WhatCompaniesMustDo

This is a spin-out question, that I’d like some clarity on at some point.

SamRose said in CommunityWikiBusinessDiscussion, “And, depending upon the for-profit model you choose, you may be required by law to do your best to focus on monetary wealth creation.”

I have heard this repeated many times in grass roots communities, to the point that I think it’s a basic, fundamental argument, in the activist scene. I have taken this for granted, myself, and unquestioningly believed it.

After having read a handful of books about making companies and businesses, though, I have to ask myself: “Is this true?”

If you own a company, 100%, isn’t it your company? Doesn’t it have to do what you say?

It’s not some automaton without human influence, like people make it out to be, is it? If it is greedy, and blind to environment, society, and so on- is it because it is a corporation (a body,) or is it because the rules and enforcements aren’t right, to not punish “fair play,” or is it because the owner is a mean, selfish person?

I can understand that, if there’s been a public offering, and if you promise as part of that– saying, “We promise to labor only to make more money,” – if that’s how it works, then the pact has been made. (Sounds like a baaad deal, to me, but I guess people have their reasons.) I can understand that “fiduciary responsibility,” may end up meaning, “You have to do whatever you can, to make more money, no matter who is hurt in the process, as long as you follow the laws, and try to change the laws as necessary.”

Is my picture just way off?

If you and you and you and me own a company, is there anything that says we must labor to make money, at the expense of society and environment and a sense of ethics, and so on? Aren’t people free to make their own agreements?

Without getting into all of the minute details, I’ll say that for S, C, and LLC for-profit corporations with shareholders, that most laws that I know of in the US require that members of the board of directors to not make decisions that will knowingly lose the company money.

Privately owned LLC corporations are not subject to these regulations.

I didn’t mean to suggest that it will always equal “evil”. I didn’t bring up the point to make teh same argument or suggest that you should infer the same thing that I think you are saying “activist scene” people are making. Addressing you original question, which talking about something that is different than what I stated quoted above, yes, definitely it’s the people who make the corporation “good” or “evil”. So you are totally right.

I was trying to say to HansWobbe that I can see why people choose a Non-Profit business model for creating, growing and curating knowledge resources, and paying people to do this on anongoing basis, because the stated legal purpose and focusfor Non-Profit corporation is primarily solving some issue or problem that is for the public good, and funding people to make a decent living solving those problems.

However, I believe that certain for-profit arrangements might perform better over the long run in helping the public good, while funding people to do this. Especially when the for-profit model is working with resources that are a non-rival information or knowledge commons, because basing part of your business value on a commons kind of forces you to engage and listen to customers, the workers who create the wares you are selling, and pretty much everyone in the “ValueChain”, if you want to be successful, anyway.

It’s going to take a lot of effort (and a bit of time) to address these questions effectively since they tend to be very controversial, and a great many people have opinions that they believe are right, in spite of their conflicts with many other schools of thought. A few starting points that I’ll call (my) “opinions”…

  • All companies are “governed” by some set of mechanisms, be they Private, Public Not For Profit, etc…
    • They are also subject to various laws enacted by various governments and their agencies, and these actually vary considerable by “jurisdiction”.
  • In general, laws fall into two major classifications. I’ll call them Criminal and Civil, in spite of the fact that this terminology leaves a lot to be desired when communicating with the ‘professionals’.
  • much more to come, commensurate with interest.

To skip to the heart of the Summary question…

  • Yes, companies can (and generally always do) enter into (contractual) agreements.
    • Given that these contract do not violate any of the “laws of the land”, any terms that they agree to can be thought of os ‘binding’. Obviously, in the event of a subsequent disagreement, there are various “enforcement” mechanisms that can be brought into effect (e.g. law suits, etc) in the event that the terms of the contract are “breeched”. These are often defined in the contract.
    • So…
      • IF (we agree to do … “x”, and one of the parties fails to do so)
        • THEN the other may … (SUE, etc.)

One interesting point is that there is generally always a President or Chief Executive Officer who has defined Responsibilities and Accountabilities which are usually documented in an Employment Contract. This is the pinnacle of the corporate pyramid from which most lesser delegated authority flows.

I believe its very important to always bear in mind that Companies are Groups of People and that they are generally arranged in a hierarchical structure. And, in Business (as in Government) Accountability is extremely important. Implemented and managed properly, a Company is a wonderful entity that bestows many benefits on all of its stakeholders. Done poorly, it may be nothing more that a tool for yet another tragic attempt at unfair exploitation. In theory, the choice is up to the Owners. In practice, greed is quite pervasive throughout our species and whatever tools we create, they are more likely to be used for “evil” as well as “good”. This is not the fault of the tool. Instead, we should consider the tool Users as the motivating factor.

after hopefully fixing the edit conflict with Sam properly… Sam’s post hints at one important aspect I left out. Not For Profit companies are generally exempt for Taxation. There’s a whole lot of law that comes into play for just these tax concessions since many more companies would rather not pay taxes (obviously).

