How Investing Turns Nice People Into Psychopaths

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The evidence suggests that corporations might encourage people to think and act more anti-socially. What does owning stock do to our brains?

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It's conventional wisdom in business circles today that corporate directors should "maximize shareholder value." Corporations supposedly exist to serve shareholders' interests, and not (or at least, not directly) those of executives, employees, customers, or the community. However, this shareholder-value dogma begs a fundamental question. What, exactly, do shareholders value?

Most shareholder-value advocates assume that shareholders care only about their own wealth. But it is increasingly accepted that the homo economicus model of purely selfish behavior doesn't always apply. This possibility provides a challenge to the dominant business paradigm of "maximizing shareholder value:" the concept of the prosocial shareholder.

THE SOCIAL ANIMAL

The problem with the homo economicus theory is that the purely rational, purely selfish person is a functional psychopath. If Economic Man cares nothing for ethics or others' welfare, he will lie, cheat, steal, even murder, whenever it serves his material interests. Not surprisingly, although homo economicus is alive and well in many economics departments, many experts today prefer to embrace behavioral economics, which relies on data from experiments to see how real people really behave. Behavioral economics confirms something both important and reassuring. Most of us are not conscienceless psychopaths.

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The vast majority of human beings are to least to some degree "prosocial." In the right circumstances, we can be counted on to make modest personal sacrifices to follow ethical rules and avoid harming others. Of course, it's easy to doubt pervasive pro-sociality when reading the daily news. We should remember, however, that cheating, corruption, and murder make the news because they are relatively rare. (No newspaper would run the headline: "Employee Doesn't Steal, Even When No One's Looking.") As the phrase "common decency," suggests, prosocial behavior is so omnipresent we tend not to notice it.

Prosociality is endemic. In a common experiment called the social dilemma, anonymous subjects choose between a "defection" strategy that maximizes their own personal payoffs, and a "cooperation" strategy that gains them slightly less, but gives other members of the group substantially more. Up to 97% of subjects choose cooperation in some social dilemmas. Not surprisingly, researchers have found that the incidence of such prosocial behaviors declines as the personal cost of acting prosocially rises. We are more likely to be nice when it only takes a little, not a lot, of skin off our noses. But the scientific evidence demonstrates the vast majority of people will make at least small sacrifices to follow their conscience and help others.

THE SOCIAL INVESTOR

Given the evidence of pervasive prosociality, it's easy to suspect most Union Carbide shareholders would have been willing to accept slightly lower dividends if this would have allowed Union Carbide to prevent the deadly explosion in Bhopal, India that killed 4,000 and severely injured thousands more. Similarly, many BP shareholders might have preferred slightly lower returns to the Gulf oil spill disaster. In line with these suspicions, one survey reports that 97% of shareholders agree that corporate managers should take some account of non-shareholders' interests in running firms.

Even more direct support for shareholder prosociality can be found in the increasing popularity of socially responsible investment funds ("SRI funds"). SRI funds invest in companies that support consumer protection, human rights, or environmental sustainability, and avoid firms that promote tobacco use, child labor, or weapons production. While the evidence is mixed, at least some studies find SRI funds slightly underperform other funds. Nevertheless, SRI funds have been attracting money at a faster rate than the institutional investing industry as a whole. By 2010, 12% of all professionally-managed assets were managed by SRI funds.

Finally, additional evidence of investor prosociality can be seen in the hundreds of proxy proposals shareholders file each year asking their companies to behave more responsibly. According to a 2010 report by the Center for Ethical Business Culture, favorite topics in recent years include corporate political contributions, global labor standards, climate change, and sustainability.

DO CORPORATIONS MAKE US ANTI-SOCIAL?

But this direct evidence of investor prosociality raises its own problems. The evidence suggests the vast majority of people--97% or more--are to some degree prosocial. Why aren't more investing in SRI funds? Why don't even more shareholders file proposals asking their companies to reduce their carbon footprints? How can we reconcile the empirical evidence on pervasive prosociality, with most shareholders' apparent indifference to anything other than stock price?

In a 2005 article, Harvard law professor Einer Elhauge explored this puzzle. He concluded that for at least two reasons, when otherwise-prosocial people put on their shareholder hats, they're likely to make asocial investing decisions that cut against their own prosocial inclinations. First, uninvolved shareholders ignorant of a company's day-to-day operations decisions are in no position to police against, or even know about, antisocial corporate behavior. To the contrary, because the only thing they see is stock price, they may even pressure managers to adopt strategies that make corporate injury to third parties more likely.

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Lynn Stout is distinguished professor of corporate and business law at Cornell Law School and the author of The Shareholder Value Myth.

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