Maximizing Profit

In laws as in software, it is rarely possible to get the rules exactly right.

A Supreme Court argument on Tuesday explored a gap in a federal debt collection law, one that consumer groups say allows some debt collectors to engage in abusive tactics. But the justices did not seem inclined to fill the gap.

When Congress enacted the Fair Debt Collection Practices Act in 1977, it imposed strict regulations on firms that collected other companies’ debts. But it did not address the activities of businesses like banks, credit card companies and car dealerships that collect their own debts.

That distinction failed to anticipate an increasingly popular business model, in which companies buy distressed debt outright and then try to collect it. ...

The main legal question in the case was the meaning of a phrase in the law, which defines a debt collector as one who regularly collected debts “owed or due another.”

Kannon K. Shanmugam, a lawyer for Santander, said that “the sole question presented by this case is whether an entity that purchases debts, and then attempts to collect them for its own account, qualifies as a debt collector” under the law.

“The answer to that question,” he said, “is plainly no.” ...

But Justice Stephen G. Breyer said Congress was allowed some leeway. “No one writes statutes perfectly,” he said. “You’ll always under-include or over-include.” ...

Mr. Russell concluded his argument by warning that a decision against his clients could allow all debt collectors to avoid regulation under the federal law.

“All they have to do,” he said, “is change their contract with their customer to arrange for a purchasing of the debt that they’ve been hired to collect and arrange to give back 60 percent of what they collect by virtue of that assignment, and they would evade regulation as well.”

- ADAM LIPTAK, Justices Appear Reluctant to Close Debt Collection Loophole, NYT, APRIL 18, 2017

Firms exist to maximise profits within the law.
- Schumpeter, A Form 10-K for America’s government [Government Inc in the April 29th print edition], Economist, April 27, 2017

“There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
- Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, NYT, Sept. 13, 1970 (cited in Justin Fox, The Social Responsibility of Business Is to Increase … What Exactly?, Harvard Business Review, APRIL 18, 2012 and in The Price of Profits, Marketplace)

Maximizing profit within the law can often involve exploiting a person's vulnerabilities (such as limited ability to resist the temptations of candy or other tasty food, or of various forms of entertainment). Advertising in large part aims to exploit people's vulnerabilities, as does selling a product for $4.99 to exploit people's tendency to think of that as being significantly less than $5. Yet it has been suggested that such exploitation is wrong, in which case there is a fundamental problem with American capitalism.

We want to protect people who are cognitively impaired from abuse, including sexual abuse. But that doesn’t necessarily mean we think they should be consigned to permanent celibacy. ...
I’m suggesting that sex involving the cognitively disabled isn’t, ipso facto, assault. I’m not concluding that what happened here was right. Even if the sex itself wasn’t violative, the man may not have been in a position to discuss whether he wanted to have a child with this woman, and therefore to think about contraception. If the woman knew this, she wronged him. ...
If she had been trying to get access to his resources — his financial situation is comfortable, you say — this would be a further wrong: exploiting another person’s vulnerabilities to your own advantage.
- Kwame Anthony Appiah, Is Sex With a Brain-Damaged Man Assault?, NYT, SEPT. 6, 2017

Nestlé’s direct-sales army in Brazil is part of a broader transformation of the food system that is delivering Western-style processed food and sugary drinks to the most isolated pockets of Latin America, Africa and Asia. As their growth slows in the wealthiest countries, multinational food companies like Nestlé, PepsiCo and General Mills have been aggressively expanding their presence in developing nations, unleashing a marketing juggernaut that is upending traditional diets from Brazil to Ghana to India. ...
The shift, many public health experts say, is contributing to a new epidemic of diabetes and heart disease, chronic illnesses that are fed by soaring rates of obesity in places that struggled with hunger and malnutrition just a generation ago. ...
“The prevailing story is that this is the best of all possible worlds — cheap food, widely available. ... A closer look, however, reveals a much different story, he said. “To put it in stark terms: The diet is killing us.” ...
In places as distant as China, South Africa and Colombia, the rising clout of big food companies also translates into political influence, stymieing public health officials seeking soda taxes or legislation aimed at curbing the health impacts of processed food.
For a growing number of nutritionists, the obesity epidemic is inextricably linked to the sales of packaged foods, which grew 25 percent worldwide from 2011 to 2016, compared with 10 percent in the United States, according to Euromonitor, a market research firm. ...
The same trends are mirrored with fast food, which grew 30 percent worldwide from 2011 to 2016, compared with 21 percent in the United States.... ...
''For some companies, that can mean specifically focusing on young people, as Ahmet Bozer, president of Coca-Cola International, described to investors in 2014. “Half the world’s population has not had a Coke in the last 30 days,” he said. “There’s 600 million teenagers who have not had a Coke in the last week. So the opportunity for that is huge.” ...
Brazil also highlights the food industry’s political prowess. In 2010, a coalition of Brazilian food and beverage companies torpedoed a raft of measures that sought to limit junk food ads aimed at children. ...
“What we have is a war between two food systems, a traditional diet of real food once produced by the farmers around you and the producers of ultra-processed food designed to be over-consumed and which in some cases are addictive,” said Carlos A. Monteiro, a professor of nutrition and public health at the University of São Paulo. ...
It is hard to overstate the economic power and political access enjoyed by food and beverage conglomerates in Brazil, which are responsible for 10 percent of the nation’s economic output and employ 1.6 million people.

