American Renewal

If You Want To Truly Understand How Corporate America Went Nuts, You Should Read This Piece

Photos by Vinicius Bacarin and photo.ua/Shutterstock; Edits by Grae Stafford/DCNF

Oren Cass Executive Director, American Compass
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I once committed the faux pas, at a gathering for business executives to discuss workforce investment, of proposing legislation that would require them to invest more in their workforces. “This group should not be in the business of changing the behavior of our businesses,” retorted an indignant participant unironically. The many comments preceding mine had suggested new public programs, partnerships, and tax credits that might reward employers for changing their behavior. Those were welcome. The prospect of a constraint, however, was heresy.

Constraints are precisely what businesses need. They can come in many forms. Some are legal—requirements for what a firm must do and prohibitions on what it must not. Some are economic—the result of competitive pressures and the demands made by counter-parties with whom the firm transacts. Some are social—shaping the business leader’s understanding of his obligations and promising censure for falling short. A well-functioning market system depends on all of these mechanisms to ensure that the private sector delivers on capitalism’s incredible capacity to support a flourishing nation. Corporate responsibility entails accepting—indeed, supporting—such constraints and acting within them.

This contrasts starkly with the new-age dogma of “Corporate Social Responsibility” (CSR), which is built on the premise that constraints are unnecessary because firms will voluntarily advance the common good. CSR reached its apogee one year ago in the Business Roundtable’s lauded and nonsensical announcement that it was “redefin[ing] the purpose of a corporation” with a commitment from nearly 200 CEOs “to lead their companies for the benefit of all stakeholders.” Trust us, we can behave ourselves, say the slickly produced marketing brochures and web videos touting enthusiasm for “sustainability,” “diversity,” and now “equity and justice.” Read between the lines and the glossy façade whispers precisely the opposite—that modern multinational corporations have become unmoored from their social purpose and incapable of delivering on it. Their “responsibility” campaigns are the indulgences they pay to maintain this status quo, calibrated to deliver the maximum political return on the minimum investment. (RELATED: Businesses Drastically Reduced New Hires In July According To Private Payroll Processor)

A return of actual corporate responsibility is a prerequisite for restoring America’s economic engine to a condition that generates broadly shared growth and prosperity. It will require a concerted effort to re-establish rules, norms, institutions and transparency that once bound business leaders and their firms in relationships of mutual obligation to workers, their families and communities, and the nation they all call home.

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Received wisdom in the business community and among self-declared guardians of the “free market” holds that maximizing profit maximizes growth and prosperity, and so the fewer constraints on that pursuit the better. Harvard Law School professor Jesse Fried warns that if corporations are asked to do more than pursue profit, “excess capital would be trapped. … Resources would be misinvested. … The economy would suffer.”

But one man’s trapped excess capital is another’s long-term investment, and whether it redounds to the benefit of a nation’s economy and workers is a very different question from whether it maximizes shareholder return. In the century before Milton Friedman’s 1970 condemnation of “social responsibility” by corporations as “unadulterated socialism,” the unprecedented innovation and dynamism of the American economy operated quite effectively within legal, economic, and social constraints far stronger than today’s. Indeed, a focus on building strong, resilient, and far-sighted organizations rather than generating immediate returns was vital to the nation’s economic success. It was in the context of shareholders asserting their primacy and heightening the focus on their own returns, not the context of limited global markets and strong organized labor and heavy sectoral regulation, that investment plunged, growth slowed, wages and productivity stagnated, and inequality surged.

What changed? Businessmen did not suddenly become more greedy or unscrupulous; to the contrary, many of the worst labor abuses, most dangerous working conditions, and tawdriest scams can be found in an earlier time. Rather, a tsunami of broader political, economic and social trends swept away the constraints within which businessmen operated.

