The First Of A 3 Part Series: Reforming Shareholder Primacy, Amazon & Boeing as a Microcosm
Deborah D’souza writes in Investopedia that stakeholder capitalism is a system in which corporations are oriented to serve the interests of all their stakeholders including customers, suppliers, employees, shareholders and local communities. This system is at odds with shareholder primacy, the idea that a corporation is only supposed to increase shareholder value. This idea as a seed was sown by libertarian economist Milton Friedman. No doubt, this article vehemently supports and endorses stakeholder capitalism because it is ethical as well as a sensible business decision. Serving interests of all stakeholders is essential to the long-term success and viability of any company.
Friedman theorized that the only social responsibility of a business was “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” Now this is a limited range of options to judge a business. It does not consider negligence for instance and this article does not even want to explore the notion of “open and free competition” because that is a discussion for another time. Consolidation in the market and a hesitation by US authorities to pursue anti-trust enforcement has whittled that principle thin and there is little true competition left.
2019 was an eventful year for Amazon. Among other things, they actually went to the Securities and Exchange Commission in an attempt to stop certain proposals from coming to a vote. What proposals or vote you ask? A vote on proposals to curb the sale of its flawed and controversial facial recognition product ironically called Rekognition. Activist shareholders wanted a review of the product to satisfy civil rights concerns and to stop selling the tool to government agencies until a civil rights review was completed. Such a tool in the hands of an oppressive government or government agency…well you see how this plays out and you can assume that whatever kind of people that are targeted with this software would not be those at the top in terms of power dynamics. The SEC denied Amazon’s request and for good reason. In a 2019 study by the MIT Media Lab led by Joy Buolamwini, the software was found to perform worse when identifying an individual’s gender if they were female or darker-skinned. Similar flaws were identified in Microsoft and IBM’s software in February 2018 and they committed to changes. Now the 2019 study found that Microsoft and IBM had improved whiles Amazon has denied that the research speaks to the accuracy of the technology. This article notes another misstep by Rekognition in 2018 when it falsely matched 28 members of the US Congress with police mugshots. Buolamwini co-authored a piece where she warned of substantial “weaponization and abuse of facial analysis technologies” These warnings fell on deaf ears because the proposals were voted down and it was set up to fail from the beginning. Bezos the founder of Amazon retains at least 12% of the voting stock as well as the voting rights in his ex-wife’s stake. (He determines a large portion of the vote) The top four institutional shareholders including The Vanguard Group, Blackrock, Fidelity Management & Research and State Street collectively hold about the same amount of voting rights as Bezos. As Monica Melton of Forbes noted, even if the vote was unanimous and they opted to ban it, Amazon was not required to act on it because the vote was non-binding. Only 2.4% of shareholder votes were in favour of the proposal to stop Rekognition. A second proposal that called for a study of the extent to which it harmed civil rights and privacy garnered 27.5% support.
Boeing is one of the two largest airplane manufacturers in the world and the ever-present rival of Airbus. Aside plane order cancellations due to Covid, they are in the news because of two fatal crashes of their 737 Max airplanes in late 2018 and early 2019 that caused airline regulators to ground their planes worldwide costing them and their suppliers money which leads to job cuts. A piece by CBC details how Boeing’s famed safety culture was relegated in favour of short-term shareholder returns. Now retired Boeing engineer Cynthia Cole, traces that culture change to their 1997 merger with McDonnell Douglas.
“McDonnell Douglas managers were more cutthroat, and it was all about the bottom line — cut those costs!” she told CBC’s The Fifth Estate. “They didn’t follow a good capitalist model. They followed greed and putting people in the upper echelon, putting their interest first above the workers and the product and just society as a whole.”
According to the LA Times, “the company cut corners to get the plane on the market quickly. It used the least expensive suppliers regardless of how inexperienced they were. Its manual contained only one sentence about the system that was the root cause of the crashes. Worst of all, it persuaded the FAA — and its airline customers — that pilots didn’t need flight simulator training to fly the 737 Max.”
The same article quotes former CEO Phil Condit at the time who said “When the headquarters is located in proximity to a principal business — as ours was in Seattle — the corporate center is inevitably drawn into day-to-day business operations,” and yet the engineers and executives were 2000 miles apart. Hardly close proximity.
Now the wage and generational income disparities between minority groups and the general population are well documented. Any layoffs are likely to be felt more by these folks. This article is not too presumptuous to suggest that white workers will be unharmed by these layoffs. It only seeks to highlight the difference in severity.
To reiterate the focus of this article and series by extension, it is to detail how when stakeholder capitalism is not adhered to, the costs can be substantial to a company both in terms of brand value decline and actual economic decline (Grounded planes costing Boeing money, general hostility to Amazon and their practices). Shareholder primacy is not sustainable.