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Comment by Zelphyr | Hacker News Reader

Or, maybe, "Everybody is altruistic until they have shareholders."

The idea that companies should only be beholden to shareholders that has taken firm hold over the past 50(+/-) years doesn't look to be a good one, in hindsight.

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Past 50 years, really?

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." - Adam Smith, 1776

> The idea that companies should only be beholden to shareholders

This concept was popularized by Milton Friedman with his Shareholder Theory. OP is not wrong.

https://en.wikipedia.org/wiki/Friedman_doctrine

Maybe, but it’s repackaging a point Smith made 194 years earlier.

I think Friedman's ideas are substantially different.

The quote from Smith is discussing tradesmen running a business in their own self interest.

In some ways, Friedman's point is the opposite. That the laborers perform in the self interest of the owner.

I don't know the full context of the Smith quote. I did a bit of digging for Smith's views on publicly traded companies, and came across this quote[0]:

>The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

[0] https://en.wikipedia.org/wiki/Criticisms_of_corporations

Surely that’s exactly the same thing Friedmam was saying. According to Friedman managers spending company money on social causes are spending other people’s money, the same phrase Smith used, when they had no business doing so. In saying that the firms responsibility is to its owners, Friedman was addressing precisely the concern that Smith was worried about.

Of course in Smith’s time joint stock companies were a relative novelty. We have a lot more experience of them now and have developed standards, checks and balances to try to maintain discipline in managers in the intervening centuries. Friedman was simply attempting to bolster that effort, but Smith was writing about exactly the same concern.

As it happens while I’m a big fan of both men, on this issue I think Friedman is too much of a purist. Some social spending can just be good business. It promotes the brand, buys political friends and can even reap commercial benefits down the line. Donating or subsidising computers in schools for a company like Apple for example.

A shareholder is more like the butcher or baker's brother than the butcher or baker. The incentives are different.

How so?

The butcher and baker a) have to understand what it takes to produce quality meats and breads and b) stand face to face with the customer, so they have both professional and reputational stakes in the game. Their stakeholder brothers and sisters may or may not have the same knowledge or reputational risk, and so their self-interested measures may correlate more with what puts money in their pockets in the short term than what makes the business viable over the long term.

Shareholders don’t care about the reputation or quality of service of the company? That seems a stretch.

As I’ve commented elsewhere I don’t entirely agree with Friedman because I think some social spending can make commercial sense for a company, but I think what he’s saying is just a pretty direct refinement of the exact same points Smith made.

> Shareholders don’t care about the reputation or quality of service of the company? That seems a stretch.

Not a stretch at all. Proven time and time again that shareholders focus on short term gains over long term.

When hired CEOs pay is tied to equity (i.e. shareholder) they make decisions based on how it affects the share price during their tenure, not after. GM after Jack Welch left is a good example.

Shareholders can sell their shares anytime. They care about the horse winning current race more than the next because they can bet on another horse next time. So they only care about the horse as long as they are betting for it.

Given the hundreds of thousands of listed companies you can find examples of anything, but there's nothing inevitable about companies being run purely for short term concerns. Not every company is run that way, shareholder theory or no. Plenty of listed companies are capable of extremely long term investments.

The drive for the short term is one possible strategy and outcome, that's all. In a competitive environment sometimes it even makes sense. Even when it doesn't the existence of failure modes in a system doesn't invalidate the entire system. All systems have failure modes, they need to be evaluated as a whole.

> Shareholders don’t care about the reputation or quality of service of the company? That seems a stretch.

It is a stretch beyond what I am arguing. On the other hand, I don't think it is a stretch to say that you are arguing that every shareholder has quality and reputation concerns indistinguishable from that of the direct proprietor. I claim that that is what would be necessary for Friedman and Smith to be saying the same thing.

Smith had very few good things to say of joint-stock (shareholder-owned) corporations. They were comparatively scarce at the time. Most businesses of his time, including the "baker and butcher" line you quite, were sole proprietorships or family-owned and operated.

The interests he writes of are those of the butcher and baker to themselves. Not to their shareholders.

"Shareholder value" is a recent error attributed to Milton Friedman.

Psychology studies in the past showed people were altruistic. Then psychologist accounted for social capital/good will and worked to remove it from their altruism tests. People stopped being overly altruistic when it stopped benefitting them, likely meaning that what we see as altruism is really a failure to account for all the benefits a person expects to gain and all the negatives they expect to avoid when choosing to perform a certain action.

As for shareholders, I think that comes down to the incentive to avoid the negative outcome of being replaced. Those at the top optimize their actions to avoid being replaced which filters down through each level until it effects every level of a company. There is some variety that results from how a company chooses who to promote, but that is still an outcome of not wanting to be replaced. Promote people who you think will strengthen your own position and not those who will weaken it. This ends up being the primordial pool that spawns corporate culture.

The concept of altruism does not require it to be "pure" or entirely selfless. Altruism can have benefits but those benefits can exist outside of economy and into the realm of the personal, spiritual, social, etc.

In other words, that doesn't disprove altruism so much as it proves that economic self-interest is not our only motivator.

They don't have to be. Everyone just chooses to do it that way because its easier to make loads of money.

It's not some idea that came about from a vacuum. Put yourself in an investors shoes: you may have some investments that you do for the sake of charity or philanthropy, however, the majority of your investments are to increase your investment. It isn't surprising then, following this basic premise, that we have arrived at the current situation. Capitalism factors in greed for the general welfare of the most people. It just seems that we underestimated the upper bound of human greed.

It's not so much an underestimation as it is a systematic breakdown of constraints and personal responsibility for owners/directors of large corporations.

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