Well, howdy. I'm Professor Michael Conklin from Texas A&M University School of Law, and in this, our penultimate video, we're going to discuss corporate ethics. And no, that's not an oxymoron.
This is going to be different from the other videos because I can't give you any correct answers here as to what is and is not ethical. My main goal when teaching ethics is just to encourage you to consider ethical dilemmas now. in a neutral and safe environment and set standards for yourself now because if you wait until you think about ethics for the first time when you're on the hot seat and something has just come up at work and you have to make a quick decision it's a lot easier to just start justifying unethical behavior so we're going to start thinking about ethics now set standards for ourself So in the future, when those little devils on our shoulder pop up and try to get us to do things that we shouldn't, we don't even listen to the first thing they say.
It's not even we don't even contemplate it. I want to keep this a practical rather than theoretical endeavor. I remember when I was in college listening to lectures about ethics and a lot of it was, well, here's this guy from 1600 and whenever. And here's what he would say about this. modern day situation.
And I remember thinking, well, first off, didn't that guy own slaves and was probably likely abusive to his wife? So I'm not quite sure how much I want to listen to this guy tell me what decisions I should make. Second, he's just some guy. Why are we letting him tell us what to do rather than his neighbor or his wife or one of his slaves? Now, if I had a question about my health, I would absolutely defer to a medical expert.
And if I had a question about my car, I would defer to an expert mechanic. But it's different with ethics. There's no mechanism through which to identify a correct and a false position like there is in medicine and auto repair.
So somebody who purports to be an expert in ethics. has no more authority to tell you what you should and shouldn't do than anybody else. Now, that doesn't mean you shouldn't do what they say. Maybe you should.
Maybe you shouldn't. But just because they've read ethics, you know, if you read some of these ethics professors, you will likely conclude that many of the things that they argue for are viewed as actually very unethical. All right, well, in keeping with the theme of this being practical, we're not going to get bogged down into all the esoteric terms and philosophies.
We're only going to look at two very broad categories of ethical thought, utilitarian ethics and deontological ethics. They both have their strengths and weaknesses. And note that you don't have to completely subscribe to either one, just as long as you don't oscillate between them based only on what's best for your own selfish. interests, of course.
So let's look at utilitarianism first. It's a somewhat mathematical approach where you calculate the net result to utility that your decision will cause. Quotes, you may have heard some of these in movies, the needs of the many outweigh the needs of the few, or the ends justify the means.
Quotes like that would be consistent with utilitarian ethics. And they are often said by villains in movies. The main problem with utilitarianism is that utility can be very difficult to quantify.
And the same circumstance will affect the utility of people differently. For example, if I had a class of 20 students and I could somehow just bear with me, you know, pretend that this could happen. I could somehow give 19 students $10 by stealing $50 from the 20th student. A true utilitarian would likely be in favor of such an act because it results in a net benefit of one hundred and forty dollars net benefit to the entire class. However, maybe all the students that got the ten dollars didn't need it and it had very little benefit to their utility.
But the student that I took fifty dollars from might have needed it for rent and will be evicted because of this. And therefore, it'll have a monumental. downside to their utility. And things get even more amorphous when we are considering things other than money. For example, which produces the greater loss in utility?
Three children aged three to eight losing their parents or four children ages 16 to 20 losing their parents. I mean, it's impossible to say for sure. Different people could make different arguments as to which is, you know, which would be hardest hit.
The other ethical theory that we'll look at is deontological ethics. This theory is in contrast to utilitarianism. It essentially maintains that the ultimate results are not as important as the reason the decision is made. So in other words, there are some actions that are just wrong, regardless of the benefits that may come from performing them. A strict deontologist would never even consider stealing $50 from one person, even if it would result in 19 other people all getting $10.
Stealing is wrong, and that's the end of the discussion. They wouldn't even consider it. You know, you would tell them, OK, let's steal fifty dollars from this person and then and they would just know.
No, I don't care what good will come of this. Stealing is wrong. I don't do it. That's the end of it. Well, problems with strictly adhering to a deontological framework include how different people have different beliefs on what is right and wrong.
Also, strictly following deontological ethics could result in extreme results. Imagine a deontologist who is hiding Jews in World War II Germany. If a Nazi simply asks him, are you hiding any Jews? And he tells the truth because he is ignoring the results of his truthfulness.
You know, you tell the truth no matter what the end result is. So he tells him the truth and then, you know, the Jews get rounded up and killed. Well, you know, that strikes many people as more unethical than just telling the lie. When it comes to corporate ethics, there's also two main theories.
