Fwd: NYTimes.com Article: The Irresponsible Investor

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Subject: NYTimes.com Article: The Irresponsible Investor

The Irresponsible Investor

June 6, 2004
  By MICHAEL LEWIS

Plug into a Google search engine the words ''investors''
and ''corporate corruption'' and you could spend the rest
of your life reading about the many ways in which the
former have been abused by the latter. Plug the same words
into the company Google and you'll get a strikingly
different result. In their recent letter to financial
markets in which they lay out the ground rules for their
public-share offering, the company's founders, Larry Page
and Sergey Brin, insist that Rule No.1 will be ''Don't be
evil.'' This, they seem to think, will strike their
audience as a radical idea. That is because the audience
consists, mainly, of investors. Five long years in Silicon
Valley have apparently taught the Google founders a great
deal about the people who are about to make them
billionaires. The rap sheet on the American investor is
long, but it can be briefly summarized:

1) The investor cares about short-term gains in stock
prices a lot more than he does about the long-term
viability of a company. Indeed, he does not seem even to
notice that the two goals often conflict. ''Outside
pressures'' from investors, write the Google founders,
''too often tempt companies to sacrifice long-term
opportunities to meet quarterly market expectations.''

2) The American investor's short-term greed leads him to be
more interested in the appearance of a business than its
substance. ''Sometimes this pressure has caused companies
to manipulate financial results in order to 'make their
quarter,''' the Google founders write. The investor, of
course, likes to think of himself as a force for honesty
and transparency, but he has proved, in recent years, that
he prefers a lucrative lie to an expensive truth. And he's
very good at letting corporate management know it.

3) Investors, in their shortsightedness, encourage
companies to neglect their social responsibility. Actually,
the view emanating from the Google boardroom is harsher
than that: the founders clearly believe that investors
require corporate executives to sacrifice their souls. To
save themselves, they've concocted an extraordinary plan to
contribute 1 percent of their company's profits to
something called the Google Foundation. The investor who
purchases Google's shares will find himself the owner of
not just future profits from the search engine but also a
charity. ''We believe strongly that in the long term we
will be better served -- as shareholders and in all other
ways -- by a company that does good things for the world
even if we forgo some short-term gains,'' the founders
explain. To further prevent investors from subverting their
idealism, the Google founders have created, unusually, two
classes of shares: one, which investors will be allowed to
buy, will come with one-tenth of a vote; the other,
controlled by Google employees, will have full voting
rights. To investors, Google is as much as saying, ''We'll
take your money and give you even more back, but please
keep your views and your values, such as they are, to
yourselves.''

This otherwise innocent letter to stock-market investors
turns on its head the moral verdict of the Internet boom:
in the world according to Google, investors aren't victims
but perps. The reader finishes the thing with a novel
thought: pity the poor corporate C.E.O.! He may genuinely
want to make the world a better place. He may genuinely
dislike his moral climate. But the atmosphere created by
investors for investors requires him continually to mollify
these awful, greedy little people who have done nothing but
put up some money and who care about nothing except next
quarter's earnings.

This is new. Refreshing, even. The investor is usually
treated like the lovable new house poodle. No one holds him
responsible for the messes he leaves behind on the carpet.
But why? The best thing to be said about the typical
investor is that, without actually caring very much about
anyone but himself, he helps to make us all rich. He
pursues the highest return without worrying too much about
the moral consequences of his actions.

Yet act he does; and he has options. There's an entire
sector, called Socially Responsible Investing (S.R.I.),
that exists to create pressure on businessmen to behave
less like greedy automatons and more like responsible human
beings. But by the most wildly generous calculation, only
about 1 in 9 dollars is invested in S.R.I. funds, and the
vast majority of those merely seek to avoid tobacco stocks.
Of the roughly $19 trillion in American investment capital,
in other words, $17 trillion or so is invested with the
implicit instruction: ''Just give me back as much money as
possible. Gouge consumers, cheat employees, poison the
environment, lie to the public markets -- just do it all
sufficiently artfully that it doesn't dent my portfolio.''
Then, when the market falls and one of the people on the
receiving end of their beastly demands is caught behaving
badly, investors collapse to the floor in disbelief and bay
for their money back. It is at that moment -- and not a
minute before -- that they discover the novel idea that
businessmen in possession of other people's capital should
be held to the highest ethical standards. But of course,
now the idea pays.

This sort of hypocrisy is woven deeply into the fabric of
American business life. But how deeply I didn't appreciate
until I sat in on some classes in ethics at the Haas School
of Business at the University of California, Berkeley.

The place is, you might think, the natural home for
woolly-headed business idealism. It is, after all,
Berkeley. And the new dean, a former Republican congressman
named Tom Campbell, has made the newly fashionable subject
of business ethics something of a personal obsession. When
we met he was trying -- and failing -- to gain entrance to
a white-collar prison, so he could bring his students face
to face with real-life business crooks. The point, he said,
was ''to show the students that the businesspeople who wind
up in jail aren't really any different from them. They look
like them, they talk like them; they just made bad
decisions.'' In the meantime, to help keep his students out
of jail, he had expanded the school's ethics curriculum.

