Unprincipled Agent Problem

This is causing somewhat of a stir but it’s mostly meaningless guff:

Nearly 200 chief executives, including the leaders of Apple, Pepsi and Walmart, tried on Monday to redefine the role of business in society — and how companies are perceived by an increasingly skeptical public.

Breaking with decades of long-held corporate orthodoxy, the Business Roundtable issued a statement on “the purpose of a corporation,” arguing that companies should no longer advance only the interests of shareholders. Instead, the group said, they must also invest in their employees, protect the environment and deal fairly and ethically with their suppliers.

This is nothing new. The idea that there is any major western corporation which thinks shareholder value is not maximised by showing a degree of consideration towards employees, the environment, and suppliers is laughable. From the statement above, one would think modern corporations are operating like a mining company in 1890s West Virginia, paying workers in scrip exchangeable only at the company store and if one gets killed they send the widow a ham.

They might have a point about the treatment of suppliers, but I suspect it’s not the one they’re making. When people think of the poor treatment of suppliers by large corporations they conjure up images of grubby children in Bangladeshi sweatshops, sleep-deprived Chinese launching themselves from windows, and Africans hacking at a piece of concrete-like soil with a hoe designed in Roman times. Executives will fall over themselves to stamp this out because to the degree it happens and is under their control it’s an easy promise to make. Similarly, I would be quick to make a promise not to double-park my Ferraris. What they’ll be less keen on rectifying is the utterly unethical practice of allowing suppliers to go bankrupt because they’ve simply not bothered paying invoices that are months overdue.

“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders,” the group, a lobbying organization that represents many of America’s largest companies, said in a statement. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

Again, this is nothing new. The realisation that companies operate best in a stable, functioning society took place at least a hundred years ago, which is why a lot of early industrialists engaged in philanthropy.

The shift comes at a moment of increasing distress in corporate America, as big companies face mounting global discontent over income inequality, harmful products and poor working conditions.

I’d believe this if the source of discontent were impoverished labourers with callouses on their hands instead of pudgy middle class westerners who wouldn’t know a rake from a wheelbarrow. To the extent a shift has occurred, it is that much of the left no longer see corporations as a problem but as a power to be harnessed in order to bring about their desired political goals, bypassing the political process that has thwarted their ambitions for so long.

What these CEOs are doing is signalling to the American left that they are open to doing their bidding provided they get left alone financially: we’ll sign up to Pride Month and let our HR department fire anyone who posts wrongthink on social media, just don’t look too closely at our lobbying efforts regarding NAFTA and our tax exemptions. As I’ve said before, we might even have reached the point where the senior executives of major corporations actually believe their job is to act as moral guardians of the nation, rather than just pay lip service to the latest woke fad in order to placate the SJW hordes and hoodwink the dim. In that case, what we might be seeing is an attempt to justify progressive CEOs virtue-signalling at the expense of the shareholders. For example:

The CEO of Gillette said he does not regret his company’s controversial marketing campaign inspired by the #MeToo movement, despite losing some loyal customers over it.

Gary Coombe called the loss of revenue from those customers a “price worth paying” in a Monday interview with Marketing Week. Procter & Gamble, the parent company of Gillette, announced Tuesday they had taken over $5 billion in losses for the quarter, after Gillette had an $8 billion noncash writedown after its market share for razors fell over the last three years.

In other words it’s a principal-agent problem, which is nothing new either.

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25 thoughts on “Unprincipled Agent Problem

  1. Spot on.

    If you don’t read it already, Matt Levines daily column for bloomberg is excellent on how stakeholder duties is in practice a fight for control between management and shareholders

  2. Companies Act 2006, s.172 (UK)

    Duty to promote the success of the company

    (1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

    (a) the likely consequences of any decision in the long term,

    (b) the interests of the company’s employees,

    (c) the need to foster the company’s business relationships with suppliers, customers and others,

    (d) the impact of the company’s operations on the community and the environment,

    (e) the desirability of the company maintaining a reputation for high standards of business conduct, and

    (f) the need to act fairly as between members of the company.

    (2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

    (3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

  3. My problem with this is that a duty to look after the environment or society or wider stakeholders pretty much gives carte blanche to do whatever the people running the firm want. Any hobby horse they want to jump on, their back is covered. And how can they be held to account for the way they balance the interests of suppliers, employees, customers and shareholders, when to some extent those interests are necessarily opposed? Pay your suppliers and employees loads, charge your customers little, and the shareholder isn’t exactly sitting pretty. I appreciate it’s bad for firm and shareholders in the long run if employees are exploited, suppliers driven to the wall and customers ripped off, bit that fact isn’t rocket science.

    As a shareholder you really don’t get a lot of say in how a big corporation is run, and it’s a bot disquieting if your interests as an owner are not being held as central by the people you have, as part owner, effectively delegated the running of that chunk of capital to. It’s all gone a long way from the guy you trusted to caravan your goods over the mountains/sail them across the seas, on the promise and trust that he would trade on your account with your best interests at heart.

  4. “As a shareholder you really don’t get a lot of say in how a big corporation is run”

    Other than voting with your feet and selling your shares.

