively, focused primarily on shareholder value, as long as they’re not misleading customers, abusing monopolistic power, or foisting costs on bystanders (i.e., imposing what economists call “negative externalities”). Those behaviours represent the boundaries of the ‘game,’ as it were. Within those boundaries: play ball!
This view implies that as long as a company keeps its nose clean, they don’t need to feel bad about pursuing profits, even when doing so means, for example, putting a competitor out of business, resulting in a loss of jobs, etc.
OK, so now consider BP. A year ago, BP’s managers might have been able to say something like this: Our job is to build shareholder value. We do that by producing a product society needs and is willing to pay for. As long as we don’t pollute too much (after all, all industry creates at least some pollution) it’s ethically OK for us to focus on our the interests of our shareholders.
Now, fast-forward to right now, to June of 2010. BP’s managers can’t exactly help themselves to the above argument, can they? The condition that normally justifies the zealous pursuit of profits doesn’t obtain, here, because BP’s managers haven’t been anywhere near sufficiently careful about avoiding imposing costs on others. Indeed, they’ve imposed massive costs (massive negative externalities) on the people of the Gulf Coast states, and (less directly) on the rest of us too.
So, when BP’s managers look around them, at the wide range of individuals and groups with a stake in their current decision-making, how much weight are they justified in giving to the interests of their shareholders, i.e., to the people who benefited from their profit-seeking behaviour in the first place?
I’d say “roughly zero.”
(The philosophical version of the argument for the basis, and limits, of profit-seeking behaviour can be found in Joseph Heath’s “An Adversarial Ethic for Business: or, When Sun-Tzu met the Stakeholder,” Journal of Business Ethics, 69, 2006. A downloadable version is on Joe’s page here.)
Galarraga’s Corvette
Filed under: advertising, governance, government, management, shareholders |
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By now everyone probably knows the background story: Detroit Tigers pitcher Armando Galarraga didn’t get credited with the perfect game he pitched last Wednesday, due to a bad call made by the umpire. Fast-forward a day to General Motors tapping into international sympathy felt for Galarraga by giving the ballplayer a red Corvette convertible. A public-relations coup…pure genius, right?
Well, unless you’re given to armchair micromanagement, in which case you slam GM for wasteful spending.
Here’s the story, by the New York Times’ Nick Bunkley: G.M.’s Gift of a Luxury Car Stuns a Few.
A free sports car for a Detroit Tigers baseball player was not among the reasons the government saved General Motors from financial collapse. Nor was a year’s supply of diapers and other gifts for a Minnesota woman who gave birth behind the wheel of a Chevrolet Cobalt.
General Motors has given away both in recent weeks — marketing ploys that would have barely raised an eyebrow in the past. But now that American taxpayers collectively own a majority of the carmaker, executives are learning that there are more than 300 million potential second-guessers out there.
The complaint, of course, is ridiculous. Never mind the fact that it’s so patently obvious, even to those of us who are not experts, that this was a brilliant move by GM. The bigger point here is that most of us (including the critics mentioned in the NYT story) are not experts, either in public relations or in corporate management more generally.
Now, that’s not to say that non-experts can’t express an opinion. (The fact that I have a “Comments” section on my blog essentially constitutes an invitation to experts & non-experts alike to comment.) The point is that shareholders in GM (including, now, indirectly, all U.S. citizens) have little business feeling aggrieved over each and every minor managerial decision, even ones they suspect are misguided. Shareholders hire managers to manage — to make decisions. Courts have long recognized that, once you empower someone to run a business, you basically need to back off and let them do their job. There are exceptions, of course. The American people now hold a major stake in GM, and they should be worried if they see GM managers heading in any truly disastrous directions. But being a shareholder neither qualifies you, nor entitles you, to have a say in day-to-day decision making. So critics of GM’s gift should feel free to play armchair umpire; but they shouldn’t expect anyone to take them seriously.
The Business Ethics Blog 