The Leader as King, the Leader as CEO

Of all the ideas in Unqualified Reservations, perhaps the one I found most compelling is the comparison of the state with a corporation.

In the Moldbug view, the state, in any meaningful sense, already is a corporation - a group of individuals working for a shared purpose under an agreed-upon structure. It's just that the modern democratic state is a very oddly run corporation. This was satirised very well in the Moldbug theory of rotary management, where he described how bewildering democratic governance would look if applied to a regular company.

But behind the parody was a serious, and brilliant, point. Most educated people in the west think that the way we run corporations is approximately optimal, given their tasks. That is, being run with dispersed shareholders separate from the customer base, elections of board members who appoint an all-powerful CEO who is subject to board dismissal, and a share price to monitor performance. And most educated people in the west similarly think that the way we run governments is approximately optimal, given their tasks - that is, with democratic elections, a permanent civil service, judicial review etc.

But it is not at all clear that the tasks of the two organisations are that different. And since they are governed in such totally different ways, if you think that they are both optimal, it is incumbent upon you to explain what specifically about the differences between the organisational tasks requires such totally different structures.

The Moldbug answer is quite simple - there is no difference. Companies fill essentially similar functions to countries, and we can thus judge the expected success of difference governing structures by the relative success of different company structures. Sovereign corporations would likely outcompete sovereign democracies, in much the same way that regular corporations outcompete co-operatives (which is approximately what democracies are, but with more dysfunction). They just haven't been tried.

But there is another aspect to this metaphor that gets less emphasis.

Suppose we have a family-owned firm. All the shares are owned in their entirety by the male head of the family, the father. The father is both the sole shareholder and the CEO. He passes both the CEO position and his equity stake, simultaneously, to his eldest son upon his death. In this corporation, the two roles are inextricably linked by company by-laws - if at any point the father ceases his role as CEO and transfers it to someone else, then the shares and any cash flow rights are transferred to his successor, except those periodic payments given as a gratuity by the new CEO who may keep him on as an informal adviser. This has some beneficial effects, since the principal-agent problem is basically solved - the CEO now has the strongest possible incentives to maximise the value of his shares.

The father does not have to make every single decision - as CEO, he can hire advisers and delegate certain decisions, but ultimate authority must remain with him in order for him to retain his ability to reap the profits of the company. As both CEO and sole shareholder, there is no board to either evaluate his performance as CEO, or provide external opinions - the only opinions he will hear are those of subordinates directly employed by him, and who may be fired by him at any moment. Indeed, as CEO he is wary of delegating too much, lest people misinterpret these actions under the company by-laws as meaning that his delegate is actually the new CEO and shareholder. As a result, it is hard for him to reap the profits of the company without actively managing it. At first this works okay, but he has to keep doing this even when he is old and feeble - retirement means losing his equity stake.

Because the CEO must hold all the shares, he is prevented from raising outside equity. If he wants to raise capital for a project, only debt financing is available. As a result, if the CEO has a firm that is short in pledgeable assets, he may find it difficult to raise external funds for capital projects. This occasionally makes it difficult for him to ward off competitor firms.

While the father naturally has affection for his son and successor, he loves his other children too, and ideally would like to arrange to transfer his shares to a formal trust to provide for all of them. Unfortunately, company by-laws prevent the shares from being transferred to a trust. Most of the time, he can rely on his oldest son to treat the rest of the family fairly well, but it's always a gamble. In addition, he occasionally suspects that the total profits would be greater if he transferred power to his smarter, younger son, rather than his oldest wastrel son. But the by-laws are fairly strict on that point.

Every so often in the corporate history, the father becomes completely evil, incompetent, or mad. Since this threatens not only the value of his shares, but the livelihoods of his senior employees and the welfare of the customers, they occasionally take drastic action. But since the by-laws don't allow for the removal of a bad CEO, and since there's no way for the CEO to transfer control without impoverishing himself, this usually means that the current CEO has to be killed. Since this is a risky move, which the current CEO has the highest conceivable incentives to prevent, it's only attempted in the most dire circumstances.

There are other unscheduled transfers of power. Sometimes, the eldest son gets impatient, and kills off the father. Sometimes, a junior son will kill off the eldest in a deniable manner, in order to be further in line for the CEO job. You'd think that the by-laws would explicitly preclude someone from benefiting in this manner, and the shares and CEO job would be taken away, but oddly this isn't the case.

Because the parallels are more straightforward, and because I lack the cleverness and imagination of Moldbug, it's probably quite apparent that I'm describing a simplified version of absolute monarchy. I have defended absolute monarchy before, and think that it probably worked a lot better than people today tend to think. But like before with democracy, we can use the history of corporate governance to judge the merits of monarchy versus neocameralism, or sovereign corporations.

