How the Dominant Business Paradigm Turns Nice People into Psychopaths

Lambert here: “What is the highest and best purpose to which we can devote our allotted lifespans?” “Uh… enhancing shareholder value?” “Very funny.” –Neal Stephenson, Cryptonomicon, p. 399.

By Lynn Stout, the Distinguished Professor of Corporate and Business Law at Cornell Law School. Professor Stout is an internationally-recognized expert in corporate governance, financial regulation, and moral behavior. Originally published a Evonomics.

Note from the editor: Sadly, Professor Lynn Stout died on April 16, 2018 after a long struggle with cancer. We’re honored that Lynn supported the mission of Evonomics and we believe the best way to honor her is to share her ideas with the world. Read about Lynn’s pioneering work here.

Adapted from The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (Berrett-Koehler 2012)

It’s conventional wisdom in business circles today that corporate directors should “maximize shareholder value.” Corporations supposedly exist to serve shareholders’ interests, and not (or at least, not directly) those of executives, employees, customers, or the community. However, this shareholder-value dogma begs a fundamental question. What, exactly, do shareholders value?

Most shareholder-value advocates assume that shareholders care only about their own wealth. But it is increasingly accepted that the homo economicus model of purely selfish behavior doesn’t always apply. This possibility provides a challenge to the dominant business paradigm of “maximizing shareholder value:” the concept of the prosocial shareholder.

The Social Animal

The problem with the homo economicus theory is that the purely rational, purely selfish person is a functional psychopath. If Economic Man cares nothing for ethics or others’ welfare, he will lie, cheat, steal, even murder, whenever it serves his material interests. Not surprisingly, although homo economicus is alive and well in many economics departments, many experts today prefer to embrace behavioral economics, which relies on data from experiments to see how real people really behave. Behavioral economics confirms something both important and reassuring. Most of us are not conscienceless psychopaths.

The vast majority of human beings are to least to some degree “prosocial.” In the right circumstances, we can be counted on to make modest personal sacrifices to follow ethical rules and avoid harming others. Of course, it’s easy to doubt pervasive pro-sociality when reading the daily news. We should remember, however, that cheating, corruption, and murder make the news because they are relatively rare. (No newspaper would run the headline: “Employee Doesn’t Steal, Even When No One’s Looking.”) As the phrase “common decency,” suggests, prosocial behavior is so omnipresent we tend not to notice it.

Prosociality is endemic. In a common experiment called the social dilemma, anonymous subjects choose between a “defection” strategy that maximizes their own personal payoffs, and a “cooperation” strategy that gains them slightly less, but gives other members of the group substantially more. Up to 97% of subjects choose cooperation in some social dilemmas. Not surprisingly, researchers have found that the incidence of such prosocial behaviors declines as the personal cost of acting prosocially rises. We are more likely to be nice when it only takes a little, not a lot, of skin off our noses. But the scientific evidence demonstrates the vast majority of people will make at least small sacrifices to follow their conscience and help others.

The Social Investor

Given the evidence of pervasive prosociality, it’s easy to suspect most Union Carbide shareholders would have been willing to accept slightly lower dividends if this would have allowed Union Carbide to prevent the deadly explosion in Bhopal, India that killed 4,000 and severely injured thousands more. Similarly, many BP shareholders might have preferred slightly lower returns to the Gulf oil spill disaster. In line with these suspicions, one survey reports that 97% of shareholders agree that corporate managers should take some account of non-shareholders’ interests in running firms.

Even more direct support for shareholder prosociality can be found in the increasing popularity of socially responsible investment funds (“SRI funds”). SRI funds invest in companies that support consumer protection, human rights, or environmental sustainability, and avoid firms that promote tobacco use, child labor, or weapons production. While the evidence is mixed, at least some studies find SRI funds slightly underperform other funds. Nevertheless, SRI funds have been attracting money at a faster rate than the institutional investing industry as a whole. By 2010, 12% of all professionally-managed assets were managed by SRI funds.

Finally, additional evidence of investor prosociality can be seen in the hundreds of proxy proposals shareholders file each year asking their companies to behave more responsibly. According to a 2010 report by the Center for Ethical Business Culture, favorite topics in recent years include corporate political contributions, global labor standards, climate change, and sustainability.

