"The greatness and the genuine trait of your thought and writings lie on the fact that you positively and interestingly make use of philosophical thoughts and thoughtfulness in order to deeply and concretely cogitate about America's social issues. . . . This does not mean that your thought is reducible to your era: your thought, being inspired by issues characterizing your era . . . , overcomes your era and will still likely be up to date even after your era, for future generations." Bruno Valentin

Thursday, April 27, 2017

Stockholders Retain Wells Fargo’s Board: A Low Bar for Corporate Governance

Corporate governance is supposed to hold management accountable. Slack in the mechanism enables not only a lack of managerial competence or ethics, but also an ineffectual board. Unfortunately, whether by proxies or connections—or just sheer power—a board’s chair and other directors can remain in place in spite of having failed to hold a management accountable. Put another way, it is not necessarily enough that an incompetent or unethical management (and other employees) is removed; replacing the derelict board may be more crucial and yet even more difficult.

 On April 25, 2017, the stockholders of Wells Fargo voted to retain the board that had oversight-responsibility while the management created millions of fake accounts. Even though 5,300 employees and the CEO, John Stumpf, lost their jobs due to the systemic fraud, 56% of the stockholder vote went in favor of retaining Stephen Sanger, the board’s chairman. Even though press referred to that as “a stinging rebuke for his failure as lead director,” the fact that he won re-election would hardly be felt by him as a rebuke.[1] That the perception would be otherwise signals just how low the bar had dropped on corporate governance. That the entire board survived intact is more important than that five of its directors failed to clear “the 70 percent threshold that typically denotes a serious protest vote.”[2] Clearly a “protest vote” is not worth much if the entire membership of such a negligent board is retained.

On account of the collusion that can occur between a management and the board tasked with overseeing that management, combined with the existing low bar in corporate governance generally, the system can ill-afford the proxy mechanism; the system is too tilted in favor of even sordid managements and board directors. Additionally, corporate social responsibility could be widened to include stockholder voting. At the Wells Fargo vote, Warren Buffett’s Berkshire Hathaway voted its 10 percent stake in favor of retaining the entire board. Even if retaining it was in Buffett’s company’s best financial interest going forward, there would be value societally and even in terms of fortifying corporate governance, which I submit would be good for business, were investors such as Warren Buffett willing to vote in favor of cleaning a sordid or ineffectual slate even if its members promise to do better. In other words, stockholders would strengthen corporate governance itself, as well as the particular companies even financially—and thus the stockholders themselves!—were they to vote to hold derelict boards accountable for bad oversight even if said boards convince stockholders of better financials ahead. Resisting such a narrow impetus can be said to be within the realm of corporate social responsibility because it is in the public interest and in line with societal norms that corporate boards actively hold their respective managements accountable even for past behavior or performance. Giving boards a pass is just as bad as a board giving its management a pass. If a narrow pursuit of financial gain comes at the expense of fortifying governance systems, then such gain is likely to be short-lived anyway because defective systems enable bad management with ineffective oversight. Fiduciary duty suffers. So, ironically, it is a matter of social responsibility that managements are held accountable, as are their respective boards themselves. Hence public policy toward reducing the power of board-management collusion is in the public interest, and corporate social responsibility should be expanded to include stockholder activism with an eye toward reforming corporate governance itself.   

[1] Antony Currie, “Wells Fargo Should Listen to Investors and Step Down,” The New York Times, April 26, 2017.
[2] Ibid.

Tuesday, April 11, 2017

Company Police-States: United Airlines Attacks a Passenger

A manager of United Airlines boarded on the ground in Chicago to have three security employees of the Chicago Department of Aviation bloody and drag a physician off the plane to make room for an employee not on the flight’s crew. Although the airline was technically within its rights to forcibly remove the man for refusing to give up his seat, which he had paid for, removing paid passengers at the last minute to make room for additional, non-essential staff showed a lack of judgment. Accordingly, the police-power of the company is problematic and should be dialed back.  In fact, the power of the industry, including its companies, may need to be reduced.

 A passenger--a physician--being dragged from his paid, reserved seat as a United manager looks on. (Source: Tyler Bridges)

Concerning the lack of good judgment, the airline only offered $800 to passengers willing to give up their seats when the airline policy states that as much as $1,350 can be offered. That a manager of the airline told the man that security would be called if he did not comply suggests that the manager was trigger-happy, and of course not respectful of even paid customers. That the man was attempting to call his lawyer should have been a wake-up call for the manager.
At the very least, the man’s attorney might want to have a judge look into the airline’s “right” to forcibly remove a paid passenger for such a spurious reason. Even if the airline industry had influenced lawmakers to pass a law written in the interests of the companies, paying customers have rights. In this case, the physician had paid for his seat and he had the right to expect to be transported to his destination in a reasonable time. That he had reserved his seat should contractually obligate the airline even if its management is uncomfortable with being obliged. The next flight would not leave until Monday and the man had patients to see that morning. It would be interesting if United’s manager had not even bothered to check other airlines, or if he refused to give the passenger the option.  