Hans, yes I see what you mean. Some people that I work with from Canada were talking with me about how they are suffering with the Not-for-profit umbrella to fund their Artist Run center in Canada:

http://www.arcpost.ca/forums/viewtopic.php?id=25

The salaries in the ARC system are pathetic though I remember when they were much worse at least here on the west coast. The thing that really never gets stressed is the amount of unpaid work has gone into artist centres over at least two generations. The system has been literally built on the backs of the artists themselves and the staff who worked there.

The problem I see is we are constantly chasing after whatever crumbs are there because we have to. In the first generation of centres it was LIP grants, for the second it was job employment schemes from HRDC now we are into the era of capacity building. All of them were minorly useful in they allowed the centres to grow but they really fucked any idea of job valuation and any kind of real liveable wage for workers.

This is a big issue in Vancouver is its pathetic local and provincial funding, its soaring house valuations and one of the highest cost of living in the world! These grants have also skewered what we do in significant ways. At grunt (their artist run center) its meant chasing project grants from places like Heritage which give you the money but require such onerous reporting that it adds huge work to the administrative end but provides no way of recovering as the grants don’t cover administration. Its another trap.

This is what a lot of people are struggling with in the not-for-profit realm, both in the US and Canada, and one reason why I am in favor of for-profit, but with stated ethics.

Anyway, it would be good to spend some time sorting out the legalities of all these corporation legal agreements in an objective way. We should do that here, and I’ll try to start out. Could be good information for Open Business Models Wiki too

If you own a company, 100%, isn’t it your company? Doesn’t it have to do what you say?

I have not researched this, but my impression is that the whole “companies are required by law to seek profits” thing only applies to situations where the shareholders are not in agreement or haven’t been consulted about the potentially unprofitable activity. For instance, in a publically traded company, some (usually most) of the shareholders bought the stock not because they want to empower the company to change the world, but rather because they want to make money. In this case, if the management of the company tried to make the company do something altruistic, it can be argued that they are using someone else’s property (the shareholders’ property), in defiance of the owners’ wishes, to pursue their own personal goals.

So, in my opinion, the core reason this action is illegal was not that “a company did not seek profit”. The root problem was that “the management abused the company by not fulfilling their duty to the company’s owners”. In my opinion, if the company’s owners expressly approved of the unprofitable activity, then there would be no problem.

Also, my opinion is that the people overestimate the reach of the profit-seeking duty. At least one of my friends who works in business thinks that a publically traded company has a legal obligation to do things which are generally considered dirty/evil and which break the spirit (but not the letter) of the law, if such things are profitable. However, another friend who also works in business thinks that that is not the case.

Bayle…

Your exemplary statements about a company’s “management” being at odds with its “shareholders” are illustrative of the fundamental point that I was trying to make earlier on this page. In general…

  • Shareholders elect Directors to a Board that has a responsibility to represent their interests.
  • These Directors have a mandate, generally defined in the companies bylaws, that authorizes them to enter into employment contract(s), at least implicitly, with a President (Chief Executive Officer) who is the pinnacle of the Management structure. Obviously such a contract usually contains clauses defining the scope and extent of Management’s authority to act and conduct the business of the corporation.
  • Directors, in representing the Shareholders, are responsible to various degrees for providing management with “direction” regarding the conduct of the companies “business” (be it “for proft” or “not for profit”). Such matters are documented in the minutes of the meetings Director’s and are generally supported by “approval” votes in Board meetings and are always validated at the corporation’s Annual Meetings (where Director’s are elected to represent the shareholders).

This is a very simplistic representation of “corporate governance”, but it is adequate to support your statements about any possible conflict between “management” and “shareholders”. In theory, such a disagreement would ultimately be resolved by firing the senior managers (President or any other “officer”) that did not take “direction”, for breach of their employment contracts.

As for the opposed opinions of your two friends, I suspect they are equally representative of the masses who have opinions, but relatively little experience. Please consider that there are upwards of 10,000,000 incorporated companies in North America alone. Given that at least 100,000 of these are quite “large”, you have a more that adequate population from which to draw examples that support any imaginable opinion anyone could possible care to state. The “trick” to appreciating the validity of such statements is to know (a) when they apply and (b) the extent to which they are a representative sample of the general population of companies. Given that most business people I meet cannot tell you the difference between the “mean” and the “average” values of a set of observations, I am not optimistic that they will ever do anything other than cite an example that supports their position, regardless of whether it is “representative” or “6 sigma” removed from the mean.