Do Corporations Make Us Anti-Social?

But this direct evidence of investor prosociality raises its own problems. The evidence suggests the vast majority of people–97% or more–are to some degree prosocial. Why aren’t more investing in SRI funds? Why don’t even more shareholders file proposals asking their companies to reduce their carbon footprints? How can we reconcile the empirical evidence on pervasive prosociality, with most shareholders’ apparent indifference to anything other than stock price?

In a 2005 article, Harvard law professor Einer Elhauge explored this puzzle. He concluded that for at least two reasons, when otherwise-prosocial people put on their shareholder hats, they’re likely to make asocial investing decisions that cut against their own prosocial inclinations. First, uninvolved shareholders ignorant of a company’s day-to-day operations decisions are in no position to police against, or even know about, antisocial corporate behavior. To the contrary, because the only thing they see is stock price, they may even pressure managers to adopt strategies that make corporate injury to third parties more likely.

Second, prosocial investors face a classic collective action problem, a kind of Investing Tragedy of the Commons. If SRI funds provide even slightly lower returns than other funds, the investor who chooses SRI funds is paying a modest price for his prosociality. Yet his individual decision to “put his money where his conscience is” will have little or no impact on the behavior of the corporate sector as a whole. Elhauge concluded that “it is remarkable that many people do invest in socially responsible funds considering that their individual decision to do so has no significant impact on furthering even their most altruistic of motives.”

Other data reinforces Elhauge’s conclusion that the nature of modern stock markets discourages prosocial investing. This is because, while most people are capable of and even inclined toward prosociality, the data demonstrates our prosocial impulses depend on largely on external social cues. As I explore in my 2011 book Cultivating Conscience: How Good Laws Make Good People, in some social situations (buying a used car) a person will act purely selfishly, while in another social situation (attending a wedding reception) the same person becomes more altruistic. We might call this the “Jekyll-Hyde Syndrome.”

What are the most important ingredients in the social elixir that triggers our prosocial Dr. Jekyll? Researchers have found that experimental subjects act more prosocially when experimenters (1) ask them to act prosocially; (2) lead them to believe other subjects would behave prosocially; and (3) structure experiments so that prosocial decisions provide larger benefits to others. Conversely, people act more selfishly when told they should be selfish, when they believe others are selfish, and when they think selfishness imposes only a low cost, or no cost, on others.

When it comes to investing behavior, the rhetoric of “maximize shareholder value” seems almost deliberately designed to bring out our inner Mr. Hydes. Shareholder-value dogma teaches that it is morally correct for shareholders to pressure managers to raise share price any way possible, without regard for how the corporation impacts stakeholders, society, or the environment. Shareholder value rhetoric also inevitably signals that other investors are behaving selfishly. Finally, it teaches that purely selfish investing decisions, far from harming others, promote better “corporate governance.”

Thus we should hardly be surprised that only a minority of investors chose SRI funds. We should be surprised that any investors do. The structure of modern stock markets, combined with the rhetoric of shareholder value, creates almost insurmountable obstacles to prosocial investing behavior. This explains why the same person who donates money to the Sierra Club and World Wildlife Fund happily holds shares in oil and timber companies that engage in environmentally destructive drilling and clear-cutting.

Our Lowest Moral Denominator

The result is that even though most of us are not conscienceless psychopaths, when we make investing decisions we often act as if we are. This observation casts an interesting light on Joel Bakan’s award-winning 2004 documentary The Corporation.” In that film, Bakan argued that because corporate managers believe they must maximize shareholder wealth, a corporation is a “psychopathic creature” that “can neither recognize nor act upon moral reasons to refrain from harming others.” To the extent this is true, shareholders themselves may be largely to blame. As University of Toronto law professor Ian Lee puts it, “if corporations are in fact ‘pathological’ profit-maximizers, it is not because of corporate law, but because of pressure from shareholders.”

