The Nanny Corporation

The “Nanny State” seems to be thriving as never before. To see this, I need only peer out from my 6th Floor window at the City of Chicago, which has recently banned foie gras (it is bad for the geese) and smoking in bars (it is bad for the smokers, non-smoking patrons, and bar employees). Similar moves are happening all over the country. This well-known phenomenon is getting traction among Republican presidential candidates, and was the subject of a recent book by journalist David Harsanyi.

We are also seeing the rise of the “Nanny Corporation”.

Faced with rising health care costs and potential lawsuits from employee misbehavior of various sorts, firms across the country are prying into the private lives of their workers. For example, in 2004, Weyco Inc. told employees who smoked that they had 15 months to quit, and when four employees refused to submit to a breath test, the firm fired them. Computer giant IBM recently got into the game too, paying employees $300 a year for agreeing to eat healthy and exercise. The program, which has cost about $130 million but returned a savings of three times this, is being expanded to include the children of employees too. Two Chicago academics, Cass Sunstein and Richard Thaler, advocate a version of this in their new book “Nudge”.

Sunstein and Thaler argue that firms (and the government) should actively set default rules—such as savings rate in firm-provided 401(k) plans—in ways that are in the best interest of workers because workers can’t be trusted to make these decisions on their own. (A better solution might be for firms to force a choice. For example, instead of setting a default rule, require employees to choose before they can start work. The choice could be: (1) set your own savings rate from X-Y%; (2) choose the average of all other workers in (a) our firm or (b) all firms; (3) let the firm choose for you; (4) let the government choose for you. This would preserve choice, would capture wisdom-of-crowd benefits, and would have the bonus of not making sheep out of all employees, something even Kant knew was a good idea.)

The rise of the Nanny Corporation raises a host of questions: Is paternalism by firms (that operate in competitive markets for products, capital, and labor) normatively less troublesome than government paternalism? What role should the government play when it sees firms increasingly taking away the privacy of individual employees? (For example, one response could be to move away from employer-paid health care.) Is corporate paternalism more effective than government paternalism at reducing smoking or other goals? Should state corporate law or federal labor or employment law have anything to say about the types of private ordering in these cases?

Although I have no answers to these questions as of yet, a recent paper posted on SSRN (and a chapter in a forthcoming “Corporate Law Stories” book), shows how the Nanny Corporation is in fact an old idea. (The paper's main goal is to provide some historical context for the case Dodge v. Ford Motor Company and to reinvigorate it in the face of recent criticisms about its role in the corporate law cannon.)

In the early Twentieth Century, Henry Ford set up a vast “Sociological Department” to ensure that workers acted in their private lives the way Ford thought best. For example, workers who drank, did not save, or otherwise did not comport with Ford’s views of the good life, would not qualify for the increased wage the Ford Motor Company paid as part of the famous “Five-Dollar Day”. The Department published pamphlets offering advice on a range of topics, and, somewhat shockingly, sent “investigators”, to workers homes to “observe[] firsthand the tidiness and hygiene of the home.” Ford believed in strongly in paternalism for his workers, and used the Sociological Department to “shape the character, domestic life, and financial
habits of Ford workers.”

The Sociological Department was very creepy and so was eventually disbanded, but it seems like corporate America is headed back in this direction. This is a potentially troubling trend that warrants close attention.

Comments

[none]

The Pullman Company, whose company town was/is just down the street from the law school, probably went even further than Ford. Basically, the employees had to live in the company town, where there was no drinking, save for visitors staying at the company-owned hotel. Employees' children went to company-ran schools and everyone shopped at the company stores. I imagine that there was lots of snitching and so forth. It was probably much more than a "nanny corporation." But it was very progressive/idealistic, as the company, or at least its leader, not only believed that such arrangements would improve the bottom line, but would also "improve" the employees and their families. I think Gary might have also been a company town (US Steel) for awhile. Company-town arrangements were also popular in Victorian England. Compared to company-town arrangments, the contemporary efforts of IBM and others are modest.

