- Kris

I found your entry interesting do I’ve added a Trackback to it on my weblog …

I also don’t mean to oversell my point…public companies still can get away with telling untruths, or leaving important information out of these publicly disclosed documents for sure. Also, as I stated before, many of the search engines you need to use require paid subscriptions, which are pricey, so you need some sort of overarching organization to cover those charges. That in itself is a problem. There are many more nuances we can go into of how the public system isn’t ideal, but I think we are both thinking and working towards something that makes the most sense.

From my understanding, back when the concept of the Corporation was founded in America, they were usually intended to have a fixed purpose and often temporary, say, to build a bridge between two towns. If the Corporation wanted to keep existing past the expiration of its charter, it has to prove its public worth. In this sense, in my mind, Corporations were required to be similar to today’s concept of a social business.

So maybe an appropriate solution is to just once again force ALL Corporations, or maybe businesses of a certain size, to publish reports on their impact as you described public corporations currently do. The threshold could be quite large, but it should be well before a business becomes the financial size of a small country.

We are also beginning to comprehend the importance of adding ALL externalities to business balance sheets, for everyone’s sake. Whether or not it is related to legal punishment, this is a proper starting point of labeling of important decision making information, both for consumers and policy-makers. We pollute this much of these toxins, we pay labor this much in this country.

Thanks so much again for helping me work through these ideas Alex! If you do end up formally writing anything on Jet Blue or any other case studies which fancy your interest, you’re welcome to publish to this blog if you like.

Everything you said is accurate. I also really like the idea of a separate stock market for social businesses. I also completely agree that stocks by no means are a democratic or egalitarian system. Your numbers about the concentration of wealth are spot on. Furthermore, I agree all the financial mumbo jumbo out there is definitely geared to concentrating money in the same people.

I should have clarified and spelled out my points further.

The terms “public” and “private” in this context are very screwy. You have hit the nail on the head with what these terms mean.

What I was trying to get at was that information on a “publicly” held company is much more readily available than a “privately” held company. And I don’t think the difference is small.

So for one example a publicly held company has to publish and file with the SEC what is called a 10-K. A 10-K is a very useful document, which is available to the whole public. In the 10-K companies reveal how it is they make most of their money, what are their subsidiaries (in other words, what names they use to hide in public), who really owns the company, what the company owns, and often times it will include things like the corporate structure of the company, who the members of the board are. It can also contain a whole host of other great information. Then after the 10-K, there are several websites (most of them have a subscription charge, which has problems in and of itself obviously…but unions, and other institutions interested in challenging companies will pay for a subscription for their researchers) that one can use as an “investor” to research firms further. Webistes such as HOOVERS, Mergent Online, Standard and Poor’s Market Insight, as well as others. You can also take a look at a company’s “books” by using Yahoo Finance or Google Finance (both free and open to the public), or most of the websites I have listed above.

Now, a privately held company is not held to these same standards. There are ways to get information on private companies, but there are a lot more roadblocks.

I think the best way for me to describe this difference (just because of the way I think, I wish I had a better way to display this) is to use to case studies.

One is a company that I researched while at Cornell which was publicly held. The company is JetBlue.

From just the 10-K I found that JetBlue has a special relationship with a company called KVH (which recieves government defense contracts). KVH makes these special antennas which allow JetBlue to run their signature tv service they are very proud of. So if one were able to disrupt in any way this special relationship, or tick off KVH with its government contracts, JetBlue is going to start feeling the heat. Furthermore, I found out that JetBlue is owned by a German airplane company which is heavily unionized. In Europe unions have a lot more power at the table than in America, and so that can be another potential leverage point. JetBlue is also planning to expand into the Caribbean, a growth plan which it has started to invest a lot of money in, another leverage point. JetBlue is outsourcing a lot of their maintenance work (most airplane companies do this), but that has garnered resentment and hurt feelings amongst various communities. Finally, from the 10-K I found that JetBlue has a ton of debt. This provides a lot of leverage because if the lenders think JetBlue is experiencing financial difficulties due to a labor dispute, they may threaten to recall JetBlue’s debt which wouldn’t be good.

Then from other research using other websites I found the following. JetBlue has one of the smallest maintenance staff, which is alarming. The ceo is heavily invested in NYC, and frequents NYC social events, providing access to him. Some of the key decision makers include the German airplane company, the CEO, and this other member of the board, who actually is also at Morgan Stanley one of the key owners of a huge chunk of JetBlue debt. However, despite this debt, JetBlue is one of the most profitable companies in the industries, and can definitely support “union wages and union health care”. I also found out when their annual stockholders meeting is and where it is, to do actions and other media events at.

