The Human Connection and the Lack of Corporate Morality

I own 25% of Blend Interactive, which is a significant percentage. This chunk of ownership binds me to this company, in the sense that I see the company as a sort of extension of myself in many ways. I’m not a minor owner – I’m a significant part of the day-to-day operations, and my input goes a long way towards steering the company.

Thus, if Blend started doing things that were morally objectionable, my personal persona would take a hit. If Blend suddenly did something bad to our employees – canceled their health care, for example, to increase our profit – word would get around, and people would think, “Wow, Deane is a jerk.”

I stand to benefit from the profits of Blend, so if I do something to increase those profits at a human cost to someone, then I am placing money above human welfare. Conversely, if I reduce my personal profit in exchange for a human good, then I’m placing humanity above money. Good for me.

This is a check and balance of my moral leadership of Blend. I am compelled to guide Blend to act morally (sometimes in opposition to profit) in part because it is a reflection of me as a 25% owner. Put another way, there is a significant “Human Connection “ to Blend. Blend is less a company by itself, and is rather a very direct aggregation of the morals and ethics of the four owners.

With such direct ownership, humanity shows through. I do not think Blend has any morals itself – it’s a legal entity, and thus knows nothing of morals. Any morals it appears to have are just the morals of its owners, reflected by what the company does.

Now, let’s contrast this to, say, IBM. That company has almost 1 billion shares outstanding. Thus, “ownership” of IBM is almost theoretical. I can own a single share, and say I’m an owner of the company, but I have no real ability to steer it anywhere.

As of this writing, the largest single owner of IBM shares is Berkshire Hathaway, which owns 7% (just over 70 million shares). Berkshire is, of course, a holding company, putatively owned by Warren Buffet, but in which you can also buy shares. Berkshire has 1.6 million shares outstanding, of which Buffet himself is the largest owner, having about 32%. This effectively means that, filtered through Berkshire, the person of Warren Buffet owns about 2% of IBM.

The largest direct owner of IBM shares is a guy by the name of Steve Mills (he’s also one of their VPs). He owns about 153,000 shares, or .2% of Berkshire’s ownership, and only .01% of the company as a whole.

What this means is that there’s much less of a Human Connection to IBM. What IBM does as a company really isn’t a reflection of anybody. Buffet is the most influential single owner, and even he owns only 2% of it, and he would have to wield that 2% to the benefit of Berkshire and its other shareholders.

When a company like this does something bad – screws its employees, burns the rain forest, ignores human rights abuses, whatever – I find it a little funny that people say, “IBM should be ashamed itself!”, because this means nothing. IBM is a legal entity, incapable of shame.

What they mean to say, I think, is “The decision makers at IBM should be ashamed of themselves!” In this, they likely mean the managers and directors. But they’re not the ultimate decision makers. They simply have to reflect the wishes of the owners.

So, let’s say this: “The owners of IBM should be ashamed of themselves!” Here we have the truth. But without a strong Human Connection , there’s really no way to “enforce” this shame. The only way for this shame to reflect on a human is for some human to identify with this company as an extension of their morality.

If I’m Steve Mills, I own .01% of IBM. Even as an officer, I doubt he looks at IBM In any way as an extension of himself. It doesn’t reflect his values or morals or ethics. He’s just a tiny owner in the big picture (even if he is the largest direct shareholder). He doesn’t own enough of this company to possibly feel shame at anything it does beyond his personal decisions in his position.

In this way, the U.S. economy has devolved into ownership by proxy. At scale, few people really “own” anything in the sense that it reflects them as humans and that they feel a driving personal need to operate the company according to their private moral code. Even if any owner wanted to exercise their personal ethics, they would have limited ability to do so.

Large, publicly-held corporations have essentially become automatons, beheld to nothing but their share price. Any why wouldn’t they be? The vast majority of their ownership only relates to the company through that number – if it’s up, things are good, if it’s down things are bad. For most of their ownership, that is the sole barometer of success.

I believe that as any financial market evolves, it will gradually strip out pesky problems like morals and humanity. Financial markets are designed to evolve in service of profit, and they do this very well.

Yes, yes, companies have charitable giving programs and employee benefits, but how much of this is in service to PR and employee retention? Consider this article in the Wall Street Journal: “The Case Against Corporate Social Responsibility”

Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare.

I feel like this sums up the thinking of most of corporate America – trickle-down economics works, and if we simply create as much profit as possible, it will all work out.

Here’s another line of thinking: “When Corporate Theft is Good”

Shareholders tolerate a certain amount of what looks like corporate philanthropy because some customers like to see it, and so become more inclined to buy the company’s products. Used in this way, philanthropy is simply part of a firm’s marketing. And it must be justified in the same way as any other marketing effort: Does it increase revenues by more than it does costs?

So, charitable giving is marketing, essentially. We’ll do it so long as it benefits us, but not just because it’s the right thing to do.

In 2002, the WSJ did a survey of corporate recruiters, asking what traits they look for in MBA candidates. The results were obvious: corporate citizenship was last. Worse:

Recruiters might even regard good deeds on a resume as a negative factor. “If an M.B.A. student spent a summer building houses for Habitat for Humanity, that person could be seen as soft and not ready for the rough-and-tumble world of investment banking,”

And this makes sense, because notions of objective right and wrong – an absolute moral standard – exist only in the minds of humans: we are the only true things that contain morals. To a corporation, the only objective standard it knows is profit, so deciding it’s cheaper to allow 180 people to burn to death rather than fix a fuel system problem (PDF; see page six) is a perfectly valid action when compared against that standard.

In the end, corporations are inherently greedy by design, and they will act in the interests of the only standard they can be held to: their bottom line. This is not their fault – these are just the rules of the game we created.

What we hope is that their owners will have a strong enough Human Connection that they desire to operate the company as an extension of their humanity. Sadly, the chances of this become more and more remote as the number of owners increases. More owners means that each individual human – each container of morality, inasmuch as only humans can be true moral actors – gets further away from the company. With dilution of actual ownership comes dilution of the Human Connection, and with that, the dilution of any need to act toward the good of anyone or anything else.

As with a lot of things in life, there is no real solution to this, short of artificial legal rules that may or may not work, but would be a constant source of legislative turmoil either way. This is just how markets evolve, and this is a price we pay for freedom and liberty and the other (considerable) benefits that provides.

I’ll conclude with a quote from Ron Paul’s book, Liberty Defined, which I read a couple years ago:

We need to become tolerant of the imperfections that come with freedom, and we need to give up the illusion that somehow putting government in charge of anything is going to improve its workings, much less bring on utopia.