Everyday Economics

Texaco’s Uncompensated Victims

How corporate discrimination hurts stockholders.

Suppose the management of a large corporation (call it Texaco) discriminates against blacks in hiring and promotion. Who are the victims of that discrimination? The most obvious candidates are the black workers who are denied suitable positions. But there’s a second class of potential victims: the corporate stockholders, who are denied the services of those black workers.

You might guess that when there is discrimination, stockholders suffer less than the black workers do. In fact, it’s more likely to be the other way around, for reasons I will explain as I go along. In that light, boycotting Texaco products would be cruelly ironic. Boycotts lower corporate profits, which punishes not the discriminatory management but the innocent stockholders–that is, not the sinners, but their victims. There is even greater irony in the reports that management will atone for its sins with a $176 million payment to black employees–all of which will come directly from the pockets of those now doubly victimized stockholders.

To see why the stockholders bear many of the costs of discrimination, let’s think through a few alternative scenarios.

Scenario 1: Suppose that jobs at Texaco are pretty much interchangeable with jobs at, say, Exxon, Mobil, and other competing companies; suppose also that discrimination is a problem only at Texaco. Then it’s easy for Texaco’s black employees to escape discrimination by taking jobs elsewhere. The positions vacated by Texaco’s blacks will be filled by whites, presumably of about equal competence. (Because we’ve assumed that Texaco jobs are interchangeable with Exxon and Mobil jobs, there’s a large pool of workers at those firms for Texaco to draw on.) In this scenario, Texaco ends up with an all-white work force, but no harm is done to anybody: Blacks who would have worked at Texaco end up in equally desirable jobs at Exxon; Texaco stockholders who would have profited from the wisdom of black executives end up profiting from the equal wisdom of white executives.

Scenario 2: Suppose again that jobs at Texaco are interchangeable with jobs at Exxon and Mobil, but suppose this time that discrimination is rampant throughout the industry. Then Texaco can treat its own black employees badly, but no worse than the industry standard; if conditions at Texaco get worse than conditions at Exxon and Mobil, all Texaco’s black employees will move to Exxon or Mobil. (Similarly, if there are comparable jobs available in other industries, the oil industry as a whole cannot treat its black employees any worse than the standard set by those other industries.) So, in this scenario, blacks can be harmed by discrimination in general–but they do not suffer any additional harm from Texaco’s policies in particular.

In this second scenario, it’s the stockholders who suffer for the sins of the management. To see why, consider this example: Suppose that throughout the oil industry, white executives earn $100,000 while otherwise identical black executives earn $60,000 because of discrimination. Then Texaco could slash its payroll by firing all its white executives and hiring blacks to replace them at, say, $65,000 each. If the management is too blinded by discrimination to pursue that option, then the stockholders end up paying an unnecessary $35,000 per executive per year.

Y ou might want to argue that paying blacks $65,000 to do a $100,000 job is itself a form of discrimination. I’d want to argue otherwise, because in the case I’m envisioning, the wage differential is driven not by racial preferences at Texaco but by profit opportunities created elsewhere in the market. But that is just a matter of definition, and we can at least agree on this: No matter how you define discrimination, hiring blacks at $65,000 is surely less discriminatory than refusing to hire blacks at $65,000. And, again, no matter how you define discrimination, the bottom line is this: If Texaco discriminates less than everyone else, it ends up with lots of black executives and a tidy profit for the stockholders; but if Texaco discriminates as much as, or more than, everyone else, that profit opportunity is thrown away. So when Texaco’s management is highly discriminatory, Texaco’s stockholders are the big losers.

Scenario 3: Suppose that, contrary to the first and second scenarios, it’s not true that a job at Exxon or Mobil is pretty much the same as a job at Texaco. Suppose, instead, that each job requires skills so specific that there is a single best person for each job and a single best job for each person. In this scenario, discrimination at Texaco is indeed costly to those black employees who are thereby excluded from their ideal jobs or forced to accept lower wages in order to remain in those jobs. But in this scenario, discrimination becomes even costlier to stockholders, who now own shares in a company that does not make the best possible use of its black talent–and even drives some of it away.

To summarize: In Scenario 1, there are no victims; in Scenario 2, the stockholders are the only victims; and in Scenario 3, the black workers and the stockholders are victims. The truth is probably some combination of these three stylized scenarios. So, if Texaco has indeed discriminated against blacks (and it’s worth noting that the evidence for that proposition is shaky, but I’ll accept it for the sake of argument), it’s quite likely that Texaco’s stockholders have borne most of the cost.

If Texaco executives had indulged their personal tastes for Van Gogh oil paintings at a multimillion-dollar cost to the stockholders, it would be self-evident that the stockholders had been plundered. If Texaco executives indulged their personal tastes for racial discrimination at a multimillion dollar cost to the stockholders, the same conclusion should be equally obvious.

If there was enough discrimination at Texaco to merit a $176 million settlement with the employees, then there was enough discrimination to merit a commensurate payment to Texaco stockholders–not from corporate coffers, but from the personal assets of the corporate executives who bilked their investors by failing to hire the best bargains in the labor market.