In 2014, food companies donated $158 million to members of Brazil’s National Congress.... ...
So the stage was set for a mammoth political battle when, in 2006, the government sought to enact far-reaching food-industry regulations to curb obesity and disease. The measures, growing out of the earlier breast-feeding policy, included advertising alerts to warn consumers about foods high in sugar, salt and saturated fats, as well as marketing restrictions to dampen the lure of highly processed foods and sugary beverages, especially those aimed at children.

Taking a page from the government’s successful efforts to limit tobacco marketing, the new rules would have barred brands like Pepsi and KFC from sponsoring sports and cultural events.
“We thought that Brazil could be a model for the rest of the world, a country that puts the well-being of its citizens above all else,” said Dirceu Raposo de Mello, then director of the government’s health surveillance agency, widely known by the Portuguese acronym Anvisa. “Unfortunately, the food industry did not feel the same way.” ...
Industry-financed academics began appearing on TV to assail the rules as economically ruinous. ...
Chastened by the industry criticism, Anvisa in late 2010 withdrew most of the proposed restrictions. What remained was a single proposal requiring that ads include a warning about unhealthy food and beverages.

Then came the lawsuits. ...
Some of the lawsuits claimed that the regulations violated constitutional protections on free speech, while others said the agency did not have the standing to regulate the food and advertising industries. ...
Seven years later, with most of the 11 lawsuits still unresolved, the regulations remain frozen. ...
In the meantime, the food and beverage industry became more aggressive as it sought to neutralize Anvisa, which it viewed as its greatest adversary. ...
Compounding the problem is the rampant street violence that keeps young children cooped up indoors.

“It’s just too dangerous to let my kids play outside, so they spend all their free time sitting on the couch playing video games and watching TV,” said Elaine Pereira dos Santos, 35, the mother of two children, 9 and 4 years old, both overweight.

- ANDREW JACOBS and MATT RICHTEL, How Big Business Got Brazil Hooked on Junk Food, NYT, SEPT. 16, 2017

Pathological gambling is being unable to resist impulses to gamble, which can lead to severe personal or social consequences.
- Pathological Gambling, NYT (on 9/24/2017)

Australia... tops the charts on... gambling losses. Last year, Australians lost $17.5 billion, or about $949 per adult. These per capita losses are among the highest in the world.

How did Australia get into this mess? It is the outcome of a symbiosis between a hugely profitable industry and pliant governments.

Half of Australians’ losses were on slot or video gambling machines, a grossly outsize proportion compared with other countries. Video gambling machines are good at making money because they are designed to be addictive. They have been called the “crack cocaine of gambling,” and Australia is hooked.

- LIZZIE O’SHEA, Australia Has a Serious Gambling Problem, NYT, NOV. 18, 2016

Tony Franklin entered a betting shop in northwest London one morning last week and paid 300 pounds, or around $400, into a gambling machine — and lost that money within 16 minutes.

Then he paid in another £300. Then a further £1,000 six minutes later. And 20 minutes after that, a final £1,000.

Within 42 minutes, Mr. Franklin had lost £2,600, the latest relapse in a decades-long gambling addiction that he reckons has cost him more than a million pounds, his marriage, several jobs and his relationship with his three children. ...

