The Underbelly of Corporate Charity as Corporate Social Responsibility

Why do corporate managements spend corporate money on charities? The obvious reason is to reduce the amount of corporate income tax due. Yet another motive, not as transparent, has to do with reputational capital, and that motive may also explain corporate social responsibility.
Achieving the low 12.6% effective tax rate was undoubtedly on Bernie Madoff’s mind when he made his firm's charitable contributions. This rationale was by no means unusual at the time.  Furthermore, Madoff would not have been above using charity in order to display himself as a very wealthy person. According to Martin Press, a tax attorney, “If [Madoff] actually gave the money to charity, it is a common theme of Ponzi scheme people to make large charitable contributions to show people how wealthy they are.”[3] The perception of Madoff as a financially successful personally rendered him trustworthy in being capable of making investors rich, and the apparent charitable giving gave the impression of trustworthiness in its normative sense (i.e., honesty and integrity).

Similarly, moreover, corporate strategies may include programs under the rubric of corporate social responsibility as a means of cultivating the impression that the corporation itself is financially successful and trustworthy both in terms of competence and fairness. That is, corporate social responsibility may be more about amassing reputational capital for the corporation than any acknowledged responsibility to society (other than to provide consumers with effective products). 
Lastly, charitable giving can be motivated by the wrong assumption that it can make up morally for unethical policies. In the case of Bernie Madoff, the firm's business was inherently unethical as a ponzi scheme. Besides providing merely a patina of morality, therefore, charitable giving can also be "rationalized" in corporate boardrooms or CEO offices as making up for any unethical policies or conduct. Like any patina, charitable giving specifically and corporate social responsibility more generally cannot make up for a sordid company culture and any unethical policies or conduct within a company. Put another way, fighting the temptation to have an unethical company when expedient is worth more ethically than having a corporate-responsibility program. Theoretically speaking, such a program is not primarily ethical; rather, it narrows the gap between existent corporate and societal norms, whereas an ethical policy or conduct is so because it survives critique of the underlying ethical justification. The difference here is between the is and the ought. To get ought out of is (i.e., business ethics out of a CSR program) is, according to David Hume, the naturalistic fallacy. Norms exist, and therefore are, whereas ethical policies and conduct pertain to what should be. 

Sources:

1.  John Waggoner, “Madoff ‘Donated’ a Lot to Charity,” USA Today, December 13, 2013.

2. Ibid.

3. Ibid.

Is Corporate Governance Anti-Democratic?

Assuming all the votes cast in an election are accurately tallied, the pronouncement of the winner would seem to be straight-forward. What it means to have won, however, is considerably more complex. Specifically, is winning getting over 50% of the vote, or should a mere plurality of, say, 38% suffice? It could be argued that a super-majority of 60% or two-thirds is necessary for there to be a discernible will of the people behind the winner. To claim that 51% represents the will of the people seems a bit of a stretch, since almost half of the voters cannot be considered to be of that will. Typically, much is read (or projected) into the 1% over the 50% in terms of a mandate. All of a sudden, 51% of the voters become “the people.”  Certainly a winning plurality of 38% cannot be said to stand for or represent the will of the people, for 38% is a minority in the total votes cast. Yet in Delaware’s corporate law, which is binding for most American corporations, a mere plurality is sufficient for a candidate to be elected to a board of directors. While this arrangement is not ideal, it is a legitimate basis even if some stockholder activists beg to differ.
Writing for the New York Times in April 2013, James Stewart defines losing a board election as “more than 50 percent of the shareholders withheld[ing] their votes of approval.” Stewart expresses his amazement that 41 boards retained directors whose pluralities in 2012 were tantamount to a resounding vote of no confidence--meaning that those directors got less than 50 percent of the votes cast. According to Stewart, those directors “actually lost their elections” and yet were allowed to remain on the boards. It sounds corrupt as well as anti-democratic. “As fiduciaries, we can’t sit by and let the board make a mochery of our fundamental right to elect directors,” John Liu, New York City’s comptroller, said in reference to Cablevision Systems. As manager of the city’s pension funds, which are invested as more than 532,000 shares in the company, Liu wrote to the company concerning three directors whose pluralities were significantly less than majorities. “The fact that all three directors remain on the board suggests that one of the few rights” afforded shareholders is “illusory,” he wrote. The company’s management did not respond. Moreover it nominated the three directors for yet another term.
Although Liu is on solid ground that insiders should not be allowed to subvert director elections. However, he is wrong in his assumption that plurality voting is not legitimate under democratic auspices. Plurality simply means that the candidate with the most votes gets elected to the given seat. Were a board to turn around and award the seat to a candidate who did not get the most votes, that would be illegitimate from the standpoint of democratic principles.
The question here is not that of legitimacy. More to the point, the question regards how much of the total vote on a seat should be sufficient for the candidate with the most votes to deserve the seat from the standpoint of the stockholders. If there are several candidates and none gets the percentage deemed by the stockholders to be sufficient, then presumably a run-off would be held.
Even though a plurality is a legitimate criterion from democratic principles, it may play into the dominance that many managements have over “their” respective boards of directors.   Where there is no stockholder-nominated candidate, management’s nominee can be elected all too easily even without much stockholder approval. Even the presence of stockholder-nominated candidates would not necessarily solve the problem; management could see to it that several “stockholder-nominated” candidates spread out the anti-management vote so the management-nominated candidate can obtain a plurality. Rather than being anti-democratic, that is merely politics.
From the stockholder standpoint, the political solution would be to up the bar on the percentage of votes cast that a candidate must have in order to be elected. Put another way, the dominance in corporate governance typically enjoyed by management (unless management really screws up) could be reduced by routinizing stockholder nominations and increasing the percentage needed for a candidate to be elected.

