Archive for July, 2006

Public companies considered harmful

The owners of shares of stock in a company are often described as the owners of the company. The executive management of a company is generally described as having a fiduciary duty to increase the share price for the benefit of the owners. Indeed any action which causes the share price to go lower may trigger a shareholder lawsuit.

I believe that the idea that companies are managed exclusively for their shareholders is a bad one, for various reasons.

  1. It’s a bad idea in that it doesn’t work. Shareholder lawsuits aside, it is clear that in many cases executive management runs a company for their own benefit. The U.S. has developed a form of crony capitalism in which shareholders have very little say in how a company is run. The only voice that most shareholders have is the annual meeting, where they can vote on shareholder proxies. Unfortunately, executive management can and does ignore the results of the votes. The CEO of a typical company is selected by the board of directors, and the board of directors is appointed by the CEO and other board members. Shareholder approval of the board of directors is required on paper, but in practice a relatively small number of voters are enough to support the board. The only mechanism the average shareholder has to control a company is the legal system, which, while not completely meaningless, is a very slow and cumbersome process. Legal cases take many years to wind their way through the courts. The typical result is not that the company changes their behaviour, but that they pay a relatively small amount of cash to each shareholder and a large amount of cash to the lawyers who handled the case.

    While some of these issues could be corrected in principle, it will always be the case that company management has much greater control over what a company does than individual shareholders do. Large companies have very complex accounting. Companies select CEOs for their intelligence and imagination, not for their probity. The system is practically designed for grand larceny.

  2. It’s a bad idea because it ignores people who have a bigger stake in the company than most shareholders: the company employees. As we all know, there are many cases where firing employees raises the share price. Clearly it must be possible to fire employees. But managing a company solely on behalf of the shareholders, and not at all on behalf of the employees, is bad social practice. The employees do have a stake in how the company is run, and giving them a voice should be recognized not just as a practice of good companies, but as a part of the system. I believe this is the case in German law, for example.
  3. It’s a bad idea because it ignores environmental considerations. The case of Maxxam and Pacific Lumber is an example. Pacific Lumber logged trees in a more or less sustainable fashion. Unfortunately, their share price fell, and the market capitalization of the company became less than the market value of the woods they owned. They were acquired in a hostile takeover by Maxxam, which has proceeded to clearcut forest as fast as possible. Society as a whole has an interest in preserving forests; encouraging companies like Maxxam to act solely on behalf of their shareholders ignores the interests of society.
  4. In general, companies sometimes justify unpleasant actions on the grounds that they are obliged to work to increase the share price over all other considerations. For the shareholder, this is akin to hiring somebody to act unpleasantly on your behalf. I expect that most shareholders actually do not want that. I am certain that it is bad practice to excuse bad behaviour on the grounds that somebody hired you to do it, particularly when the hiring party has very little direct input on your actions.
  5. Having shareholders doesn’t actually help a company, except in the single limited case of a public stock offering. Selling stock is an important way for companies to raise investment capital. Clearly the people who buy the stock must receive something in return for their investment. However, especially for a company which has been in existence for a long time, the shareholders do not actually contribute anything, and it is not clear why the company should be run solely for their benefit.

The question, then, is how we can encourage companies, and executive management in particular, to recognize the interests of all the stakeholders, while also providing an appropriate reward for people willing to risk their money by purchasing stock. I can see several improvements which could be made.

  1. Have three different types of directors on the board: directors elected by the outside shareholders, directors appointed by executive management, directors elected by the employees. Employees, including executive management, are prohibited from voting for directors elected by the outside shareholders. These elections must be real elections, unlike the elections used for directors today: there must be public ways for people to be nominated, and all nominees must be presented to the relevant voters.
  2. The executive compensation committee, which sets the salary of the CEO and sometimes other top executives, must not contain any directors appointed by executive management.
  3. Companies should honor shareholder proxies which receive a majority of votes cast. Actually, that seems like a no-brainer.
  4. Companies are incorporated for the public good. Therefore, they should give 10%, say, of the shareholder voting power to the public. Any citizen of the country where the company is incorporated should be permitted to register to vote as a member of the public. Any shareholder or employee can vote either with their own class, or with the public, but not both. The votes by the public are adjust to contribute 10% to the total numbers of votes cast. This permits people to influence a company even when more than 90% of the stock is held by insiders or by large investors, as is often the case.
  5. Given the above reforms, we should abolish the fiduciary duty to the shareholders. Companies should be run as management sees fit, subject to the constraints imposed by the directors and the voters. Management should not be required to increase shareholder value at all costs, although of course they may choose to do so.

I think these would be positive steps toward fixing a somewhat broken system.