[Todd Henderson]

Nice point "none". Thanks for sharing. I know of these towns, but not enough to know whether they are directly relevant. For one, they no longer exist (right?), which says something about their efficiency. You are correct to say that the modern moves are modest in comparison, but I would predict that the degree gets increased dramatically over time. We may not see "company towns" or Ford's inspectors in the near future, but I don't doubt that our employers are going to play increasingly large roles in our private lives. (For libertarians, this might be a good thing, since these firm nannies may replace government ones, and given the market checks I discussed above, this might be preferable.)

I can see the need for company towns in certain circumstances, such as building the Hoover Dam or towns set up in Tennessee and elsewhere for the Manhattan Project. In this case, the firm builds the town and owns it all because (it is assumed) no one else will, and for security or other reasons keeps control centralized. In this case, it makes some sense for the firm/town owner to be paternalistic. This is the case Sunstein and Thaler make in "Nudge". If you (meaning the sole entity with power to decide) have to choose, choose as wisely as possible considering the best interests of the persons for whom you are choosing.

For example, Sunstein and Thaler trot out the example of the firm-sponsored cafeteria, and ask whether the firm should display salad or dessert more prominently. This seems like a no-brainer and a very soft form of paternalism. As they argue, if you really want dessert, you can still have it.

The question of whether the firm should have a say in what you eat in your spare time is an entirely different question. Of course it impacts the bottom line, so the argument is not silly. Unhealthy workers cost more in terms of lower productivity, absenteeism, health care costs, and turnover costs when they die. This would suggest a large role makes sense in terms of profit maximizing behavior. Although it may make us feel just as uncomfortable to have Big Brother Firm watching us as Big Brother Government, the former might be much more preferable. Markets will provide a check on firms overreaching and firms will have incentives to target behaviors that are the most costly, instead of the ones that are the most headline grabbing. Firms will also see immediate feedback from their policies, as employees head for the exits, and so will be able to more easily and correctly fine tune policy choices. So there is, at first blush, a stronger case to be made for the Nanny Corporation than the Nanny State.

One potential difference between a company town and what IBM and other modern firms are doing is choice. Everyone who worked at these company towns presumably was on notice that their liberty was going to be infringed by choosing to work there. This is not obviously the case for workers at IBM or these other firms, and the transition costs could be large. So even if the Nanny Corporation is a good idea (a big if), the implementation may be difficult. For example, should the no-smoking policy of Weyco apply equally to all workers? What about the guy who has worked there for 30 years and is 5 years from retirement and the vesting of his pension? This and many other questions linger.

[none]

Regarding efficiency: I don't know about the fate of other company towns, but Pullman, the town, "went public" because the Illinois Supreme Court, in 1898, ordered the company to sell off the property that constituted the town. I've never read the decision, but, given the date, I suspect that monopoly, either implicitly or explicitly, was the concern. As such, that few company towns persist may not say much about their "efficiency" as part of a firm's larger organizational structure. I suppose, though, that to the extent the towns were monopolies, they may have been socially inefficient.

Regarding the direction of corporate meddling in "personal decisions": if you expect the degree to increase dramatically, but also think that company towns represented more interference than even the most significant current corporate interferers, what explains the mid-century decline? That is, history might suggest that corporate interference is not always on the rise. One explanation might be historical attitudes about the efficacy of central planning. During the late 19th century, there was a big push towards centralized town planning and corporations were very much into "cooperation" and Marxist ideas were catching on and so forth (much of this under the banner of "rationalization"). But the US government remained relatively hostile to such planning and cooperation, at least until WWI. So maybe corporations filled the void and attempted to dictate from on high. Then, during the New Deal, when the US government embraced centralized planning and so forth, corporations shied away, for whatever reasons. And then perhaps from the 1950s on, corporate managers were heavily influenced by Hayek and Friedman and other market-based and decentralization arguments, so they chose to leave their employees alone. And now today we see more skepticism about the accuracy of the homo economicus model, so companies are more willing to "nudge" or even push. (A better explanation might be: companies in the late nineteenth century and early twentieth century interfered greatly with employees' personal lives because they could. Later, they couldn't -- to the same extent, at least. Now, they try, but are very careful about going too far.)