The physician seen here looks to have been the victim of disruptive and belligerent employees and their henchmen. (Source: CNN)
The CEO of the airline, Oscar Munoz, referred to the passenger as having been “disruptive and belligerent.”[1] Yet none of the passengers later confirmed this. In fact, a company spokesperson said “we had asked several times, politely” for the man to give up his seat, so it would be strange if a physician would answer politeness with being “disruptive and belligerent,” unless the airline employees perceived any push-back to their self-interests to be “disruptive and belligerent.”[2] I suspect that the company culture allows for a state of denial, for the spokesperson—rather strangely, and I might add pathologically—explained, We had “a number of passengers on board that aircraft, and they [wanted] to get to their destination on time and safely, and we [wanted] to work to get them there.”[3] Besides the unseemly bragging—as if the employees were simply serving customers—the spokesperson conveniently ignores the fact that the physician was one of those passengers, so the airlines failed even on this assertion!
Ethically, the spokesperson’s attempt at a utilitarian justification—that the airline employees were merely trying to further the greatest good for the greatest number—fails because the ethic ignores the rights of the individual customers—rights that should be reflected in the contracts. The physician had reserved his paid seat, which said customer legitimately relied on (so he could see patients in Louisville the next morning).
The stronger ethics are not in the company’s favor. Kant’s Categorical Imperative, for instance, declares that it is unethical to treat beings having a rational nature (so excluding the employees and manager on the plane)—such as a physician would doubtlessly have—as means only rather than also as ends in themselves. That the manager on board the plane could have offered the passengers considerably more money, and perhaps even a free round-trip to a vacation spot, such that a fourth willing-passenger could have been obtained, suggests that the resorting to force was not only arbitrary, but also needlessly at the expense of the physician’s inherent worth as a rational being—another human being. The lack of respect is palpable, in other words.
Rawls’ theory of the justice of systems as fairness also fails to redeem United Airlines. Rawls claims that in designing a system—whether in business, government, or society—the worst off in it should not be short-changed by the design of the system. That the manager on the plane went after passengers who had cheaper fares and were not frequent-flyers suggests that the company’s system was in this respect designed at the expense of the “lowest.” Rawls advocates that people designing a system should not know where they will be in the system so they could be among the worst off. Only then will the designers take care that the lowest positions bear a disproportionate burden. Clearly, United’s system was designed by people who knew that they would not be low-paying, non-frequent-flyer passengers. Hence, by Rawls’ reckoning, the company’s system is unethical.
It should thus come as no surprise that the company’s “businesslike” ex post facto reframing of the incident does not permit the ethical dimension to enter. The company’s CEO referred to the passenger as having been “re-accommodated,” for instance—a technical word that not only misleadingly implies satisfaction, but also leaves no room for the normative dimension of should and should not.[4] Furthermore, the term suggests that even the head of the airline was in a state of denial. Let’s be clear; the severe lapse in the manager’s judgement and the brutal treatment of the passenger was much worse than “re-accommodation” connotes. Minimizing the aggression of the security men and the airlines’ accomplices while perceiving the passenger as having somehow instigated the raw aggression by being “disruptive and belligerent” points to such a sordid mentality that it is likely that the company’s culture is infected. Trying to re-frame, or “see” the incident in business terms does not do justice to just how far from business practice and thus legitimacy the aggression, which was unnecessary given that the $1,350 maximum had not been reached, truly was. Businesses like United should not be able to reap a façade of legitimacy simply from being a business and putting the incident in business terms. The aggression was not business, so a business rationale does not pass muster; rather the criminality befits the mob, complete with henchmen. Only here, the mob benefits from societal legitimacy in being an established company. I submit that such legitimacy—that which large companies automatically get—is part of the problem, for it enabled a manager at United to over-step substantially as if with impunity.
The airline industry, moreover, may be at fault. Charles Leocha, founder of a passenger advocacy group, observed that airlines had been figuratively beating their own passengers down for some time. “Our expectations have been driven so low that passengers have begun to accept it. What they shouldn’t have to accept is being dragged off the flight to make way for an employee.”[5] Perhaps airline people working at airports and on aircraft have become too entitled with respect to power. Like the common man with drink, it has gone to their heads, forestalling virtually any accountability because the toxin has come to pervade the industry’s culture. I suspect that perspectival minutia from the daily tit-for-tats with complaining customers has enabled the squalid mentality. We need only recall the Stanford experiment in 1968 in which “prison guards” got carried away with their authority over the other students who were in the role of prisoners.
That the industry has gotten away with contracts that allow for even such excessive violence against a paid customer with a reserved seat suggests that the airlines have too much power over legislatures; doubtless this has been made possible by the sway inherent in campaign contributions. With the contract written in the airline’s favor at the expense of even paid customers and an aggressive security force at a manager’s beck and call, the public should indeed be alarmed and call for legislative reform penning in the airlines. Simply put, the companies and the managerial and other employees therein have amassed too much power. With great power over other people comes great responsibility—not an invitation to a power-trip under the subterfuge of service.

[2] Daniel Victor and Matt Stevens, “United Airlines Passenger Is Dragged from an Overbooked Flight,” The New York Times, April 10, 2017.
[3] Ibid.
[4] Joel Gunter, “United Airlines Incident: What Went Wrong?” BBC News, April 10, 2017.
[5] Ibid.