Lion, starting you cite:

:”…depending upon the for-profit model you choose, you may be required by law to do your best to focus on monetary wealth creation.”

which is probably not true, although this depends on the local law. Typically “profit” is a natural goal of people and therefore economy, so natural, that it rarely needs to be stated specifically. Laws typically state the conditions and shape economic endeavors so that “going for profit” is tamed to do no harm to society and to tax it so that part of the created energy is available for the “common good”.

Basically it is up to the owner to decide what to do with his energy. As long as the owner doesn’t tell his employees differently, they have to assume that following the mission statement in an economic way towards economic success is the way to go.

A owner who wants to direct part of his energy in a different direction is probably wise to do it in a way that is easy to understand and which makes it easy for his employess to cope with his expectations. For example he can have additional organisations (e. g. non-profit NGOs) for charitable goals. It is also easy for him to put money into improving the situation of his employees - new building, better wages, social benefits. It is also typical nowadays that owner interests are coupled with image building as part of marketing - sponsoring of social or cultural events or buying some successful sports team.

All this depends on whether a corporation is successful, for when it is fighting for survival, no surplus energy is available.

It is a pity that many NGOs are in a “fighting for survival” situation, so that apart from their charitable goal, they are similar to “greedy” organizations. For example they compete fiercely for scarce resources like funding or public attention against their opponents.

There are a lot of patterns in this, which can be better understood using pattern theory (Lion prefers AlexandrianMethod), which lets us see structures as solutions to problems - that serve interests, create advantages - that are optional, replaceable, adaptable according to what we are able to learn.

The creation of economic organization structures that have no explicit single owner (or small group of owners) has probably a lot of negative effects, because it makes it difficult to define other specific goals that are beyond “profit”.

A lot of what is on this page sidetracks the important point that generated it in a discussion between myself and Lion:

  • Yes, there are requirements in the US that people running publicly traded companies with a certain amount of profit (not revenue) to show that they were not negligent, that they made best effort decisions to try and make the company profitable. The law does not explicitly state you must make a profit (that I know of). But, if you don’t make an effort in publicly traded companies to give share holders a return on investment, you leave yourself open to being sued by those shareholders.
  • Furthermore, you leave yourself open to being de-listed from the stock exchanges if your stock is devalued, due to poor decisions/management. This can then lead to the point above, about being sued by your share-holders.

What can be deduced from the above, about how it may or may not force people who manage publicly traded companies, to focus on profit? I leave that up to you. I know what I deduce, and I know what I’ve experienced over the last 15+ years of working for and with publicly traded companies.

I am content with Sam’s statement that…

The law does not explicitly state you must make a profit

since this answers Lion’s opening question.

Beyond that, I sense that my Observations and experience are sufficiently different from Sam’s, so that they would only color my interpretations in ways that would lead to unnecessary controversy, should I try to participate further (something I am always loathe to do).

Actually, hans, please feel free, because I fully accept your experience, and your viewpoint, which was probably quite different from mine. I also accept, that just because there is corruption, ineptitude, and mismanagement, and socially irresponsible people in the world of business, does not mean what so ever that all business/business people are that way.

After discussing my own ideas related to “business” and finance with many different people over the last few years, I can respect that some people are very averse to some of the ideas that I am suggesting, or ways of changing the way that people focus and conduct business, that I am suggesting in different places. I can understand that some people are not ready for the type of change that I am suggesting. I believe that what I am suggesting in different pages here on CommunityWiki, can co-exist with existing systems quite easily.

I also find quite a few people who resonate with what I am suggesting. Enough to encourage me to continue to pursue and try to evolve and solidify the ideas into something useful.

“And, depending upon the for-profit model you choose, you may be required by law to do your best to focus on monetary wealth creation.”

Along the lines of what Bayle is saying above, US Law does explicitly state that if shareholders (or their elected representatives) decide that your decisions must be based first and fore most upon making money, then you are bound by law to comply (with the types of public corporations in the set up to give shareholders and/or their elected reps this type of control).

So, for this reason, I believe my statement above is correct. Because you may indeed have the requirements I describe in the statement above, should shareholders/Elected Reps decide this a requirement.

I know people who were funded by VentureCapitalists?, who did have these requirements, and were limited in their decision making, bound to the interests of the people who invested in the company they created.