The ideology of shareholder value drives corporate managers to make business decisions contrary to prosocial shareholders’ true interests. Of course, some shareholders may indeed be purely self-interested actors–psychopaths–who don’t mind if their companies deceive consumers, maim employees, or pollute the environment. But the hard evidence indicates the vast majority of us would prefer to tolerate at least somewhat diminished returns to avoid such results. And most studies find that SRI investing erodes investors’ returns only slightly, if at all. Shareholder psychopathy is neither natural nor inevitable but an artifact, the unfortunate outcome of collective action obstacles combined with the ideology of shareholder value.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.

44 comments

  1. bruce wilder

    It’s conventional wisdom in business circles today that corporate directors should “maximize shareholder value.”

    “Maximize” is a concept that ought to be taken apart in this context. What could it possibly mean?

    Presumably there is implicitly a constraint and also sufficient knowledge of consequences, whatever “sufficient” might mean.

    Perhaps the prosocial constraints should be made explicit and assigned as the responsibility of interests opposed to the shareholders. Including a public interest in, say, constraining predation or poisoning non-shareholders.

    Just a thought.

    Reply
    1. SimonGirty

      Well VARIOUS brain spirochetes, xanthines, molly, cocaine hydrochloride, ractopamine, bovine somatotropins, HFCS, alcohol and inbreeding all have their place, I bet you’re on to something? But, just think of the absolute genius of replacing pensions with 401k where we’d no longer have to, “pay half the working class to kill the other half,” we’d avariciously starve der untermenschen, off-shoring their jobs, out-sourcing their subjugation to skip trackers, repo men, bounty hunters, POs; then incarcerate ’em as convict slaves. We’d have to blame it all on somebody, though…

      Reply
  2. 1 Kings

    I quibble, yes quibble with the term ‘nice’ in this post. Are a-holes nice? Yes, but nice to who(m)? Like A Corp CEO shipping jobs then advertises her/his charity work, or a university pres making 500 large but each year raising tuition because fiscal responsiblity, e how about Goodwill Corp who gets FREE stuff from people, puts in ‘dynamic’ pricing in, then asks to round up to help the children. Sometimes a-h’s just do what they gots to do.

    Reply
  3. Charles Eisenstein

    Interestingly, not even psychopaths make choices to maximize rational self-interest. This is a misconception that is probably conditioned by economic ideology and the dynamics of the money economy. The two defining features of psychopathy are lack of conscience, and impulsiveness. The second is normally overlooked today, but it was crucial to Cleckley’s classic study, The Mask of Sanity. Typically, psychopaths like to take huge risks for trivial rewards.

    Still, the point of this article holds. The system suppresses conscience. Usually the suppression is so diffuse we don’t notice it. Every time we seek the best deal, we participate in it. A lot of the “shareholders” seeking to maximize value are pension funds desperate for a return of five or seven percent so they can meet pension obligations. I think a careful analysis inevitably traces the problem to usury — specifically, that we live in a system where money is created through interest-bearing debt, setting us into competition with each other on a playing pitch tilted toward scarcity. It begs ruthlessness of us. Corporations are exquisitely designed to be better at ruthlessness than individual people.

    Reply
    1. JTMcPhee

      Interesting that Muslim polities, operating under the rubric of “Islamic finance and banking,” outlaw interest-generating transactions in favor of risk-sharing and cooperative endeavor.

      Here’s the Western-lensed view of this form of economic activity: https://www.investopedia.com/terms/i/islamicbanking.asp

      Here is another very-long-form view, with the religious-strictures context intact: https://islamicbankers.files.wordpress.com/2014/09/marifas-practical-guide-to-islamic-banking-and-finance.pdf

      Of course that kind of thinking gets one into deep trouble with the dominant economicus memetrope. So not going to happen here. And all the very smart and subtle sociopaths that operate the “Western” FIRE rackets are constantly at work to insinuate “Western” modes of looting into the Muslim world, which includes 1.8 billion or so potential consumers/lootees/mopes, in the expectation of hybridizing and thus rendering sterile the financial principles and inherent decency of the Islamic system. https://www.imf.org/external/themes/islamicfinance/ The IMF notes that Islamic banking and finance are growing quickly, insh’Allah. One wonders why…

      Reply
      1. Mirdif

        “Islamic” banking is a pack of lies. It’s just interest rebranded to fool people and take advantage of a new market. Once you dig in to these things they always emerge as a rebranding exercise.