Mr. Franklin has been trying to quit gambling for years. What usually drags him back in is a particular kind of gambling machine, known as a fixed odds betting terminal, that lies at the heart of a bitter debate about the future of British gambling. Campaigners and some researchers say the machine is an unusually addictive form of gambling that is sucking billions out of Britain’s poorest communities....

But bookmakers, backed by other researchers, counter that there is no clear evidence that the machine is any more addictive than other kinds of gambling.... They warn that banning the machines, which are found only in British betting shops and provide more than half their profits, would lead to the loss of thousands of jobs.
- PATRICK KINGSLEY, 42 Minutes, £2,600 Lost: The U.K.’s Growing Gambling Problem, NYT, SEPT. 23, 2017

Quitting [Facebook] will be very hard, because FB (and Twitter) is a real physical addiction. Studies show that for every "like," or new follower, or re-tweet, your brain gets a nice little jolt of dopamine.
- Karen Garcia, a trusted commenter, 9/23/2017, Comment on Maureen Dowd, Will Mark Zuckerberg ‘Like’ This Column?, NYT, SEPT. 23, 2017

The personal code of ethics of businessmen is to close the sale of something to your advantage by any means that might work, and leave it to the buyer to perform due diligence. The personal code of ethics of businessmen is illustrated by Volkswagen and Wells Fargo, who got away with what they were doing for years; we have no idea how many other businesses are behaving in similar ways but are not being caught.
- sdavidc9 of cornwall, Comment on David Leonhardt, Gary Cohn and Steven Mnuchin Risk Their Reputations, NYT, OCT. 9, 2017

Under growing pressure, the companies are mounting a public relations blitz. Sheryl Sandberg, Facebook’s chief operating officer, was in Washington this week, meeting with lawmakers and making public mea culpas about how things happened during the election “that should not have happened.” Sundar Pichai, Google’s chief executive, was in Pittsburgh on Thursday talking about the “large gaps in opportunity across the U.S.” and announcing a $1 billion grant program to promote jobs.

Underlying the meet-and-greets is the reality that the internet long ago became a business, which means the companies’ first imperative is to do right by their stockholders.
Ross Baird, president of the venture capital firm Village Capital, noted that when ProPublica tried last month to buy targeted ads for “Jew haters” on Facebook, the platform did not question whether this was a bad idea — it asked the buyers how they would like to pay.

“For all the lip service that Silicon Valley has given to changing the world, its ultimate focus has been on what it can monetize,” Mr. Baird said.
- DAVID STREITFELD, Tech Giants, Once Seen as Saviors, Are Now Viewed as Threats, NYT, OCT. 12, 2017

Long ago, 40 percent of Link-Belt’s stock was owned by its employees, according to a company document from 1925. Back then, business schools taught that a chief executive’s role was to balance shareholders’ interests with those of employees, customers and the government.

But today, most of Rexnord’s shares are held by mutual funds managed on behalf of global investors. ...
In today’s model, chief executives like Mr. Adams get more compensation in stock, to align their interests with shareholders, who are now considered more important than other stakeholders. That’s why Mr. Adams made more than $40 million over the last six years, as he cut the cost of labor.
- FARAH STOCKMAN; Photographs by ALYSSA SCHUKAR, Becoming a Steelworker Liberated Her. Then Her Job Moved to Mexico., NYT, OCT. 14, 2017

The marriage of Harvard’s prestige and intellectual pedigree to overtly moneymaking pursuits has yielded an institution that not only teaches the fundamentals of business education but also provides its soon-to-be-wealthy graduates with “unrivaled opportunity,” and has become a “money machine unto itself,” as Duff McDonald puts it in his sweeping survey of the school’s history and influence. ...
In “The Golden Passport,” he’s determined to call the Harvard Business School to account, citing its founding doctrine, which was to develop “a heightened sense of responsibility among businessmen” (and eventually women) who “will handle their current business problems in socially constructive ways.” In that regard, McDonald is scathing in his critique: Harvard Business School has not only “proven an enormous failure,” but its very success has made it positively “dangerous.” ...
McDonald’s criticism of Michael Jensen, now an emeritus professor, is especially withering. As he sees it, Jensen bears major responsibility for the rapacious hostile takeovers and the obsession with stock prices and short-term results that led to the Enron and WorldCom scandals, as well as for the emergence of outlandishly high chief executive pay.

