Capitalistic Economic System

*Don’t Answer these questions only consider them** Chapter 7–What obligations if any, do domestic companies owe the countries that they are located in?  As you review the readings below, you should consider the following:   a.      What is the purpose of corporations—too maximize shareholder return vs the new philosophy announced by the Business Roundtable?   b.     What happens if the corporation’s goal conflicts with your moral compass—for example, shareholder return and maximizing profits versus better costlier health care for the employees? Or not exploiting child labor in Africa.  Or not paying taxes?   c.      Can capitalism exist morally, without government establishing boundaries of what is and is not acceptable behavior?   d.     When I state the following company names to you, do you think of them in a positive or negative light–Google, Amazon, Apple, Walmart and Facebook?    e.      Do you want to change the rules for corporations and if so, what would you change and why?                            Prepared remarks for Congressman Danny Davis Town Hall Meeting                                                                         October 15, 2008                                                                   By Robert S. Kallen   The overall questions being raised from the subprime loans, the credit swaps and the financial bailout is whether our democratic capitalistic economic system is broken and, if so, how do you want to fix it?   Our U.S. economic system in my opinion is Darwinism at its best.  “Survival of the fittest.”  There are winners and by the very nature of competition, the U.S. economy will create individuals who cannot compete successfully.  Thus, the objective for individuals and corporations is to win—hopefully within the rules defined by government and without violating individual or corporate codes of ethics.    In today’s market, from a business perspective, winning was defined by how much credit could be generated in the market place and how could the liabilities be shifted off the balance sheet so that even more loans and thus more bonuses and financial rewards could be generated?  That was the game.    The business community was not considering the ramifications of their actions on the people who could not really afford the houses they were financing or the people who would be holding the paper which had no value if the housing prices started to go down.  From Bears-Stern, to Lehman Brothers, to Fannie and Freddie to AIG, they were all caught-up in the process of maximizing shareholder and individual returns.   This is not unusual and throughout our U.S. history, corporations have attempted to push the envelope, with government then reacting to redefine acceptable business practices when these actions have caused harm to our economy or have caused the exploitation or abuses to others.  For example, in the late 1800’s, the U.S. government reacted to the concentration of wealth and power by businesses and individuals such as Rockefeller, Vanderbilt, Carnegie, and Mellon, and responded by passing the Sherman Act and other antitrust laws to reign in this undue influence.  As the industrial revolution continued government again intervened in reaction to the exploitation of labor, especially women and children, passing legislation covering child labor laws and the number of hours individuals could work.   During the 20th century, Congress reacted to the first stock market crash in 1929 by subsequently passing the SEC Act and trying to cure the abuses of trading on margins with the assumption that stock prices would always continue to rise—just like we thought housing values would always continue to rise over the last few years.      In the 1960’ and 1970’s Congress again saw how businesses were pushing the competitive envelop and reacted by enacting the Civil Rights Act, the Equal Pay Act and even the Clean Air and Water Acts to contain the negative action’s by businesses to minorities, women and the environment. All of the legislation pertaining to businesses was in reaction to business competing and trying to gain a competitive advantage over the competition.  After the effect!   The argument can also be made for the rise in Federal agencies such as OSHA, CPSC, EEOC, EPA and the SEC.  All of these agencies are responsible for trying to keep corporations from pushing the envelope too far.  Finally, we can look back to the most recent abuses by a major corporation which was Enron and again see that Congress had to react to the events and eventually passed Sarbanes Oxley to try to reign in the accounting abuses that were occurring by Enron and other corporate entities.         Another contributing factor to the events of today is the marketplace and how dramatically it has changed over the last 28 years.  The Reagan revolution, combined with the influence of the Chicago School of Economics and the free market philosophy of the early 1980’s was the beginning of a new economic system.  The rules of business changed dramatically when it was decided that companies would be allowed to merge with competitors, as long as they could show that economies of scale existed and that the combined entity would be more efficient and consumer welfare would not be harmed.    This new economic revolution prompted phenomenal consolidation in most industries and an unprecedented level of merger and acquisition activity.  Consequently, this lower level of government scrutiny led to a consolidation of power and wealth and made it much more difficult for Government to monitor the abuses that were occurring in the marketplace.   