Reader, suppose that we unleashed our monarchical corporation into the world, to compete with the firms in the S&P 500. Do you suppose it would succeed? True, it has its advantages. If it started in office with a great CEO, it might do quite well for a while, since it wouldn't suffer from the standard principal agent problems of managers empire-building, or enriching themselves at the expense of shareholders. But how long do you think such an arrangement would last, especially past the first CEO? Most CEOs, even good ones, are only at the top of their game for a short number of years, and when they screw up, they have to get replaced by someone else, who is picked from among the top managers across the whole planet. The advantages here are fairly plain.

It seems quite apparent that our monarchical firm would struggle to compete. Most of the world's successful coprorations have structures that are nothing like the one we describe above. They look more like our regular, familiar public firms.

"But," you may protest, "there are successful family firms too!"

This is true. In the world today, there are large, successful family-run firms. But they tend look more like regular public companies than our monarchical corporation. Many of them are publicly traded as well, like Wal-Mart, with the family retaining only a controlling stake. Out of the rest, the shares can be distributed across family members or held a trust. The CEO job can be kept within the family, or transferred to an outsider (even if the outsider is "adopted" into the family, like in Japan). The firm can raise equity financing.

And for the families that own such firms, they don't seem to be in a huge hurry to change their corporate by-laws to those of a monarchical corporation. By revealed preference, they seem to prefer more modern arrangements.

Out of the various aspects of an absolute king, it seems beneficial that the executive has absolute authority over personnel, budget, operations, and other kinds of organisational decisions. Divided power in this regard mostly just causes problems and inefficiencies. But the linking of absolute organisational authority (which both the King and CEO share) with sole inalienable equity ownership (which only the King has) is not nearly so obviously beneficial. And the process of removing a bad CEO seems far preferable to the process of removing a bad king.

Moreover, if the CEO is not to be the sole shareholder, then it seems misguided to make the CEO the sole judge of his own performance. Having a board, who lacks any major organisational authority except the power to appoint and remove the CEO, along with other major structural changes, seems fairly benign as far as divided power goes, and is very beneficial in the event that you need to change the CEO. It's possible that the board might become meddlesome, but most of the charges against boards made by economists are that they rubber stamp the CEO's decisions too much, not that they're overly combative.

And finally, dispersed shareholders also go a decent way to combating the problem of an owner with perverse or evil preferences. When the sole shareholder in a country is the king, it's possible that the king just has preferences for evil, nasty stuff. Sure, he'd like more profit, but perhaps he's more interested in droit du seigneur, even though it's value-destroying and the citizens hate it.

But if we take the preferences of a multitude of shareholders, and ask what set of preferences can they agree upon, it's typically to just get paid more. In other words, maximise dividends, and let each shareholder buy whatever he wants. There's not usually cross-subsidisation of shareholders in their purchases from the company. It's possible that shareholder citizens in a sovereign corporation might also vote for droit du seigneur, but it seems easier and cheaper to just get hookers or groupies with the extra dividends.

Sovereign corporations have their problems, no doubt. But if your plan for how you'd like a government to be run varies wildly from how you'd like a regular corporation to be run, then you at least want to know the specific reasons why, lest the ghost of William of Occam haunts your country's fortunes.

Optimism

Check out this email from genetic testing company 23andme for the most upbeat corporate email I've received recently. Scroll through to the end and see which bit stands out:

Hmm, what's that tucked away in November? Government f***s our entire business model when the FDA decides unilaterally to extend its authority to include not just medical treatments, but medical tests? And announces this by ordering us to shut down our health-based business model immediately? As part of an illegal power grab not even authorised under legislation whose very existence would give the founding fathers grave concerns about the commerce clause as currently written, or indeed about the wisdom of having a commerce clause at all?

But look, in February we were also on Jeopardy!!!

I'm trying to imagine a similarly cheery email just glossing over an equivalent corporate disaster.

Dow Chemicals Newsletter, December 1984:

What a year it's been! We've had some highs and lows, but we've managed to get through:

February: Dow Chemicals celebrates a 15 year retrospective on its most lucrative contract to date - supplying Napalm to the US government for the Vietnam War. Peace through superior firepower!

April: Dow earnestly supports President Reagan's call for an end to Chemical weapons, stressing that chemical production should be used for peaceful purposes.

July: Our famous company 4th of July BBQ proves a great success. Our illustrious COO wins second prize in the 'best potato salad' competition!

November: Plastics! Dustin Hoffman names Dow Chemicals as a motivating factor behind the famous 'Plastics' line in the movie 'The Graduate'. Plastics division reports record sales increase of 35%

December: Nasty chemical spill at Union Carbide plant in Bhopal, India, poisons half a million people, killing over 8000 immediately, becoming worst industrial accident in history.

