Ethical Technological Development and Corporate Governance

-- By EricaPedersen - 09 Dec 2019

In a capitalist economy, how might technology companies be forced to take seriously the ethical implications of their products and business strategies? Eschewing the shareholder primacy model may be a necessary first step.

The Shareholder Primacy Model

In the 1960s, Milton Friedman began to proselytize the theory that the fundamental purpose and singular “social responsibility” of a corporation is to “use its resources and engage in activities designed to” maximize profits for its shareholders (Capitalism and Freedom). The “shareholder primacy” model has since been widely adopted as a central tenet underlying modern American corporate law. Federal and state courts have amassed substantial precedent affirming the shareholder primacy model and prescribing profit maximization as an “unconditioned obligation.” The fiduciary duties of corporate managers and directors are defined and enforced within the context of shareholder wealth maximization. Managers and directors may only consider the interests of other constituencies—such as employees, customers, and the general public—insofar as they will result in corporate benefits which may be passed on to shareholders.

Proponents argue that the shareholder primacy model ultimately optimizes social benefit by aligning the interests of shareholders and management, reducing agency costs, and incentivizing efficient allocation of firm resources. However, this model has also come under fire in recent years for fostering short-termism, anti-competitive business strategies, and a lack of concern or accountability for the destructive social and environmental externalities of those strategies. The weak counterargument to the latter concern centers on corporations’ dependence on public trust to enhance their reputation, customer base, and market share.

Shareholder Primacy in the Digital Tech Industry

The digital technology industry is an excellent example of the destructive consequences of shareholder primacy dogma in an anti-competitive and largely unregulated market. The relentless search for increased shareholder value has propelled the centralization of digital services in the hands of a few Tech Giants, the exacerbation of informational disparities, and the hoarding of knowledge in the form of intellectual property and trade secrets. Investors pump capital into early-stage start-ups in the hopes that that the business will disrupt or replace an existing market (Theranos) or industry (Uber, Airbnb), or at least generate enough monetizable data to be purchased by one of the Tech Giants (Snapchat). Seed funding may come with strings attached, but rarely do these provisions relate to minimization of possible negative impacts that the technology’s design or monetization might have on society as a whole. Such concerns are denigrated as the hyperventilations of conservative outsiders flailing against inevitable and socially beneficial technological development. Traditional ethics have no place in this brave new digital world.

Eliminating possible constraints on developers’ creativity and destructive capacity is considered the ideal mode of maximizing the profitability of digital technology companies by insiders. Zuckerberg has repeatedly opined in his testimonies to Congress that limiting the applicability of government regulations is necessary to ensure that the United States remains a leader in technological advancement. Mass surveillance of consumers and the invasive and oft-undisclosed collection of sensitive and behavioral data are touted as necessary to feed this development. Some scholars have even raised concerns that, in the current regulatory landscape, the failure to collect and analyze such data might be considered a breach of fiduciary duty to shareholders. Ian Kerr warns that this environment could lead to the development of a “duty to prevent,” under which managers have a fiduciary obligation to use predictive tools built on expansive data collection to mitigate future risk to the corporation. Perceived fiduciary obligations could also be used to rationalize decisions to sell already-collected consumer data to third parties in a perverse race to maximize the value of corporate assets.

Moreover, the key mechanisms relied upon to incentivize some consideration of social welfare in corporate governance and decision-making, such as public trust and Corporate Social Responsibility doctrine, are effectively neutralized. Digital technology companies are insulated from public scrutiny by trade secrets and copyright protections, as well as the public’s debilitating belief in the complexity of the technology. Moreover, by creating vast webs of integrated services on which consumers increasingly depend for a broad array of day-to-day activities, the Tech Giants have effectively entrapped their constituencies. Crises in public trust thus have little impact on company profit when consumers face substantial switching costs, there are no viable alternative providers, or the alternative providers are likely engaged in the same negligent practices as the original offender. Ignorance, convenience, and social pressure ultimately prevail and the ethical concerns about social impact are thereby rendered moot with respect to the corporation’s profit-maximizing purpose.

Reconceptualizing Corporate Governance for the Digital Age

Some scholars have advocated for the adoption of a “information fiduciary” legal obligation which would, in theory, require executives to forego shareholder profit maximization in favor of the public interest under certain circumstances. This idea is analogous to the fiduciary duties owed by professionals engaged in providing direct services to clients with whom they have a relationship of trust and confidence, such as doctors and attorneys. A similar idea is reflected in the practice of Data Stewardship, the holding of consumer data in a public trust governed by ethical principles. However, given the environmental nature of the threat that pervasive digital monitoring poses to privacy, such a fiduciary duty would only be helpful if it is also applied proactively when the company is making important decisions regarding software architecture, market opportunity, and business strategy.

Empowering other stakeholders in corporate decision-making could also provide a helpful incentive. Employee activism has played a key role in forcing executives to reconsider unethical business ventures. The inclusion of ethics in computer science curricula and widespread promotion of professional standards would facilitate conscientious and effective employee oversight. However, as Google has demonstrated, employment-at-will doctrine allows companies to easily quash employee dissent through terminations. Unionization of workers in the digital technology industry and actual enforcement of protections for whistleblowers would help to shift this balance of power.

Faced with organizations behaving badly, it is said, we can impose standards of care on them and charge them if they deviate from those standards. Or we can attempt to change the internal balance of power within them in the direction of behaving better. Who says that? Well, pretty much everybody (including you here) who doesn't think we should do something fundamental to disempower them altogether.

In that sense, centrism is the primary purpose of this essay: laissez-faire is unsuitable, and so is structural upheaval of the socio-economic or socio-political landscape. So let's do what we do and if it doesn't work out at least we did it.

But the gravest problems of this next half-century are the ones (privacy destruction, climate change, radical inequality of wealth) that aren't responding and won't respond to these measures. Sense of helplessness, collapse of social trust, and loss of political coherence are resulting. What is your analysis of the appropriateness of scale of your proposals against the scale of the problem, and the appropriateness of the timeline of those proposals against the tempo of the problem? Realism on those points would be improvement.

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