There’s a huge irony in talking about fairness and executive pay. 

The irony is that perceived unfairness is one of the drivers for the upwards ratchet in pay. That is, some CEOs feel hard done by, and some remuneration committees worry that their CEOs will feel hard done by, and so feel obliged to match the pay of others. This is not good, but it is human.

So deeply inculcated in humans is the sense of fairness that while it is hard to believe that increments on significant incentive pay can create a greater incentive to perform — most doubt that a CEO will genuinely work harder if paid £4 million rather than £3 million — there is nonetheless scope for rewards to operate as a disincentive. If others that the individual perceives to be peers are all paid £4 million then the CEO will feel hard done by, tough though that is for a thoughtful independent third party to believe. The sorts of people who become CEOs of public companies are by their nature more than marginally competitive.

But this sense of feeling hard done by is pure perception. In their excellent paper The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1% Incomes, Josh Bivens and Lawrence Mishel of the US’s left-leaning Economic Policy Institute provide significant evidence that there is rent-seeking in executive pay. This is strongly suggestive that the roles would still be attractive if executives generally received lower levels of compensation — so that CEOs would work as hard if they were paid £3 million rather than £4 million. It is not that the quantum is necessary, it is just that it is expected because others get that level of pay — so that £3 million will be ‘enough’ only if others also receive similar amounts. But £2 million would also be ‘enough’, as long as others received similar amounts.

These days the peers that CEOs measure themselves against in this way are international. Bivens and Mishel acknowledge the negative influence that US pay structures and levels are having on the rest of the world. Yet just this week the latest statistics from shareholder advocacy group As You Sow on the votes of major US mutual fund groups reveal the extent to which many institutional investors bless the surprising structures and pay levels typical in the US. Even among the pay schemes enjoyed by what As You Sow deems the 100 most overpaid US executives, Northern Trust backed them all in 2018, Fidelity opposed just 7%, BlackRock 11% and Vanguard 14%:

These numbers are at least a toughening of positions on previous years’ stances — all of these investment houses, and 20 in total, had opposition levels in single figure percentage points in As You Sow’s 2017 report when the campaigner challenged: ‘Are fund managers asleep at the wheel?’.

Yet even a very basic set of standards with regards to executive pay leads to remarkably different voting results. A few years back I set out some basic requirements on performance linkage for my investment institution, meaning that US schemes would be opposed if any one of these triggers was breached: supposed ‘long-term’ rewards are released within 3 years of award; more than 25% of awards are time-based only and not performance-linked; and rewards paid out if they applied a total shareholder return (TSR) metric that allowed a payout for underperformance, that is if TSR was below median of the peers. This doesn’t amount to more of an insistence than that there should be at least some limited degree of genuine long-term performancing of US awards (not least given the quantum that is standard in that country), but even just applying these very simple requirements led to my employer opposing 74% of all remuneration resolutions in North America in the last full year I was responsible for those decisions.

The negative influence of US pay practices and quantum is shown very clearly by statistics from UK campaigner the High Pay Centre. This chart is from their August 2018 High Pay Centre/CIPD FTSE 100 executive pay survey report:

Those sectors where CEO single figure pay is above £4 million are those where there is a clear international market for talent. Pay has been pulled upwards in those sectors where UK companies face global competition.

It’s also worth noting as an aside that the High Pay Centre numbers show that median UK CEO pay has stayed roughly level from 2011, when it was £3.90 million, to 2017, when it was £3.87 million. It does not appear that executive pay is becoming more of a problem, at least in the UK, even if the attention focused on the issue, and on the generosity of specific outliers, continues to become more intense.

But there is a clear problem. These charts from my excellent colleagues at governance data shop Aktis tell a remarkable story*:

This close compression of pay at US banks — in effect they all seem to pay the same amount — strongly suggests that their directors believe that there is a going rate for the job. In short, compensation committees seem to have come to the bizarre conclusion that it is more important to pay at the same level as their peers than it is to pay according to the executives’ performance. This demonstrates the benchmarking ratchet in visible practice. Encouragingly, there is no such compression seen in the European figures; performance seems to be more of a driver of pay in the region (as well as overall quantum being lower).