        Reply
        1. JTMcPhee

          Yes, maybe so, where the folks from “advanced” economies, or who have gotten educated in their “business schools,” get into the act, bringing their marketing and looting skill sets along. Humans, of course, can always be relied on to crapify, where culture does not rein in self-interest.

          I guess all the interest and “investment” in Islamic banking and finance is all just groping by the Dimons and Blankfeins of the world to get hooks into the transactional needs of 1.8 billion non-Western-banked people… Sad, if true. https://www.mohammedamin.com/Islamic_finance/Simple-introduction-to-Islamic-mortgages.html

          Reply
    2. djrichard

      setting us into competition with each other on a playing pitch tilted toward scarcity. It begs ruthlessness of us.

      “Players only love you when they’re playing”

      Reply
  4. WobblyTelomeres

    On the way back from a motorcycle trip to Yellowknife, I met a management professor from Perdue at a hotel near the Beartooth Pass (you should, all of you, at least once in your life, cycle, bike, or drive the Beartooth Pass). Nice guy, he and his traveling companion were there to trout fish.

    The conversation somehow turned to the psychopathy of corporations (and their management). For every example I gave, he gave a counter-example of a socially responsible corporation (or at least, an example of a corporation that treated its employees humanely). It wasn’t until later that day that I realized that every counter-example he offered was privately held. I think this distinction needs to be made in these sorts of articles.

    Reply
    1. Norb

      Yes agreed, but those socially responsible elite still tolerate the anti-social behavior of their peers. They feel no need to change the behavior or feel responsible as your story shows. It is an excuse for a failing system.

      The failing of capitalism is that the elite running the system have no responsibility to anything but themselves. This does not say much for human civilization in its present form.

      An economic system that by necessity and design, degrades the physical environment upon which it depends for survival cannot be virtuous in a closed ecosystem. That was why capitalism persisted as the world was explored and conquered. But that opportunity is coming to an end.

      While the good guys are biking and fishing- the sociopaths will one day consume or enslave them as well. Their hubris has a good probability of destroying the world in a nuclear accident or holocaust brought about by their uncontrollable belligerance.

      Very harsh, but that seems like the future. Just like facing death, you can run, but you cannot hide.

      Reply
      1. sierra7

        +1000
        “Corporate Responsibility” is an oxymoron” (not quoted above but just put that in to express my overall view)
        There was a time early on in the history of corporations in America where corporations lost their charters if doing “damage” to the social/person structure. No longer. Greed breeds corruption. And, bottom line, “You’ll get your gratification in Heaven”. (And we know what “Charlie M.” said about that!)

        Reply
      2. False Solace

        Reminds me of SF author C.J. Cherryh’s Foreigner universe, in which a species called the atevi feels strong bonds of loyalty to atevi who rank above them. This is true of all atevi except for their leaders, who are raised explicitly to feel no loyalty for anyone. (Forgive me if I have some details wrong, it’s been a while since my last readthrough.) Anyway I always thought that was a more honest way of accounting for the reason sociopaths tend to cluster at the top of human society.

        Reply
    2. jrs

      interesting, being privately held does give more leeway to be ethical I guess (of course it doesn’t mean they will be cough Walmart as well as countless ruthless small businesses driven to being unethical due to perceived harsh competition) but … it’s not rule by anonymous funds pulling money in and out at least.

      Reply
    3. grayslady

      Perdue: A poultry processor headquartered in Maryland.

      Purdue (University): Indiana’s land grant university, and one of the finest institutions anywhere for studying math and engineering.

      Apologies, but being from flyover country I couldn’t let this pass.

      Reply
      1. WobblyTelomeres

        You are correct to not let it pass. A niece received her master’s there this spring, so I really should have gotten that right.

        My excuse: it was early and I had ridden several Greyhound buses from Austin, getting home late last night.

        Apologies to all Purdue students, faculty, and alumni.

        Reply
  5. flora

    Since the 1980s many directors and CEOs in large Cos. are paid in stocks and stock options that ‘maximizing shareholder value’. It was supposed to be a way to align management interests with shareholder interest, said alignment supposedly a spur to better business results. Instead, it is a polite way to say ‘maximize CEO’s personal wealth via stock options’, no matter how badly the company is run. Stop paying management in stock options, put them on a straight salary, and see if this behavior changes.