One such trend has been globalization. Whereas firms once had no choice but to think and act locally—buying from, producing for, and hiring in the domestic (and typically regional) market—the greatest profit is now often associated with doing just the opposite. A corollary is that workers find themselves far less able to exercise countervailing power. Americans compete in a labor market that now includes hundreds of millions of foreign workers in laxer regulatory environments and with lower reservation wages and costs of living. Meanwhile, unionization has declined precipitously and the rise of the “fissured” workplace means jobs are more likely to be temporary, on-call, and freelance.

Another corollary of globalization is that managers and owners have less connection and accountability to their communities or their nation. The American model of meritocracy extracts talented young people from around the country, concentrates them in elite universities, and then launches them into professional careers in select economic hubs. Perched thusly, these professionals tend to identify and affiliate most closely with their fellow placeless knowledge workers and with peers in similar hub cities around the world, rather than with either their newfound homes or their erstwhile hometowns. Places that are not talent destinations, meanwhile, find themselves without the leaders and locally owned businesses that traditionally played a cornerstone role.

Owners, for their part, have become not only diffuse and anonymous but also in many cases hidden behind layers of legal fiction. The owners of a widely-held, publicly-traded firm are difficult to identify and their preferences impossible to discern. They are not accountable, or even known, to the communities in which their companies operate. They likely do not know, or care to know, how those companies operate. (RELATED: Questioning Tech Execs On Conservative Bias Is Crucial During Antitrust Hearings, Rep. Buck Says)

All of these actors now operate in a radically less constrained competitive landscape, reshaped as policymakers gave priority to market “efficiency,” deregulating the economy sector by sector and imposing constraints only for purposes of correcting “externalities.” Fifty years ago, bank holding companies could not acquire banks across state lines and most states limited branching even within their own borders. The Civil Aeronautics Board awarded flight routes to airlines and set ticket prices. Federal antitrust doctrine still considered the concerns of small business and “a mix of economic, social, and political goals,” rather than merely “consumer welfare.” Each of these changes may well have been salutary, but taken together (and with countless others) they transformed the economy from a zoo of caged habitats to a veritable savannah.

With fewer constraints came massively increased profits. Wages stagnated, but U.S. corporate profits rose by 145% from 1978 to 2015 after adjusting for both population growth and inflation. CEO pay at the 350 largest American firms went from 30 times the median worker’s salary to 286 times.

For the capital class, things were going almost too well. A democratic society will tolerate such trends only so long before a backlash occurs; how to keep the gravy train running? Enter Corporate Social Responsibility (CSR).

The central fact of CSR is that it is a sham. Both corporate leaders and outside consultants understand and are surprisingly candid that CSR is intended not to constrain or cost firms at all, but rather to pursue profit more effectively, in part by earning the public-relations benefits of appearing socially responsible. McKinsey, for instance, notes that the “best” programs “create financial value in ways the market already assesses—growth, return on capital, risk management, and quality of management. Programs that don’t create value in one of these ways should be reexamined.” Unsurprisingly, the “best” programs tend to focus on “diversity” and “sustainability”—areas already governed by extensive regulation and tailor-made for marketing campaigns that contribute directly to the bottom line without requiring significant changes to business practices.

More recently, these themes have given way to what is called “woke capital,” the direct engagement of the corporate sector in progressive political causes, seemingly to placate and distract progressive critics who might otherwise demand economic reform. Just as CSR is notable for the naked admission of its practitioners that the goal remains unconstrained profit maximization, woke capital is admirably upfront about its cynicism. Apple and the NBA, for instance, remain silent on human-rights abuses in Hong Kong and Xinjiang, but found intolerable North Carolina’s requirement that people use public bathrooms corresponding to their biological sex.

“I think we deal with whatever set of circumstances are dealt to us,” said Commissioner Adam Silver when pressed on his principles. “I don’t have a cut-and-dried response to that. … It’s net incredibly positive for us to be [playing games in China]. It wasn’t a net positive to continue the track we were on and playing our All-Star Game this season in Charlotte.”

