Thursday, October 18, 2018

Who determines the purpose of a company? (Or, can an anonymous Amazon employee define corporate evil?)

I could limit myself to the recent Medium post by an anonymous Amazon employee regarding Amazon's provision of facial recognition software to government agencies (DISCLOSURE: my employer provides competing facial recognition software to government agencies), but I'd rather talk about the general case first before delving into the specifics.

In the United States, a corporation may consist of a single shareholder, a few shareholders, or a bunch of shareholders. Amazon, for example, probably has thousands if not millions of shareholders; the company has 487.74 million shares outstanding. At the same time, a company has some number of employees - Amazon has approximately 566,000.

Who determines what a company (Amazon, or any other company) is supposed to do? The shareholders? The employees? Someone else?

One possible answer to this question is "the government" - not necessarily the specifics of what any company does, but how the company will do it. Take this quote from then-Senator Al Franken at a 2010 event:

[I]t is literally malfeasance for a corporation not to do everything it legally can to maximize its profits...

Later in 2010, Max Kennerly, Esq. published a post on this topic, looking at Franken's statement, other views on the truth of Franken's statement, and a Delaware court case that touched on this. The court case (PDF) was eBay vs. Newmark, and concerned the company Craigslist. Unlike Amazon, Craigslist had a limited number of shareholders: a guy named Craig, a guy named Jim, and a company named eBay. As Kennerly quoted from the case:

Jim and Craig did prove that they personally believe craigslist should not be about the business of stockholder wealth maximization, now or in the future. As an abstract matter, there is nothing inappropriate about an organization seeking to aid local, national, and global communities by providing a website for online classifieds that is largely devoid of monetized elements. Indeed, I personally appreciate and admire Jim’s and Craig’s desire to be of service to communities.


The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.

Well, that's what the court said, in essence saying that the shareholder eBay was entitled to assume that Craigslist was in the business of making a profit. But Kennerly himself added a caveat to what the court said:

Unlike Chancellor Chandler, I don’t think Jim and Craig did anything wrong by trying to protect the frugal, community-centered corporate culture at craigslist. Although it is certainly reasonable to presume that, in general, a shareholder invests in a for-profit Corporation for the purpose of maximizing their returns, it’s not like eBay bought shares of Halliburton and then watched as Halliburton forsake war in favor of soup kitchens and music programs for kids. It’s not Dodge v. Ford.

Instead, eBay knowingly and voluntarily bought a piece of Jim and Craig’s frugal, community-centered company. As such, the fiduciary duty owed by Jim and Craig to eBay has to be viewed in the context of the company itself – a company renowned for its tiny size, community service mindset, and its refusal to adopt typical principles of short-term profit-maximization.

But Kennerly then notes that he isn't the one making the rules; the court is.

But what I think should be the law — and what a couple politically-biased professors claim is the law — isn’t necessarily the law. Under eBay v. Newman, the law is as Franken said: “it is literally malfeasance for a corporation not to do everything it legally can to maximize its profits.” Just ask Jim and Craig; no one disputes it’s their company, but they’re legally prohibited from taking steps to preserve the profit-alongside-community-service mission that’s served them well. Maximize profits, or else.

So, let's return to my initial question: who determines what a company (Amazon, or any other company) is supposed to do? The shareholders? The employees? Someone else? Some people say that the government requires maximization of profits, while others say that shareholders (or maybe just a majority of them) can determine how the company stays in business.

What about the employees? Well, now we're ready to get to the Medium article about Amazon. By way of introduction (DISCLOSURE: my employer provides competing facial recognition software to government agencies), Amazon provides a product called Rekognition that can be used for facial recognition. Washington County, Oregon has purchased the software, and as I write this Orlando, Florida is testing it. For a variety of reasons that I won't get into here, over 450 Amazon employees do not think that Amazon should be selling this software to government customers. An anonymous Amazon employee, writing about this view, says the following:

Amazon talks a lot about values of leadership. If we want to lead, we need to make a choice between people and profits.

On the surface, this strikes me as an extremely naive statement. I don't know how happy the Amazon employee would be if Amazon turned around and said, "OK, we're not going to do business with governments, despite the reduction in revenue. By the way, here's your pay cut." (Incidentally, I'm assuming that the anonymous Amazon employee is NOT one of the Amazon employees who is receiving government food stamps. Not THERE'S a people and profits issue.

But in reality the Amazon employee may not be that naive after all.

While the company's requirements for warehouse workers aren't necessarily all that stringent, a higher skill level is needed for all of those Amazon employees who do the tech stuff to build the platforms. And when Amazon seeks new employees, it has to compete against other tech companies such as Google, Microsoft, Apple, and Craigslist. When the companies are in the driver's seat, this isn't too hard - Amazon can pick the employees it wants, and the employees will swallow whatever job requirements Amazon imposes.

But what if the potential employees are calling the shots? It could get a little tough.

INTERVIEWER: Congratulations, Cindy. Amazon is prepared to offer you a salary of $150,000 a year, a bonus incentive plan, company paid health insurance, $100 in Uber vouchers every month, and pre-paid Amazon Prime. Just sign here...

CINDY: Wait a minute. I have a few questions.

INTERVIEWER: The Amazon Prime is prepaid.

CINDY: Before I sign, I need assurances that Amazon is fully committed to the Me Too movement.

INTERVIEWER: Amazon takes allegations of harassment very seriously, and strives to maintain a workplace that is inclusive for all.

CINDY: OK, what about Black Lives Matter?


CINDY: But wait. Based upon an MIT study that examined three specific facial recognition algorithms - none of them from Amazon - I have personally concluded that every single facial recognition algorithm is racist and sexist and should not be provided to any government agency that could deprive people of color of their freedom. Does Amazon agree with this, or do I need to offer my technical services to Craigslist?

So who determines what a company is supposed to do?

The government, which (via the court system) seems to argue that companies MUST put profits before people?

The majority of shareholders, who (at least in theory) decide the direction that the company should take in the short-term and the long-term?

The company's management, which often wrests de facto control of the company from the shareholders and does what it wants to do?

The company's employees, who (since they're doing the work) are entitled to have a major say in what the company does, and does not do?

There's one category that we didn't cover - the company's customers. If the customers quit buying Amazon products (or Nike products, or whatever), then it doesn't matter what the government, shareholders, management, and employees think. If people (and government agencies) refuse to buy Amazon products, Amazon may join Sears in bankruptcy court.
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