Putting Ethics on Par With Shareholder Value: CEO Daily
It’s Jeremy Kahn here, filling in for Alan.
Corporations exist to make money for their shareholders. In the United States, this raison d’etre has been elevated above any other consideration and enshrined in securities law. Public companies can be sued for failing to take action that maximizes shareholder value, even if doing so trammels other values: workers lose their jobs, customers are forced into decidedly one-sided bargains, harmful products are not recalled, and the environment is damaged.
Jamie Gamble, a retired high-powered corporate lawyer who once represented insurance giant AIG. in the wake of the 2008 financial crisis, accuses boards of being forced to act “like sociopaths.” And he has hit upon a seemingly simple, but radical, fix. According to a story in the New York Times, Gamble has written a provocative essay proposing businesses be required to enact ethical guidelines into their corporate bylaws. This opens an avenue for the plaintiffs’ bar to sue these companies if they fail to live up to these principles. In essence, Gamble’s idea is to use the mechanism that has helped elevate shareholder value above all others—the shareholder lawsuit—and, in a bit of legal jujitsu, turn it into a tool for placing ethical considerations on at least an equal footing with profit.
Gamble writes that his idea will mean corporate boards will have to discuss wider ethical considerations. “They will have to make a conscience,” he writes, according to the Times.
Columnist Andrew Ross Sorkin notes Gamble’s idea is similar to what Democratic presidential candidate and Sen. Elizabeth Warren has proposed. She wants to require companies with more than $1 billion in revenue to receive a federal charter that would obligate their directors to consider the interests of all stakeholders, not just shareholders.
Sorkin writes that the idea could have lots of unintended consequences, including miring companies in yet more litigation. But Gamble told him he thinks it could actually reduce legal challenges, as plaintiffs would be forced to show that the company’s ethical deliberations were conducted in bad faith—a high bar.
There are other possible drawbacks Sorkin doesn’t mention. For instance, if securities law—rather than the sort of public charter Warren has proposed—is the mechanism for making companies think about ethics, it may mean fewer companies elect to go public.
But it is still a proposal worth pondering—for what it says about the current zeitgeist, if nothing else.
More news below.
Trade Talks Spur Jitters
Trade talks between the U.S. and China are set to restart on Tuesday, and worries about the trade war have been causing jitters during this reporting season. The number of companies mentioning the tariffs in their earnings calls has steadily climbed from the previous quarter, and companies have been outlining how they will minimize the impact of the dispute while also grappling with slowing growth. Reuters
The Pound Plunges
The pound appears to be having an allergic reaction to Boris Johnson's approach to Brexit. Sterling is now on track for its biggest monthly loss since October 2016, and was falling further on Tuesday. Since Johnson became prime minister last week, he has taken a hard line on Brexit negotiations, deepening worries that the U.K. will leave the EU without a deal at the end of October—something numerous U.K. officials have warned could plunge Britain into a recession. FT
Capital One Hack
A hack at Capital One may have compromised the data of tens of millions of credit card applications, according to federal prosecutors. The attack allegedly came from a Seattle woman, whom prosecutors said hacked into the cloud computing systems earlier this year. They also allege that she boasted online about the theft, which is how investigators found her after another hacker informed Capital One about the leak of its data. Fortune / WSJ
The ride-hailing app said it would lay off about 400 people on its marketing team as the company cuts costs following its IPO in May. Those cuts come amid lingering questions about Uber's business model—in the lead-up to its offering, the company faced questions about whether it could ever be profitable, and the stock fell 7.6% on its first day of trading. New York Times
AROUND THE WATER COOLER
Greece's Brain Drain
Greece has come out of the worst of its economic crisis, but it's not over yet, Bank of Greece Governor Yannis Stournaras says in this interview with Fortune's Vivienne Walt. One lingering effect? Brain drain—and Stournaras says the country needs to bring those people back. "Not in the distant future, but immediately, by achieving higher growth and creating good new jobs, with good salaries," he says. Fortune
The End of Mini Toiletries?
InterContinental Hotels—the owner of the Holiday Inn and Crowne Plaza hotels—has said it would remove plastic bathroom products used in its hotel by the end of 2021. Yes, you know what that means: your stolen stash of mini shampoos and soaps is about to take a hit. “Five years ago it was a tick the box exercise," said the group's chief executive, speaking about environmental pressures, including the push to reduce plastic. "Today it’s follow-up meetings going through in detail what are we doing about our carbon footprint." FT
The College Guardianship Scam
After the fall-out over the college admissions scandal, another system-gaming tactic has come to light: wealthy families transferring the guardianship of their teenagers to friends or other relatives, so the child can be treated as an "independent" and eligible for financial aid. The practice is legal, but hardly ethical, and has allegedly been touted by some college consultant companies. The Education Department is now investigating. WSJ
The Diamond Squeeze
If you're in diamonds, business is hard. What was once a highly lucrative trade—especially if you could become part of a small, elite group of companies that traded directly with diamond giant De Beers—has become a struggle as margins have compressed. In some cases, buyers and middlemen have been forced to sell the gems at a loss. That's due to both slipping demand from the end customer, and banks that are less willing to extend financing to the industry. Bloomberg