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Why I Pirate - An Open Letter to Content Creators

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IainB:
My entire point is that there is no such law that requires a corporation, by law, to put making a profit above all other considerations in its day to day operations. And furthermore, in actual practice (since reality so often diverges from what the law says) acting in a manner that goes against the public good is generally frowned upon by the judicial system and the public at large. And arguing for doing wrong in the name of profit is not accepted as an absolute defense in any legal context I'm aware of. Which indicates (to me at least) that individuals and society do have a conscience and underlying moral framework that goes beyond the letter of the law.
-40hz (March 13, 2012, 06:50 AM)
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I'm not sure that's completely true, so it could be an entirely false argument.
The film The Corporation covers this point comprehensively.

From experience (scratching my memory re my training in corporate law in the UK) the Companies Act 1948, or something, stipulated that any limited liability company had to have a Charter, and that the Charter was to include the objective to operate at a profit in the interests of shareholders. (OWTTE.)

I think the situation in the US is very similar, and that it is common throughout the Western economies.

For example, I googled the subject and found post this here by one Robert Hinkley:
HOW CORPORATE LAW INHIBITS SOCIAL RESPONSIBILITY
After 23 years as a corporate securities attorney-advising large corporations on securities offerings and mergers and acquisitions-I left my position as partner at Skadden, Arps, Slate, Meagher & Flom because I was disturbed by the game. I realized that the many social ills created by corporations stem directly from corporate law. It dawned on me that the law, in its current form, actually inhibits executives and corporations from being socially responsible. So in June 2000 I quit my job and decided to devote the next phase of my life to making people aware of this problem. My goal is to build consensus to change the law so it encourages good corporate citizenship, rather than inhibiting it.

The provision in the law I am talking about is the one that says the purpose of the corporation is simply to make money for shareholders. Every jurisdiction where corporations operate has its own law of corporate governance. But remarkably, the corporate design contained in hundreds of corporate laws throughout the world is nearly identical. That design creates a governing body to manage the corporation-usually a board of directors-and dictates the duties of those directors. In short, the law creates corporate purpose. That purpose is to operate in the interests of shareholders. In Maine, where I live, this duty of directors is in Section 716 of the business corporation act, which reads:

…the directors and officers of a corporation shall exercise their powers and discharge their duties with a view to the interests of the corporation and of the shareholders….

Although the wording of this provision differs from jurisdiction to jurisdiction, its legal effect does not. This provision is the motive behind all corporate actions everywhere in the world. Distilled to its essence, it says that the people who run corporations have a legal duty to shareholders, and that duty is to make money. Failing this duty can leave directors and officers open to being sued by shareholders.

Section 716 dedicates the corporation to the pursuit of its own self-interest (and equates corporate self-interest with shareholder self-interest). No mention is made of responsibility to the public interest. Section 716 and its counterparts explain two things. First, they explain why corporations find social issues like human rights irrelevant-because they fall outside the corporation’s legal mandate. Second, these provisions explain why executives behave differently than they might as individual citizens, because the law says their only obligation in business is to make money.

This design has the unfortunate side effect of largely eliminating personal responsibility. Because corporate law generally regulates corporations but not executives, it leads executives to become inattentive to justice. They demand their subordinates “make the numbers,” and pay little attention to how they do so. Directors and officers know their jobs, salaries, bonuses, and stock options depend on delivering profits for shareholders.

Companies believe their duty to the public interest consists of complying with the law. Obeying the law is simply a cost. Since it interferes with making money, it must be minimized-using devices like lobbying, legal hairsplitting, and jurisdiction shopping. Directors and officers give little thought to the fact that these activities may damage the public interest. Lower-level employees know their livelihoods depend upon satisfying superiors’ demands to make money. They have no incentive to offer ideas that would advance the public interest unless they increase profits. Projects that would serve the public interest-but at a financial cost to the corporation-are considered naive.