In addition, MBA and Law Schools were teaching a new generation that the number one responsibility of corporations was to maximize shareholder return and profits.  We also trained and rewarded the students to find the exceptions to the basic rules and finding the “loop-holes” in order to compete.  In fact, I remember numerous courses in law school that rewarded the students who could find the exceptions with the highest grades in the class rather than reward those students who followed the intent of the law.    Throughout U.S. economic history we know that capitalism and the free market left unencumbered will eventually create behavior that in certain cases will cause economic harm and that society will find unacceptable.  In other words, there is a natural tug of war between winning, survival and pushing the envelope too far:  like subprime mortgages and the credit swaps that are responsible for today’s economic environment.  Thus, the question becomes how should government react to this new corporate model and how much will it cost?   I have great faith in Ben Bernankee and Secretary Paulson.  I do believe that they are attempting to act in the best interest of the US and also trying to secure their places in the history books as the two individuals who help prevented us from a financial meltdown.  However, the events are moving very quickly and they do need the advice and consent of the legislative branch and it is extremely important for meetings like this to occur so that Congressman Davis can provide the necessary oversight to ensure that the bailout plan can work.   I am predicting that the financial crisis is likely to become more severe; housing prices are likely to decline by at least five to ten percent more at the national level.   The impending recession is likely to lead to a significant decline in corporate profits, which is almost certain to impact stock prices even more and further weaken consumer confidence.  The number of individuals at work has declined for ten successive months, and by a cumulative total of more than 700 thousand. Add in several hundred thousand undocumented workers who have lost their jobs in construction, and the total approaches over one and one-half million people.  Thus, it is imperative to get credit and liquidity into the market place and unfortunately, the quickest way is through our new banking system which is dominated by a few large players.    04/01/2020 comment by author:  In reaction to the abuses of 2008, Congress did pass Dodd-Frank and then during the last 4 years have amended the legislation and loosened the requirements.           Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’   AUG 19, 2019 Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders WASHINGTON – Business Roundtable today announced the release of a new Statement on the Purpose of a Corporation signed by 181 CEOs who commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders. Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders. With today’s announcement, the new Statement supersedes previous statements and outlines a modern standard for corporate responsibility.  “The American dream is alive, but fraying,” said Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. and Chairman of Business Roundtable. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”  “This new statement better reflects the way corporations can and should operate today,” added Alex Gorsky, Chairman of the Board and Chief Executive Officer of Johnson & Johnson. “It affirms the essential role corporations can play in improving our society when CEOs are truly committed to meeting the needs of all stakeholders.”  The Business Roundtable Statement on the Purpose of a Corporation is below Statement on the Purpose of a Corporation Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all. Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth. While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to: Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations. Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect. Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses. Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders. Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.   Top CEOs are reclaiming legitimacy by advancing a vision of what’s good for America By  Steven Pearlstein August 19, 2019 What most distinguishes America’s brand of capitalism is the widely held belief that the first duty of every business is to maximize value for shareholders.  The benign version of this credo is that there is no way to deliver maximum value to shareholders over the long term without also satisfying the needs of customers, employees and the society at large. But in its more corrosive application — the one that is inculcated in business schools, enforced by corporate lawyers and demanded by activist investors and Wall Street analysts — maximizing shareholder value has meant doing whatever is necessary to boost the share price this quarter and the next. Over the years, it has been used to justify bamboozling customers, squeezing workers and suppliers, avoiding taxes and lavishing stock options on executives. Most of what people find so distasteful about American capitalism — the ruthlessness, the greed, the inequality — has its roots in this misguided notion about what business is all about.   