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|In: Business Ethics|Last Updated:

It’s about more than just shareholders! Business writers are excited! Bernie Sanders supporters are gratified! Long-time members of the KJR community are wondering (1) why this is even news, and (2) how could so many commentators all miss the point so completely?

The subject is the Business Roundtable’s discovery that creating shareholder value is too cramped a metric to tell the whole story. It’s breathing new life into the ancient mantra that businesses need to create value for all their other constituencies as well — the communities in which they do business, their employees, suppliers, and even (gasp!) their customers.

The discovery fits nicely into the developing narrative that capitalism, in its unfettered, laissez faire form, often creates damage that ranges from minor inconvenience to monstrous harm and injustice.

So let’s congratulate the Business Roundtable for trying to soften the impact of the emerging backlash — for modifying its allegiance to the newly unpopular proposition that pure-play economic theory automagically defines good public policy.

But ethics predicated on fear of punishment isn’t ethics at all. To the extent this is all an attempt to placate those who see capitalism as a system that mostly looks out for someone else’s best interests, it’s a shallow and fragile change.

What matters more, as was first pointed out in this space seventeen years ago, there are bigger reasons for CEOs to reject such a puerile and shallow fiduciary philosophy as the pursuit of shareholder value.

It’s like this: Shareholder value, which is EconomistSpeak for making the price of a share of stock increase, is a poor predictor of future performance. Heck, it doesn’t even reliably describe current performance.

Why? you might ask. Answering a question with a question I might ask you in return, what does reliably describe current performance and accurately predict future performance?

Well, you might answer, steps that increase a company’s competitiveness in the marketplace are what describe current performance and accurately predict future performance. Steps like developing superior products; instituting efficiencies that let the company sell its products for less; making doing business with the company in question more convenient. Steps like that.

The steps companies have been taking to increase shareholder value aren’t just different from what it takes to be more competitive. They interfere.

Take, for example, the popular practice of using cash assets, often supplemented with borrowed money, to buy back stock. The theory is that the same assets, divided by fewer shares of outstanding stock, result in the remaining shares being more valuable.

Which they would be if the CEO and board of directors were to immediately liquidate the company. Otherwise, all buybacks do is make this money unavailable for such trivialities as product improvement and customer care.

Debt-funded stock buybacks might be the most egregious paean to the shareholder value theory of business governance, but it’s hardly the most prevalent, or the most banal. That award goes to the constellation of practices focused on artificially deferring profitable expenditures so as to “make the numbers.”

And by profitable expenditure I mean all expenditures, because any expenditure that isn’t a profitable one shouldn’t be deferred. It should be eliminated on the grounds that why would you do anything else?

For example: You need to hire a systems administrator. There are only two possibilities: The company will, in the long term, be more profitable because IT has filled this position, or it will be less profitable. If it will be more profitable, deferring the expenditure defers profit.

Imagined conversation between the CEO and board of directors:

Board: We understand you deferred some profit this quarter.

CEO: (Proudly) that’s right! And we’ve identified lots more profit we can defer in future quarters!

Board: What the hell is wrong with you?

Real-world board: Great job! Keep it up!

Much of the problem, as should be evident, is that cost reduction is easy to measure. Just about all other value creators are not. Deferring a hire, or an equipment purchase, or what-have-you reduces expenditures in easy to recognize ways. The benefits resulting from having enough staff with the right skills and equipment to do the work is, in contrast, easy to understand in principle, but devilishly hard to measure.

And as we’ve all had the tiresome mantra drilled into our heads that anything we can’t measure we can’t manage, the results are as easy to predict as they are hard to avoid.

Which leads to this conclusion: The Business Roundtable has taken a correct step.

It’s for the wrong reason, but at least it’s a step.

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|In: Digital|Last Updated:

No, don’t thank me.

Last year I proposed what I’m now calling the Shut the ‘Bots Up Act of 2019 — legislation limiting the First Amendment right to free speech to organic humans only.

California has just passed legislation that, while not quite so all encompassing, still takes an important step, making it “… unlawful for any person to use a ‘bot to communicate or interact with another person in California online with the intent to mislead the other person about its artificial identity.”

You’re welcome.

# # #

Speaking of rights I wonder if it’s time to recognize that states’ rights interfere, with greater or lesser seriousness, from your average company’s ability to do business.

For example: Every state in the union has its very own regulatory rules and regimes governing the same sorts of services. Fifty separate sets of rules place a significant compliance burden on companies that would have been happier to comply with any one set of rules — any — than with having to comply with all of them.

Except, that is, for the mega-providers who can afford a platoon-ful of lawyers to contend with these regulations. For them, 50 PUCs are a formidable barrier to entry for new competitors.

Getting back to California, it will have to figure out whether and how it can enforce its new Truth in ‘Botfulness Act against offenders whose ‘bots aren’t located in California, just as the federal government, should it decide to make foreign interference in our elections illegal (wait … it is illegal!) would have trouble enforcing a ban on foreign ‘bot-based interference when it comes from ‘bots located outside the 50 states.

# # #

More about free speech: Once upon a time I figured if you prevent stupid people from speaking, others might think they’re idiots, but if you let them speak they’ll remove all doubt.

That was when I lived in the Chicago suburbs and the ACLU defended the right of the National Socialist Party (aka the Nazis) to hold a march in Skokie.

But back then it was safe, because the Nazis were a harmless fringe group.

Sadly, that’s no longer the case and I’m a bit more cognizant that the line dividing speech from incitement is, although fuzzy, critical.

Nazis are still idiots, but their fringiness is steadily decreasing. Enough of our citizens are embracing it that we need to aggressively keep its promoters inside the speech/incitement dividing line.

# # #

The question of defending Nazis’ freedom of speech versus preventing them from inciting violence brings up an esoteric but still important notion. Call it the Principles Scaling Rule. What it is: Take any fundamental principle that’s near and dear to your heart. My guess is that when you think of one of these principles it’s in the context of a small, close to home example.

For example, in the Good Old Days the local butcher knew that Mr. Phillips loved pork chops. He used that knowledge to recommend them to Mrs. Phillips when she entered his shop. It was early CRM.

My principles about companies knowing their customers’ preferences are built on this model. The digital model that scales this up to millions of customers whose on-line behavior companies mine to their sales and marketing advantage? That’s more complicated.

The Principles Scaling Rule states that when you scale a principle, nuances and complexities start to matter.

# # #

Closer to home, where do you think the line is that separates your right to free speech from your employer’s right to restrict it so you don’t say or publish something that might embarrass it?

There’s more to this question than the speech itself. There’s also the question of how employers might find out about infractions. So before we get to freeing speech from employer interference …

Before we get to that we need to establish the line that separates an employer’s right to surveille its employees from their employees’ right to insist that whatever they say in their private lives is none of their employer’s business.

It’s an old topic, made new again by the digital technologies businesses use to mine social media so their marketeers know what customers are saying about their products and services.

HR can use the exact same technologies to track down employee-generated content and evaluate its impact.

And by the way, I’m hardly unbiased on this topic, given that I’m gainfully employed by an utterly marvelous technology services firm while also publishing books and articles whose content has little to do with the company’s official stances.

Utterly marvelous. Hey, you — the HR ‘bot — did you catch that? It’s a compliment! You don’t need to flag it. It can be our little secret.

Nooooooooo!

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