Tuesday, 14 July 2009

On Not Being Evil

About ten years ago I happened to have lunch with Eric Schmidt. The CMU board of trustees was visiting the School of Computer Science and they had lunch with some of the CS grad students. Our table was just Mr Schmidt, me, and a couple of other students. At the time he was CEO of Novell. I was feeling cantankerous and took the opportunity to ask Mr Schmidt how he managed when the imperative to maximise shareholder returns required unethical (but legal) behaviour. His answer was that this never occurs. He suggested that ethical behaviour always, in the long run, maximises returns.

I thought (and still think) this was grossly wishful thinking. It would require extraordinary luck or divine providence, and even for a theist like me I think it's clear that God has not always arranged for profit and ethics to be perfectly aligned (end sarcasm). A company truly focused on shareholder returns will sometimes, probably often, be obliged take advantage of unethical opportunities. Fortunately, Mr Schmidt's wishful thinking seems very common. People want to do the right thing, and convince themselves and each other that it's going to be best for the company too. They cheat the shareholders and do the rest of humanity a favour. Bravo!

I saw a lot more of this at IBM Research and (from outside) other labs --- publishing corporate research labs depend on corporate vanity mixed with altruism, and a desperate wish to believe against all evidence that they're an acceptable return on investment. It's a relief to work for a non-profit where we can be honest about such things.

Of course back at that lunch at CMU I had no idea that Mr Schmidt would go on to become CEO of the world's newest corporate superpower. Keep the faith, Mr Schmidt, and may the scales never fall from your eyes!


  1. Noel Grandin14 July 2009 11:26

    Well, no.
    (a) you're a Christian theist
    (b) you're talking about the fairly long run (i.e. >= lifespan)
    (c) you include "not adding to shareholder moral debt" in "shareholder return".
    Then Mr Schidmt is correct.
    In a weaker sense, God blesses those that keep his commandments, but that's a multi-generational blessing, and not necessarily of physical value.
    The poverty of greedy capitalism is that it considers purely the material, and even worse, tends to only consider the short-term material.

  2. Robert O'Callahan14 July 2009 11:45

    I'm pretty sure that "shareholder moral debt" is not normally included in the "shareholder returns" as defined by the appropriate securities laws.

  3. Smart people are often altruistic. So if you want to attract smart employees, a company has no choice but to be altruistic too. Google understands this very well.

  4. Any particular event cause this line of thinking?
    I understand what you're saying about short term pressures affecting the ethical quality of decisions. But I have to agree with Mr Schmidt that if a CEO is capable of fending off those who would pressure them down such a course and has oppertunity to stand back and look at the long term goals then this oft leads to a course devoid of unethical choices.
    However that's quite a big if. Maybe I'm wrong. Still curious what made you think of this meeting :).

  5. I think you're correct in terms of relatively short-run profits and incorrect in terms of relatively long-term regarding the expected value of unethical behavior.
    Note that I'm not saying it's *never* long-run profitable to act unethically, nor am I saying the converse, just that the expected value is negative in the long run and positive in the short run.

  6. Two points:
    1) One might believe (though I'm unconvinced) that in the long run bad behavior will lead to poor image and ill will that will reduce stock price. It would be most implausible if image and good deeds were perfectly synchronized but one might think there was no easy way of promoting a corporate culture that lead to good image (unlike MS) without actually just trying to do good.
    2) Despite the dogma to the contrary the CEOs duty is not to maximize shareholder profit. It is to look out for the shareholder's interests and that's not quite the same thing. One thing most investors want is for their money to be used for good and not for evil.
    Now certainly this gets into a complex grey area when some investors may feel that their capital is being co-opted to support charities favored by the majority but this doesn't undermine the validity of the point.

  7. @Grandin:
    When it's wrong to invest in a morally imperfect company is a really tough question.
    For instance almost all large companies out there probably engage in behavior you think is immoral (even if it's just being mean to employees). However, it's quite possible that all things considered refusing to invest in such companies (thus depriving them of capital) would result in a worse world (more poverty, fewer jobs) than if you invested.
    To put the point differently you might think that (despite your best efforts) if you give your brother the $1000 he asks for he will use it for some slightly immoral purpose. However, if you think that he will murder someone for the money if you don't pay up and you couldn't stop him then lending him the money might still be moral.
    In short it seems wrong to assume that bad acts committed by someone you fiscally support add to your moral debt. You also have to consider the alternatives to see if you had a better choice.

  8. It appears to me that what you have here is a confusion of the terms "ethical" and "moral". I bode you to read "The Ethics Liberty" by Murray Rothbard.

  9. I agree with Eric. It's called ethical capitalism and it is the way to true success.
    Read Thou Shall Prosper by Rabbi Daniel Lapin

  10. Perhaps Eric believes that a company needs a good reputation to prosper and that trickery won't hurt in the short-term, but word would spread and sales would eventually suffer.
    This is true to an extent. But reputation only counts for the company's potential customers. This can be a real problem: hitmen don't get paycheques from their victims!

  11. Eric IS correct, because he's talking about the "long run", which is a goal very much in conflict with most current corporate thinking that only focuses on next quarter's numbers. To maximize profit in the long run, one thing you must do is make sure people will want to buy from you. If you have a track record of being unethical, you'll lose customers. If you instead have a track record of being trustworthy, people will be much more likely to buy from you even if it's not as cheap as they can get it elsewhere. If you don't have to convince customers you're trustworthy, then you can focus on what about your product they want, as you don't have to waste time proving you're worth risking money on.

  12. Capitalism is like natural selection: There is no guarantee that what succeeds (e.g., parasites) will coincide with human morality, which in any case has never been and will never be a settled subject (e.g., you'll find religious people on both sides of every human issue).