Source:

James Stewart, “When Shareholder Democracy Is Sham Democracy,” The New York Times, April 12, 2013.

Steve Jobs: A Unique Societal and Organizational Visionary

Typically as a company transitions from an enterprising, creative new venture to a large organization to be managed, a staid CEO replaces a visionary founder. In the case of Steve Jobs at Apple, the very nature of the man’s vision was not only inherently at odds with the status-quo underpinning of a large organization with a budget, but also essential to the company’s business model. Hence, the company, including its shareholders, paid a price for years for jettisoning Jobs. The film, Jobs (2013), is centered on the distinctiveness of Jobs’ vision. Although the film also hints at why this distinctiveness is such that the company would (and did) lose as a large organization after making the typical founder-to-CEO transition.

The full essay is at "Jobs."

BP's Criminal Guilt in the Deepwater Horizon Oil Rig Disaster

More than two years after the worst oil disaster in U.S. history, BP agreed in 2012 “to accept criminal responsibility for the . . . disaster that killed 11 workers.” What does it mean for an association to “accept criminal responsibility”? The notion seems unwholesomely anthropomorphic, if not chimeric in nature. Taken even just practically, holding a corporation itself criminally responsible may not be make sense, even as a deterrent. I contend that the notion of criminality applies only to human beings, whereas civil charges are suitable for associations including corporations.

From a corporate perspective, criminality would of course be viewed in financial terms, ideally from the standpoint of the financial welfare of the stockholders. Accordingly, the “criminal responsibility” translates into $4.5 billion in “fines and restitution.” The figure includes nearly $1.3 billion in criminal fines. The settlement includes payments of $2.394 billion to the National Fish and Wildlife Foundation, $350 million to the National Academy of Sciences over five years, and $525 million to the Securities and Exchange Commission for having misled investors by lying to Congress. The fines relate to BP pleading guilty on 11 felony counts of misconduct or neglect of ships officers, one felony count of obstruction of Congress and one misdemeanor count each under the Migratory Bird Treaty Act and the Clean Water Act. The 11 counts related to the workers' deaths are under a provision of the Seaman's Manslaughter Act.

It is the outflow of cash, rather than “pleading guilty” to 11 felony counts of “seaman’s manslaughter” relating to the deaths of the 11 workers onboard the rig and one felony count of obstruction of Congress in providing false information on the rate that oil was gushing from the deep-water well, that “translates” directly into corporate terms. During the three months in which the well was gushing uncontrollably into the Gulf, the U.S. Government relied on BP for accurate information on the rate of output, and the company executives in turn were aware of this reliance and yet chose to lie—misleading investors as well as the U.S. Government. It could be argued that the fines are essentially the same as pleading guilty, but then such fines are generally perceived as qualitatively different than those in the civil cases against BP. It is this qualitative distinction that does not translate into a business calculus other than in terms of the negative financial impact in terms of reduced reputational capital from headlines such as, “Oil Giant to . . . Plead Guilty to Criminal Charges.” What really registers in the bewindowed albeit closed offices at BP is the “to Pay $4.5 Billion” part of the headline.

Fundamentally, a company’s management is geared in its very perspective to the interest of the company, and ideally its stockholders, rather than to the business environment, even when the company has created harm to the latter. How does a corporation even accept responsibility for something like manslaughter or lying? It is not as though an organization has a mind, much less a conscience. A business mindset is more like that of a shark—a feeding machine. It does not make sense to hold a shark responsible; it can only be kept out of Sydney’s swimming areas, for example, by nets.

Organizations are basically the people who run and operate them. “Company” is actually a plural noun, as in “a company of men.” Accordingly, the individuals who formulate, sign off on, and implement a policy, procedure or decision that results in harm to others (or the environment) can and should be held criminally responsible. Put another way, human beings rather than associations can feel punishment and thus can be subject to it.

