Profit Versus Principle

Yesterday, I ran across an article on Slashdot, which in turn lead me to the text of a shareholder proposal to be presented at the next Google shareholder’s meeting. This particular proposal, in and of itself, is not anything terribly unique. I’m not even of the opinion that it will actually do anything. It did get me thinking about the larger issue, though.

The proposal can be shortened to say that if it were adopted, the company would agree to resist the efforts of authoritarian regimes, of which it lists a number, to restrict access to information over the Internet. The company would agree not to engage in proactive or self-censorship, only limiting access to specific information when presented with legally binding orders. In addition, the company would be required to publicly document cases in which it had been forced, by legally binding procedure, to censor content.

The intent is to prevent the company from doing what a lot of companies do in order to gain market share in those countries. Namely, they frequently set up filters and other limitations on information in an attempt to never show any content that the governments of those countries would object to, thus avoiding ever finding themselves in the middle of an uncomfortable legal dispute. There is a strong argument that engaging in these kinds of self-censorship makes companies like Google more appealing to authoritarian governments, and positions them to be granted much greater access to some of the largest and fastest-growing Internet markets in the world. The question, though, is “Is this the right thing to do?”.

Now, to be clear, this proposal will not pass. The board of directors has recommended that shareholders vote against the proposal, and in any shareholder’s vote, the majority of the shareholders do not even bother to specify their votes, but rather just sign the proxy statement, authorizing a board-appointed person to vote for them. The proxy will always vote the same way the board does. Regardless of how the shareholders vote, the directors of the company, between them, control 72.5% of the voting stock (according to a different section of the same document). This means that the board, all by itself, can pass or fail any proposal by a wide margin, regardless of how any other shareholders vote.

Either Sergey Brin or Larry Page, the two founders of the company, hold enough votes to individually reduce the sum total of all of the directors to below 50% (and thus allow other shareholders to possibly pass the proposal), but even then, most of the largest shareholders who are not directors are large investment institutions, who are entirely focused on improving the return on their investment, rather than any ethical consideration. They’re not likely to vote against the rest of the board, regardless.

The argument to be made by the board of directors is that they have a fiduciary responsibility on behalf of the shareholders of the corporation. In most cases, this responsibility will be interpreted as a responsibility to make the shareholders as much money as possible. Thus, if the board fears that accepting the limitations put forth in the proposal will reduce the profitability, they could quite reasonably argue that it is their duty, and perhaps even their legal obligation to oppose the measure.

The counter argument is that the true responsibility of the board is to represent the interests of the shareholders, and that those interests are not measured purely in terms of profit and loss. If you believe that you personally benefit when everyone in the world is more free, it is easy to argue that the board, on your behalf as a shareholder, should do everything in its power to ensure that the company does nothing to restrict the freedoms of any of its users. The shareholder proposal goes so far as to invoke article 19 of the United Nations Declaration of Human Rights. The proposal misquotes it slightly, but the version it presents is a reasonable paraphrase. The definitive version reads as follows.

Everyone has the right to freedom of opinion and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers.

Further, it is entirely possible to argue that accepting the limitations of even very strict censorship in order to gain access to a market the size of China, with one and a third billion potential customers, is in fact the most effective way of promoting their rights. By establishing itself as the preeminent search engine in China, the argument holds that Google would be helping to expose those new customers to everything the Internet has to offer, and that with time, they could work from within the system to make it more open and free.

This second argument, I think, is less at the heart of the matter, but I’m going to address it first, because in some ways I think it is the more interesting point. At some level, I have to admit that the argument has merit. In the event that Google, or any other American internet company for that matter, is adamant enough about free speach that the Chinese government simply refuses to let them do business, there are certainly any number of Chinese firms that would love to take their place.