Lastly, my guess is that company towns still persist, and maybe thrive, in other parts of the world. First, if a company has a lot of negotiating power with the government, it can probably get some assurance that the government will stay out of its company-town affairs, thus the fixed costs associated with the town are a better investment. My guess is that that kind of bargaining power is difficult to achieve in the US but possible other places. Second, a company-town is probably only a good idea if the company can minimize the amount of the health and welfare costs of the rest of the society it must pay. It might not do a company a lot of good to provide good schools for its employees in the company town if it must continue to contribute to the education of non-employee's children. My guess is that such opting-out is unavailable in the contemporary US, but might be other places. Third, company towns probably make a lot more sense with industries that require lots of people in one place at one time. The US's service economy probably has fewer and fewer of these type of operations.

[Todd Henderson]

Fabulous comments, "none". You should reveal yourself--there is no reason to hide!

[1L on a study break]

Prof. Henderson,
Your example of the guy working 30 years and 5 years from the vesting of his pension is impossible/illegal, see ERISA.

This line begs the question that if US corporations are being asked to be responsible for the health insurance of their employees, where else do they reduce costs. If the fried chicken in Ford's cafeteria results in higher employee benefits costs, the company has a duty to get rid of it. A company in a similar situation might then decide to become more proactive.
Lots of companies are waiving health premiums, if the employees sign up for an evaluation or health assessment. Then the employee is constantly berated with emails and phone calls from 'professionals' checking up on your eating habits.

So can you blame them for trying to reduce costs? If these companies were cutting benefits (as they do) people (unions) would be saying that they are shunning responsibilities and commitments.

[LAK]

What constitutes acting like a Nanny? Banning smoking in public places doesn't seem like it would qualify, as smoking creates significant externalities for others. It would be one thing if the state banned smokinging people's houses (who don't have children). In the presence of significant externalities, prohibiting behavior does not seem like acting the nanny to me, rather it is the appropriate role of the government, like banning assault.

Re: Corporations, they shouldn't be able to regulate behavior any more then the government. But there is a big difference bewteen offering a cash incentive to eat right, and testing people for what they do in private. The former should be fine, the later is scary. The only worse thing than Big Brother in my mind would be a privatized, unregulated and unchecked Big Brother.

And I must say the incentive for busienss to act the privatized big brother is that they foot the bill for health care costs. If we had a single payer health care system, corporations wouldn't have the same duty to its shareholders to regulate bahavior to keep health costs down.

Also note if we didn't subsidize farming the way we did and enforced labor law, unhealthy food would cost a hell of a lot more than it does now. If we priced people out of purchasing cigarettes and transfat too, we'd avoid a lot of this discussion.

Isn't pricing people out of behaviors with targeted taxes a lot more desirable than all out bans on behavior, whether by gov or gov proxy in a corp? and isn't it the constitutional role of the fed gov to be doing that anyway?

[Dennis]

In China, some manufacturers have company dorms and cafeterias. I'm not sure how that compares to old towns like Pullman. There is no rent charged, but the wage is so low that no worker could afford to live anywhere else.

[Kimball Corson]

The Nanny State is a natural corollary of democracy. If a 51% majority decides some invasion of our privacy and individualism is "good," the other 49% have to swallow it. The commerce and health and well-being clauses of federal and state constitutions have no reasonable limitations.

I contend we all need handrails on all mountain trails, including on Mount Everest and K-2 and that all coconut trees world-wide should be cut down because of the few people killed each year by falling coconuts.

If we are to be protected from second-hand smoke, we can be protected from anything.