Nassim Nicholas Taleb has argued (see his 2018 book Skin in the Game or Inequality and Skin in the Game) that it is this mindset that is felt to be unfairness (he uses the term inequality, but in two forms): people feel it to be unfair that time-serving should itself be rewarded. Taleb argues that no one objects to inequality that is deserved; that genuine entrepreneurs are seen to deserve wealth because their success comes from risk-taking and creativity. But merely participating in business life does not deserve huge reward — the inequality that arises from this is resented rent-seeking, he says. This just shows why fairness is a better term to use — the entrepreneur’s rewards are largely perceived as fair (unresented inequality), while the time-server’s similar sizeable rewards are seen as unfair (resented inequality).

So much for restating the problem: it’s unfair, and it isn’t working well. In many ways, things do not seem to have moved on much from nearly 20 years ago when my article Not badly paid but paid badly identified taxes, timeframes and trust as three key drivers of executive pay dysfunction. 

But we need solutions not just restatements of the problem. Here are some initial suggestions:

• Let’s use the lens of fairness, not be shy of it. That’s why the Investment Association’s use of the term fairness in relation to executive pensions (Investors to Target Pension Perks and Poor Diversity in 2019 AGM Season) is so welcome — and the associated plan to press for changes when management enjoy different rates for their pensions than the rest of staff. Let’s do this more. One obvious candidate is the blithe assumption that seems to be made that asserting CEO salary increases can readily be justified where they are of the order of pay increases throughout the organisation; given the multipliers from incentives that the CEO enjoys the comparison is weak and doesn’t feel like fairness.
• But the lens of fairness should not allow us to fall into the ‘price of the job’ trap. As Taleb rightly points out, it is this mindset that particularly fuels concerns about unfairness. Genuinely deserved riches can be a matter to be celebrated, but undeserved riches are not. This requires 2 things: 1. remuneration committees need to escape the benchmarking trap, and 2. they need to ensure the clarity of a link to performance is clear. As the US banks appear to have failed to do, they need to ensure that pay is driven by performance, not by the level of pay at peer organisations.
• Instead of the oft-mentioned worker representatives on boards or on remuneration committees, the accountability to the workforce regarding executive pay could come very directly in the form of an annual remuneration committee presentation to workers representatives. This would be of the remuneration report, i.e. the decisions in the year and proposals for the year to come. I am not sure there needs to be a vote by workers, as the UK’s Labour Party appears currently to be considering; the force of having to explain decisions and the implication of needing clearly to understand the broader context for the workforce could have a remarkable, salutary effect for many remuneration committees.
• Disclosures of pay ratios between the reward of CEOs and the average employee — flawed as they are for purposes of comparison between companies, even within a sector — should assist this salutary lesson and help encourage some sort of lid being placed on pay increases for top management. A comparison of such ratios year on year at a single company could be a powerful tool.
• If the overall numbers are too high, and are not necessary except that others pay it, we face a difficult collective action challenge. We need to change the norm, and in part recognising what are the limits to acceptability must be part of that; investors need to play a stronger part in bringing the acceptable norms closer into the boundaries of normality and rationality. For me, a reduction in quantum is the main attraction of restricted stock based schemes, which have been the subject of ongoing debate in the UK and remain opposed by many investors. That opposition is based on the argument that such schemes are seen reduce the linkage to performance, so perhaps my backing for them is ironic given what I have said (not least the inclusion of such schemes in my simple 3 tests for poor structure in the US). But in part the answer — particularly the inconsistency with the US — is to do with quantum. I would argue that is a trade that we have to be willing to make in order to address the perceptions of unfairness such as those Taleb identifies. But if the performancing at the front end of restricted stock schemes, through the annual bonus system, is delivered effectively we may in fact get a better linkage to what better reflects genuine performance and drives better behaviours through organisations than we now get from the forward-looking performance metrics embedded currently in long-term schemes. I will return to the question of what sort of performance we should be thinking about linking to for those bonus payments shortly in a forthcoming post.

