posted
Hi folks, this has been on my mind a lot lately, and I'm wondering if you could help shed some light on it, especially our legal experts here...
So, fact: Corporations are legally required to maximize profits for their shareholders. If shareholders believe that profits are being lost, they have the right to sue the corporation, and often win. Am I right?
And fact: Due to increases in technology and decreases in foreign trade laws, it's now often far more proftiable for corporations to move production overseas, where lower wages and fewer environmental and labor regulations mean less money for employees and more money for the company.
So... if both of these are true, does that mean that corporations are legally required to send jobs overseas, if at all possible?
Posts: 1681 | Registered: Jun 2004
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posted
Hey Storm, how would I have had to word that to get a response that wasn't sarcastic and flippant? Posts: 1681 | Registered: Jun 2004
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posted
I'm assuming this is hypothetical - if it were real, you'd need to see your own attorney. Short answer, such a suit would be hard for shareholders to win.
quote:Corporations are legally required to maximize profits for their shareholders. If shareholders believe that profits are being lost, they have the right to sue the corporation, and often win. Am I right?
Yes, but it's more complicated than that. There's something called the business judgment rule. Stated baldly, in it's most severe form, it says "The board of directors are presumed to be acting in the best interest of the company unless it is clearly established they are not." This can be interpreted several ways. It can require gross negligence or worse on the part of director actions before shareholders can recover. It can also be states as a reasonable person standard: could a reasonable business person make that decision based on the information available at the time. This means that almost any disputed tactic (that's legal) can be justified by the business judgment rule, which would prevent liability. Taken to its theoretical limits, it precludes most shareholder suits unless there is obvious wrongdoing - violations of law, conflict of interest (which flips the presumption against the director - he would have to prove it was a good idea, which is actually pretty hard), or failure to perform a ministerial act.
In practice, it's not quite that difficult to win a judgment, but it is very, very hard.
Moving jobs overseas is not something that every business person will agree on. Even if the numbers look good, it's possible that quality will suffer, customer backlash will cause loss profits, or the upfront investment to change over doesn't have a high enough NPV to justify it. Because each of those factors can be evaluated to reach wildly different conclusions with only small changes in starting assumptions, it's hard to overcome the business judgment rule on an issue like that.
Also, corporations may take "moral" considerations into account to a certain extent, and environmental and labor regulations are part of that. That is, a manufacturing plant does not have to emit as many pollutants as it is allowed by law in order to maximize shareholder profit.
The mechanism of the suit must be understood in order to appreciate the ramifications. A "derivative" suit is a suit by a shareholder on behalf of the corporation to assert a claim that the corporation has failed to assert. For example, if person X owes firm Y $1 M dollars, but the corporation hasn't collected, then a shareholder could sue on behalf of the corporation. But, the business judgment rule applies to filing suit as well, so if the board thinks filing suit is a bad idea, it doesn't have to. And if a shareholder files a derivative suit that the board doesn't want to pursue, the suit is dismissed.
To get around this, the shareholder usually also files suit against the members of the board for breach of fiduciary duty. In that situation, it would be a conflict of interest for the board to refuse to pursue the claim, so the shareholder is free to proceed. Note what is happening: the derivative suit is against the board on behalf of the company. The shareholder is not suing the company, but acting in its stead.
The problem? Most directors are indemnified by the company for any error not resulting from deliberate violations of the law. So if the shareholder wins against the director, the company pays the damages ... to the company.
So unless the suit alleges a cause of action rooted in intentional wrongdoing, the company stands to gain little. In many states, derivative actions without a certain percentage of the shareholders signing on require a bond to be posted to reimburse the company if the suit fails.
Probably more than you wanted to know.
Posts: 26071 | Registered: Oct 2003
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Thanks Dagonee, this is great to read. I didn't know about the business judgement rule.
So when a company like, say, Dell computers, chooses to offshore much of it's telephone support to, say, India, do they make that decision without a lot of pressure from the shareholders? Even if actual lawsuits from the shareholders don't win all that often (how often do they win, if I could ask?), does the threat of lawsuits play a big role in decisions like this?
Posts: 1681 | Registered: Jun 2004
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posted
I was going to post about my own experience working at MCI in customer service and the outsourcing to India that they've been doing. But T_Smith pretty well sums up my point. (Edit: and then deleted his post, apparently)
Just because something costs less does not mean it will necessarily result in more profit, especially in the long run.
Your conclusion is probably right on in a lot of cases. It's just that it leaves unanswered the question of what happens 5, 10, 15 years down the road. It doesn't take into account the increase in productivity that results from having fewer sick or hurt workers because of labor and environmental laws, etc. Sometimes businesses can be penny wise, and pound foolish.
