Cory Doctorow’s definition of corporations

Corporations are immortal, trans-human artificial life-forms and humans are their gut flora.  Gut flora and host organisms are often aligned in their interests. Ultimately, your gut flora’s strategies are not yours.

via Boing Boing.

Corporations as privately-owned governments

A large corporation is not like a person.  It is like a government, a privately-owned government.   We Americans make a big mistake when we fail to realize this.

Our American tradition tells us to be suspicious of the power of governments.  We try to limit the government power by means of a written Constitution, and separation of governmental powers among three branches of government and between Washington and the states.   We tend to value individual rights more highly than the common good.

We don’t  have a good way of fitting corporations into this way of thinking.

A public, limited liability corporation is an institution with special privileges and powers established by law, in order to allow people to combine their wealth to accomplish a common purpose.

The power of the corporation comes from the principle of limited liability.  Investors in a company are not responsible for the obligations of the company beyond the amount of money they have put in.   That gives corporate owners a huge advantage they would not have enjoyed as individuals.

This is a good thing when the purpose aligns with the public good, as sometimes happens but not always.   Big American corporations historically have been strong engines of economic growth.   They’ve also been dangerous concentrations of monopoly power and sources of political corruption.

American leaders in the era of Theodore Roosevelt and Woodrow Wilson understood this well.  They enacted anti-trust laws so that corporations were subject to the discipline of competition.  They set up systems of regulation to prevent executives from advancing corporate interests at the expense of the public.

Starting in the late 1970s and early 1980s, American leaders forgot this.  They thought that anti-trust laws and government regulation held corporations back [1] and experimented with giving corporations free rein.

Many adopted the philosophy of Milton Friedman, which was that since the working of the free market produced the optimum result, there was no need to consider anything else.

We’re now living in the results of that experiment.

Mercenary armies and the fate of nations

Kelly Vlahos wrote a disturbing article in The American Conservative about the Pentagon’s growing dependence on mercenary troops and about how mercenary companies are becoming just as important as regular troops worldwide.

Use of military contractors offers many short-term conveniences for governments and long-term dangers for the public.

Hiring mercenaries frees a government from the difficulties of recruitment or a military draft.   Mercenary companies are usually willing to do whatever they’re paid to do, without concern for such things as the Uniform Code of Military Justice, the Constitution, the Geneva convention or a sense of military honor.  Their activities are not subject to the Freedom of Information Act.

The long-term danger is having your country’s national defense dependent on people whose services are for sale to the highest bidder.   That was the situation in the city-states of Renaissance Italy during the time of Machiavelli, and Sean McFate, a writer and former mercenary himself, thinks the world could be returning to that situation.  Very convenient—for the government in power.

The great sociologist Max Weber defined a sovereign government as the institution that had a monopoly on the legitimate use of lethal force within a given area.  But there is nothing that limits a military contractor to selling its services to a government.

Mercenaries can sell their services to anybody that can pay them, be they corporations, political parties, fanatic religious movements or international institutions.

Corporations nowadays operate like private governments and sometimes have the power to bend actual governments to their will, as the big banks are doing in Greece and Ukraine.  But while they have their own security forces, they as yet lack full-fledged armies.  If Vlahos and McFate are right, they might acquire them, too.

LINKS

A Blackwater World Order by Kelley Vlahos for The American Conservative.

Book Review: Sean McFate’s The Modern Mercenary for Scholars and Rogues Literary Journal.

Blackwater Convictions Don’t Mean the End of Mercenary War by Sean McFate for The New Republic.

The nature of a corporation and how it changed in the 1980s by Matt Stoller for Ian Welsh.  About corporations as private governments.

Corporations that bestride the world

Double click to enlarge.

Some giant corporations are larger than small countries, but that is not the source of their power.

The source of their power lies in the fact that if a large corporation doesn’t like a government’s policies, it can take its money to a nation more to its liking.