Fairness is for management often a driver of the upwards ratchet in pay. The rest of us should not succumb to this perspective, but rather should use fairness as a lens to focus in on how the appropriateness of pay can be demonstrated. Pay structures that reward time-serving will never seem fair, but reward for performance (if at a reasonable level) can. Expecting remuneration committees to be able to explain how they have done that is a minimum expectation, and being able to do so to stakeholders as well as shareholders may provide additional challenge that helps them towards delivering in practice. And calling out any failures to deliver fairness — and calling them out on a level playing field globally — is the least that we can fairly expect from institutional investors.

 

* the full Aktis data is discussed in this Yahoo! finance article: New study argues US bank CEOs make too much money

 

The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1% Incomes, Josh Bivens and Lawrence Mishel, Journal of Economic Perspectives, 27 (2013)

The following briefly captures the responsible tax discussion at the recent ICGN conference in Amsterdam, a topic to which I will return more fully in later blogs. In large part this was an encouraging discussion, though there were clearly significant gaps in practical implementation.

Inevitably perhaps in a self-selecting group, investors were clear the issue matters: 89% say responsible tax is a consideration in investment decisions, and fully 95% say corporate philanthropy is not enough, that responsible companies must focus first on paying a fair level of taxes. Further, 87% believed that country-by-country tax reporting should be required of all companies — though the discussion in the room suggested that the practical experience of this was not always as valuable as the theory.

Yet, even among this enlightened group only 47% say that they definitely take responsible tax concerns into account when structuring their own investments. And while one Dutch pension scheme reported that it has stopped stocklending because it could no longer defend the dividend tax arbitrage implicit in this process any more, its representative noted that most of his peers are unaware that this is even an issue in stocklending.

It is clear that there is much work to do before fair tax is delivered in practice, and it becomes an issue that we address as well as just expecting them to.

See also: Fair tax reflections from investors II

We are social creatures, and our attitudes and approaches are framed by the world around us. If we believe that world to be fair, we are likely to behave more fairly. The general and growing belief that the world is inequitable must therefore have a debilitating impact on many people’s approach to life.

In a series of experiments in quiet alleyways, Dutch scientists demonstrated just how susceptible we are to behaving in a way that we believe others are behaving. Sadly, we are easily persuaded to behave less well than we otherwise might.

Published in a study called The spreading of disorder the scientists reported on experiments in the small northern Netherlands city of Groningen — probably better known for its 400-year old university than for it being the Dutch host of the annual International Cycling Film Festival. 

Groningen is not a particularly dirty or unruly city, but the experiments explored the extent to which people can be influenced into worse behaviour by their environment. They are more likely to litter if the alleyway they are in has untidied rubbish and intact graffiti — 69% littering in the presence of mess, against 33% when the alleyway is tidy. The academics report that Groningen police do not enforce littering rules so they suggest that fear of getting caught is not the driver, rather that social norms are, and in a similar test found that 58% littered in a car park where a call to tidy away shopping trolleys had been clearly breached, while only 30% did where all shopping trolleys had been put away properly. 

Audible cues had a similar impact — the noise of fireworks being set off in breach of a national pre-New Year ban was sufficient to stimulate 80% littering rather than the 52% in a more obedient silent control situation. Furthermore, people appear to be more likely to trespass in breach of a clear sign instruction if they can see that another sign has already been ignored (82% vs 29%). 

The most striking of all studies are those where the academics created a temptation to steal: a stamped, addressed envelope with a visible €5 note in it was left not fully pushed into a postbox. Where the postbox was covered in graffiti, 27% of passers-by stole the envelope; where there was no graffiti but the ground was littered, 25% of passers-by succumbed to temptation to steal. Both results are significantly worse than the 13% level of theft in the clean and tidy control situation.

We are much more likely to misbehave if we believe that is the norm of those around us. We are much more likely to behave well when we understand that others do. We are social beasts.

And our actions are framed by the world around us not just in Dutch alleyways. For example, if people believe they have been cheated, they are more likely to cheat: one study found that those who received little or nothing in a dictator game (explained in Ultimatums and dictatorship: fairness shines through), or simply believe themselves to have been cheated in the game, are much more likely to cheat when reporting the results of a subsequent coin tossing game to gain an undeserved payoff. 

