Starbucks: A Racist Company Against Racism

In June, 2023, Starbucks had to face a unanimous jury decision in favor of a regional manager whom Starbucks' upper management had fired because she had resisted the company's racist policy of punishing innocent Caucasian managers for good public relations, which the CEO felt was needed and appropriate after a store manager had legitimately called the police on two Black people in a Starbucks restaurant who presumed the right not only to sit in a restaurant without ordering anything (before Starbucks allowed this),  but also to ignore the authority of the store's manager. Starbucks cowered to the unjust negative publicity, and thus showed a lack of leadership, and went on to act unethically in wanting to show the world that the company can go after Caucasian employees. This racism is ironic, for several years earlier, Starbucks' CEO had ordered employees at the store level to discuss racism with customers. Interestingly, the anti-racist ideology being preached was partial, and thus contained a blind spot wherein racism such as the company's upper management would exhibit is acceptable. 

As the CEO of Starbucks, Howard Schultz had employees promote his political ideology on two social issues: gay marriage and race. Regarding the latter, he ordered employees, whom he artfully called partners, to write race messages on cups so customers would unknowingly enable employees to impart Schultz’s position on the issue by raising the topic. I assume that the employees could not begin such conversations. I have argued elsewhere that Schultz’s use of the employees for such a purpose was not only extrinsic to making coffee as per the employees’ job descriptions, but also unethical.[1] In terms of corporate governance alone, the shareholders, as the owners of the company, should have decided whether to have their company used to promote partisan positions on social issues. In 2023, Target and Budweiser would learn of the perils in wandering off the knitting to get political on social issues. In terms of jurisprudence, the “right” of a company, a legal entity, to have free speech is dubious, as abstract entities, even if legally recognized as such, are not human beings. Rather, the “free speech” claimed by companies is really that of the human beings who work for the companies. Using an abstract entity that itself cannot speak to gain additional publicity for one’s ideological views is unfair because the vaulted or amplified speakers are not so from a democratic standpoint. In short, why should Howard Schultz have access to a megaphone and employees to propagate his political ideology on social issues, when you and I have no such means of self-amplification? Whether we agree or disagree with the former CEO’s political ideology on race is not relevant to my point. To be sure, that his employees were told to speak against racism is in my opinion much better than had they been told to advocate racism against Black people. That Starbucks would then engage in racism is that much harder to understand, but perhaps the hypocrisy reflects a hidden negative aspect of Schultz’s ideology on race. American society could benefit by having that aspect uncovered; such a benefit vastly outweighs any benefit to business. Even in a pro-business culture, a lower good should not be put over a higher one. Aristotle refers to this error as misordered concupiscence.

In June, 2023, a jury in New Jersey “found in favor of former Starbucks regional director Shannon Phillips, who sued the company for wrongfully firing her, claiming she was terminated for being White.”[2] The company’s position was that Phillis’ boss fired her because she had displayed weak leadership. The use of such vague jargon as leadership for what is actually management is itself problematic. Even if Phillips had “appeared overwhelmed and lacked awareness of how critical the situation had become,” as her boss presumably had written, does not constitute weak leadership, for she was not in a leadership role[3]; instead, the company’s CEO should have got out in front of the issue and provided a vision for the company.[4] If Schultz was the CEO at the time, the failure of his leadership would be especially telling, considering his earlier foray into politics using the company to promote his ideology.

The triggering incident that had overwhelmed Phillips, according to her boss, whom the CEO at the time must agree in retrospect failed as a supervisor but presumably was not fired, involved two Black men who had refused to leave a Starbucks store in 2018 even though they would not purchase anything. They were thus not customers, and the incident occurred before the company allowed non-purchasers to be in the stores. That the two Black men refused to leave the company’s private property means they were trespassing, so the store manager was on solid legal grounds in having the local police remove the men from the store. Being Black, even if that race has been (and is) subject to racism generally, does not give a person the right to trespass on private property, and efforts to remove such trespassing is not racist, for anyone trespassing would be legally subject to removal from the property. 

