January 22nd, 2012 // 7:22 am @ M.H. Nicholas
The notion a corporation is a person, shorthand to indicate that a corporation as an entity separate and distinct from the people owning it, has become the subject of great political fodder. The politicized nature, whether or not corporations have the individual rights of citizens (such as free speech), masks the fundamental operational flaw of the corporation: that it is never separate but rather comprised of people, oftentimes with interests differing from those of the business itself.
Instead of becoming mired in the debate of whether a corporation is actually a person, a legal distinction with significant practical ramifications, it is on point for us to discuss the conflicts of interest embedded within a business between it, the people who run it, and those who work for it.
The Function of a Business
A business exists solely to achieve the goals of that business. Perhaps these goals are purely monetary, philanthropic, altruistic or more commonly a blend. This is summarized by the legal shorthand that a for-profit corporation has a fundamental obligation to maximize shareholder value. This lingo is used to summarize the important point that a business’ goal is to mirror the goal of its owners, and the most common goal of investors/shareholders is to make money. This stated purpose was not intended to be absolute, but rather to confirm that the business is owner-oriented.
Then people come along to mess the whole thing up.
The purity of corporate goal is corrupted from the very beginning not by design but because of human nature. Businesses make decisions every day that are contrary to their business goals, but more aptly, reflective of the goals of the individuals within the business. That is because “businesses” don’t make decisions. Individual decision makers have their own requirements, emotions, personal conflicts and aspirations. While an effective business will find ways to become more united in purpose, in which individuals will act and make decisions contrary to their own best interests, the business faces this challenge constantly.
This is not about individual weakness or isolated selfishness, but rather functions at the core of human nature. Human beings face a constant struggle with anxiety and apprehension, relative perception and outlook, risk profile, etc. There is the constant tension of the group vs. the individual’s need (perhaps to keep the job, get promoted, pay bills, etc.). For instance, while a business may wish to operate on a 2-5 year (or longer) timeframe, individuals may be week to week or annual review to annual review. We’re talking about conflicting goals, group dynamics, game theory and cognitive dissonance, all shorthand for the inevitable self-interest imbedded in an otherwise cohesive group.
From the Officers to the Janitors
There are countless examples of self-interest (or group interest) acting contrary to business interest. For instance, corporate officers pay themselves the maximum salary and bonus that they can individually negotiate – not the least amount necessary to stay and work hard. The opposite would be in the business’ best interest – as an officer acting in the business’ interest would theoretically take as little as possible; a clear conflict of interest. Instead, t
he business pays more than it needs – and the decision makers fully understand that the business’ value is lessened by this conflict.
Our human psyche rationalizes as justifiable many areas in which individuals act contrary to the business – from the rationalization (I Come First as relative fairness) which is used to justify why expense reports are improperly bolstered, pens and paper are taken home, and broader personnel conflicts and politics are permitted by otherwise decent people. We see this in the way money is spent as personal value is sought to be demonstrated or departments fight for budget funds. In other cases, money is spent not out of necessity, but so that future resources can be allocated. Some departments are starved of resources and others flooded, because of the personalities of the department heads (and their negotiating ability) rather than the true needs of the business. Short term profits and instant wealth become fair goals at the individual level. Efficiencies and savings are lost, oftentimes from the perception that corporate money is abstract, or even unlimited.
We also see this tension in personnel as well. Individuals make decisions that favor their friends, employees and department over others. Some sabotage others to garner favor. Some corporations make contributions to political parties when the business cannot be improved by the contribution but rather when the expenditure mirrors the political preferences of the decision makers.
We see this as well in the way in manner individuals ultimately find themselves in hot water, such as the creation of Ponzi schemes in which money is brought in to cover an act that may have been improper in the first place (many perpetrators will reveal that the scheme was intended to be short term to fix a one-time problem, but just got out of hand).
And so forth.
Politicizing Human Virtue
It is no surprise that in an era which has suffered so greatly from self-interest that this little topic of human behavior would become so politicized and controversial. The modern buzzwords relate to capitalism and free market versus government interference, over-regulation, free market, socialism, etc. This detracts from the inherent conflict that we should be discussing. We need to understand the conflicting goals so that we can better spot it. Only when we spot it can we stop it.
However, the notion that corporations are people simply because corporations are comprised of people is inherently incorrect. Instead, the corporation, as a person, would be displeased with many of the people comprising it – if it could only have a say in the matter.
The Moral of the Story
The moral of this story is that your business’ value will be maximized only when the individual human preference is minimized. This requires hard work to get to know the reason why people are thinking the way that they are and in particular the “stake holders” and “advocates”. Constantly question the assertions being made by those individuals – particularly those in which the individual’s decision or position mirrors that same individual’s personal best interests.
To the individuals, from the business owner to the most junior employee, we’re on to you. Being good-for-business means managing yourself and others to identify behavior and decision-making contrary to the business’ ultimate purpose. This is not just about the Enrons and the Madoffs, but about every decision in every business. Cognitive dissonance can obstruct even basic objectivity. This is not about punishment but a constant check and balance on the process.
Failing to understand the psychology inherent in business is a significant disadvantage. The perceptions, motivations, needs and frustrations of individuals who are making decisions on the business’ behalf are highly relevant. Great companies do this better.