Capital Matters

Expensify’s Political Email to 10 Million Customers Is a Classic Example of the Principal-Agent Problem

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Why would a company risk losing customers for political reasons?

In the lens of recent discussion on the 50th anniversary of Milton Friedman’s New York Times essay on shareholder primacy, which I’ve recently written on, I’ve been thinking about a strange decision made by expense-management-software company Expensify to email all 10 million of its customers (who are likely divided roughly evenly on politics) urging them to support Vice President Joe Biden and further criticizing any customer who would think otherwise, saying that “anything less than a vote for Biden is a vote against democracy.”

What makes it particularly strange is not that it’s related to Biden but how rare it is to see a sizable company with significant institutional shareholders and lenders make such a brazenly political move that could potentially jeopardize half of its customer base.

To be sure, this isn’t just another boilerplate statement in support of woke capitalism. Those public-relations moves in many ways seek to benefit shareholders by attempting to retain and help win new socially aware customers (consistent with Friedman’s shareholder primacy).

It also would be different if Expensify were solely owned by its founder and CEO David Barrett, in which case a political endorsement would arguably improve the sole shareholder’s utility (even if revenue were lost), still conforming to the Friedman model of shareholder primacy.

But Expensify has received millions from venture-capital firms. The question is whether Expensify shareholders such as Travis Kalanick, Redpoint Ventures, PJC, OpenView, Hillsven Capital, who have invested a sum total of $38.2 million (according to TechCrunch)in the company, all approve of this decision?

That doesn’t appear to be the case. According to the Wall Street Journal, the decision was made by employees after Barrett proposed the idea on the company Slack, where the email was later drafted. Apparently, a team of about 20 senior employees then voted on whether to send the email, and more than two-thirds agreed to do so.

The CEO defended the decision in the context of shareholder primacy, arguing that “Expensify depends on a functioning society and economy; not many expense reports get filed during a civil war.” Do Expensify’s outside investors agree with this “civil war” forecast in the event of a certain election outcome?

He further told customers that he’s serious about his hyperbolic prediction that another Trump win would actually threaten the expense-management industry, “As CEO . . . I’m obligated on behalf of shareholders to take any action I can to avoid it. I am confident our democracy (and Expensify) can survive a Biden presidency. I can’t say the same about Trump. It’s truly as simple as that.”

Barrett did concede to the Wall Street Journal that he had some concern about downside risk from a political endorsement (“Of course we’re worried about [losing customers]”), but somehow thinks that sharing his politics could bring in more customers: “Customers want to work with brands that share their values, and I think that the value of promoting democracy is a pretty universal one.”

Why make such a gamble? In my opinion, the Expensify email is a consequence of what economists call a “principal-agent problem,” which arises when those managing a corporation act in interests contrary to those who own the business.

Barrett in such a move gains some fame (he has already gained a substantial amount of positive press from the email), but at enormous risk to shareholders if the move comes at the cost of customers.

Why are no other companies with outside investors making similar political endorsements? Simply put, overt politics are bad for business. As Friedman famously put it in the 1980 Free To Choose series, free enterprise has the power of promoting cooperation among people who ordinarily “might hate one another” ultimately fostering “harmony and peace.”

One unhappy Expensify user told the Wall Street Journal that this was “gross negligence in sending out a politically charged email.” I wonder how outside investors feel about that.

Jon Hartley is an economics Ph.D. student at Stanford University and a visiting fellow at the Foundation for Research on Equal Opportunity. He formerly served as a senior policy adviser to the Congressional Joint Economic Committee.


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