International treaties, as well as organizations such as the World Trade Organization and International Monetary Fund, insist in the right of money to migrate wherever and however its owners wish.

Individual human beings do not enjoy the same right.  Large and sudden shifts of money and population both can be disruptive, but the migration of money is considered a right and the migration of people is considered a problem.

International treaties and agreements such as the World Trade Treaty, North American Free Trade Agreement and the proposed Trans Pacific Partnership Agreement give international corporations a legal status equal to sovereign governments.  If corporate executives think a government’s laws or policies are unjust, they can appeal to a business-friendly tribunal to overturn the law or penalize the government.

The important thing to remember about all this is that none of this is the result of impersonal workings of the laws of economics.

It is the result of decisions made by governments, which could have decided otherwise.

Corporations are created by law.  Any powers they have come from charters by a state or local government which define what the corporate body can and cannot do.

Without legislation allowing such charters, corporations would simply be collections of individuals.  There would be no corporate structure to stand between them and their liability for debts and criminal penalties.

The power of international corporations to shift capital from one country to another exists only because there are laws that allow this to happen.  The power of international corporations to override national sovereignty exists only because nations give up their sovereignty.

It’s possible to imagine a world in which things are different—in which international treaties set standards to require corporations to treat workers decently, sell non-toxic products and refrain from damaging the local environment.

That’s not the world we live in right now.  But it is a world that we the people have the  power to create.

Overall, CEOs don’t earn their big paychecks

The following is by Mark Symonds for Forbes

It isn’t every day that academic research comes along to tell you something you really wanted to hear and that you suspected was the truth all along.  In this case it’s about the long running debate around top executive pay.

A recent paper by J. Scott Armstrong of the Wharton School and Philippe Jacquart of France’s EMLYON, seem to have finally established that paying top dollar simply doesn’t get a better job done.  And, in fact, it might actually get a worse one done.

According to Armstrong and Jacquard, while there is plenty of evidence that financial incentives can be effective in motivating people to do mundane and boring tasks, individuals do the more interesting and challenging stuff…well, because it’s interesting and challenging.

Perversely, they say, very large financial incentives may actually hinder top performance. The paper argues there is strong evidence that individuals can become fixated on incentives and either become limited in their thinking, unable to digest and adopt new ideas or alternately become convinced that they will achieve the goal automatically so do not need to try as hard as they might otherwise.  Whatever the outcome, every other stakeholder from the more modestly earning employee to the corporate stockholder loses out.

And finally the research also suggests that we might not really be getting the brightest and best talent at the top because the tools and processes used to identify candidates are either limited or downright faulty. 

There is simply too much emphasis on past performance, personal recommendation, unstructured interviewing, an unwillingness to ask really difficult and searching questions and that more dangerous selection criterion of all – gut instinct. Worryingly, it seems that the headhunters and in-house recruiters charged with hiring occupants of the corner office may be relying too much on perception and too little on good, hard facts.

The paper points out that CEOs who win prestigious industry awards constantly out-earn those that don’t.  Yet the stocks of the companies the award winners head up consistently under-perform in comparison to those of their less publicity hungry peers.  Perhaps because the latter spend their time running their businesses well instead.  [snip]

Unlike many academics, who might shy away from coming up with a solution, EM Lyon’s Jacquart is one willing to give the obvious if uncomfortable answer – namely that current incentive models need to be abandoned and overall executive pay should be reduced.

And he’s also ready with a counter to those who will doubtless argue that this will make it impossible to recruit the right people and bring major banks and corporations crashing to the ground.

“Yes, of course this may make it more difficult to recruit very senior individuals from outside an organization, at least in the short term. However it would force businesses to focus more on the development of the talent it already has, the talent that is more likely to be more loyal to and understanding of its aims, goals and methodologies.”
[snip]

via Big Company CEOs Just Aren’t Worth What We Pay Them.

Why do we need labor unions?