Another experiment is perhaps still more startling. Volunteers given expensive designer sunglasses are more likely to cheat in a self-marked maths quiz if they believe the glasses to be fakes. Those scoring well in the test earned up to $10; all were told that they were trusted to mark their own work, but the papers were later recovered and cheating identified. While 30% of those who believed they had been given genuine sunglasses cheated, fully 71% wearing supposed fakes did. Furthermore, those wearing fakes are significantly more likely to believe that others lie and act unethically; the wearers of fake glasses have their view of the world and of society significantly tinted for the worse. Given the prevalence of fake goods, this is a remarkable result — a sign that we risk the erosion of much through people’s desire for cheap substitutes to costly goods. Cheating the expensive designers may mean we lose more than we imagine we gain.

Social norms can be found on a much larger scale too. Researchers studied the honesty of people from 23 different countries, again through the medium of a self-reported test, this one involving a higher dice roll earned a greater reward. While none showed much evidence of blatant lying, there was clear evidence of some cheating through the statistically unlikely results that were reported. And these levels of (minor) cheating were greatest in those countries perceived to have the highest levels of corruption and rule violation, and lowest in countries where there is felt to be less corruption and unfairness. The researchers concluded that the results “show that weak institutions and cultural legacies that generate rule violations not only have direct adverse economic consequences but might also impair individual intrinsic honesty that is crucial for the smooth functioning of society”.

So the general belief that there is significant unfairness in the world must have a negative impact on the way that we treat each other and the fairness that we display in our lives. And no wonder that there is righteous anger when we see people avoiding taxes who are well able to pay. In contrast, if we wish to see fairness we must show fairness so that others feel it is the norm expected of us all.

One other lesson of the Dutch alleyway study is that I can no longer feel selfless when picking up rubbish on the streets around my house — I actually have a self-interest in so doing. Perhaps we also need to consider what are the metaphorical dirty alleyways of our world, and find ways to clean those up too. Surely finding some way to empower people to tidy the filth and rubbish from the world of social media would be a positive — and what a gift to us all if it no longer was an acceptable social norm to resort readily to anger online.

 

The studies discussed in this blogpost are:

The Spreading of Disorder, Kees Keizer, Siegwart Lindenberg and Linda Steg, Science 322 (2008)

Fairness and Cheating, Daniel Houser, Stefan Vetter, Joachim Winter, European Economic Review, Vol 56 (8) (2012)

The Counterfeit Self: The Deceptive Costs of Faking It, Francesca Gino, Michael Norton, Dan Ariely, Psychological Science 21(5) (2010)

Intrinsic Honesty and the Prevalence of Rule Violations across Societies, Simon Gaechter and Jonathan Schulz, Nature 531 (2016)

I was reminded in a chat this week of the Credo published by US pharma and consumer company Johnson & Johnson, and in particular its all-important final sentence: “When we operate according to these principles, the stockholders [shareholders] should realize a fair return.” The word ‘fair’ appears 4 times, once in each of the short paragraphs.

What does this focus on fairness, on a fair return, look like? Of what is it the outcome? 

The Credo was created by Robert Wood Johnson, a member of the founding family and J&J’s chair from 1932 to 1963. It was written in 1943, just before Johnson & Johnson became a publicly traded company; J&J claims it as a bedrock of how the business still runs 75 years on: “Our Credo is more than just a moral compass. We believe it’s a recipe for business success.”

What is that recipe? Simply, that its customers come first, that suppliers have a right to a fair profit, that employees need to be respected and given scope to prosper, and that local communities matter; and that J&J needs to be a good corporate citizen (including expecting to “bear our fair share of taxes”). Only once all that is delivered do the shareholders gain any consideration: “Our final responsibility is to our stockholders.” It is clear that shareholders’ fair return is an outcome of running the business well and delivering value for all the other stakeholders, it is not an end in itself.

And the consequence of this focus away from shareholder value maximisation and towards business success through delivering value to customers, suppliers, employees and the broader community? Value creation for shareholders too, with an impressive share price chart and still more impressive progressive dividend record dating back to the early 1970s.