The course I sat in on had been introduced shortly before
Campbell's arrival. It was called Corporate Social
Responsibility. As it happened, the name was a bit
misleading. The class might better be titled How to Do Well
by Doing Good. The professor, a 38-year-old woman named
Kellie McElhaney, has little professional interest in
goodness for goodness' sake. Corporate social
responsibility, as taught in business schools, is
apparently all about using your goodness to make more
money. McElhaney's students don't just sit and listen but
hook up with actual companies to investigate how they might
increase their profits by improving their behavior. But the
field is sufficiently new that business executives do not
always understand what McElhaney, or her students, are up
to. They assume that because the professor is
sweet-natured, works in Berkeley and teaches something
called corporate social responsibility, she must, like a
priest or a therapist, intend to hold them to some new,
vaguely high standard of behavior. ''I tend to inspire
guilt in businesspeople,'' McElhaney says. ''I don't know
what I like less about my job, the pats on the head or
other people's guilt.''

This spring McElhaney sent her students out to study a
dozen or so enterprises, among them the pharmaceutical
giant Pfizer, the computer company Hewlett-Packard and the
Detroit Lions. In doing so she revisited an old dichotomy
-- boringly familiar to her but new to me. Public
corporations understood that their investors would endorse
good works only if they paid. The students who worked for
them spent their time grappling with not a moral but a
technical problem: how do we most efficiently use socially
responsible behavior to increase our profits? It was the
students who went to work for private companies who were
far more likely to encounter the obvious moral question:
Can you truly claim to be doing good when the only reason
you're doing it is to make more money? No doubt private
companies have their share of executives uninterested in
goodness for goodness' sake. But their owners, lacking
outside investors, were (like people!) more inclined to see
altruism-for-profit as a hypocritical sham. ''With many
people,'' McElhaney says, ''it's almost a religious thing.
If you give to receive in return, it lessens its meaning.
And my research tells me that family-owned companies,
especially, are the ones that have difficulty with the
concept.''

To McElhaney -- who, oddly enough, is not selfish at all
but open and generous, or, at least, clever at seeming open
and generous while in fact pursuing a strategy of intense
self-interest -- this points to a weakness in private
companies. ''I get very nervous when I hear people say, 'We
do it because it's the right thing to do,''' she says. ''At
some point this feeling-good stuff burns out.'' She is less
interested in motives than in acts, and for a company to
perform socially responsible acts it must survive. Any
action its executives take that makes survival even a tiny
bit less likely -- like giving up something for nothing --
is not good but bad. ''I don't think unprofitable corporate
goodness is sustainable,'' McElhaney says.

And she has a point. But her assumptions may also offer a
clue to the origin of a certain kind of business villain --
the kind who winds up on the front page of the newspaper
every time the stock market collapses. Business executives
acting on behalf of shareholders are expected to behave in
such a self-interested fashion that even their good works
-- philanthropy, environmental sensitivity,
greater-than-necessary concern for employees and so on --
must generate profits. That's what they teach in business
schools, because that's the convention of the financial
marketplace. Extreme self-interest is what most investors
demand from their corporations. But if goodness for
goodness' sake has no place in public corporations, is it
any wonder that the people who work for them exhibit
less-than-ideal ethical standards? For that matter, is it
surprising, given their necessarily relentless selfishness,
that they occasionally forget exactly for whom they are
meant to act selfishly? The pressure applied to people who
run public corporations almost requires them to forget how
to be good.

one day this spring, two students from the Haas Business
School, imbued with the values of public corporate life,
traveled to a small private company to explain why it
should reconsider its ways. The company was Birkenstock
Footprint Sandals, or, as the employees like to call it,
Birkenstock USA. Just to say the name, of course, is to
hear the sound of granola crunching and the rustle of
female underarm hair in the wind. The shoe company of
choice for hippies is slightly more complicated than its
reputation. It was founded in 1966 by a woman named Margot
Fraser to sell orthopedic shoes manufactured by the German
shoemaker Birkenstock. In the beginning the only retail
outlets that would stock the sandals Fraser imported were
health-food stores (then novel), and so the company's first
customers had a countercultural flavor. The American
distributor now sells many different kinds of shoes,
including a line for the striving office worker. It has a
strain of hippie in it, but other strains too.

At any rate, Birkenstock USA is still a private company,
subject to ordinary market forces but immune to pressures
from outside investors. When the Haas Business School
students went into the company's headquarters in Novato,
Calif., they found something of a mess, at least by public
corporate standards. Birkenstock had been doing good works,
willy-nilly, for 30 years. It paid employees to volunteer
and gave away sacks of cash to worthy causes without
telling a soul about it. The company was reluctant to
disclose the recipients of its philanthropy; after all,
wouldn't it violate the spirit of good works to publicize
them? But the business-school students were able to uncover
a few specifics. For instance, they discovered that
Birkenstock gave money to the Elizabeth Glaser Pediatric
AIDS Foundation. And that, from the investor-driven
corporate point of view, was a problem: sick kids are nice
and all, but what do they have to do with selling shoes,
especially if you don't spend a lot of time explaining to
them why they should be grateful to you?

