A Link To And Excerpts From The Most Important Problem in the World [Is The Maximize Requirement Of Corporate Governance]

Here is a link to and excerpts from The Most Important Problem in the World [Is The Maximize Requirement Of Corporate Governance] by James Gamble*, from medium.com.

*James Gamble is an attorney and retired partner of a large corporate law firm. He is the volunteer director of justiceindex.org (Nat. Ctr. for Access to Justice).

To learn more about James Gamble and his important work

Here are excerpts from the above article:

[The most important problem in the world is not]:

  • Climate change;
  • millions of people displaced by war, crime and poverty;
  • epidemic income insecurity draining the good-will and hope required for democracy to work;
  • authoritarian fever rising in response;
  • multitudes rejecting compassion in fear that the world they cherish is lost if “us” isn’t protected from “them”;
  • dirty water, toxic soil and urban air that sometimes can’t be seen through let alone breathed.

Rather, all of the above problems directly stem from the fact that the goal of the private corporations is to get as much money as possible [maximize profit] regardless of how much that goal harms the nation, its people, future generations, and the environment.

The most important problem in the world is a reasonable sounding provision of the corporate law that governs most major U.S. companies.

That’s a big claim. It’s also slightly misleading. A better answer is that the above complex network of horribles all connect back to a common root that is nourished and guarded by the extraordinary power of corporate “persons” who are legally obligated to act like sociopaths.

The rule: corporate management and Boards of directors are obligated by law to make decisions that maximize the economic value of the company. Colloquially: when you invest your money in a company, the people who run that company are required to do their best to bring you the highest possible financial return on your investment rather than using your money to pursue any personal or social agenda.

Sociopath? Yes. The corporate entity is obligated to care only about itself and to define what is good as what makes it more money. Pretty close to a textbook case of antisocial personality disorder. And corporate persons are the most powerful people in our world.

The “maximize rule” does its damage in two ways. Corporate entities are direct actors in the world. A decision to build a factory in a place with weak environmental laws, low wages and poor worker protection matters. Preferring share buybacks to increased wages or lower prices matters. Lobbying for taxpayer subsidies that transfer wealth from poor to rich matters. They contribute to the problems listed in paragraph one in obvious ways. More damaging: the maximize rule infects real people with tragic faith in the magic of markets.

The tragedy is that markets have for a great many people taken on the power to transform selfishness into a virtue. If everyone acts in her rational self-interest, the market scripture goes, an invisible hand will cause the sum total of selfish acts to serve the common good. Faith in the invisible hand is the seed from which the maximize rule springs. The maximize rule in turn revises the faith. It defines “rational self-interest” as maximizing economic value. Technically, that applies only to corporate people. Practically, the maximize orthodoxy has infected real people so deeply we barely even recognize how much it guides our actions.

In rebellion at the idea that real people are ruled by the drive to maximize, you may be listing in your head your own selfless acts, or those of others that inspire you. Ask this of yourself: how do I feel about the people on my list of selfless altruists? I’ll participate in my own thought experiment. I am repeatedly brought to the edge of tears by a story of a college softball game. In the bottom of the last inning, a young woman came to bat who in her college career had never hit a home run. There were two outs, one person on base and her team was down by one run. A homer would win the game. She hit the ball over the fence, but on her way around first base she fell. Her leg was so badly injured she couldn’t make it all the way around to touch home plate. Under the rules, her home run wouldn’t count. If her own teammates touched her to help, she’d be called out. The other team had won. But they didn’t. The rules didn’t prevent the opposing team from picking up their fallen adversary and carrying her from base to base so she could touch each one, score her home run and win the game. That’s exactly what they did.

When I think of this story, I think of these young women as extraordinary. I don’t think: “Of course. What else would someone do?” Newspaper coverage; cafeteria conversation; pillow talk; silent self-reassurance that the world isn’t careening toward its end: almost universally, in all our voices, we treat acts like this (and others in more dire situations) as exceptional. This implies that the baseline choice would be to — in my example — take the win.

To value others’ well-being as we value our own is “supra-normal”.

One more step in the thought experiment: whatever noble act you recalled, did it bring up at least a little guilt? An internal reproach that you don’t always act nobly yourself?