There's the shareholder model and the stakeholder model. The shareholder model states that corporations should only focus on maximizing profits for their shareholders. Now, here, some people say maximize profits.
Some people say maximize shareholder wealth. I mean, technically, it's maximize shareholder wealth because if you had the choice between owning stock in a company. that your stock kept going up or the profits kept going up, you'd want your stock price to go up. And sometimes you can invest in a company that's never turned a profit and still your stock goes way up. So you'll see that distinction.
Technically, it's maximized shareholder wealth, but a lot of people will refer to it as maximized profits. Oftentimes, those are aligned. If your profits go up, your shareholder go up, but it's not a perfect correlation there. All right, this theory is not quite as heartless as it first sounds. This is because ethical behavior is often profitable in the long run, and conversely, unethical behavior is often unprofitable in the long run.
For example, a corporation run strictly on the shareholder model of ethics would still be incentivized to pay their taxes, honor their contracts, treat their workers well, maintain positive relationships with suppliers. keep the customers happy, and not illegally pollute the environment. But such a corporation would not be doing these things just because they are the right things to do. Rather, they would only be doing them because doing so is likely to increase shareholder profits. The other main theory of corporate ethics is the stakeholder model.
Here, instead of only considering the interests of the shareholders, The corporation would also consider what's best for the other stakeholders. Other stakeholders would include the workers, the suppliers, the customers, the government, and even society at large. So note that under the stakeholder model, the stockholder interest in profits is not ignored.
It's just that the interests of other stakeholders are also considered. Let's look at a very interesting example. real-life case involving the stakeholder versus shareholder view of ethics that you may find surprising.
The case is Dodge Brothers versus Ford Motor Company. In 1916, the Dodge Brothers owned a 10% interest in Ford Motor Company and were very displeased that Ford decided to drastically reduce its dividend payments to shareholders. The Dodge brothers were even more displeased in the reasoning Henry Ford provided for the reduced dividends.
An altruistic motive to pay workers more and keep prices of the car low. At least that's the story that Henry Ford gave publicly. I mean, look at the picture of the two Dodge brothers on the left. Do those look like two guys who care about workers? I don't think so.
All right. There's a lot of kind of lore around this decision. There's rumors that Henry Ford was doing this. in an effort to deprive the Dodge brothers of funds needed to compete with Ford, but this has never been proven.
Additionally, the move to reduce dividends might have been self-serving for Henry Ford himself, as at the time he would have faced a whopping 80% federal and state combined tax rate. So for every dollar he got in a dividend, he would have only got to keep about 20 cents of it. Now, Now, under this theory, all the public statements Henry Ford made about wanting to do what's best for the customer and worker were likely just lip service to enhance his image, something that many CEOs engage in today.
Somewhat ironically, some of the altruistic sounding public statements that Henry Ford made were used against him at trial. Take this following quote, for example. This is Henry Ford.
And let me say right here. that I do not believe that we should make such an awful profit on our cars. A reasonable profit is right, but not too much.
So it has been my policy to force the price of the car down as fast as production would permit and give the benefits to users and laborers. Well, that might have sounded good when he was out, you know, speaking in public. You know, the masses probably really liked that.
But. In a court where the Dodge brothers are suing for his fiduciary duty to do what's best for shareholders and maximize their wealth, a statement like that didn't come across too good. All right, so what did the court hold? Did they rule in favor of Henry Ford? I mean, after all, he was the majority shareholder.
It's his company. So shouldn't he be able to run it as he sees fit? Well, actually, the court ruled in favor of the Dodge brothers. and held that the primary concern of a corporation should be to maximize shareholder wealth, not to increase worker wages or decrease the cost of the product just out of kindness to the consumer.
Therefore, Ford was ordered to pay an additional $19 million in dividends. And that was a lot of money back in, I think it was around 1919 that the decision came down. This result is clearly more aligned with the shareholder view of corporate ethics rather than the stakeholder view. However, this case further illustrates how the law evolves over time as similar litigation today would likely result in the opposite outcome. In other words, 21st century case law provides no legal mandate to follow the shareholder view.
Shareholders practically never have a right to a dividend. In recent years, corporate law has even created an option for corporations who want to explicitly define their purpose as more than just pursuing profit for shareholders. Instead of filing as a C-Corp or an S-Corp, as we've discussed in these videos, you can file as a Benefits Corp. Not in every state.
I think about 30 to 35 states have this option to file as a Benefits Corp. Some argue that filing as a benefits corporation helps the corporation receive funding and potentially even customers as people will be impressed by the altruistic motives. And there's even these private benefits corporation certification organizations that go around.