So, long before the current debate on corporate purpose, and even long before the nonsense suggestions that US businesses are obliged to focus only on narrow shareholder value maximisation (both discussed in Accountable Capitalism, my article in October’s Governance), here was a US company going to the market with the explicit statement that shareholders do not come first, rather all other interests in the business do. And one that has amply demonstrated that the outcome of seeing shareholder value creation as an outcome not an aim is prolonged business success.

Some inevitably will criticise J&J and suggest that the Credo is mere words that deliver no substance. And of course, as a US healthcare business it faces multiple lawsuits regarding its products, a number of which it has lost. But my experience was that representatives of the company, both staff and independent board members, did talk about it differently from the way one hears from many US businesses. In particular, there was a pride in the company’s record of voluntary recalls of its products ahead of being obliged to by regulators or any certain evidence of problems — perhaps a putting into practice of the ‘first responsibility’ being to customers. It was never quite clear that problems were always avoided in the first place, but it was clear in discussions that this was a company with something of a different mindset.

I believe its Credo has something to do with that. Others might prosper by thinking in a similar way.

An excellent Private Sector Opinion document from the IFC, a meta-analysis of the research revealing the business benefits of diversity on boards and among management teams.

It was an honour to provide the Foreword for this document:

“The ongoing discussion about diversity—and, more broadly, about the importance of environmental, social, and governance performance—plays to a growing sense that the business world should be less distant from the population as a whole and that there is a growing need to be energized by a sense of fairness. A business world that more fully reflects its community and customers is more likely to be seen as fair and trusted.”

It’s a question of scale. Like Gulliver in Lilliput, it is almost impossible for large organisations to conceive of the impact that they may have on small ones. Sometimes that impact can be devastating.

This thoughtful, mournful article reveals that we are all potential giants in the Internet world, sometimes able to damage without being aware of it.

The article discusses the demise of what was said to be the greatest burger joint in America. It is more than worthy of the investment of time in reading it. While the editorial note that now heads the page adds a further set of factors regarding the demise of Stanich’s, the core theme and tone of the story focuses elsewhere and holds some interesting truths.

The article discusses the impact that all those clickbait lists that all internet users love can have — and the tendency that the readers of such lists often have to use them as checklists while ignoring what may be just around the corner.

It talks about individuals who serve local communities and do not want any more than that. It highlights though that the scale of modern media reach is such, and our checklist culture is such, that it is hard for the really good community businesses not to be impacted when their greatness is recognised.

It is impossible not to sympathise with the ceviche chef Jose Luis de Cossio who stopped serving ceviche when a selection as best restaurant made it impossible to serve his community. I personally love ceviche (as so much that comes from Peru), but some of my favourite restaurants have been those just around the corner from home.

We see the same harm from checklist behaviours in the damage that the weight of tourists have on some of our most beautiful places. Barcelona, Venice and Dobrovnik to name but three fantastic cities now struggle to manage the numbers wanting to visit. I’m not suggesting that it was all better when few could afford to travel — and I personally fully intend in due course to make it to the one of these three that has not been marked off my personal checklist. But it is amazing how narrow-minded we are; I am told that the National Trust now limits its core maintenance activities to 100 metres from its car parks because in a bizarre version of the pareto principle 90% of visitors do not walk further than 80 metres. We simply do not look beyond the near at hand or the obvious.

And in the Internet world the near at hand and obvious is frequently provided by clickbait lists rather than the evidence of our own senses. Our willingness to seek out for ourselves is too often supplanted by the ready reckoners provided by others.

In one of my favourite ever Letters from America the great Alistair Cooke began by saying there was something that he ought to talk about and something he must talk about (the delightful Workers, Arise! Shout ‘Fore!’ from December 1974). This blog is written in the same spirit. Having happened across the article on Stanich’s it has worried away at me and required me to share it. While not directly on fairness, it nevertheless seems relevant to some of the ways forward regarding our economic system, and the challenges that we currently face. 

I suspect that localism and appropriate scale will turn out to be part of the answer of having an economic system that works for all. In order to foster the success of local business, the Stanich’s story reminds us that localism is challenging in an internet world — just as the web offers an outlet for small manufacturers and artisans, internet success will challenge production levels and quality standards. Perhaps the challenges of scale was ever with us, but with global reach within easy reach, we may find Gulliver crushing more Lilliputians than he sustains.