My own theory, is that the problems in US business described by DavidCallahan? in the CheatingCulture? (http://www.cheatingculture.com/) are very often rooted in this demand by investors for profitability over and above everything else. Corporation employees cheat to meet the demands of Executives, who push them, and even encourage cheating due the demands of the controlling Board/Investors. I theorize that this same pressure also pushes company executives to break the law by doing things like dumping toxic waste/harmful emissions, other damage the environment. This dynamic is where most activists ideas come from about the hyperfocus on profit, and irresponsibility of more than a few corporations in America.

This is why, for many types of services, for many locations, it would be socially better, plus physically more sustainable in the long run, if investors voluntarily reframed their focus away from materialistic gain alone, and towards investment that has requirements for social, economic, and environmental equity.

Is there the implicite or explicite assumption, that specific parts of laws are the main cause for the exaggerated profit-orientation of some corporations or their employees?

IMHO this would create an example for CausalFallacies.

Helmut…

Speaking for myself, I can only say that “Law(s) have become extremely complicated!” I know that there are several important “dimensions” to law. For example…

  • Jurisdiction - different countries have different laws, reflecting the wished of their societies, as articulated by their politicians, adjudicated by their courts and as enforced by their infrastructures.
  • Scope - as in Federal, Provincial, or Municipal laws all of which can over-lap in an incoherent manner.
  • Type - as in the differences between Criminal and Civil law.
    • Note that Contracts are generally covered by Civil laws as opposed to Criminal laws, but again there are cases of over-lap.

The reason I make these statements is to support my opinion that Laws have become so complex that most of us only have very simplistic “assumptions” (at best) of what is legal and what is illegal in any particular set of circumstances. This is consistent with your statement that the ‘opinions’ we are discussing are likely just based on our personal experiences and the resulting assumptions. In fact, all of this ‘dissent’ is occasionally presented as one of the features of our legal systems and the trials conducted to judge the relative merits of dissenting opinions.

I think the most important reason for “…the exaggerated profit-orientation” is simple human greed and this this is inevitably evident in individuals. Corporations, being nothing more or less that a collection of individuals, exhibit such characteristics to the extent that they are present in the aggregate conduct of the individuals. After all, there are at least as many “benevolent” corporations as there are “rapacious” ones, just as is the case with individual people.

As for whether or not this is an example, of a CausalFallacies, I do not feel I know enough about the topic, to be able to comment meaningfully.

“Is there the implicite or explicite assumption, that specific parts of laws are the main cause for the exaggerated profit-orientation of some corporations or their employees?”

In the case of the line of argument I am giving, here, on this page, the only parts of the law that are a “cause”, are the parts that grant decision making powers about the focus of the company, to representatives elected by investors (and/or to investors themselves). When those investors and their elected reps are focused on profit above all else, then the laws that give them this power are part of the cause, so far as I can see.

The law may be complicated, but it is my opinion that we can meaningfully and competently talk about this section of the law (in the United States), since the information is publicly available, and I don’t usually buy into caution about exploring a topic merely because it is complex.

The rules that govern our societies qualify as being at least part of the “cause” of some existing conditions. What is the “cause” of a person stopping for a traffic light? What is the “cause” of a person who mails in their tax payment?

When I refer to “laws” causing something, I am not so naive as to think or mean that there is some faceless force that I refer to as “laws”. I understand what causes are compressed into laws, and there are causes compressed into those causes. However, for the purpose of communication, I think it is not a disservice to reasoned dialogue, to refer to “laws” as a term, encompassing several factors (like process that created the law, the people who enforce them, the people who follow the laws), as a being a packaged factoral “cause” for some existing conditions.

In a complex system there are typically many influences or causes that contribute to situation. Law typically stabilizes the status quo or tries to solve a problem, relative to a given society.

If the US law is more towards profit-making-behaviour vs. social-responsable-behaviour then because it’s probably in its tradition of a pioneer land, where everyone cares for his own business, and where a simple recognizable indicator for status - like money - is attractive. This increases when basically all services in the society - from schools to health service - depend in quality from what their users can afford.

This is quite different to Austria, where almost all schools are public, rather good in quality (compared to the rare private schools) and free. Pretty much the same is true for a generally available health service system and pension system. There is discussion about a general basic income, to simplify the social net, e. g. for workless people.

I do not want to value these differences, but it is clear to me, that a more competitive society like the US society as a whole forces people toward profit-orientation. Laws probably only reflects that.

Given that I want to explain what I mean by referring to CausalFallacies. I asked for “main cause” which was not answered. This is important. If we assume a dozen influences for an unsound profit-orientation, it is quite clear, that the law is a factor among others (Hans mentioned human greed), there can be no discussion about that, only about their relative importance. But if it is not put in such a multi-factor-perspective then imho it is clearly a “single cause” over-simplification, a causal fallacy.

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