    Reply
    1. oh

      I agree. The shareholders whose value they’re maximizing are top management, directors who hold options and stocks granted to them. They CFO tweaks the earnings to get maximum value for these people. He also buys back shares to keep EPS and stock price high. Such a crooked game in the huge casino that is called Wall Street.

      Reply
    2. Linus Josef Anton Huber

      This is one way to go, flora. In addition it seems to me appropriate that the fact that the capital company is treated in front of the law like a natural person, is an aspect that should be discussed in more depth. A corporation cannot be put in jail and the management is more or less immun on a personal level, except in extreme cases when direkt irrefutable proof of misconduct exists. In addition share owners liability is limited as well; their responsibility stops once the company defaults even when countless uncovered obligations exist. We have seen in 2008/09 the result of a situation that encourages risk taking and high leverage which includes endangering society’s well-being and instead of addressing the root cause, nothing has been done but encourage the same behavior on an even larger scale, involving not simply the banking system but corporations of all stripes. We may think that the problems of 2008/09 have been resolved but I not only doubt that idea but believe that this unresolved problem is partially responsible for the fact that trust in the political establishment has been steadily evaporating over the past years resulting beyond other aspects in the election of Trump.

      Reply
  6. Summer

    ‘”Socially Responsible Investment Funds” really means nothing unless there are “Socially Irresponsible Investment Funds” – that are actually named that.
    SRI means nothing without a contrast…that is systemically believed. I don’t see that.

    Now comes a related question: How long do people go on believing psychopaths are “good faith” negotiators? Or go on attempting to compromise with them?

    Reply
  7. DJG

    First, the idea that I, a middle-class person, am managing an SEP, a couple of IRAs, and a 401 k plan is ludicrous. I would rather than we all just get a lot more from Social Security and stop pretending that the DJG funds, voting 22 stocks, have some effect on the economy. A friend of mine once referred to IRAs as the world’s largest Christmas Club (and CCs still exist but don’t claim to be a pension plan, being only one way to finance Santa Claus).

    With regard to the socially responsible funds, I’m not sure that I agree that I haven’t done as well. I have money in Pax, in Parnassus, and in Domini, all of which are chugging along. Domini seems to have gone through the most vicissitudes. Yet during the financial crisis of 2008-2012???, Pax dropped less and bounced back as fast as the “regular” funds. In fact, the socially responsible funds that I have are all run thriftily: No speculation.

    With regard to voting my proxy of my 22.5 shares of such-and-such, I learned a while back to vote against the “shareholder value” crowd: The management compensation packages invariably balloon up into gazillions of stock options, which, quelle surprise!, mean goosing up stock prices to keep management happy. Because every named manager deserves 10 million dollars a year, right?

    And stock buybacks have been covered here at Naked Capitalism: Talk about psychopaths. Manipulating stock prices and announcing that one is doing so. Even Nokia (of which I have several of their $5.00 stocks) dutifully puts stock buybacks on the proxy. And I vote no. Sorry, Finland.

    All in all, though, a good posting because she cuts through the ridiculous idea that businesspeople have no responsibility except to money and “the free market.”

    Reply
  8. Norb

    The role of the media cannot be underestimated in perpetuating the current human dilemma. Human beings are conditioned to act certain ways, and the constant media barrage reinforcing antisocial acts and divisive human relations train people to accept the current order. The population is basically shell shocked into conformance.

    Question this dynamic, and functioning sociopaths loose their grip on “reality” and the pathology breaks out into the open. All this is possible because because the 9.9% have successfully sheltered themselves from the negative effects of cultivating this behavior- as is always the case for a corrupt elite. This, “let them eat cake” mentality projected from the gardens of Versailles is where we stand now, and will only last as long as the illusions can be maintained.

    Trump represents an effective slap in the face that breaks the comfortable stupor most elites find themselves in. The degradation is finally breaking through and the shriek cries to return to and reinforce the crumbling illusions reveal themselves as lame excuses to maintain an unjust privilege.