Have you ever thought of an act of compassion as naïve, or even irresponsible? How often have you heard someone sigh about how awfully we treat refugees and immigrants, finished by a phrase like “but if we let everyone in . . .”? Have you ever steeled yourself against your own compassion when a homeless person asked you for money by saying to yourself, “. . . if I give to everyone . . .”?

Many — maybe all — of us believe that it has to be OK to prefer ourselves and our family-clan-tribe-nation’s well-being to “others” because if we didn’t believe it was OK, we’d either feel bad all the time or give away everything in a futile attempt to right the wrongs of the world.

Blessing the maximize rule as “right” for the [legally] created super-persons [corporations] who rule our economic reality creates a loop back to our real selves. It helps us feel that acting in our personal self-interest leads to a collective outcome that is “right.” That’s a faith: it pushes outside of us responsibility for the structure of the world and it allows us to say that whatever markets create must be the best outcome possible.

We can fix the maximize rule to provide each “corporate person” with a conscience. To get rid of the super-sociopaths and solve the most important problem in the world, we should do the following:

Rule 1: Keep the maximize rule in place.

Rule 2: Every company should adopt a binding set of ethical rules, approved by stockholders and addressing the key ethical dimensions of corporate life: (i) relationships with employees; (ii) relationships with the communities in which they produce and sell; (iii) relationships with customers; (iv) effects on the environment; and (v) effects on future generations. The maximize rule has to be followed, but the Board is constrained to act consistently with the ethics rules.

Rule 3: Any shareholder could sue the Board of Directors for violating the ethical rules — just as any shareholder can today sue the Board of Directors for violating the maximize rule. If the shareholder suit is successful, the Court could order the Board to comply with the company’s ethical code.

A Note On Method

Because uncertainty is unavoidable, it can’t be a reason for inaction. Decisions about what the corporate law should require of legal “persons” are political decisions. Political decisions are always made on the basis of incomplete information and limited understanding of how those decisions will play out.

As you read this essay, test the examples and arguments against your own observations of the world. If they track, I submit that logic compels the conclusion that the risk of change is far less than the risk of doing nothing.

What’s so bad about maximizing?

There are thousands of books detailing the harm done by globalization, industrialization, urbanization, finance capital and the general hunger for profit. There are also thousands of books detailing the good done by all of those things. The most serious books about economics in the modern age recognize both the benefits and the harm and in simplified summary say:

· Trade and industry are responsible for a huge expansion of the resources available to human beings to live and pursue fulfillment

· The world has not yet reached a point where every person has enough resources to live and pursue fulfillment, so expanding those resources is a good thing

· The costs and benefits arising from trade and industry are unevenly distributed both between regions and countries and among individuals within regions and countries

· The uneven distribution results in hardship for a large number of people and a deep sense of insecurity among a much larger number of people

· The hardship and sense of insecurity have had historically and are having today important negative social and political consequences

· Both people and markets are bad at accounting for the future costs of current consumption; as a result, the harm being done to future generations is rarely well considered in current decisions (referred to as “present-bias”)

The maximize rule in its current unbounded form is bad because it is the primary reason for the extreme inequality of distribution of benefits and gains and also of the present-bias. Those are the key economic elements that contribute to all the Paragraph One problems.

Religious differences, race hatred, historical grievance and other elements of faith and culture, of course, also contribute to our failings. But economics is central. Economics isn’t the study of complex capital flows, exchange rates, graphs and curves. It is the word we use to describe the process by which humans transform natural resources into the stuff we need to live and pursue fulfillment. The stuff that comes from those actions is rarely (maybe never) sufficient for our fulfillment. In almost all cases some amount of that stuff is necessary. Food, shelter, clothing, art, sport, a place to meet with friends, a school for your children, books and magazines, a footpath carved into the woods and the shoes you wear to walk it, an altar to worship at: there are material — economic — elements to nearly everything we do.

The maximize rule is the most important problem for us to focus on because: (i) it defines our economic relations; (ii) economics effects everything; and (iii) it’s fixable — changing it is a choice.
How the maximize rule hurts us is best shown by explaining how the rule works in the boardroom and makes its way into all of our heads.

Agency, clarity and seduction

Please read the rest of the article as it explains and clarifies why Mr. Gamble’s solution (to the problem of the Maximize Rule) is so important.


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