Corporate law thus casts ethical and social concerns as irrelevant, or as stumbling blocks to the corporation’s fundamental mandate. That’s the effect the law has inside the corporation. Outside the corporation the effect is more devastating. It is the law that leads corporations to actively disregard harm to all interests other than those of shareholders. When toxic chemicals are spilled, forests destroyed, employees left in poverty, or communities devastated through plant shutdowns, corporations view these as unimportant side effects outside their area of concern. But when the company’s stock price dips, that’s a disaster. The reason is that, in our legal framework, a low stock price leaves a company vulnerable to takeover or means the CEO’s job could be at risk. In the end, the natural result is that corporate bottom line goes up, and the state of the public good goes down. This is called privatizing the gain and externalizing the cost.

This system design helps explain why the war against corporate abuse is being lost, despite decades of effort by thousands of organizations. Until now, tactics used to confront corporations have focused on where and how much companies should be allowed to damage the public interest, rather than eliminating the reason they do it. When public interest groups protest a new power plant, mercury poisoning, or a new big box store, the groups don’t examine the corporations’ motives. They only seek to limit where damage is created (not in our back yard) and how much damage is created (a little less, please).

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So, if I make the statement suggesting that "Corporations should have a social responsibility" then it is a statement of opinion which flies in the face of fact - that is, corporations are not charged with having a sense of social responsibility.
This is what makes Google's principle of "Do no evil" look rather like a cynical baby-pacifier (or dummy) for consumers, because there is little or nothing that obliges Google to adhere to that principle, whilst there is potentially a great deal to oblige them to operate to the contrary - e.g., Google effectively enabling discrete country Internet control and censorship of the Google services.

J-Mac:
I can't accept that 40hz. "Normal" humans still have that thing we call a conscience, and it still tends to give a twinge when you ignore it. I still see that in young people whom you would think don’t have one. Of course it has been posited by more than one psychologist and psychiatrist that corporate CEOs have a higher incidence of psychopathy than the general population, so that may account for a lack of moral consideration when making such decisions as described above.

Jim
-J-Mac (March 12, 2012, 09:13 PM)
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@J-Mac - I'm sorry, but you lost me there. What is it I said that you're responding to?  :huh:

My entire point is that there is no such law that requires a corporation, by law, to put making a profit above all other considerations in its day to day operations. And furthermore, in actual practice (since reality so often diverges from what the law says) acting in a manner that goes against the public good is generally frowned upon by the judicial system and the public at large. And arguing for doing wrong in the name of profit is not accepted as an absolute defense in any legal context I'm aware of. Which indicates (to me at least) that individuals and society do have a conscience and underlying moral framework that goes beyond the letter of the law.

Was it possibly somebody else's comments you were responding to? :)
-40hz (March 13, 2012, 06:50 AM)
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Nope, it was your comment in the post just above mine, quoted here:

Perhaps people ignore the morality of the situation because they don't realize there is a moral issue at all.
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Sorry for not quoting you in the previous post but I was on either my iPad or new and weird Android "Thinks it's smart" phone, so I was trying not to confuse the darned device! I just don’t think that there are many persons at all who truly don’t feel that twinge when they are ignoring the morality of an issue. And the ones who do are usually damaged in another way - emotionally, mentally, or maybe they are just new on this planet.   ;)  :)

Jim

40hz:
Nope, it was your comment in the post just above mine, quoted here:

Perhaps people ignore the morality of the situation because they don't realize there is a moral issue at all.

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-J-Mac (March 13, 2012, 10:34 AM)
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@J-Mac - umm...Jim? You might want to check again. That was Deozaan's comment. Not mine. ;) 8) His post is what's directly above yours. :P ;D

What 40hz really wanted to say! :-))


-Ed

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Perhaps people ignore the morality of the situation because they don't realize there is a moral issue at all.
-Deozaan (March 12, 2012, 07:31 PM)
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Onward! :Thmbsup:

40hz:
I think the situation in the US is very similar, and that it is common throughout the Western economies.
-IainB (March 13, 2012, 07:59 AM)
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From what I do know of UK law (which is admittedly not very much) I think there are vast differences between our two legal systems despite their surface resemblance and common ancestry.

In the United States, the letter of the law holds sway. Some nod is given to judicial precedence and interpretation. But the bulk of our legal disputes revolve around an almost rabbinical level of debate on exactly what each word in a statute means. There's a big difference between "should" and "must" in our legal system. (That's why you can ask the question: Exactly what do you mean by "had sex"? and get away with it.)