    The Trump wrecking ball offers an opportunity for all people of conscience not to criticize and demonize Trump, but to juxtapose a new social order promoting equality and compassion. It would call out neoliberal tyranny and reject it.

    All this becomes possible when an ideology of less is more gains purchase in the public mind.

    It is that, or prepare to become cannon fodder for the unrepentant sociopaths.

    Boredom is the most pernicious human failing. Seeking not to be bored is what drives most human behavior.
    It is the weakness of the lower orders if not given proper direction and guidance. It takes a certain character to want to address that issue for humanity or a nation on whole and devise a system to make that vision a reality. Reflectively, it is what makes someone great. A nation or state cannot be great, by definition, if its leadership only seek self-interest. It becomes a corrupt and deluded state.

    Capitalism has triumphed. The heroic journey of shareholders has led to a world guided by avarice. How ironic that something seemingly so powerful, in the end, reveals itself to be so small and limited. The question must be asked, is this all that there is? A world and millions of lives destroyed so a few can have unfathomable bank accounts.

    A massive redistribution and reorientation of the productive capacity of the planet is needed along the lines guided by conservation.

    Reply
    1. cnchal

      >. . . is this all that there is? A world and millions of lives destroyed so a few can have unfathomable bank accounts.

      From the viewpoint of those large and in charge, yes. They don’t care that division of labor creates wealth. All they care about is division of profits, all for them none for you. Psychopath’s rule.

      Reply
    2. Jason Boxman

      “Boredom is the most pernicious human failing.”

      I recently watched Altered Carbon on Netflix and that seems to be the premise. I rarely watch TV, but sometimes it happens.

      Reply
  9. Newton Finn

    Jesus is reported to have said, in justifying the lifting out of a sheep from a pit on the day of rest, that the Sabbath was made for man, not man for the Sabbath. Certainly the same applies to corporations and the economy in general. The loss of that sense of priority is all one needs to explain the history of economic development, right up to the current neoliberal paradigm.

    Reply
    1. Harry

      An excellent point, but one which is potentially problematic now that corporations have free speech rights like citizens. The playing field will never be level between citizens and corporations because they will usually have more money – except in the case of Gawker vs Thiel.

      Reply
  10. Watt4Bob

    I hope while we’re looking at the psychopaths in big corporate C-suites, we don’t forget about their down-stream affects on small business owners who have universally adopted the dogmatic proscription against giving workers a break.

    Down where the rubber meats the road, on main street, there is a manufactured consensus;

    Austerity for thee, socialism for me.

    Meaning employer collusion in fixing wages at the lowest point possible.

    Reply
  11. Michael

    If you ask “When did you stop beating your wife” you are begging the question of whether he does beat his wife, assuming it be to true. Your ” this shareholder-value dogma begs a fundamental question.” is not an accurate use of the phrase. The dogma simply RAISES the question, it does not BEG it.

    Reply
    1. Mel

      I share your pain. So many people misuse it that it’s come to be said, even on Naked Capitalism, that that’s what it means now. At the least you have to be alert (as you probably are) to the possibility that what some person just wrote is not what they meant.
      Years ago we had a trope on Naked Capitalism: “the death of meaning.” Don’t see it much lately. Eventually entropy will conquer and everything will mean the same.

      Reply
  12. Jamie

    I think the main point of the article is well made… i.e. investing in an SRI is simply purchasing a warm fuzzy feeling for oneself and has no actual effect on business-as-usual.

    There is an issue not addressed by the author; that is the definition of “social responsibility”. When I looked into the matter a few years ago, I was unable to find a fund that I felt adequately represented what I felt would be “socially responsible”. That is, there are funds that don’t invest in arms manufacture and funds that invest on “christian principles” and funds that try to make environmentally sound investments, but the anti-war funds were heavily invested in fossil fuels and the “pro-environment” funds were heavily invested in other dubious endeavors and so on. I don’t manage my funds personally, I pay an “expert” to do it. As a result, the funds I am invested in are extremely diversified. I have resigned myself to the fact that, if one has investments, unless one hand picks a few select companies, one is implicated in all the good and bad of the market. There is no way to escape this. But I console myself with knowing that, because of broad diversification, no one evil corporation is getting more than a tiny fraction of my investment dollars. I think this is the best I can do with the way things are.