Fortunately, besides the criminal settlement, “three former BP employees were charged by a federal grand jury with felonies in the incident, two of them for allegedly failing to carry out a critical safety test properly” and “to alert onshore engineers to problems with the drilling.” The two oil well supervisors were charged with 11 counts of “seaman’s manslaughter,” 11 counts of involuntary manslaughter and one violation of the Clean Water Act. The third, “David Rainey, BP’s former head of Gulf of Mexico exploration, who took a lead role in the disaster response, was charged with obstruction of Congress and making false statements to a law enforcement officer for allegedly lying about how much crude was spewing from the well.” Unless decided on his own to lie, others at BP should have been charged criminally too.

The fact that criminal charges were made against particular persons at BP is extremely important, both in itself (i.e., justice) and as a deterrent. Two years after the disaster, BP was still the largest oil producer in the Gulf of Mexico. Additionally, the oil giant was exploring for oil and gas in Texas, Oklahoma, Arkansas, Louisiana, and Ohio. The company would likely have to send executives to the Hill to testify in the future, and those executives should know that they could go to prison for deciding to lie or even “just following orders” to mislead Congress.

As for the criminal fines, they may actually be insufficient financially, given the wealth of the oil giant. The $4.5 billion is merely 17% of the company's profit in 2011 alone. To cover most of the cost of the criminal fines, the company simply sold its Texas City, Texas refinery—where fifteen people had been killed in an accident in 2005—for $2.5 billion. Meanwhile, the multinational company was able to maintain “strategically important” refineries in Washington, Ohio and Indiana in the U.S. alone. Although “leaner,” the well-publicized company might even benefit in terms of public relations in the future from being rid of the sordid refinery in Texas.

To be sure, the civil claims pending at the time could include up to $20 billion under the Clean Water Act if the company is held grossly negligent (i.e., “conscious and voluntary disregard”). Additionally, the company has spent about $14 billion on spill response and clean-up and more than $9 billion in claims to business and individuals. A related claim was up to $7.8 billion when BP announced the criminal settlement in late 2012. Also, Louisiana, Mississippi, and Florida were suing BP for civil fines. Clearly, these fines dwarf the monetary element of criminality. I contend that the other elements of criminality do not register at the company level.

In spite of having agreed to have BP plead guilty, the company’s executives did not seem particularly interested in admitting guilt. "We believe this resolution is in the best interest of BP and its shareholders," said Carl-Henric Svanberg, BP's Chairman. "It removes two significant legal risks and allows us to vigorously defend the company against the remaining civil claims and to contest allegations of gross negligence in those cases." This is hardly an acknowledgement of criminal guilt. Rather, it is a statement of how the settlement benefits the company! This is like boy sent to his room as a punishment bragging about being able to play video-games from his bed. Surely his mother hearing this would wonder whether she had in fact just punished her son or rewarded him for bad behavior.

From BP’s standpoint, the decision to plead guilty on criminal charges was done in the best interest of the shareholders by reducing legal risk. This is not to accept and acknowledge being blameworthy in a criminal sense. Accordingly, on the day in which the criminal settlement was announced, shares of BP actually rose 14 cents, ending the day at $40.30. Relatedly, the Journal reports that analysts “reacted positively to BP’s settlement of its criminal liability.” There is no sense in this reaction of how you or I might react to a person who “pleads guilty to criminal charges.” We would not exactly buy stock in that person. A company is different—it is a financial machine wherein a settlement that provides a ceiling on the cash to be spent translates as “limiting legal risk.”

In my view, the various civil fines are what must have registered at the company level at BP because of the sheer amount of cash involved. It can be asked from this case whether it even makes sense to hold a company criminally guilty. “Fighting crime” could be more focused against the persons involved—expanding what counts as who is “in the know” on a given policy or a decision that harms others—while the monetary aspect to a company is in civil crimes.

Alternatively, if a corporation truly is to be held criminally guilty in a given country, then it would seem to me that “going to prison” would mean that the company could not do business inside or even with that country or its businesses during the length of its sentence. Lest it be answered that an oil giant would hardly agree to a settlement under those terms, I answer that criminals don’t necessarily agree to plead guilty and there is, after all, the alternative of a criminal trial and verdict. A company being found guilty rather than agreeing to plead guilty deprives it of its share of control while still implying the ethical obligation to admit rather than deny the guilt implied in the verdict. In short, either being criminally guilty should mean something besides reducing legal risk (i.e., something bad ) or concept should not apply at all—to companies, that is.

Sources:

Michael Kunzelman, “BP Oil Spill Settlement Announced,” The Huffington Post, November 15, 2012.