December: Christmas! Dow bonuses, pre-approved before the recent unpleasantness, get paid out to all employees


Let's face it, whoever is working PR for these guys is earning their money right now.

Amazon: Supporting Ben Franklin's legacy by making one of two certainties more certain

To paraphrase England's greatest prime minister, commercial partners, like nations, have no permanent allies, only permanent interests.

It used to be the case that Amazon was a fairly reliable partner in helping consumers find the lowest cost purveyors of particular products. Of course, it was only limited to those in their network of people selling through them, but this tended to be pretty liquid. For most products I searched for, there would be a sufficient range of sellers that you'd get decent price competition. This is made easier by the fact that once you're comparing literally the same product, it's basically a commodity market - there's some sorting on reliability of shipping and returns policy, but that's about it.

Amazon always privileged themselves slightly by defaulting to selling the item themselves if they stocked it. But it was simple to click on the tab for 'new' and find a range of sellers sorted by the total cost of the item plus shipping, which was what you paid. Problem solved - buy from the cheapest guy, the end.

In other words, as long as you clicked on the tab, Amazon would make it easy to tell if they were the cheapest provider of the goods or not, and the sorting process made it clear how you could purchase the lowest cost item, even if wasn't from them. Amazon were willing to take the hit to some direct sales (though they got some back in fees from the marketplace seller) for the repeat business that came from running a good price comparison service. 

But starting about a year ago, the interests of consumers and Amazon started to diverge. The reason is that for residents of various states (now up to 12) Amazon has to collect sales tax on their purchases. The citizen was always obliged to pay the tax, at least nominally, but in the past Amazon wasn't involved in collecting it. Collection was meant to occur because citizens would voluntarily report the sale tax on their internet purchases to the state (Ha ha! Stop it, you're killing me!). In practice, this made the Greek Tax office look like a model of perfect enforcement.

The loophole, which doesn't get greatly discussed, is that while Amazon is now forced to collect sales tax for its own providers, and for providers in the same state as the purchaser, it isn't compelled to (and in practice, doesn't) collect sales tax for third party sellers outside the state of the purchaser.

So what would a permanent ally do? 

Simple - he'd now sort purchases on total purchase price of Price + Shipping + Tax. That's the end cost to the consumer, let them find the lowest cost item.

But this was apparently a bridge too far for Amazon. This would put their own offerings at a structural disadvantage, and a decent one at that. In California, for instance, the minimum sales tax at the moment is 7.5%. This article claims that Amazon's after-tax profit margin, for comparison, is 1%. Can you see why playing at a 7.5% disadvantage is a game they're incredibly reluctant to play? 

And so we witnessed the internet commerce equivalent of the Suez Canal Crisis between erstwhile allies. Amazon felt that listing the total price would hurt them so much that they were willing to significantly degrade the usefulness of the price comparison function of their website. So they continue to only list cost in terms of Price + Shipping.

It gives me the absolute $#!7s that I can't sort on total cost any more. The only way to find out is to click through various sellers, add them to the cart, see if tax is added on, remove the item if it is, go back, find another seller, and then compare the tax with the difference in price. 

For small items, I won't always bother. But I will always resent the fact that Amazon is deliberately making my life harder for their own purposes. 

To give them credit, Amazon fought damn hard for a long time to prevent the states from forcing them to pay, but in the end, they saw the writing on the wall. Tax was going to get collected eventually, because the bankrupt states saw them as a cash cow waiting to be milked. Maybe I should cut them some slack.

Or maybe not. There are, after all, no permanent allies in commercial transactions. They happily screwed us when it suited them, so I have no compunction in reducing my business to them in response.

I don't know if it's possible, but if someone figures out how to scrape amazon prices for the lowest total cost, I'll direct all my purchases through them.

The only thing that would be even better would be to be able to scale the weight placed on taxes by a fixed amount. I'd probably set it at about 1.1 for small purchases. In other words, I'd rather pay slightly more money just for the pleasure of depriving the State of California of additional revenue.

That's not going to happen, of course, because Amazon makes it hard to just scrape all their data. So in reality, we consumers just have to bend over and take it.

Marketers love to tell you that the customer is always right, but it's not true.

It sucks to spend so long thinking that your purchasing dollars made you Dwight Eisenhower, only to find out that you were actually Anthony Eden all along and didn't know it.

Whole Foods Doesn't Want My Money

In many ways, I would be a natural demographic for Whole Foods, grocers to crunchy yuppie mums everywhere, to market to. I like high quality fruit and vegetables. I'm fairly price insensitive. I live in an area where they are located fairly close by. I could be upsold on a bunch of other random interesting food items.