Which is why today’s statement by the Business Roundtable disavowing shareholder primacy is so significant and so welcome. In the Roundtable’s new formulation of corporate purpose, delivering value to customers, investing in employees, dealing fairly and honestly with suppliers, supporting communities and protecting the environment all have equal billing with generating long-term value for shareholders. The statement rejects the whole idea of “maximizing” one value to the exclusion of all the others. Instead, it acknowledges the need for balance and compromise in serving all of a company’s stakeholders.  Skeptics will likely see the announcement by the country’s leading corporate executives as a public relations gimmick that will do little to change the way American corporations are managed. But the significance is not so much that it will change corporate behavior, but rather that it confirms a shift in attitude that has already occurred.   In many ways, the Roundtable’s new policy represents a return to a view of corporate purpose that prevailed during the era of “managerial capitalism” of the 1950s and 60s. “For years, I thought what was good for our country was good for General Motors, and vice versa,” Charles Wilson, the carmaker’s chief executive, declared at his confirmation hearing to be defense secretary in 1952. But after the decade of the 1970s — a decade during which stock prices failed to keep up with inflation and American businesses started to lose out to foreign competition — investors began demanding a new focus on profits and share prices. And executives who refused to get with the new program soon found themselves at the receiving end of a hostile takeover bid by “corporate raiders” or competitors who promised to send them packing.   Indeed, by the time the Roundtable issued a new statement of corporate purpose in 1997 declaring that “the principal objective of a business enterprise is to generate economic returns to its owners,” it was merely acknowledging what had already become the new norm. Executives had become so fixated on maximizing shareholder value that some (Remember Enron and WorldCom?) even began cooking the books to prevent those same shareholders from learning the true state of the business.  Although chief executives were happy to get fabulously rich on stock options meant to focus their minds on the share price, many chafed under regime. They resented analysts and traders who punished them for missing an earnings target and feared and loathed the plaintiff lawyers and “activist investors” who were ready to pounce at the first sign of trouble. They despaired at the loss of respect they had suffered from employees, the media and the public, as well as their own children.  My hunch, however, is that what finally led members of the Roundtable to jettison the idea of shareholder primacy has been the growing recognition that there is a new generation of employees and consumers who will not work for, or do business with, companies they believe to be socially irresponsible.       This is one area where social media seems to have had the effect of improving norms of behavior, even at companies as powerful as Facebook, Disney, Uber, Walmart and Amazon (whose chief executive, Jeff Bezos, owns The Post). Executives also have discovered what Warren Buffett and Steve Jobs learned long ago — namely, that refusing to bow to Wall Street’s incessant demands for double-digit earnings growth can actually attract a larger and better class of investors.  Still, while norms of business behavior can sometimes be altered by pressure from below, business institutions rarely change without leadership from above. The Roundtable’s chairman, Jamie Dimon of JPMorgan Chase, its president, Josh Bolten, and the chairman of its governance committee, Alex Gorsky, deserve lots of credit for initiating this rethink of corporate purpose. It is also noteworthy that all but a dozen or so of the Roundtable’s 180-odd members stepped forward to sign the statement.   There is, as you may imagine, a political context to all of this. Two of the leading Democratic presidential candidates — Sens. Bernie Sanders (Vt.) and Elizabeth Warren (Mass.) — have made curbing corporate greed the centerpiece of their campaigns, while in the Democratic House of Representatives, much of the energy has shifted to a liberal wing that is determined to raise wages, raise taxes and strengthen environmental regulation. With Republicans in control of Congress or the White House for most of the past 20 years, the business community has been able to achieve much of its policy agenda by playing an inside game. But with Democrats now threatening to retake the White House and possibly the Senate in 2020, and the Republican Party lining up behind a Republican president spouting populist rhetoric, business leaders feel some urgency to re-engage in the public debate. By disavowing shareholder primacy and embracing a broader vision of corporate purpose, the Roundtable has now enhanced the political legitimacy of such efforts.                                 If Business Roundtable CEOs are serious about reform, here’s what they should do By   Lawrence H. Summers   September 2, 2019 The Business Roundtable recently announced a major policy change declaring that the purpose of a corporation is not just to serve shareholders (its official position since 1997) but “to create value for all our stakeholders.” At a time of considerable disillusionment with U.S. capitalism, this is a significant statement that could signal meaningful change in the operation of the American economy. Certainly the recognition by leading chief executives that they need to look beyond the narrow metric of their stock price is to be welcomed.   