So when you are required to "act in the best interests of the shareholders" there's considerable room for interpretation and individual discretion in exactly how that is to be done. When disputes arise, it becomes a matter for the courts, with a the judge presiding over material issues of law - and a jury determining material issues of fact.

And in practice, the American judiciary has been extremely reluctant to micromanage businesses. Unless gross and callous disregard for statute or fiduciary responsibility can be clearly demonstrated in a court of law, even a director-level decision that costs a business significant money (or results in bankruptcy) will not be questioned too closely. To be blunt, "fucking up royally" is not, in and of itself, a tort or crime in the United States.

Investors have the right to demand a publicly owned company act in a responsible and legal manner. They do not have an innate right to demand a certain level of performance (i.e. maximize profits at all times) unless they have negotiated a contractually binding agreement with the management of the company that they do so.

For the most part, courts have also frowned upon grass-roots activism when it comes to corporate governance. The feeling is if you are that opposed to what the company is doing, you have two main options available to you. You can: force a proxy vote and replace the management - or - divest yourself of your investment in the company.

Shareholders are generally NOT allowed to directly interfere or intervene in the day to day operations of a business. (If they could, any competitor could buy up a block of shares in a rival business and completely disrupt it's operation.) Nor are they automatically guaranteed access to internal corporate documents or records for the same reason.

As an investor, you can go in and request to "inspect" the pro forma financial statements and any other legally required (i.e. 10K, etc.) documents. But you wouldn't need to be given access to current internal operating statements; or things like the secretary's raw (as opposed to official) minutes of a board meeting. Or internal memos or other communications. If you wanted those, and the company balked about showing them to you, you'd have to go to court and show reason why you should be allowed to see them. Simply owning some stock in the business would not be considered sufficient reason.

Corporate boards and director-level management are not usually held to specific standards of performance. Except maybe by shareholders. But that's a very different thing than being held to it by law. Otherwise most corporate directors would face the risk of prosecution any time they made a bad judgement call. With the result you wouldn't be able find anybody with an ounce of brains in their head willing to run a public company or sit on a corporate board.

There have been cases (civil) where some management has been called to book for poor performance. But in every case I'm aware of the complaints were either dismissed outright or resolved in favor of the accused. Because the law recognizes business is an intrinsically risky activity. And as long as those engaged in it acted in a legal manner, and behaved as prudently and responsibly as the situation and their judgement allowed - there's no fault, liability, or foul on the part of the management.

And  that's because there's no US law against being unlucky, not smart enough, prescient enough, or clever enough to be successful at business. It's all just part of the game. And a risk the operators and investors take.

But anyway...this is really going on too long for me (plus I'm getting tired of typing all this) so I'm gonna wrap it up and bow out of this whole debate. I will restate that I am not aware of any US law that either states in word (or strongly and unmistakeably implies) that US corporations are required - as a matter of law - to maximize profit as a condition of executing their fiduciary responsibilities to their shareholders.

I'll even go further and say such a law (or laws) flat-out doesn't exist in the United States.

And although many people (and some businesses) may interpret the legal requirement that management "represent and act in the best interests" of their shareholders as being the same thing as a requirement that profit be maximized at all times, this interpretation is erroneous. And is furthermore not recognized by US courts as being a valid interpretation, in theory or in fact.

So, if anybody can point me to a state or federal statute that specifically says otherwise - or can show a case where a corporate board or management team was prosecuted solely because the profits they achieved were not in keeping with investor expectations, I'd be happy to read about it and modify my statements accordingly.

If there is such a law anywhere outside the United States I'd also be interested in hearing. Mostly because I'd want to make it a point never to conduct any business there. :)

IainB:
So, if anybody can point me to a state or federal statute that specifically says otherwise - or can show a case where a corporate board or management team was prosecuted solely because the profits they achieved were not in keeping with investor expectations, I'd be happy to read about it and modify my statements accordingly.
-40hz (March 13, 2012, 02:23 PM)
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Well, no pointers from me, sorry. I did say I wasn't sure about US law, and that's why I gave the long quoted example from that US lawyer, Robert Hinkley (above). That was the result of a quick google session. Maybe he is loopy, mistaken or being ambiguous? If so, then he's in for a surprise, because he's apparently left his lucrative day job to focus on getting corporations to be socially responsible - he at any rate seems to think that that objective could currently run contrary to their profit objectives.