 

Web address for the story of Stanich’s:

https://www.thrillist.com/eat/portland/stanichs-closed-will-it-reopen-burger-quest

A fair approach to climate change policy

A former colleague asked me a few months ago about the Just Transition on Climate Change. We chatted about fairness and justice and its implications. In the end, their investment institution did not sign up to the investor statement in this respect. And that put them in perhaps a minority among ESG-minded investment institutions, for when the Investor Statement to Support a Just Transition on Climate Change was launched in the outskirts of the Katowice climate change summit, the latest COP or conference of the parties to the UN Framework Convention on Climate Change, it was signed by 116 investment institutions with some $5.46 trillion assets under management.

The concept of a Just Transition in effect means taking into account social issues in the approach to climate change. In the increasing way of these things, the investor statement is no more than a signal and in effect commits the investment institutions to nothing in particular. Rather, they assert that they will integrate just transition concepts into one or more of their investment approach, capital allocation, company engagement activities, public policy campaigns or transparency. We shall see whether it will indeed change behaviour.

The Just Transition idea originates with the organised labour community: in 2013 the International Labour Conference adopted a set of conclusions seeking to ensure that labour issues are embedded in any move towards a more sustainable economy. As paragraph 4 reads:

“A just transition for all towards an environmentally sustainable economy … needs to be well managed and contribute to the goals of decent work for all, social inclusion and the eradication of poverty.”

Nick Robins and others at the excellent Grantham Research Institute on Climate Change and the Environment deserve particular credit for bringing this issue to the fore in investor thinking. But perhaps the activities of the gilets jaunes in Paris and across France have made the need for fairness and justice in climate change policy more apparent to all.

The catalyst for the street protests by campaigners without any formal leadership and self-identifying by wearing the high-vis vests that all French drivers must carry was an increase in fuel duties. But the disquiet that they were so vigorously expressing seemed rather more broad-reaching. Not least, the sharply retrogressive tax changes that President Macron had implemented — and is now rapidly withdrawing. 

Once again it is fairness that needs to be applied. Of course, the Paris Agreement already captures climate change fairness of one form: by insisting on different CO2 reduction trajectories for developed and developing economies it understands that the current levels of atmospheric CO2 are largely the results of past industrialisation by developed economies and recognise that it would be unjust — and politically impossible — to bar developing economies from economic development by applying constraints equally.

In some ways the concept of the just transition is a smaller scale reflection of the same concept of fairness: the burden of the fundamental economic changes that carbon constraints will wreak need to be borne by those with the greatest means to pay, rather than those with least flexibility and resources. At present, because carbon taxes largely fall equally across the income distribution, their effect is in practice regressive and so they appear unfair — an impact made more immediate given that many of those hit most hard by the economic dislocations caused by a carbon transition will be among the less well-off.

In part the response to this challenge will need to be hypothecation of tax revenues. I suspect this is an issue I will return to in future blogs, but hypothecation is the explicit allocation of tax revenues to spending in a particular way. Governments, and particularly treasury departments, don’t like hypothecation because it reduces their freedom of action and constrains them to certain forms of spending. Our politicians would much rather have ongoing budgetary flexibility, a large pot of unconstrained money from which to allocate to what they deem the political necessities of the time.

But this is precisely the point: hypothecation introduces a little more tension into government’s relationship with the people and so ensures a fuller sense of accountability. Hypothecation of taxes to spending commitments can help maintain the licence to levy tax. A hypothecation of green tax revenues to explicitly progressive tax relief could help mitigate unfairness that these taxes impose. Even if it did not entirely remove opposition to such taxes it could significantly draw its sting.

It increasingly looks like whatever emerges from Katowice will not be a strong agreement, limited by a bizarre coalition of the unwilling, Kuwait, Russia, Saudi Arabia and the US, who refuse to acknowledge the implications of the recent IPCC report encouraging a 1.5 degree rather than a 2 degree world (and rather than the 4.5 degree world that our current trajectory seems set to take us to). These four countries share little apart from wealth built on economic fossil fuel dependence. They may succeed in delaying concrete responses to climate change, the effect of which will be an increase in the eventual cost, and imposing a greater burden on those least able to bear it — because the physical impacts of climate change thus far seem to fall disproportionately on the poorest countries and the poorest communities. 