    To the extent that I am a data point of relevance to the question: “What happens to investor’s prosociallity when faced with investment decisions?” My answer is not, “I simply try to maximize my personal gain”, it is, “SRIs as currently constituted do not satisfy my prosocial needs and are not a good measure of social responsibility”.

    Reply
    1. Jeremy Grimm

      You raise a question about this post that bothered me too. What gives a bundle of stocks the label SRI? I recall the label “Made In America” and how little that means — the label “charity” applied to some organizations that share little of what they receive — the labels “organic” or “natural” food. All these labels have been debased. And the assumed relationship between purchasing SRI stock funds and human prosocial instincts seems completely unfounded to me.

      Reply
  13. Louis Fyne

    my opinion is that the premise of the writer is wrong.

    nice people aren’t turned bad, my anecdote-based hypothesis is many corporate cultures are so power-politics psychopathic that it’s mostly the psychopaths who get promoted in the system and nice people proactively opt-out or get shunted into decent but limited power roles.

    Or put it in another way many corporations are like distilleries that drip out psychopathy

    your mileage may vary.

    Reply
    1. Jeremy Grimm

      Embracing behavioral economics, based on “how real people really behave”, in place of homo economicus does little to change the underlying goal of explaining aggregate economic activity in terms of the activities of the aggregated behaviors of a collection of individual model human behaviors. We should cast aside the old idea that some form of optimality arises spontaneously from the aggregate behaviors of individuals — no matter how those individuals are modeled. The “Invisible Hand” has proven no more than a useful fiction for apologists explaining away the egregious actions of the “free market” as somehow promoting the greater good — except for a few cases where a little tweaking is needed to repair some sub-optimal behaviors and outcomes. The larger program and framework directing the thought in this post are flawed, as plainly evidenced by too much recent empirical evidence. Instead of straining to analyze the formulation “maximizing shareholder value”, as done in this post, I believe it were more useful to treat that formula as the simple self-serving cant it is.

      We have a society run by sociopaths. I believe Corporations indeed most of our hierarchical organizations are run by sociopaths — far less often psychopaths. Psychopaths too greatly lack method to their madness. I believe this peculiar feature of hierarchical organizations — their promotion of sociopathy — is a flaw resulting from a basic flaw in our present human society. Human society honors and rewards sociopaths with wealth and power and naturally the socialpaths have used their wealth and power through human history to enhance the celebration of wealth and power. Over time those who would not bend their knee to wealth and power were shortened by a head. Contrary to the title of this post I believe Corporations select for the worst among us as enabled and lauded by the dogmas of the “Invisible Hand”. I suspect if we were rid of the worst of the odious 3% and strongly discouraged those who remained — human society might evolve to a more just society.

      Reply
  14. Jean

    I’ve always been interested in personal rebellion against businesses and the establishment.
    IMHO, people everywhere, of all ages, not just young people, are finally waking up, the meme out there is that “They–the government, businesses and some individuals– are out to screw you.”

    More importantly, the reaction has begun. Employees refusing to do off the books work without pay or, the trend I hear about that it seems perfectly acceptable to lie on mortgage, student loan and financial applications since the system is rigged against you. The only restrictions being the ability of institutions to catch and prosecute you.

    When a supermarket or Target undercharges for something, people will keep their mouth shut rather than invoke some moral code and say something like they might have in the past.

    Conversely, it seems more important than ever to be scrupulously honest with individuals and small businesses and at the same time to stoke the fires of resentment among those with whom you speak.

    Reply
  15. susan the other

    There is a disconnect. How do we explain our high moral intentions, using capitalism to float all boats and protect freedom and democracy all going haywire? We’ve got a feedback delay, like we can’t even describe our consciousness. The native Australians call it the dreamtime – our conscious world. I think I understand why. But I’m not conscious of the definition :-) yet.

    Reply
    1. skippy

      I think the distinction is floating a PR group think ideological preference as a social consciousness, rather than a broad baseline sense of social consciousness, nor do I think the latter suffers the same cultish mannerisms due to lack of orthodoxy.