So you can you have to pay them a little bit of money and they kind of evaluate your corporation and they can kind of. You get this stamp of approval that you're, you know, an official approved benefits corporation. And in theory, maybe people would prefer that and be more likely to invest with you.
Or maybe people would be more likely to buy your product if you do that. But others point out that this may backfire as it creates an additional and somewhat vague duty to the shareholders. So now not only are you running a business to make money for the shareholders, you're still doing that.
But now you've got this extra burden to pay workers well or do above and beyond for the environment what's legally required or some other extra burden that you're putting on yourself. If you're watching the video, then you are now looking at a picture of a potato, and you're probably wondering why. Well, this picture sold for over $1 million.
And for those of you just listening to the audio, the photographer didn't even bother cleaning the potato before taking the picture. It's got dirt all over it. I use this picture to illustrate my position on CEO compensation. My personal view, which you're free to disagree with, is... I think you would have to be a complete idiot to have purchased this picture for over $1 million.
But at the end of the day, if the buyer valued the picture more than the $1 million, and if the photographer valued the $1 million more than the picture, then it's a win-win transaction. It wasn't my money, so it's really none of my business. And that's also how I view CEO compensation. It's their money.
If they want to spend a lot of it on a new CEO, that's their choice. It's not my business to tell them how to spend their own money. Now, yes, there could be minority shareholders who disagree and don't want that much of their money to go to CEO compensation.
But that's part of being a minority shareholder. If they are unable to convince others of their position, then you're stuck with the majority's decision. That's just the way it goes. You knew that going into the deal. Now, thus far, that's just my opinion.
And, of course, you're free to disagree. And a lot of people do disagree because recent legislation has been passed in an effort to try to start to rein in CEO compensation. For example, federal law now requires public corporations to have outside compensation committees.
And the Dodd-Frank Act implements a say on pay element where shareholders may hold an advisory vote on executive pay. But note that both of these are only advisory, meaning completely non-binding, so directors are free to disregard them. But remember that directors can be fired by shareholders, so they would be wise to at least address the issue if shareholders brought it up. Note that shareholders suing on the grounds that the CEO is allegedly overpaid is practically a guaranteed waste of time.
It hardly ever works. For example… Here's a picture of Michael Ovitz. When he was fired as CEO of Disney after only serving for one year and after very poor corporate performance, he was given a $130 million severance package.
Not a bad deal. Shareholders attempted to sue and they lost. Shareholders can sue the directors if executive compensation is performed in a manner that amounts to waste.
But this would be an extremely uphill battle as the directors could pretty easily provide some minimum justification for paying an executive a lot of money. I mean, again, just look at this example. This guy, he served for one year, didn't do a good job and still got a hundred and thirty million dollar severance package. And that's the severance package. He still got paid for the year he served.
And then he got an additional one hundred thirty million. So if that's not waste, it's a pretty high burden. All right. Well, a potential example of when the shareholders would be successful under such a waste claim is if the directors gave additional money above and beyond what they were contractually obligated to give when the CEO left the company.
Here, it would be difficult for the directors to justify such an action as the corporation would not be getting anything in return for the expenditure. One final point on executive compensation. There have been some interesting quantitative studies performed that purport to show that CEO performance does not justify the salary they receive.
Now, for me in my position, this is a total non-issue because people are free to spend their own money as they see fit, even if it's a bad idea. But it is interesting to note that these studies do not take into account the effects that high CEO pay has on incentivizing those in upper management. Those who are working hard trying to become one of those overpaid CEOs. All right.
Well, again, that's mostly just my opinion. You're free to disagree. I have received no compensation from CEOs to promote these views.
But if you do know any of them that would like to make a donation, I would welcome it. All right. Just one concluding thought on corporate ethics.
Overall, ethical behavior is beneficial. Unethical behavior is costly in the long run. However, there are instances where doing the right thing comes at a great cost. You may only come across two or three opportunities your entire life to do something and kind of stand up for what's right at a great personal cost to yourself. I use that word opportunity intentionally because this is where you can really find out what kind of a person you are.
Even the worst people on earth can do the right thing when they benefit from the act. That's easy. Now, this is not an ethics class, but honestly, if you only take away. one thing from this class.
If you only remember one thing 10 years from now, I hope it's this right here. Be looking for the rare opportunity to do the right thing at a great cost to yourself and commit in advance that no matter what the cost, you're going to take advantage of that opportunity and do what's right regardless of the cost.