The students recommended that Birkenstock ditch most of
their good works and put all of their energy into a single
very public act that connected up naturally to footwear.
They shrewdly recommended that Birkenstock sponsor walks
for causes. The cause did not matter so much as the fact
that potential customers would be walking many miles on its
behalf, and, somewhere along the line, encounter a giant
sign that said birkenstock.

The C.E.O. of Birkenstock, Matt Endriss, listened politely
to what the business-school students had to say. ''I
wrestle with the words and phrases they throw around,'' he
said afterward. '''Formalize' . . . 'standardize' . . .
'best practices' . . . 'bang for your buck.' Those words
don't live in this organization on a daily basis. A lot of
them are words we try to abolish.'' He tells me, ''There's
a lot of discussion inside Birkenstock about
'authenticity.''' While that concept is notoriously hard to
define, its opposite is not. It is inauthentic to seem not
to care too much about making money in the interest of
making even more of it. It is inauthentic to go bragging
about corporate goodness, in hopes of selling more shoes.
When you are honest only because honesty pays, says
Birkenstock's C.E.O., you risk forgetting the meaning of
honesty. When you are socially responsible only because
social responsibility pays, you lose any real sense of what
responsibility means.

Put another way: the instinct to give quietly to a
pediatric AIDS foundation is second cousin to the instinct
not to use slave labor to make your shoes, or not to
manipulate your earnings. It is part of a struggle against
the market's relentless pressure on the business executive
to behave a bit too selfishly -- to become one of those
corporate villains whom investors can one day profitably
sue. ''The whole concept of marketing corporate social
responsibility seems odd,'' Endriss says. ''Hit folks over
the head and tell them how good we are and, in exchange,
there's a monetary return for us.''

But the matter is clearly not so simple: the people on the
receiving end of Birkenstock's social conscience may be
grateful, and there's no law to prevent them from telling
others what the company has done. Word spreads. And it's
possible that the brand Birkenstock is actually
strengthened by a less conventionally corporate approach --
that is, that the company, in the long run, makes more
money by doing its good works on the sly. ''People
subconsciously think that the company is doing the right
thing,'' Endriss says. ''But you ask them, 'Why do you
think it's a good company?' And they can't tell you.'' If
it somehow pays for Birkenstock not to publicize its good
works -- if stealth charity is just a clever strategy for
marketing to hippies -- then the company is simply
strolling down a different path to the biggest pot of gold.
But if so, the path is long and poorly marked. ''We're not
as profitable as we could be,'' Endriss says, and then goes
on to say that if he wanted to maximize the company's
earnings he would fire 60 percent of the workers (the ones
who build long-term relationships with customers and
vendors) and jack up the price of the shoes.

''Maximizing our profits is not our chief goal,'' Endriss
says. ''The exchange of goods and services for money --
Birkenstock feels it's here for different reasons.'' Those
reasons can be summarized in a sappy sentence: the
happiness of employees and customers and a feeling that it
is contributing to the general well-being of the world
around it. Make money, yes, but don't make a fetish of it.
''If the company were compelled to answer to
shareholders,'' the C.E.O. says, ''it would destroy us.''

This kind of talk is daft to most investors. Birkenstock
USA has existed for nearly 40 years, but it still has only
about $120 million in annual sales. It has grown slowly,
generating steady but modest profits and exhibiting no
great ambition to grow a lot faster. Who'd want to invest
in that? To the financial market these guys are a bunch of
mediocrities. But that's the idea: when you make a point of
behaving extremely well you are unlikely to make as much
money as when you don't. A few highly desirable companies
(Google?) might be able to dictate morality to investors,
but most cannot. The highest moral standards have a price,
and most investors do not wish to pay it. But
businesspeople who don't have distant, amoral shareholders
to answer to are able to pay whatever price they can
afford, for the sake of some other goal. And these goals
can include behavior so admirable as to make an investor
weep.

Three years ago, the founder of Birkenstock, Margot Fraser,
by then a septuagenarian, realized that for her company to
survive her it would require another owner. She controlled
60 percent of the outstanding shares, and the question was
what to do with them. Rather than take them into the public
market and find the highest bidder -- who would, of course,
demand the fastest-rising share price -- Fraser decided
that she wanted to sell them all to the company's employees
in a way that turned just about every employee into an
owner. To calculate the price of her shares, the board,
aware of the founder's desires, took the current
fair-market value, then reduced it as much as they could
without making the price so ridiculously low that it could
be construed as a gift. But when they presented her with a
price for her shares, Fraser's only question was, ''Why
can't you make it lower?''




Michael Lewis is a contributing writer and the author of
''Moneyball.'' He last wrote for the magazine about a
high-school baseball coach in Louisiana.

http://www.nytimes.com/2004/06/06/magazine/06ETHICS.html?
ex=1087734489&ei=1&en=ca80949b339f92ee