  5. “Nearly 200 chief executives, including the leaders of Apple, Pepsi and Walmart, tried on Monday to redefine the role of business in society”

    Let us worry about that. Just get on with making the computers and the sugary drinks.

  6. Nearly 200 chief executives, including the leaders of Apple, Pepsi and Walmart, tried on Monday to redefine the role of business in society

    Well, in that case we can all be thankful that Pepsi no longer has the 6th largest military in the world.
    We might have had a problem if they decided to promote their woke culture via more direct means.

    https://www.businessinsider.com/how-pepsi-briefly-became-the-6th-largest-military-in-the-world-2018-7?r=US&IR=T

  7. If the Gillette campaign had exactly the desired effect then surely it would be repeated in other similar markets, maybe Canada, Australia, the UK etc…
    If there has been an equivalent advert in the UK then I haven’t seen it.
    Anyone else?

  8. The lovely ladies of our countries control about 80% of consumer spending. Those same lovely ladies will purchase a product far more expensive than it’s identical substitute if (1) other, high status ladies are purchasing it, and (2) it tickles the feelz.

    So it’s vitally important for the businesses competing directly for these dollars to be seen as “acceptable”, which means safe, caring, and comfortably vague because that’s popular with high status women currently. If horribly unethical products were in vogue with enough women in Manhattan (eg fur coats) these companies would be touting their commitment to clubbing baby seals in a heartbeat. See baby foreskin facial cream as an unfortunately real-world example of this disgusting phenomenon.

    These CEOs might actually believe it’s their mission to save the world, shareholder value be damned, but that’s only because high-status women have cottoned on to the lip service game big companies have been playing, so a more convincing commitment is required. So it really is simple market forces at work, though a correction could be due.

    In short, big-name companies have been telling sweet lies to get into ladies’ pants but now they have to step up their game before getting that sugar.

  9. A note about the Gillette catastrophe: it wasn’t the ad that sunk them, nor even cost them much in sales. It was mail-order razor companies like Harry’s and Dollar Shave Club (and, I wouldn’t be surprised to learn, the current vogue for ridiculous beards among low-testosterone hipsters).

    Healthy, profitable companies don’t do social justice wank because healthy, profitable companies are conservative about their cash flow. You only get cringefests like the Gillette ad when a company is in dire straits and chucking desperate Hail Mary passes in an attempt to shore up plummeting sales. I’ve watched this happen in a ton of niche hobby markets (tabletop games, video games, comic books, SF literature, streaming media services, etc., etc.) and it’s starting to hit mainstream markets as the impact of the Amazon revolution is felt across the economy.

    SJWs are like parasites – they can only infect a weak or sick host.

  10. What they’ll be less keen on rectifying is the utterly unethical practice of allowing suppliers to go bankrupt because they’ve simply not bothered paying invoices that are months overdue.

    Which company is guilty of this? What would the purpose of this behaviour be?

  11. What would the purpose of this behaviour be?

    Free raw materials/services. Then bid for the next desperate sucker, rinse, repeat.

  12. Which company is guilty of this? What would the purpose of this behaviour be?

    Too numerous to mention and too litigious to write about on a blog. As a contractor, I’ve had to resort to tell the project manager that “unless my overdue invoices get paid by COB Friday, I won’t be in returning to work”, more than once.

    Only the fact that the project manager was able to call up the AP staff and demand immediate payment of contractually fulfilled, approved and authorised invoice payments actually got me paid. I would imagine the problem for pure 3rd party companies without “someone on the inside batting for them” is much, much worse.

    Is it common-place / widespread? absolutely. The problem is that without resorting to the courts to get paid small companies have no leverage.

    All the mandatory late payment / excess interest legislation in the world doesn’t help if the company has a policy of delaying payment as long as possible (often until suppliers refuse to deal with them because of previous late payments / outstanding invoices).

    The small claim courts in the UK make the process of debt recovery easier for those with the knowledge to use them effectively against bad / late payers, but many small business owners are too intimidated to use them effectively.

  13. Which company is guilty of this? What would the purpose of this behaviour be?

    Many big companies do this, purely through bureaucratic incompetence (although I’ve known Korean ones do it in the hope of never having to pay a supplier who’s gone bankrupt). The sort of people working in accounts payable aren’t the brightest and most motivated, and if an invoice gets stuck in the system, or someone’s on maternity leave, or an approval is needed by some twat who has 1,000 unread emails in his inbox, then who cares? It’s not their money that’s being held up.

  14. Keeping this as vague as possible to avoid legal repercussions:

    Years ago there was a big athletic event. For this event, the organizers formed a media company. The organizers also owned a cable network. They used the cable network as the main reference to get lines of credit for the new media company from many suppliers

    After the event was over, the new media company ceased to exist. Suppliers went to the cable network for payment. The cable network said “That was not us.” Many suppliers went without payment.

    In other cases, companies become suppliers to a large company (such as one of the companies of the list in the cited article). The small company gets a contract and expands accordingly. After a year or two, the small company is told, “Sorry, we found someone else.” The small company is left holding the bag with facilities and employees, no longer needed, taken on to fulfill a contract that went elsewhere.