But I don't go there very often, except for certain specialty items. I certainly don't do my regular shopping there.

And why not?

Because they don't sell any Coca-Cola products.

Now, I'm not saying this means I boycott them on principle.

But rather, it means that if I want a regular supply of Coke Zero and want to buy their fruit and vegetables, I now have to visit two stores per shopping cycle*, instead of one.

And you know what? There are closer substitutes to Whole Foods high quality fruit and veg at the povvo supermarket than their are substitutes for Coke Zero among the gourmet artisan Mexican soft drinks, or whatever junk it is they have instead.

The thing I find so funny is that there is no chance that a small amount of shelf space devoted to Coke wouldn't shift some product. Hell, they'll devote entire aisles to ridiculous placebo pills and potions for every conceivable ailment, real or imagined. You're telling me that the fifth brand of echinacea sells more than Diet Coke would in the same shelf space? Don't make me laugh.

So why do they do it?

Simple. Because Whole Foods knows that they're marketing themselves to the demographic of wankers. These people pride themselves in part on not buying soft drinks because they're "bad for you", but clearly that's not enough. Not only do they not want to buy it themselves, they also don't want you to be able to buy it there either. They think that the presence of Coke would somehow taint their wholesome organic good-for-you vibe. With all of the puritan fury they can muster, they're eschewing patronising anyone who sells Coke products because ... well, frankly I've got no idea why. Insert crappy modish cause here.

The people running Whole Foods are no fools, of course. They seem to have estimated that there's far more money to be made appealing to the Anti-Coke puritan crowd than there is to be made appealing to me.

That's fine. It's a free country, they're a free company, and I wish them the best of luck.

But I'll take my low brow dollars somewhere that isn't too pompous to sell me a Coke Zero, and avoid the professional shopping-cart busybodies.

Which is a shame, because they have really good fruit. So it goes.

*The phrase 'shopping cycle' is used under advisement. The original draft read 'week', but then a fit of honesty compelled me to admit that the actual frequency is less than that.

Yahoo Employees Know Less About Computers Than You Think

Well, the CEO anyway.

Via Hacker News comes a letter from Third Point LLC claiming that newly appointed Yahoo CEO Scott Thompson may have, er, 'embellished' his academic credentials:

According to the Yahoo! Form 10-K/A, filed with the Securities and Exchange Commission on April 27, 2012, newly-hired Chief Executive Officer, Scott Thompson, "holds a Bachelor's degree in accounting and computer science" from Stonehill College. ...
A rudimentary Google search reveals a Stonehill College alumni announcement stating that Mr. Thompson's degree is in accounting only. ...

Furthermore, Stonehill College informed us that it did not begin awarding computer science degrees until 1983 -- four years after Mr. Thompson graduated. 

Hmm, that's quite a pickle, no? 

I mean, maybe he just forget to correct everybody for all these years when they talked about his computer science degree? He's reading the press release where they're lauding him for this degree that he doesn't have, and he figures 'Hey, why not? I deserved  a computer science degree. It's like an honorary PhD, but granted by the secretary at Yahoo instead of the college itself!' 

Could happen to anybody, really.

Third Point then decides to put the boot in:

We inquired whether Mr. Thompson had taken a large number of computer science courses, perhaps allowing him to justify to himself that he had "earned" such a degree. Instead, we learned that during Mr. Thompson's tenure at Stonehill only one such course was even offered - Intro to Computer Science. Presumably, Mr. Thompson took that course.

Oooh, that's gotta burn.

Third Point are an activist hedge fund, and as such are professional rabble rousers. They own 5.8% of Yahoo, and want their own people appointed. That doesn't make them wrong, of course, but it does tell you their incentives in the whole thing.

So far, Yahoo has admitted the discrepancy, but claims that it was all a clerical error. They also claim (with perhaps more credibility) that it doesn't matter anyway, since the guy has a lot of tech experience, running PayPal and Visa's Innovant division.

Personally, I think they're right. It's hard to imagine that my opinion of the guy's credentials would be much increased by the presence of a computer science degree in 1979. Learn the fundamentals of Fortran! Study the coming microprocessor revolution! And to add to the gravitas, the piece of paper certifying all this comes from a college I'm not sure I've even heard of.

This makes Third Point's claim that this "undermines [Thompson's] credibility as a technology expert" laughable. On the other hand, they do have a point that this bodes poorly as a sign of the guy's character if he's been lying about his credentials. That kind of thing is hard to come back from.

Still, Yahoo shareholders can take solace in the fact that in the bigger picture, the provenance of Scott Thompson's degree is the least of their problems:

Whether the same can be said for Mr Thompson himself remains to be seen.