On the other hand, some businesses are moving to Canada, where many of those regulations are just as stringent, if not more so, and the tax rate is (correct me if I am wrong) about the same. However, because of the fact that those businesses don't have to pay for health care, that is the cost of health care is spread out between everyone, they end up saving enough money that it makes the move worth it.
Another problem that your correct conclusion overlooks is that just because it's profitable to move your business overseas, doesn't mean that it may not hurt the security of a country. If businesses start investing in, say, Libya or Iran, but save money, then this may be bad for the security of our country, but good for the profit margin of the company.
The rebuttal, of course, is that if a country profits from institutions sponsored by its enemy, and depends on that institution for its economy, how can it really be enemies with that other country? It's a convoluted question.
Anyways. I was snarky and flippant because your conclusion was correct, but has some really awful possible implications. Sorry, again.
Edit: There is also the usual supply-side argument that savings a company accrues from moving overseas come back to the host country. I'm not going to argue whether this is always true or not, though I would argue that it's probably sometimes not, and sometimes is. Posts: 13123 | Registered: Feb 2002
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quote:So when a company like, say, Dell computers, chooses to offshore much of it's telephone support to, say, India, do they make that decision without a lot of pressure from the shareholders?
The Board of most publicly traded companies act as they wish without any input from most shareholders. Obviously, the very large institutional investors can get face time and demand changes, but there aren't many of those for any one company, and they usually had a say in the selection of the board.
Ousting a board is very difficult - they are elected by slate in many companies, meaning that it's all or nothing. And it usually requires a LOT of shareholders to get another slate on the ballot. And the company pays for the "campaign" material in support of the existing board's slate, while the shareholders have to pay for most of the materials supporting their own slate.
One interesting phenomenon is that some of the largest institutional investors are union pension funds - very pro labor and very anti-outsourcing. So the pressure might be coming in both directions.
Posts: 26071 | Registered: Oct 2003
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posted
Thanks Storm, sorry to have responded so snarkily myself.
You have good points about profits not being as clear-cut as they may appear, Dagonee did too... at the moment, lower quality of overseas 3D animation is keeping feature and special effects animation mostly in the US (like in, say, Narnia, almost all of the animation on that was done by US workers), but the gap is closing fast. When animators in India and Singapore finally get enough experience and training to compete with animators at Disney, Dreamworks, Pixar, Sony, R&H, and ILM, what will keep those studios from simply laying off all of their US employees and hiring 10 Indian workers for every 1 American they used to pay? Anything?
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posted
I doubt threats of lawsuits are often the impetus behind outsourcing. More often I suspect it is more just a motivation to cut costs in general, which often leads to better financial results and a higher stock price for the company.
Posts: 45 | Registered: Jun 2000
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Zeugma: they'll be kept from it because if they can get Indian animators that cheap, Indian animators will start charging more.
Not only that, but costs are rarely so apparent; successful off-shoring usually requires increased management oversight and retention of a staff of highly trained people in the US able to evaluate off-shored work and communicate appropriately for the field.
More and more now, the ICT development being "outsourced" to India is being outsourced at expert rates because there are an astonishing number of brilliant people in India in that field.
Posts: 15770 | Registered: Dec 2001
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quote: they'll be kept from it because if they can get Indian animators that cheap, Indian animators will start charging more.
Which is only a consolation if a) no other overseas animators step up; and b) the American animators left jobless in this event are able to find jobs as useless middle managers.
What bothers me enormously about the farming of our technical and semi-creative jobs overseas is that these jobs tend to function as training ground for higher-level positions. In the absence of these positions, what will entry-level animators in the States do -- and why should we assume that, ten years down the line, we'll be putting experienced, talented American animators into management positions when all the people with experience will be Indian or Korean?
Posts: 37449 | Registered: May 1999
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posted
The other possibility is that the really powerful directors and producers won't want that distance between them and the animators.
Plus, as animation becomes a more practical possibility for smaller businesses and capital costs decline, there will need to be a thriving market of consultants. So I think at the very high end and the very low end you will still see animators in the U.S. for sure.
Posts: 26071 | Registered: Oct 2003
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quote:The other possibility is that the really powerful directors and producers won't want that distance between them and the animators.
This fails to explain where the powerful directors and producers will come from when all the people with movie-making experience have been farmed out to other countries.
Posts: 37449 | Registered: May 1999
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There are already powerful directors and producers, Tom. George Lucas likes to interfere with everything - you think he's going to fly to India to check up on the animators? So not all of the people with movie-making experience will have been farmed out to other countries.