  15. CEOs can do what they want. Functionally, they own the company — not the shareholders. Of course that is not the legal position, but it is the real position.

    Not to pick on Boeing any more than it needs to be picked on, but what owner of a company would NOT have demanded the resignation of Dennis Muilenburg, Boeing’s president, chairman, and chief executive officer? He may not have been individually responsible for the crash of two 737-Max planes, the deaths of hundreds of people, and the probable future unsalability of one of Boeing’s most important aircraft — but he is accountable. The French used to say that the Brits would hang an Admiral from time to time, to encourage the others. If Boeing’s Board of Directors had any independence, they would have stripped Muilenburg of any golden parachute and then fired him.

    But Directors often have no skin in the game. If Congress was not so occupied with really important things like transgendered bathrooms, they would pass a law requiring every Director to invest at least 20% of his personal net worth in company stock, in a trust fund that could not be sold until at least 3 years after the Director resigned from the Board.

  16. Don’t fret too much lads, there is still a good bob to be made out there by investing in merit. Especially if you picked up a shit load of shares in them a mere fortnight ago!

    …………………………………………………………….

    Shell enters Australia power industry with $419 million bid for ERM Power

    MELBOURNE (Reuters) – Royal Dutch Shell has made its first foray into Australia’s highly competitive power sector with a A$617 million ($419 million) takeover offer for ERM Power Ltd, the country’s no.2 energy retailer to businesses and industry.

    ERM agreed to the offer, pitched at a big 43% premium to its last closing price, and recommended shareholders should accept it in a vote expected in November.

    https://www.reuters.com/article/us-erm-power-m-a-shellenergyaustralia/shell-enters-australia-power-industry-with-419-million-bid-for-erm-power-idUSKCN1VB2L1

  17. “The cable network said “That was not us.” Many suppliers went without payment.”

    Otherwise known as counterparty risk.

    Unfortunately in business this still remains the highest and most occurring risk, I dont think it will ever be eliminated.

  18. This strikes me as being key:
    “After the event was over, the new media company ceased to exist.”

    How did this happen without someone signing off a set of accounts showing that the company had dealt with its liabilities? Because either they were there, in which case I can’t see how the company was shut down, or they weren’t, in which case we can jail the directors for fraud.

    Which is it?

  19. How did this happen without someone signing off a set of accounts showing that the company had dealt with its liabilities?

    If it is a one-off event then it is perfectly possible for a company to operate for up to 18 months without filing accounts (just by setting the accounting date as far forward as possible), then having the company struck off before the accounts filing date has passed.

    Truth is though that they probably never even did that, just never filed any accounts, ignored everything apart from the initial filings and had the company struck off when the scam was done. Technically HMRC will object if their is a large tax liability outstanding, but if they’ve been running adhoc without having formal employment arrangements then perfectly possible to achieve.

  20. “it is perfectly possible for a company to operate for up to 18 months without filing accounts (just by setting the accounting date as far forward as possible), then having the company struck off before the accounts filing date has passed.”

    And to think I got grief on Tim Worstall’s blog for suggesting that limited liability was a fraudsters charter and should be significantly restricted if not banned outright.

  21. There was an interesting research paper I read a while back that said the primary purpose for companies to have these ‘social responsibility’ type programs is that it lowered recruitment costs and salary expectations.

    Basically, staff felt ‘better’ working for a company that pretended to care and they would accept a lower salary and were less likely to leave.

    If you work for Evil Omni Corp, you want better pay….

  22. Matt

    “Which company is guilty of this? What would the purpose of this behaviour be?”

    This is a favourite tacit in the construction industry. Not always deliberate, but it can be. Given the one-off nature, and the retention payments, there is an advantage to send your subbies bust, then negotiate a lower settlement with the receiver.

    I worked for a UK construction company for a short time that had a policy of simply not paying anything until legal action started.

  23. Daniel Ream,

    “Healthy, profitable companies don’t do social justice wank because healthy, profitable companies are conservative about their cash flow.”

    I’m not sure what you mean by “healthy” but the problem with large, profitable corporations is that they can become unhealthy quite quickly.

    One thing that boosts the principle/agent problem is scale and layers. A company owned and run by a CEO who employs a dozen people can see everything going on. Someone goes off in a bad direction, they can stop them quickly. You, a shareholder of P&G can’t see this with the people agreeing a Gilette ad. And all the people between you and the people agreeing the Gilette ad aren’t necessarily serving your interests. They’d like to do things that aren’t what you’d like. And I don’t just mean things like paying for escorts on expenses. They’ll try and do things that mean they avoid work, or divert money into pet interests or into things that are fun. And the further away you get from the shareholders, the less people give a crap about the shareholders.

    For example: the only companies that still use classroom training for software development are large companies. Why? Because they’ve got money sloshing around, and armies of people who want to get their hands on it. They want to get out of the office, do a bit of travel, get a nice lunch. The manager has a budget, and doesn’t give a fuck as long as it’s allowed. It’s not his money.

    In a small company, the software developer is 2 steps from the owner. He looks at this and thinks it’s a lot of money compared to video training.

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