Magic formulas and failed corporate strategies

Clayton Christiansen

Clayton M. Christiansen of Harvard Business School is a brilliant management scholar who has written about how U.S. corporations fail when they neglect the basics of their business.  He wrote recently in Salt Lake City’s Deseret News about another reason the corporations decline when executives focus on the wrong things.

You have such concepts as Return on Net Assets (RONA), Economic Value Added (EVA), Internal Rate of Return (IRR), Earnings Per Share (EPS) and Gross Margin Percentage. They are all ratios.

By standardizing the definition of profitability, corporations lined up to optimize these profitability ratios. RONA provides a good example.  A company could improve its RONA by generating more revenue and put that in the numerator.

But the other way to improve this ratio is to reduce the denominator by a company getting rid of assets.  Reducing assets is much easier than increasing revenue.  So if a CEO is rewarded for a good RONA ratio, the incentive is to outsource aggressively. When there are no assets on a balance sheet, then this rate of return is infinite, and according to this definition, it might seems like such a company is doing better and better.

via Clayton M. Christensen

McDonnell-Douglas was an example, he wrote.  Its DC-3 transport was a powerhouse of the industry, but the company’s RONA was low.  The company started outsourcing more and more of its work, and its RONA rose to 60 percent.  But when the DC-10 had been put on the market, there was not enough cash flow to launch a DC-11.

The economist Milton Friedman said back in 1970 that corporate executives are employees of the shareholders, and that their object should be to maximize shareholder value.  Steve Denning wrote in Forbes, quoting Jack Welch of General Electric, that this was the “world’s dumbest idea,” which is not to say that Welch never believed in it.  Denning said the truth is that the executive is the employee of the corporation, and that the purpose of the corporation, in the words of management scholar Peter Drucker, to “create a customer.”

I find this discussion familiar, because I remember how, when I was reporting on Eastman Kodak Co. for the Rochester, N.Y., newspaper in the 1980s, Kodak exited or outsourced certain businesses because profit margins were not high enough, while its main competitor, Fuji Photo (now Fujifilm), simply tried to maximize its share of the market.  Like Kodak in the days of George Eastman, Fuji never gave up any basic technological or manufacturing capability.

Why are so many corporate executive beguiled by financial formulas at the expense of long-term survival?  Christiansen thinks it is because of dogmatism and Denning because of stupidity.  Probably they’re right in many cases.  But for certain categories of people, focusing on financial ratios makes perfect sense.   They include hedge fund managers, private equity fund managers who specialize in leverage buyouts and any other investor or speculator who wants to cash in and get out.

Corporations behaving badly

Corporations aren’t really people, of course.  They are organizational structures which people can use for good or ill. Corporate structures serve the necessary function of accumulating capital.  It is through capital investment that the total wealth of a society is increased.  Both experience and economic theory show that this works better when capital is in private hands than in the hands of central planners.  Even though corporations represent a dangerous concentration of wealth and power, it is a danger that has to be risked if we want to enjoy the blessings of a growing industrial economy.

Corporate investors have the privilege of limited financial liability.  That is, unlike individuals who own businesses, they only risk what they have invested.  If the corporation fails, any additional debts and liabilities have to be absorbed by someone else.  If it weren’t for this privilege, if the investors were individually responsible for the corporation’s actions, there would be few investors.  I would not buy corporate stock or invest in mutual funds if I were on the hook for everything a company might do.

Under current law, the executives of corporations have a fiduciary responsibility to maximize return to shareholders.  Period.  Whatever obligations they assume beyond this is a matter of law, regulation and of individual ethics.  But if there no laws and regulations concerning labor, health and safety, environmental, consumer protection, monopoly power or fraud, or the laws and regulations are not enforced, there is not necessarily any material reason for corporate executives to care about such things.

And if you believe in an economic theory that says that the corporation maximizing profit always results in what is best for society, and that the unfettered individual pursuing his or her self-interest always results in what is best for society, then there is no ethical reason to do so either.  The result is the behavior described in the chart.