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Singularity, Schmingularity

Several science fiction authors have been writing about an idea called the singularity. The theory is that technology is being developed at an accelerating pace, one which will lead humanity to a point which will be incomprehensible to people living today. And, since the pace of technological development accelerates exponentially, this will happen much sooner than we think. In the terms of literary movements within science fiction, this is cyberpunk taken to the extreme. I believe the first story to present this idea in its full form was Vernor Vinge’s Marooned in Realtime, and it was recently explored in more detail in Charles Stross’s Accelerando.

I think the idea of the singularity has led to some good stories, but I don’t find the idea to be particularly plausible. I don’t think the pace of technological change is accelerating, and I don’t think there is any reason to think it can continue to increase.

In terms of how technology affects daily life, the biggest changes happened more than a generation ago. The locomotive and the steam ship, and then the airplane, dramatically increased the speed at which people were able to travel. First gas lights and then electrification freed people from the day/night cycle. The automobile permitted people to live away from their work. Washing machines and vaccum cleaners significantly cut down on the time-consuming drudgery of housework, and freed women to work outside the home. The television permitted people to retreat into their homes for entertainment. Vaccines against smallpox and polio freed millions of people from early death and disability. In general many improvements in medicine and agriculture kept more people alive, leading to a worldwide population explosion that started fifty years ago, and has started to slow down, at least in the second derivative, only recently.

All of the these things happened at least a generation ago. Recently we’ve seen computers and the Internet. There has been a steady improvement in medical technology, but nothing nearly as dramatic as the polio vaccine. Otherwise, recent technological improvement has merely been a steady refinement in existing technology. I don’t want to belittle this improvement, but its effect on daily life is minimal compared to the effect of, say, the automobile. Computers and the Internet are certainly a significant technological innovation, but I don’t think they change daily life as much as, say, the television.

So the argument that the rate of technological innovation is increasing, much less that it is increasing exponentially, seems very weak. We can see some significant developments potentially coming in the future, such as designer organisms, nanotechnology, or fusion power. And, no doubt, new things we haven’t even thought of yet. But none of these developments are going to happen soon. And when and if they do happen, they aren’t going to make the other developments happen any sooner.

The only new technology which I can imagine leading to a real increase in the pace of development would be true artificial intelligence. An artificial intelligence would not necessarily be any smarter than we are, though it might be. Either way, it could be focused and replicated. That could accelerate the pace of change. (I discount another possibility, that of uploading human minds into software, because I think it is quite implausible.) But there is no reason to think that true artificial intelligence is going to arrive any time soon. The lesson of the last fifty years of research into AI has been one of clearing away our misconceptions about the nature of intelligence, but while the elimination of negative ideas is valuable it has left us with almost nothing in the way of positive ideas. HAL 9000 still seems as far away today as the year 2001 did when the movie was made in 1968.

Even if we should develop a true artificial intelligence, the singularity still seems remote, because I believe that humans can only handle a certain degree of complexity. People resist things they can not understand. New things are not widely adopted until they become familiar. Also, new things often threaten entrenched interests, which produce another type of resistance. I believe these human characteristics set another limit on the pace of technological change. I see no reason to expect that these characteristics will change in the future.

To give the singularity its due, it is undeniably true that life is becoming increasingly complex. However, this complexity is being hidden. As a computer programmer, I would say that it is being hidden by a set of abstract interfaces which present a simplified view which is all we need to understand in practice.

To explain this, let me start by saying that as recently as the Renaissance it was possible for one exceptional person to understand almost everything there was to know about technology. People like Leonardo da Vinci or Isaac Newton could know almost everything there was to know about the technology of their day. They didn’t know everything–they didn’t know the myriad details known by a successful farmer or blacksmith–but they could have learned them.

That is not possible today. Today, any technological object contains a remarkable depth of complexity. I recently bought a child’s plastic swimming pool, and I was reminded that this simple object was constructed out of a petroleum product extracted from the ground, was shaped in a factory probably in China, was shipped around the world through a series of middleman, to eventually arrive at a store where it was displayed, promoted, and sold to me, using an electronic cash register which computed the change. Every one of those steps incorporates considerable complexity, to the point where there are humans who specialize in each one of them, focusing on nothing else. All that complexity is completely hidden from me by the relatively simple interface of the store. A modern Leonardo da Vinci could learn every one of those steps in detail. But then let’s move over to, say, the clothing aisle; he might learn all those steps in detail as well. But could he also master the details of the cosmetics aisle, and the electronics aisle? And we haven’t even left the store yet.

The truth is that modern life is far too complicated for any one person to understand in detail. And yet, it doesn’t matter. That is because we have developed abstractions which permit us to to understand what we need to know, while hiding what we do not need to know. And while these abstractions are vast simplifications, they are not normally dangerous simplifications; in almost all cases, we really do know what we need to know (I think that the modern financial markets may be an exception here, but that is a topic for a different essay). We can expect life to continue getting more complicated, but we can also expect to continue to develop useful abstractions to hide that complexity.

So I think the idea of the singularity, while an interesting one, is simply very unlikely to happen. Certainly not in our lifetimes, nor in the lifetimes of our children.

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