The documentary The Corporation also identifies the profit-above-all-else sort of objective as a causal problem, and shows how some communities in the US have managed to reign in their local behemoth's socially damaging tendencies by local regulations that do not frustrate proper corporate operation and profitability.

Off-topic rant on corporate "social responsibility":
SpoilerIn any event, corporate social responsibility would seem to be a bit of a wish-fulfilment myth. We'd all like to see those nice corporates being "socially responsible" wouldn't we? So, when push comes to shove, why aren't they? Why does social responsibility seem to usually be the first casualty?

Presumably because there is no profit in it.
But doesn't it sound great when a CEO says how seriously they take their social responsibility, blah, blah? Of course it does. That's probably why they say it. Lip service. High-sounding and soothing phrases for the credible/gullible to lap up. "Social responsibility" is a cliché and can mean whatever you want it to mean anyway.

From my experience as a chief accountant, I think you would be hard-pressed to find a corporation that consistently is genuinely able to be "socially responsible" in its main drivers. I don't know of any currently, in these cold and uncertain economic times.
However, from history there are two that I know of - one of which I was an employee of. The first was the formation of Cadbury Brothers (Chocolate manufacturers) in Bournville, UK. The second was CDC (Control Data Corp).

Cadbury Brothers:
This company was started by two Quaker brothers and became a main textbook example (and I think it could even be the earliest) of a corporation that had an absolutely ethical and socially responsible attitude to its entire operation. (Not sure about Kellogg.)
From: Wikipedia Cadbury - 1824-1900 early history
In 1893, George Cadbury bought 120 acres (49 ha) of land close to the works and planned, at his own expense, a model village which would 'alleviate the evils of modern more cramped living conditions'. By 1900 the estate included 313 cottages and houses set on 330 acres (130 ha) of land. As the Cadbury family were Quakers there were no pubs in the estate;[7] in fact, it was their Quaker beliefs that first led them to sell tea, coffee and cocoa as alternatives to alcohol.[8]
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CDC (Control Data Corp):
At one time, CDC was the second largest computer manufacturing and services company on the planet. Driven by its philanthropic founder and CEO William Norris (a brilliant computer engineer), it went bust after expending its financial resources across too many of his mandatory and diverse "social good" causes projects, resulting in underfunding and underdeveloping of the wealth-creating assets of its core business. It literally starved itself to death, financially.
Result, disaster. Happened over quite a short period too. I was there to watch it as it occurred, and got out before it sank in the early '80s. That was one seriously great corporation though. Even so, I recall that it wasn't without some egregious examples of management BS/buzzword doublespeak - in fact, CDC was where I came to understand the concept of "corporate BS" as an apparently deliberate US management tool for cynical psychological manipulation. (It was the first US company that I had worked for, in the UK.)
I recall that one of the "social good" programmes at CDC was a series of projects underway to increase food crop yields for various impoverished and starving parts of the world. Much as I admired the ethical objectives of this programme, I never could for the life of me figure out how to rationally prove that that had anything to do with running a business for profit, but there you are.

CDC was the sort of case study that fitted the class of case studies they called "BP" ("Big Project") corporate collapses in the book Corporate Collapse: The Causes and Symptoms by John Argenti (1976). (Great book, by the way! :Thmbsup:)

Note that CDC's collapse would have post-dated the book's publication by several years, so the management couldn't really have been reading the writing on the wall. Probably too busy reading about what successful corporations do, or just doing what their boss "inspired" them to do with his irrational "vision" - without arguing, of course, and regardless of how loopy it might all have seemed. Who wants to read or even think about collapse anyway, when your fat bonus probably depends on the completion of a huge and costly non-business, non-profit (i.e., loss-making) and non-sense project? Heck, anybody can make a loss! Let's do it!

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