In class we recently covered the topic of the corporate principal-agent problem. As is well-known, the problem arises because corporate organization separates the roles of ownership and control. The owners are the shareholders, but day-to-day control of the organization lies in the hands of the corporate managers. In theory, the managers work for the shareholders, but the shareholders (principals) cannot exercise sufficient control over the managers (agents) to get them to do what the shareholders want, which is to maximize the firm’s long-term profit. As a result, the managers have at least some freedom to dissipate the firm’s profits in ways that benefit not the shareholders, but the managers themselves.
Just as we were discussing this issue with students, as if right on cue there appeared in the news a vivid illustration of the principal-agent problem in action, this one involving Apple’s CEO Tim Cook. Apparently, Cook has been devoting Apple resources to trendy but economically dubious projects involving ‘green energy,’ ‘sustainability,’ and fighting ‘climate change.’ (You know the drill.) Well, one of Apple’s shareholders, the National Center for Public Policy Research (NCPPR) asked Cook to provide information on the profitability of those projects, and to discontinue them if they proved unprofitable. This was a request by Cook’s bosses that he focus on the job that he is supposed to be doing, which is maximizing value for shareholders. And how did Cook respond to this reasonable request from his employers? He got angry.
What ensued was the only time I can recall seeing Tim Cook angry, and he categorically rejected the worldview behind the NCPPR’s advocacy. He said that there are many things Apple does because they are right and just, and that a return on investment (ROI) was not the primary consideration on such issues.
“When we work on making our devices accessible by the blind,” he said, “I don’t consider the bloody ROI.” He said that the same thing about environmental issues, worker safety, and other areas where Apple is a leader.…
He didn’t stop there, however, as he looked directly at the NCPPR representative and said, “If you want me to do things only for ROI reasons, you should get out of this stock.”
OK Tim, thanks for letting us know that we should invest in something other than Apple. But the question arises, who has the moral high ground here, Cook or NCPPR? Judging by the comment section of the article, it’s no contest. The hipsters, geeks, and Apple fanboys who comment at Ars Technica sided with Cook at about a 98.5 percent rate. The prevailing view is that Cook is heroically trying to save the planet, while NCPPR represents a bunch a greedy guys who want to smoke cigars and drink cognac by the pool while the environment gets trashed.
Here’s the problem, however, with that (to borrow a term from the article) ‘worldview.’ That money that Tim Cook is blowing on trendy environmental projects is not his to blow–it’s the shareholders’. The shareholders own the company, not Tim Cook. The company is not Tim Cook’s plaything that he can use to indulge his own preferences, or ‘worldview.’ If Tim Cook wants to finance ‘green energy’ projects or plant trees to combat ‘climate change’ he is free to do so with his own money. But he has no right to commandeer other people’s money just because he thinks he’s found a good cause.
Are the shareholders being greedy for expecting Cook to maximize the ROI? Not more so than anyone else who expects to receive full value in an economic transaction. In every transaction that Tim Cook carries out on a daily basis–with his grocer, his gardener, his doctor, his bartender–Tim Cook expects to receive full value on his dollar. Likewise, his shareholders have every right to expect full value from him.
The truth of the proposition is quite elementary, and can be illustrated with a simple analogy. Suppose Tim Cook paid a maid to clean his mansion for 8 hours. The maid, however, cleans only for six hours. Here’s the hypothetical dialogue between Cook and his maid.
Cook: Why did you clean for only six hours when I paid you to clean for eight?
Maid: I used the other two hours to volunteer at a soup kitchen, feeding the homeless. A very good cause!
Cook: But if I pay you for eight hours, I expect you to work for eight.
Maid: I did work for eight. You just don’t approve because not all of my work went directly to benefit you. Why does it always have to be about you?
Cook: But I’m the one who’s paying you…
Maid: Feeding the homeless is a very good cause! You seem to care only about yourself. Don’t be so greedy!
Of course, we can never say exactly how Tim Cook would handle such a situation, but our students seemed quite certain that Cook would fire the maid. That sounds about right, even though what the maid does to Cook does not differ substantively from what Cook is doing to his shareholders. Just like Cook, the maid fails to maximize ROI, then has the audacity to get mad and hurl insults at the injured party. Notwithstanding the ignorant and confused thinking of 20-something Apple fanboys, in this situation it is not Tim Cook who occupies the moral high ground.