Now, certainly, those companies might not do what Google does as well as Google does it, but their customers, who would have no access to Google, wouldn’t know the difference. In time, with that much experience with that many customers, they might well become a serious rival to the American companies they’d supplanted. This is bad for American business, but even worse, it’s bad for Chinese consumers, because a Chinese company is in a much worse position to attempt to influence the system to the benefit of a free and open society.

This is, in many ways, a powerful argument. I’m still not certain if I agree with it or not. Is it better to take a stand on your principles, even if that stand prevents you from participating in a market at all? Is entering a market and having some influence on it internally enough of a good thing to overcome having to reduce your principles in order to get your foot in the door? Can you really do more good from the inside, even if you have to stoop to get there in the first place?

Setting that issue aside, we reach the more fundamental one lurking at the heart of the matter. When running a company, how do you balance a responsibility to make a profit on behalf of your shareholders against a desire to do the right thing? Must you always choose one over the other? If not, how do they balance against one another?

It has been my experience with publicly traded (which is to say, publicly owned) companies that the board of directors, for better or for worse, selects profit over principle every time. They view it as their responsibility to make the company as profitable as possible, and to produce the maximum return on investment for their shareholders. There have been some cases, however, where large shareholders were able to influence this position.

Under United States law, it is illegal for a US company to do business with a state sponsor of terrorism. However, there is no provision as to what their overseas subsidiaries may do. To choose an example from the news recently, Halliburton has complied with the Department of State and the SEC’s restrictions on doing business in Iran. However, they owned several subsidiary companies in other nations who continued to do business in Iran.

When the Comptroller for New York City became aware that municipal investments, including the Fire Fighter’s pension plan, among others, were invested in businesses with subsidiaries that continued to engage in commerce with regimes the federal government had designated as state sponsors of terrorism, they threatened to dump the stock of offending companies, including Halliburton. Facing the possibility of a major drop in their stock price in the wake of a huge divestment by the City of New York, in addition to the bad publicity involved, Halliburton ordered its subsidiary companies to cease their involvement in Iran. Several other companies did, too. It is the Comptroller’s office which has submitted the Google shareholder’s proposal, as well.

Clearly, shareholders have the power to force large changes in business practice based on principle, rather than profit, when they put their minds to it. Corporate directors are likely to continue to favor profit as a driving principle. Perhaps they are right to do so. I’m not certain I’d be comfortable with the board of a company I owned stock in making choices about principles that I didn’t necessarily share. I’d rather that they focus on making me rich, and leave me and my fellow shareholders responsible for ensuring that we can sleep at night, and look ourselves in the mirror come morning.

I don’t own anything like enough Google stock to be able to sway this coming vote. In considering the issue, I’m not even certain which side of the issue I’d be most likely to come down on. I hope that Brin and Page have given serious thought to their principle of “Don’t be Evil“. I can’t say which vote is the principled one, and I don’t know how for each of them personally their responsibility to do right balances against their responsibility to ensure the profitability of their company. I certainly hope that both of them give the issue the very serious thought that it deserves.

I hope that each of you does the same, the next time you receive a proxy statement from a company you own shares in. Where does this balance exist for you, personally?

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One Response to Profit Versus Principle

  1. Dana says:

    One presumes that it is dilemmas just like this one that leads people to engage in the ever-growing trend of Ethical Investing.

    I did hear on the news (Marketplace?) a while ago, though, that there are now people who specifically practice Vice Investing, with a focus on alcohol, tobacco, oil, etc., because the perception is that those things will always make money, no matter what.

    Interesting thoughts, though. There’s a lot for companies like Google to consider when moving into new markets, as has been evident from the news about them and China in the past year or so. I thought your point about compromising principles to both prevent competition and lead to eventual openness was a good one. However, you know I tend toward idealism over wealth, so I’d like to think that Google, and indeed many major companies, would want to take stand for principle over more profit, provided they were going to be making a profit either way.

    It’ll be interesting to see what they decide. Will you tell us? I doubt a shareholder meeting decision will make the news, unless it’s major.

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