      Reply
  16. Peter Phillips

    As someone that worked deep in the bowels of a financial organisation for an extended period (15 years), both in IT and business management, I can relate to much that the author of this article sets out.

    The organisation was one of my countries largest banking organisations. When I joined superficially it appeared to be a reasonably well run institution. When you got to looked under the bonnet, “organised chaos” was a more fitting description.

    Initially I found many senior managers who were not either psychopaths or sociopaths, but regular human beings acting in good faith to produce products that served the customer base relatively well and at the same time ensured a “reasonable” return to shareholders.

    About 6-7 years into my stint, things very obviously changed. From grassroots to senior management we were all packed off to off-sites where the dominant message, indeed the only real message was “maximise return to shareholders” and though not explicitly stated, “screw the customer”.

    Consequently, over the next couple of years, “human” and “caring” managers with a degree of customer focus were made redundant or parachuted out. They were replaced by what I experienced as “psychopaths” in my interactions with them. Their mindset went along the lines of f**k the customer, spend money and effort reducing customer facing services and forget about customer sat. Focus instead on outsourcing, off-shoring and buybacks. Of course they were direct beneficiaries of this approach through stock option setups etc which led them to think only in “short term” investment and returns that made them substantially richer. (Incidentally..the money that flowed to “bonuses” seemed to aggregate tightly around the top 5% of management. Everyone else was fobbed off with fairly meaningless, small “bonuses”

    The upshot of all this was as I approached my planned exit from this institution I was literally surrounded on all sides by a cadre of lying, backstabbing, self seeking managers..that on a day to day basis were almost unbearable to work with. If I was in a meeting of say ten senior managers, I would be outgunned 9 to 1 on any proposition that actually had the potential for improving customer sat. Of course all sorts of excuses were rolled out as to why my proposal was “wrong”..but in the end it always came down to return to shareholder.

    I finally threw in the towel as I found each day I was loathing going to work to bang my head against the brick wall of return to shareholder. I retired early and joined a much smaller customer focused service industry.

    Best thing I ever did. My new smaller and privately owned organisation was not “psychopath free”..but at least my day to day interactions with other staff and customers was positive and good for my mental health. I actually enjoyed going to work.

    Reply
    1. Spring Texan

      Thanks, great comment from the inside of things. I think this has happened in so many organizations, including pharmaceutical companies, and worsened the lives of us all.

      Reply
  17. none

    > the hard evidence indicates the vast majority of us would prefer to tolerate at least somewhat diminished returns to avoid such results [emphasis added]

    This is fallacious since “vast majority” is only relevant if investing is a democracy, which it isn’t. Are the people owning most of the capital in the market–i.e. the richest–likely to accept diminished returns? I’d guess not, because of the many studies showing them to be the biggest sociopaths. So either different evidence is required to show that the super-rich are also willing to accept diminished returns, or we need laws making us not have to depend on their largesse.

    Reply
    1. JBird

      The sharks care only about feeding the blackhole that’s become their soul, and so they will do anything regardless of the costs to others to do so, if they can. So it does not matter what anyone else wants at all.

      When reading yet again about the ethics free businesses controlled by the morally deficient “Job Creators” I am reminded of Albert J. “Chainsaw Al” Dunlop and always get John Fogerty’s Mr. Greed going through my head:

      Greed, why you got to own everything that you see?
      Mr. Greed, why you put a chain on everybody livin’ free?
      You’re hungerin’ for his house, you’re hungerin’ for his wife
      And your appetite will never be denied
      You’re a devil of consumption; I hope you choke, Mr. Greed

      CHORUS:
      How do you get away with robbin’? Did your mother teach you how?
      I hear you got away with murder, did you do your mama proud?

      Mr. Greed, why you got to take more than you can ever use?
      Bring ’em to their knees; isn’t it enough just to win while they lose?
      You bring no honor to the game, you feast upon the blood and pain
      But the bones you hoard can only bring you shame
      There’s corruption in your path, be that your epitaph, Mr. Greed

      Reply
    2. jrs

      I doubt they are really the problem, I mean ok vast wealth inequality poses a whole set of other problems, but I think most stock movement is actually driven by large institutional funds.

      Reply

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