I contend that Howard Schultz’s notion of racial reconciliation suffers from the weakness of being blind to the racial presumption displayed by the two Blacks. In having employees talk about the need not to be racist to customers, Schultz was assuming that racism is something that non-Blacks do to Blacks. Employees were not told to suggest to Black customers that being Black does not give them special exemptions from the law or in society. Schultz could have had employees suggest to Black customers that jay-walking between intersections in a major street even if cars are coming is not “a Black thing” that is justified because the race in general has been subject to discrimination. Furthermore, the use of the word, nigga, cannot be allowed only if the speaker is Black, for that would be a racist position. For a Black person who uses the word to become hostile or aggressive towards an Indian, Oriental, or Caucasian who also uses the word is itself racist (and of course the hostility is unjustified unless the related word nigger is used in a hostile manner). The U.S. Constitution does not indicate that free speech depends or is limited by race; such a clause would be prime facie racist.

Phillips’ complaint, which the jury accepted unanimously, states that following the arrest of the two Black men, Starbucks “took steps to punish White employees who had not been involved in the arrests, but who worked in and around the city of Philadelphia, in an effort to convince the community that it had properly responded to the incident.”[5] Phillips was ordered “to place a White employee on administrative leave as part of these efforts, due to alleged discriminatory conduct which Phillips said she knew was inaccurate. After Phillips tried to defend the employee, the company let her go.”[6] It does not sound like Phillips was overwhelmed; in fact, she was being pro-active and ethical in defending an employee from an unjust punishment. The implication is that the person who fired Phillips acted unethically.

Moreover, in being willing to sacrifice Caucasian employees based on their race for good public relations, the company’s upper managers were being racist. An unseen implication is that those managers believed that the public reaction against the company for having the two Black men removed from the store in Philadelphia had some validity—that Black people should not be treated like that or that Black people deserve special treatment due to their race. But such a belief is itself racist. Schutz’s talking points for his employees to discuss with customers on race did not include mention of the racism in such beliefs. Moreover, he did not have the company’s employees talk about racism by Black people stemming from resentment. Any ideology is partial, rather than whole, and even claim of being against racism can fall short. In going after Caucasian employees, including Phillips, Starbucks’ upper managers fell short; the failure of leadership ultimate belongs to the CEO at the time. At least at the time of the trial, Howard Schultz was the CEO.

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1. Skip Worden, Bucking Starbucks’ Star.

2. Danielle Wiener-Bronner, “Starbucks Ordered to Pay $25.6 million to a Manager Who Says She Was Fired for Being White,” CNN.com, June 14, 2023.

3. Ibid.

4. Skip Worden, The Essence of Leadership.

5. Danielle Wiener-Bronner, “Starbucks Ordered to Pay $25.6 million to a Manager Who Says She Was Fired for Being White.

6. 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.

On the Unfairness of the Bonus System on Wall Street

Craig A. Dubow, Gannett’s former chief executive, had a short six-year tenure that was, by most accounts according to The New York Times, “a disaster.” David Carr reports: “Gannett’s stock price declined to about $10 a share from a high of $75 the day after [Dubow] took over; the number of employees at Gannett plummeted to 32,000 from about 52,000, resulting in a remarkable diminution in journalistic boots on the ground at the 82 newspapers the company owns. . . .  the company strip-mined its newspapers in search of earnings, leaving many communities with far less original, serious reporting. . . . Not only did Mr. Dubow retire under his own power because of health reasons, he got a mash note from Marjorie Magner, a member of Gannett’s board, who said without irony that ‘Craig championed our consumers and their ever-changing needs for news and information.’ But the board gave him far more than undeserved plaudits. Mr. Dubow walked out the door with just under $37.1 million in retirement, health and disability benefits. That comes on top of a combined $16 million in salary and bonuses in the last two years.”