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The world economy relies on relative advantage. If it really turns out there's a sudden huge relative advantage to offshoring high end animation, then, absent certain relatively rare conditions, it should be done. The cost to social welfare of not doing it far exceeds that of doing it. Any argument centering around the poor American worker in field X completely ignores the poor American workers in field Y not being hired because inefficiencies in X are being inappropriately supported. Perhaps moreso, it completely ignores the poor [insert-other-nationality] workers in field X who endure massive employment shortfalls because the US is artificially supporting an inefficiency, drag their national economy down with them, stop buying as many American goods, and stop their companies from purchasing as many expensive American services.
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quote:lower quality of overseas 3D animation is keeping feature and special effects animation mostly in the US (like in, say, Narnia, almost all of the animation on that was done by US workers), but the gap is closing fast. When animators in India and Singapore finally get enough experience and training to compete with animators at Disney, Dreamworks, Pixar, Sony, R&H, and ILM, what will keep those studios from simply laying off all of their US employees and hiring 10 Indian workers for every 1 American they used to pay? Anything?
I'm not sure if animation is a good example. I'm not an expert, but I tinker in the animation field. First, there is knowing the right people. ILM, Adobe, Maya, Pixar, Dreamworks all have long relationships. It all kinda started from Star Wars. The same people who did Star Wars (even George Lucas) are still pushing the animation scene, including the software.
There is also the technology. It isn't just skill, but being able to use the tools. With every major animation movie that is made, the technology takes a huge leap forward. Whole job positions have been elimiated by computers. I know with The Incredibles, things that took a week for specialized people were now done by the director, on his laptop.
George Lucas is building a new animation studio in California that is suppose to keep pace with the technology. Most likely, similar studios would have to be built overseas. And I just don't see it happening because George Lucas happens to have his studios in **the most expensive places** in California. My guess is if he were going to start hiring people from overseas, he would probably make them move to California.
And I recently read about China and how brilliant they are. But they don't invent anything. They don't inovate. We are lazy and all, but we tend to think of the darnedest things over in America.
Edit: I was speaking of China, not Japan. Japan thinks of much more crazy things than we do. And ironically, they sure know how to animate.
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quote:And I recently read about China and how brilliant they are. But they don't invent anything. They don't inovate. We are lazy and all, but we tend to think of the darnedest things over in America.
They're suffering from a stupid, oppressive government right now, human2.0, which currently has little need for innovation because it's trying to bootstrap its way up the ladder of industrial and technological progress.
The directions for that are already written. They've been written by dozens of other nations already, so it's pretty clear what China needs to do-and they're doing it. Once they've caught up, I think you'll eat your words about the people that invented a heaping helping of the fundamentals of modern technology.
Posts: 17164 | Registered: Jun 2001
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quote:George Lucas likes to interfere with everything - you think he's going to fly to India to check up on the animators?
No, not India... Singapore.
quote:Today marked the formal opening of Lucasfilm Animation Singapore, a digital animation studio designed to produce movies and television programs for global audiences.
My classmates tell me that back in the 70s the animation industry in the US essentially died as almost every single TV animation studio went overseas. To this day, the vast majority of cartoon shows you watch, from Simpsons to Nickelodeon, are animated in Korea.
One of the only reasons the animation industry is growing in the US right now is because of the increasing popularity of 3D animation, and so far the market on quality 3D is being cornered by the US for the most part. But that's changing fast. Americans are certainly no more talented or creative than Indians or Koreans or folks from Singapore, but we do have way higher wages and a pesky government that likes to protect things like workers and the environment.
So 5, 10 years down the road... maybe the top-of-the-line animation studios will continue to employ animators in-house, but the studios like R&H that contract out for special effects shots like Narnia? Or games studios, that already tend to keep labor costs low by hiring entry-level workers and laying them off when it comes time for raises? What will keep them in the US?
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posted
Really? That's not a very true statement, especially since historically Japan has been inovative for centuries. Just like at samurai swords for example.
Posts: 9942 | Registered: Mar 2003
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In fact, for nearly 150 years Japan was anything but innovative, technologically speaking. Their borders were shut against foreign influence for quite a long time, until the outside world (America) thrust through those borders.
Samurai swords were for a timethe best steel in the world, but that was no exceptional innovation, really-it was just that the weaponsmiths worked really, really, really hard and long at hammering and folding the steel over and over and over again.
Japan's "innovations" historically speaking come almost exclusively from China. Arguably Japan has been very innovative in the humanities and warfare, but historically they have not been very innovative technologically speaking, until quite recently.
Edit: I should add their borders were not TOTALLY shut, there was a very small enclave of foreigners.
Posts: 17164 | Registered: Jun 2001
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There are already companies who are trying to bank on China's genius population, and that was what the article I read was about, how they are getting them to inovate.
Hm. Well, I didn't know all current non-3D animation is done overseas. I'm just glad my job requires me to be physically present. Can't hire someone in Singapore to move a computer from one room to the other. I've told myself this line many times over the years.
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