Corporate decisions on when to take a stand or demur are incomprehensible when viewed through the lens of principle. They make perfect sense if understood as profit maximization and, specifically, an effort to curry favor with the highest-value consumers and employees, who are presumed to be cultural elites with socially progressive priorities. Sometimes firms even say the quiet part out loud. Trendy companies like Zoom, Slack, Square and BirchBox published a full-page ad in the New York Times warning that abortion restrictions are “bad for business.” Nearly 400 companies including McKinsey, Goldman Sachs and Google submitted an amicus brief to the Supreme Court in Obergefell vs. Hodges asserting that “allowing same-sex­ couples to marry improves employee morale and productivity.” They added, lest there be any confusion, “our corporate principles of diversity and inclusion are the right thing to do. Beyond that, however, such policies contribute to … significant returns for our shareholders and owners.”

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The publicly-held multinational corporation has no moral intuition. Its owners do, but they are rendered powerless, anonymous and unaccountable behind layers of abstraction and aggregation. The managers who make its decisions do, but the express premise of shareholder primacy is to disavow and override any broader sense of obligation. Constraints will have to be imposed from the outside, by policymakers in government and institutions of civil society. In some cases, old ones can be re-imposed. In others, new ones will be needed. The first step is to establish the right focus.

Declaring everyone a stakeholder and everything a priority is a surefire recipe for avoiding meaningful action or accountability. The needed social functions for which firms are the indispensable contributors are creating good jobs for workers, maintaining a workplace compatible with family life, providing the economic foundation for strong communities and advancing the long-term prosperity of the nation. These are where corporate actual responsibility should focus. (RELATED: The American System: How We Return To An Economy That Lifts All Americans)

Workers are particularly well positioned to hold corporations accountable—their working conditions, their families, their communities, even their nation are what is at issue. But to impose economic pressure they must have countervailing power. This could mean formal unionization, but it need not. European-style “works councils,” for instance, create collaborative relationships between management and worker committees at the local facility level, which is what workers say they want. At broader scale, “sectoral bargaining” would allow representatives of labor and capital to establish broad ground-rules industry- or economy-wide. “Co-determination” places representatives of labor directly on corporate boards, short-circuiting the default assumptions of shareholder primacy by including workers among those to whom management is accountable.

While social pressure can often motivate progress, legal reforms help. Transparency, for instance, works more reliably when disclosures are mandated. New relationships with, and forms of, organized labor would improve on today’s dysfunctional system. In other cases, legal reform is the only pathway. For instance, trade and immigration policies that constrain access to foreign labor or outright require domestic production have a way of focusing corporate attention. An education system that emphasizes on-the-job training could dragoon the corporate sector into a constructive role if participation were vital for gaining access to new talent. One easy adjustment would be prohibiting the requirement of a college degree in a job description.

Finally, like Odysseus at the mast, corporate leaders could facilitate the process of constraint. Suppose they do acknowledge and wish to fulfill their obligations, but feel powerless in the face of economic and legal imperatives to maximize profit. A remedy is available: act together; not with empty “stakeholder” commitments, but with concrete pledges. Nothing stops the Business Roundtable’s members from agreeing to eliminate non-compete and no-poach agreements or to partner in creating an apprenticeship system that pairs community-college coursework with on-the-job training. They could agree tomorrow to stop seeking handouts from states as a precondition of their investments, an unsavory practice that reached its nauseating nadir in Amazon’s “HQ2 competition.” Upon making pledges like these, keeping their word would immediately become rational. And with all likewise constrained, none would be at a competitive disadvantage.

How will the economy manage to thrive in the face of so many inconvenient obligations? Concerns that constraining the pursuit of profit will prevent an “efficient” allocation of resources lose much of their force upon realization that they beg the question, starting from a definition of “efficient” as the allocation that would occur absent constraint. That outcome is not necessarily a desirable one for our country. The mystery is not how prosperity emerges when the interests of workers, families, communities and the nation factor into business decisions alongside shareholder returns. It is how we ever thought the contrary.

This article is adapted from “Constraining the Corporation,” published by American Compass as part of its project on Corporate Actual Responsibility.

Oren Cass is the executive director at American Compass.

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