There was much more information I found, but I don’t need to write a whole book. But all this information was found just by using the internet, and in one week. More information could definitely be found by working with workers for JetBlue who also inadvertently have a lot of access to info.

But then using a case study of trying to research a company that has gone “private”.

There was a dispute at an aluminum factory in West Virginia. To figure out who the company did business with, they had to follow trucks around in cars, potentially across several state lines. They originally believed that it was owned by the President of the factory, then they discovered it was owned by a separate company called Clarendon Inc. They then had to travel to Sweden, the location of Clarendon Inc’s HQ to figure out that Clarendon Inc was really a front for this one man Marc Rich (real name, Marc Rich had this crazy scheme of investing in private companies through front companies to make it difficult to trail the ownership back to him, as he cut lots of illegal backroom deals). They then had to do some dumpster diving to find out who the key lender was that was carrying the most of the company’s debt.

What I am trying to display is that corporations are complex in our world. And while I agree companies going “public” is not the answer by a long stretch, I think it does provide us with a lot of useful information that we would have limited access to otherwise. Private companies have a lot more layers they can cover themselves in. I hope that helps clear up the point I was trying to make. (Sorry that I don’t have more hard evidence to provide.)

As to your other question about union power, unions have immense power! So part of the case study of the workers at the aluminum factory, they teamed up with environmental groups to expose the fact that the company was not disposing its waste properly, contributing to polluting a local river, leading to more acid rain in the area and high levels of sulfur in the soil. A big push in the labor movement right now is to become more connected with other organizations and movements. For example the Sierra Club (I don’t know how you feel about them, I sadly know little about the specific organizations that make up the environmental movement) have an ongoing partnership with the United Steelworkers. Unions are also known for building connections with the community a business is located in, finding out what issues the community has with the company. They do originate from helping with worker’s needs, but often it is critical that they form coalitions and partnerships with environmental, political, and community groups to gain any power to force a company to a) recognize the union, b) give in to demands for greater wages, health care, pensions/retirement accounts, etc.

What I would also say, and unions are aware of this too, is that you might have noticed that a lot of the information I dug up during the week, if pushed to an extreme and in certain ways could push JetBlue out of business. This is also never the goal, since it does no good to run a business into the ground, that will only put every worker out on the street.

So I would agree with you that publicly held companies are not the answer because of the fact that they are obligated to maximize profit…however, I would just be wary that private companies are the answer either. We must dream of something one step beyond both, either something like this new stock market for social businesses, or a new form (or lack of form) of corporation.

I hope this helps!

But in regards to your other points on going public, I very well could be wrong and someone please teach me if I am, but this is my understanding…

So first, going public is not like nationalizing. US citizens do not collectively own public companies because they pay taxes, and the government is not supposed to run them. Theoretically at the end of the day, every business is a private entity, separate from government…maybe except for the innovators like Goldman Sachs and Blackwater.

But anyway, even though shares of the company’s stock becoming open for sale to the public, this is another example of vast inequity:
http://sociology.ucsc.edu/whorulesamerica/power/wealth.html (2005)
“In terms of types of financial wealth, the top one percent of households have 38.3% of all privately held stock, 60.6% of financial securities, and 62.4% of business equity. The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.”

So in this respect, “the public interest” (of the US or the world) is not really represented is today’s average shareholders of companies that ‘go public.’ In my opinion, the stock market and ridiculous financial instruments like DERIVATIVES have no purpose plainer than further consolidating wealth, the ruling class’s casino.

Sure, companies, non-ruling class shareholders and communities/countries may benefit during relatively short time periods. Of course the CEO and a some collection of inner circles also generally make out like bandits.

But in my mind, the real problem is that this sells the potential soul of a social business. Standard corporations are LEGALLY bound to maximize their profits for their shareholders. Literally!..