Tom Fowler, “BP Slapped With Record Fine,” The Wall Street Journal, November 16, 2012.

Angel Gonzalez and Daniel Gilbert, “Accident Fails to Dent British Firm’s Ambitions in U.S.,” The Wall Street Journal, November 16, 2012.

Connecting the Dots: Zuckerberg's Facebook Stock

Why did Mark Zuckerberg unload $2.3 billion of his Facebook stock? The complete answer likely involves more than meets the eye, at least relative to what business reporters and editors had to say publicly in 2013. What was not said is itself a story worth publishing. Beyond Zuckerberg’s stratagem, what the media didn't say might be more significant than what made it through the filters.
Part of the answer concerning Zuckerberg’s sell-off involves his need for cash at the time to pay taxes that would be due from his exercising an option to purchase 60 million Class B shares in 2013. This move likely implies a belief that Facebook stock would not go much higher. Had Zuckerberg strongly believed at the time that Facebook was yet to cash in on advertising revenue beyond that which the market had already factored into the company’s stock price, the CEO would not have exercised the options in expectation of a wider spread. Even with the taxes coming due, the billionaire could probably have found an alternative way to come up with the cash. 
Like a deer frozen in an oncoming car’s headlights, the media did not analyze Zuckerberg’s motives beyond his public statements. Instead, the herd animals let themselves be led along, prancing in the tracks of positive correlation, which is does not in itself connote causation. That two things tend to occur together does not necessarily mean that one caused the other to act some way. For instance, we see umbrellas on rainy days. This does not mean that umbrellas cause rain, or that rain rather than manufacturing causes umbrellas. To assume causation from two things tending to occur at the same time is to commit what David Hume calls the naturalistic fallacy. 
So the media’s report that Zuckerberg’s stock sale and exercise came as the CEO was donating $1 billion worth of shares to the Silicon Valley Community Foundation to “boost his philanthropic efforts in education,” and Facebook was selling 27 million shares to raise an expected $1.46 billion for general purposes all count only as positive correlation; causation cannot be assumed.[1] In other words, we cannot conclude that Zuckerberg decided to sell off a chunk of his stock and exercise an option because he had decided to donate some stock and Facebook was raising more capital. In other words, the additional information conveniently provided does not get us any closer to a full answer. Worse still, Zuckerberg and his PR staff might have been throwing the media a tantalizing, diverting bone. This would have been in keeping with claims that Facebook's management was unethical.
One reporter took the bait, writing that with cash and marketable securities of $9.3 billion as of September 30, 2013, Facebook may not have needed another $1.46 billion.[2] Off reporter’s radar screen was the possibility that Zuckerberg had designed his philanthropy and the company’s additional stock offering as luring camouflage that would use even criticism of his company to keep the eye off his own trades and especially what they imply about his view of the company’s future. That shares of Facebook dropped only 1% to $55.05 in trading on the news suggests that investors were swallowing what Zuckerberg and the media were serving as dessert.
What of the market insiders? Were they also biting? As John Shinal puts it, “More important, insiders have detailed knowledge of a public company’s near-term prospects and thus are in a better position to know when to sell.”[3] I suspect that “people in the know” may have connected the dots. Two months earlier, a poll revealed that as the most important social media site for teenagers, Facebook fell from 42% in the autumn of 2012 to 23% a year later.[4] Can we suppose this poll somehow missed Zuckerberg’s attention? The media certainly did not connect the dots.
The theory behind my analysis is not financial; rather, I consider Mintzberg’s theory of the organizational life-cycle to be more revealing in this particular case. The theory suggests that just as empires rise and fall, so too do companies. Once past their peak, a “hardening of the arteries” sets in.

The organizational lifecycle. When Zuckerberg decided to sell a block of shares and exercise options, he already had a picture of Facebook already on the downward slope without much chance of revitalization. Image Source: www.sourcingideas.blogspot.com

The aging (i.e., a decreasing willingness or ability to adapt to a changing environment, and increasing dead weight internally) can be delayed as the downward slope bides its time; but like entropy as a final destination, the end is inevitable for humans and our organizational artifices. I suspect that Zuckerberg had come to view his company as past its prime, given the leading indicator shown in the poll. If I am right, the game has already changed to keeping the illusion alive long enough for the Facebook insiders to get out under the black shimmering cover of the Styx.

---

Sources:

1. Scott Martin, “Zuckerberg’s in Mood to Sell,” USA Today, December 20, 2013; John Shinal, “Facebook Shares May Underperform,” USA Today, December 20, 2013.

2. John Shinal, “Facebook Shares May Underperform,” USA Today, December 20, 2013.

3.Ibid.

4. Bianca Bosker, “Facebook’s Rapidly Declining Popularity with Teens in 1 Chart,” The Huffington Post, October 23, 2013.