That isn’t just, and it isn’t fair.

No, this is not the official collective noun for our closest animal relatives. Unlike the wonderful unkindness of ravens*, the proper collective for a group of chimps is a troop or family — or occasionally a cartload or whoop.

But the collective noun for chimps might as well be an unfairness, because that tendency is what they seem regularly to display. Their failures of fairness put humankind’s successes into relief and perhaps demonstrate still more why we need to uphold fairness in order to continue to prosper.

Unlike homo sapiens, chimpanzees are close to a form of homo economicus, the theoretical human who behaves according to the selfish logic that underlies traditional economics: operating to their own narrow individual benefit, unmoved by any sense of altruism, or of fairness. 

Chimps have been challenged with a form of the ultimatum game. Two chimps have access to trays of a range of different splits of goodies. Only one can choose the tray and so allocate the goodies; only the other is able to pull the tray so that each can access the allocation chosen.

Whereas humans have shown that there are levels of allocation that are unacceptable, and so the second participant might reject some sets of choices in splitting the goodies, doing without a benefit if the split seems unfair, the experiments show that chimps will take whatever they are offered as long as it is not nothing. Unlike humans who care for fairness, it seems chimps obey the expectations of traditional economists and will accept the smallest of benefits, knowing that they are better off for having done so. The concept that the chosen split is not fair, and that might influence whether it should be accepted or not, seems simply alien to our chimp cousins.

This reflects the lack of cooperation shown by chimpanzees in the wild. While they appear to hunt in packs, close analysis of what goes on reveals that this is simply the combination of a series of individualistic selfish motivations of each chimp seeking to catch their red colobus monkey prey. The chimp who makes a successful kill at the end of a hunt does not share the proceeds fairly with other participants. Rather it tries to sneak off with the body, and shares it not according to the level of participation by others in the hunt but instead allows shares to be taken according to the scale of begging and harassment from those who crowd around.

This selfishness has been replicated in scientific studies, to the extent of it preventing the participating chimpanzees from getting food at all. The challenge set is of food being placed some distance away from their cages which can only be brought within reach if two chimps work collaboratively to pull ropes to draw the food nearer. The study found that while two chimps will cooperate to drag two separate items of food towards them, they actually avoid collaboration if the reward has not already been separated into two parts. It is not unfairness they cannot face, as they will cooperate even if the two separated rewards are notably unbalanced, it is the fear of receiving nothing because the weaker knows it will lose out to the stronger once the single meal is within reach. Thus the chimps expend no effort and gain nothing — the contrast with the ability and willingness of humans to cooperate, and then to share fairly, is striking.

There are some studies that suggest this sense of selfishness among our brethren is not universal and that they may enjoy some sense of fairness. Studies where the participating chimps have a choice of fellow participants show more success in cooperation — and that chimps choose fellow participants who are better at cooperating and shun those that fail. But even these studies show that the levels of collaboration fall far short of what can be expected by even the youngest humans (this collaboration is explored wonderfully in Michael Tomasello’s Why we Cooperate, Boston Review 2009).

Perhaps most shockingly, while human mothers will starve themselves in order to feed their children, chimpanzee infants tend to be given the worst of the food that their mother is eating: the peelings, the husk, the shell rather than the more nutritious part of the fruit. Even where chimp infants are trying to get good food from their mother, they are more likely to be rejected than fed. Even in the most intimate relationships, chimpanzees are selfish and don’t act fair.

In this failure of cooperation by our very closest relatives (and chimp DNA is all but identical to that of humans) may well lie human’s crucial evolutionary advantage: that we are willing to work together and trust each other to share the rewards with some level of fairness. We thus take at least a portion of the benefit of our efforts, and as a result enjoy a larger collective pie to share between us.