Hat tip for this chart to The Big Picture.

How corporations are being milked

This chart tells a shocking story.  It says that stockholders of American corporations are taking out more in dividends and stock buybacks than the corporations are earning in profits.  They are eating the seed corn.  They are taking for themselves the funds the corporations need to reinvest in new products, new equipment and research.

The blue line is corporate profits.  The dotted red line in dividends to stockholders.  The solid red line is the total of dividends to stockholders plus corporate purchases of their own stock.  In some years, the solid red line is below the dotted red line; those are years in which the amount corporations took in more by selling new stock than they paid out by buying back their existing stock.

Somebody who starts a company that produces something of value deserve a rich reward for their risk and effort.  The investors who enable somebody to start a successful company deserve a rich reward for their risk.  People who keep a company going deserve a reward for their effort.  But the passive stockholders who come after contribute very little.  They are not the equivalent of venture capitalists.  Their only role is to create an aftermarket into which the initial investors can cash out.

I have nothing against stockholders.  I put my own savings into Vanguard and T. Rowe Price mutual funds.  I would like to earn a return on my savings, but that does not entitle me to go to the front of the line, ahead of the workers, managers, suppliers and others who actually create value in the companies in the mutual funds.

On many levels, the United States is pulling back from investing in the future except for future war.  This is not sustainable.

Click on Disgorge the Cash! for more about this.

Why I don’t hate BP

I don’t hate BP or any other oil company. Neither do I defend BP.  An oil company is not a person. It is an organizational structure through which people operate.

I drive a car, and I need gasoline to make my car run.  The hard-working men and women of BP, ExxonMobil and the other oil companies extract oil in remote parts of the world and distribute and refine it in an incredibly complicated process. Thanks to them, I can drive up to the pump whenever I want, and fill my tank with gasoline. I am grateful to them.

There are people in BP’s chain of command whose decisions resulted in the Deepwater Horizon oil disaster, which resulted in 11 deaths and the destruction of the property and livelihoods of untold thousands along the Gulf coast.  I loathe and despise these individuals, even though I will never know who most of them are, and I know they will escape any serious consequence of their decision.

Some of these same BP executives ordered the survivors of the Deepwater Horizon rig held incommunicado until they signed waivers of liability, and their henchmen are acting like little tin dictators in the Gulf. I loathe and despise these individuals as well.

But the fact is that we the people, for all the talk about “ending our addiction” to oil, are going to need oil for the foreseeable future, and we will have to rely on the knowledge, experience and effort of oil company workers. What’s wanted is not to destroy the corporate structure, but to put responsible people in charge of the structure, and subject them to reasonable regulation.

BP: too big to fail?

Last night I watched a segment on the PBS Newshour about the consequences of BP failed as a result of its liabilities for the Gulf oil spill.

The conclusion was that a lot of innocent people would suffer. Many British pension funds are heavily invested in BP stock, and retirees would suffer severe loss of income if BP’s stock price collapsed or BP stopped paying dividends over an extended period of time. Some U.S. pension funds also hold BP stock. Then there are BP’s 80,000 employees. I have no reason to doubt that the vast majority of them are doing their jobs well, and have no responsibility for the decisions that led to the Gulf spill.

The people that are responsible, on the other hand, are likely to get off scot-free. BP CEO Tony Hayward received $6.2 billion in cash and shares last year. Even if he loses his job tomorrow, he is not going to have to give it back. The worst-case situation will leave him vastly better off than the people along the Gulf whose properties and businesses have been ruined.

There is no such thing as punishing a corporation. A corporation is an organizational structure and cannot suffer. Only human beings can be punished. Human beings at the head of a corporate respond to economic incentives, which in BP’s case was to protect profits by cutting corners on safety and environmental protection. To offset this, you have to have strict governmental oversight, which the Bush and Obama administrations have failed to provide.