“A corporation is governed by a board of individuals known as directors who are elected by the shareholders. Directors may directly manage the corporation’s affairs when the corporation is small, but when the corporation is large, directors primarily oversee the corporation’s affairs and delegate the management activities to corporate officers. Directors usually receive a salary for their work on the corporate board, and directors have a fiduciary duty to act in the best interests of the corporation. These fiduciary duties require the directors to act with care toward the corporation, to act with loyalty toward the corporation, and to act within the confines of the law. A director who breaches this fiduciary duty may be sued by the shareholders and held personally liable for damages to the corporation.”
http://corporations.uslegal.com/basics-of-corporations/shareholders-directors-and-officers/

But unless some of that top 10% of our country, who are shareholders of a corporation, have a moral compass than outweighs their greed on a particular issue — AND assuming they’ve even been given enough information to be outraged — a corporation can probably evade this as oversight. Also, if they can evade the government which also theoretically has access to corporate books if needed, I bet they can dupe their shareholders.

Not only does the law say they must maximize profits within the law, but the top corporate management and the shareholders all have huge incentives to keep the corporation maximizing its profits, as they keep directly benefiting.

So back to social businesses…if a company is legally bound to maximize profits, then they cannot legally obey a triple-bottom line, or listen to concerns for at least seven generations from now. In his books, Yunus discusses creating an entirely separate stock market just for social businesses. In his paradigm, social business shareholders can invest for a [life-long] vote, and can optionally be paid back when appropriate, but that investor would not gain anything financially…directly. In a way, the shareholder only benefits as much as their community as a whole. Since no net profits go to the shareholders and stay within the social business, its positive social impact continues to maximize.

You do make a very excellent point that it is greatly helpful that they must publish information, though I tend to imagine most of the standard information across industries would be mostly financial information. While there may be some vulnerabilities here for corporations, it seems likely that most of the offensive externalities would not show up much. Here’s one quick scoop:

“Shareholders also have the right to investigate the corporation’s books. So long as the shareholder seeking to investigate the corporation’s records is doing so for a proper purpose or a purpose that reasonably relates to the shareholder’s financial inter-ests, the corporation must allow the inspection. In some cases, a corporation may require that the shareholder hold a minimum number of shares or that the shares be held for a certain period of time before allowing a shareholder to inspect the corporation’s books and records.”

Also, it seems that most legal business structures for shareholders would include some level of oversight. So maybe the question in any case becomes, ‘what are the motives and representation of the shareholders?’ for a given business. If this is the case, then the shareholders investing in a system for maximizing profits might not be able to compete on a moral compass.

Of course, not all businesses are bad, and my problem in this realm of discussion is purely with the modern definition of corporations. I think this definition corrupts the very concept that businesses should be improving the world, and we mostly just see the really nasty examples,
…You know, the kinds of corporations that do as much business as most countries.

Thanks again for discussing Alex! I hope this helps convey my understanding of the current situation…and interests you. I’d be curious if you any sense of how much power unions have to pressure corporations to take a hit on profits. I assume they usually spawn from first taking care of the workers’ needs, but can their power extend to influence environmental concerns for example?

“Capitalism doesn’t say businesses must compete by maximizing-profits, which is very selfish and short-sighted, that’s just how we’ve been playing. If more large-scale businesses stop going public to make them legally bound to maximize profits for shareholders, they will be free to be the best business they can be across all dimensions which humans care about.”

I completely agree with you that nothing says companies in Capitalism have to maximize profits. Businesses can, and in my opinion should, choose socially responsible ways of acting. You probably remember the Better World Shopping Guide Cliff owned that would sit on our coffee table. Here is a link to their website:

http://www.betterworldshopper.com/idea.html

I think this is a great resource to start the project you are partly talking about, using our money to support good businesses.

However, what I really want to ask you about in that paragraph is you support companies not going public in order that they are not legally required to maximize profits. I want clarify, are you suggesting that what might be better is more companies to go or remain privately held? And if so, I am not sure this is the right tactic to promote social business over profit-maximizing business.

If companies remain or go private, there is still investment into that company. However, that investment is far less transparent. Privately held companies are much better at keeping hidden who the true decision makers are in a firm, and thus far less transparent or responsive to public demand. This is displayed well in this book, which I highly recommend:

http://www.amazon.com/Ravenswood-Steelworkers-Victory-Revival-American/dp/0801436338

I am not sure if we should advocate for more transparency in our government and less transparency in our companies.

Second, publicly held companies have a lot more leverage points than just their profit centers. Publicly held companies have to publish lots of information meant for potential investors in the public, but can be used by socially minded people to find alternative ways besides just boycotts (as important as these are) to put pressure on a company to become more socially and community minded. Having public stock gives a community and the public greater power over a company in my opinion.

Overall though I like the post, I agree we must move beyond just the yelling back and forth of two entrenched camps. We should avoid becoming a nation of north-going and south-going Zaxes.