Besides the inherent unfairness in an incompetent manager getting millions of dollars in compensation (for championing incompetence?), it is morally problematic when, as Carr puts it, “the consequences of bad decisions land on everyone except those who made them.” As already pointed out above, in the midst of Dubow’s “championing” (this word is so broad it has scarce any real meaning), “the number of employees at Gannett plummeted to 32,000 from about 52,000.” One could just as easily point to Bank of America’s downsizing of its labor force in the wake of Ken Lewis’ shopping spree at Countrywide and Merrill Lynch. Lewis really did exemplify the “walmart” mentality applied to banking: an almost-complete indifference to quality in a desire to be everything to everyone. The “exporting” of bad consequences while exuberant rewards are retained indicates that the corporate executive compensation system in the United States is fundamentally broken. The fixation on aligning an executive’s incentives with the financial enrichment of the stockholders has not functioned as anticipated.

For one thing, the vesting of stock, which is meant to orient an executive to the longer term financial interest of the stockholders, is typically bypassed as an executive gets the equivalent in cash (or stock) from his or her new employer. An executive can thus discount having to look out for the eventual downside in his or her decisions.

Moreover, the sheer amount of the compensation cannot be justified on the basis of a competitive upper echelons labor market (which functions more like an oligarchy). Indeed, the degree of fixation on the bonus system alone has resulted in larger payouts (as executives make decisions primarily from the standpoint of the impact on their bonus). David Carr points to the excess as mentioned in a USA Today editorial: “The bonus system has gone beyond a means of rewarding talent and is now Wall Street’s primary business. Institutions take huge gambles because the short-term returns are a rationale for their rich payouts. But even when the consequences of their risky behavior come back to haunt them, they still pay huge bonuses.” Carr’s overall point is that this hypertrophy allies to corporate America—not just Wall Street, though certainly it is salient there too.

When John Thain of Merrill Lynch gave lip-service to serving the stockholders, even his own subordinates knew he was more concerned with having to play second fiddle to Ken Lewis at Bank of America than with keeping Merrill’s stockholders from losing everything (as Lehman Brothers’ stockholders did). Even as Fleming got $29 per share as a buyout price from Lewis, Thain preferred a line of credit of billions from Goldman Sachs in exchange for a 10% ownership that would keep Thain on top. That was Thain’s driving motivation: to remain CEO. Meanwhile, the general public assumed that CEOs, including Thain, were motivated to act in their stockholder interests—that boards of directors insisted on this agency. However, where a CEO is focused on his or her bonus (Thain insisted on $40 million cash bonus even as Merrill was losing billions) and position (and thus future bonuses) and the CEO controls “his or her” board, the stockholders are in actuality left unknowingly fluttering in the wind—relying on a system of executive compensation that supposedly aligns the executives’ motivation with the financial interests of the stockholders. Much too much is being assumed here, yet assumptions, like habits, are difficult to break.

Source:

 David Carr, “Why Not Occupy Newsrooms?” The New York Times, October 24, 2011. http://www.nytimes.com/2011/10/24/business/media/why-not-occupy-newsrooms.html

BP's CEO Tony Hayward: A Golden Parachute Despite Having Failed on Safety

In terms of corporate governance setting executive compensation to align the employee's incentives to the financial interests of the company even beyond his or her term of employment, it is apparently quite easy to go overboard. This can include severance packages for top managers--packages that may not reflect the performance of the executive. At the very least, it would appear that corporate lawyers are not writing very good contracts. Worst yet, insider board-management friendships may mean that the gap between achievement and severance pay may be intentionally wide. Sadly, the innocent non-management investors whose interests are not adequately represented in the board room pay the price, even if they don't perceive it on an individual level.  Even so, the lack of fairness alone calls for an end to the insider luxuriating.  The case of BP, whose rig exploded in the Gulf of Mexico in 2010, provides a good case study.

The full essay is in Cases of Unethical Business, which is available at Amazon.