Jensen came to the business school in 1984, just as the junk-bond-fueled takeover boom was gaining steam, and he became a full-time faculty member in 1989. Undeniably one of the most influential business theorists of modern times, he advocated an “agency” theory of management in which management’s sole duty was to maximize shareholder value. This upended the long-held “stakeholder” model, in which management was seen as having broader obligations to a corporation’s workers, customers and communities.

Jensen’s theories had simplicity and consistency: If all that matters is shareholder value, then hostile takeovers, leveraged buyouts and other forms of financial engineering are fine as long as they boost share prices, no matter that battalions of workers have to be fired and community relations damaged.
- JAMES B. STEWART, How Harvard Business School Has Reshaped American Capitalism, NYT, APRIL 24, 2017

A deadly combination of right-wing free-market fundamentalism and left-wing moral relativism led to a withering away of moral norms and shared codes of decent conduct. We ripped the market out of its moral and social context and let it operate purely by its own rules. We made the market its own priest and confessor.

Society came to be seen as an atomized collection of individual economic units pursuing self-interest. Selfishness was normalized. As Steven Pearlstein puts it in his outstanding book, “Can American Capitalism Survive?” “Old-fashioned norms around loyalty, cooperation, honesty, equality, fairness and compassion no longer seem to apply in the economic sphere.”
- David Brooks, The Remoralization of the Market, NYT, Jan. 10, 2019

In March 2017, the FAA certified the 737 MAX as safe to fly. Opportunity for Boeing’s misrepresentations or omissions in the certification process existed because of the FAA’s long-standing practice of delegating the safety analyses required for aircraft certification to the manufacturer. Safety engineers employed by Boeing are supposed to report to the FAA, but reports from investigative journalists suggest that Boeing’s management exerted its power as employer to restrict the analysis process and short-circuit unfavorable information that emerged from it. ...
Five years later, consumer activists mounted “Campaign GM,” which included a shareholder proposal at GM’s annual meeting in May 1970 to have three “public interest” members on GM’s board of directors to advocate for safer and more fuel-efficient cars. The proposal garnered little shareholder support, but the very fact that GM’s management had been confronted with the need for change was enough to lead The New York Times Magazine to publish, in September 1970, an article by free-market economist Milton Friedman to counter the movement for corporate social responsibility.

In an introductory comment published with the article, “A Friedman Doctrine—The Social Responsibility of Business Is to Increase Its Profits,” a New York Times editor referred to the shareholders’ meeting in May 1970 and its aftermath, making absolutely clear why Friedman had written the article:

Representatives of Campaign G.M. demanded that G.M. name three new directors to represent “the public interest” and set up a committee to study the company’s performance in such areas of public concern as safety and pollution. The stockholders defeated the proposals overwhelmingly, but management, apparently in response to the second demand, recently named five directors to a “public-policy committee.” The author Milton Friedman calls such drives for social responsibility in business “pure and unadulterated socialism,” adding: “Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of free society.”

Really? In retrospect, the demands of Campaign GM for safer and less-polluting cars were basically demands for GM to engage in automobile innovation. In the 1970s and beyond, the world leaders in producing these “socially responsible” cars would be Japanese and European companies, leaving the “profit-maximizing” General Motors lagging further and further behind. What Friedman called “pure and unadulterated socialism” proved to be the innovative future of the automobile industry.

The “Friedman Doctrine,” as annunciated in 1970, became the clarion call for companies to be operated to “maximize shareholder value.” On Main Street as well as Wall Street, stock yields, even more than profits, have become the almost unquestioned measure of corporate performance.

In the case of Boeing, the availability of the LEAP-1 engine enabled the company to offer a much more fuel-efficient plane, and with the 737 MAX’s burgeoning sales its stock price soared, especially after the new plane was certified and delivered in 2017. Tens of millions of dollars in compensation ostensibly rewarded senior executives for the great job that they had done. Now in the wake of two plane crashes that have left 346 people dead, it seems clear that Muilenburg and his executive team have failed in their fundamental responsibility—to build and deliver a safe plane.
- WILLIAM LAZONICK & MUSTAFA ERDEM SAKINÇ, Make Passengers Safer? Boeing Just Made Shareholders Richer., The American Prospect, MAY 31, 2019

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