It is not that fairness is a uniquely human trait — I had the privilege two years ago of witnessing humpback whales collaborating to take it in turns as a pod to chase fish down a narrow funnel of sea between the cliffs (known in the delightful Newfoundland dialect as a tickle) into the mouth of one of their group, with the taking of turns and sharing of effort just being a natural response for them — but it is so fully embedded in who we are that we struggle to understand why our closest animal relatives can possibly fail to follow the same obvious steps. Some of how our modern world works seems to act more chimpanzee than human, and to stifle those natural instincts. It is this that this blog is seeking to explore, and to try to understand what we might choose to do about it.

It is an unfairness of chimpanzees, but it is a fairness of humans — and we need to remind ourselves of that, and take the full benefit of it.

 

* Though ‘an unkindness’ is wonderful, it’s odd that there’s a collective noun at all for ravens as they are largely solitary beasts, more likely to be found in pairs than more, and indeed seem to suffer stress when in groups. Genuinely, an unkindness.

 

Studies evidencing the unfairness of chimpanzees:

Chimpanzees Are Rational Maximizers in an Ultimatum Game, Keith Jensen, Josep Call, Michael Tomasello, Science 05 Oct 2007: Vol. 318, Issue 5847

Meat sharing among the Gombe chimpanzees: Harassment and reciprocal exchange, Ian Gilby, Animal Behaviour 71 (4) (2006)

Tolerance allows bonobos to outperform chimpanzees in a cooperative task, Brian Hare, Alicia Melis, Vanessa Woods, Sara Hastings, Richard Wrangham, Current Biology 17(7), April 2007

How chimpanzees cooperate in a competitive world, Malini Suchak, Timothy Eppley, Matthew Campbell, Rebecca Feldman, Luke Quarles, Frans de Waal, Proceedings of the National Academy of Sciences, 113(36), September 2016

Food transfer between chimpanzee mothers and their infants, Ari Ueno, Tetsuro Matsuzawa, Primates 45 no 4 (2004)

Peter Drucker, the management education guru, was clear: “The purpose of business is to create and keep a customer.” There is no business without being able to serve a customer and deliver something to them that they value more than the cost of creation and delivery — that is what profit is, after all.

It is a shame that profit has become a dirty word, given that it is just the measure of the value that a business adds for its customers — or should be.

So customers matter, and businesses that want to prosper for the long-run must nurture their customer relationships. Hence the importance of a recent discussion ‘What does it mean to be honest and fair with customers’ fostered by the reliably thoughtful Blueprint for Better Business.

Customers are central to any business, and serving customers well is vital for any business that wants to prosper for the long-run. Yet Citizens Advice recently used its new powers to launch a so-called super-complaint, requiring the Competition and Markets Authority to investigate the penalty that loyal customers apparently pay. According to Citizens Advice, who call it a systematic scam, customers who stick with their existing suppliers for mobile, broadband, savings, home insurance and mortgages, are losing more than £4 billion a year — in effect being overcharged by nearly £900 each. 

Loyalty does not pay, it seems — so why would any customer be loyal to such businesses? Not least, there is a clear benefit to companies from loyal customers as the cost of winning new business is always a significant one. Sharing part of that cost with those who are retained business might be a better way to engender trust and be seen to be acting fair. But without this spirit of fairness in relation to their customers, some businesses might find that they will not retain them — and that cost risks being far greater than any fine from the CMA.

For me perhaps the most powerful element of the write-up of the Blueprint discussion
 is the acknowledgement that being called consumers may not drive the right dynamic among customers: “The goal of activating ‘more conscious consumerism’ does not play to human instincts to collaborate – the data shows that when we identify as a person, a householder, a neighbour, we act more in group interest and have greater trust in the collective, than if we are approached and described as a ‘consumer’. The language matters.” It usually does.

Helping our customers to be active participants in long-term business success may be a bold step but perhaps it is one that every fair-minded corporation needs to take. After all, Drucker’s maxim includes keeping customers as well as creating them.

Blueprint is planning an event to discuss fairness in more depth, to be held at the RSA on March 9th 2019.

My article in Governance, October 2018, on Elizabeth Warren’s Accountable Capitalism Act proposals:

“A corporate sector that more explicitly aims to add value to society and not simply to itself has a better chance of reversing the current perceptions of significant unfairness, and beginning to change the negative view of capitalism as a whole.”