But there are some questions that Business Roundtable members will need to wrestle with going forward. This is crucial, because initiatives of this kind can be not just ineffective but also counterproductive if they weaken the impulse to address problems through government policy. First, who will watch CEOs going forward? Under what authority do CEOs have the role of declaring the purposes of the corporations as broader than just shareholders, when they were appointed by boards of directors representing shareholders? It’s legendary that whenever you serve multiple masters, you serve none. With shareholders disempowered and no other form of vigilance empowered, how will the risk that stakeholder capitalism becomes an agenda of CEO empowerment be avoided?   Second, will the roundtable act on its professed principles? For example, I have no idea whether recent grievances against General Electric, Boeing or Johnson & Johnson are warranted, but if they are valid, they represent blatant violations of the roundtable’s principles. Will companies or CEOs ever be forced to leave the Business Roundtable? How will this be adjudicated?  Third, while the statement references communities, consumers and customers, what role does the United States have as a stakeholder for roundtable companies? Are roundtable companies that act according to the group’s principles supposed to be indifferent between locating new plants in the United States and other countries? What obligation are roundtable companies now under not to subvert American democracy with campaign contributions or extensive lobbying operations? What is their obligation to speak out against presidential words or deeds that undermine the United States’ standing in the world or offend core values of their employees or customers?   Fourth, is it as clear as the Business Roundtable seems to assume that standing up for stakeholders is the right thing to do in a dynamic economy? Consider, for example, a firm debating whether to relocate some or all of its operations out of super-prosperous, fully employed Silicon Valley to a disadvantaged area to reduce labor costs. On “shareholder” grounds, this would likely be desirable. Its employee stakeholders would likely object. Yet I would argue that broad American egalitarian values would be well-served by the move. We generally celebrate disruptive innovation such as digital photography, but it often comes at the expense of some employees and customers with traditional skills and tastes. How are stakeholder capitalists supposed to decide about pursuing disruptive innovation?  Fifth, what role does the roundtable imagine for public policy? The idea that companies should be run for the benefit of stakeholders is a powerful one. But for it to work, companies that practice stakeholder capitalism must be protected by law from excessively ruthless competition from companies run only in shareholders’ interests.   If the Business Roundtable is serious about stakeholder capitalism, and if responsible firms are to flourish and spread their benefits, it will not just decree principles according to which its firms will operate but will also push for laws and regulations that support firms’ ability to stand up for their stakeholders. These might include minimum-wage and benefits requirements and broader mandates to protect companies that want to do right by their workers from those competing companies that are ruthlessly pursuing shareholder interests. Or they might include rigorous restrictions on advertising and promotion practices, so firms who are honest and transparent are not placed at a competitive disadvantage. Or universally high capital standards on financial institutions, so that imprudent willingness to take on risk cannot be a competitive advantage.  Most CEOs want to do the right thing by all their stakeholders, and most shareholders want to support them in being responsible. But in a world of fierce competition, good intentions are not enough. All companies do right some of the time. Some companies do right all of the time. But even the Business Roundtable should know that all companies do not do right all of the time. That is why a serious Business Roundtable program in support of stakeholder capitalism will include legislation and regulation.     How corporations can be a force for good:  By Tom Wilson  September 29, 2016 Tom Wilson is chairman and chief executive officer of the Allstate Corporation and vice chairman of the U.S. Chamber of Commerce.   For decades, corporations have been expected to concentrate on one mission: Maximizing profits for shareholders. While that might have been appropriate decades ago, it isn’t now. The emphasis on profits has widened the trust gap between corporations and society, resulting in an adversarial relationship between the private and public sectors. Let me be clear: Shareholders must get a good return, but at the same time corporations must work to be a force for good in society. This single-minded focus on profits is largely due to the late Milton Friedman, Nobel Prize-winning economist. In his 1962 book “Capitalism and Freedom,” Friedman declared, “There is one and only one social responsibility of business .?.?. to increase its profits.” That argument has shaped the thinking of business leaders and created the corporations we have today. But now it’s in danger of diminishing the very capitalist system Friedman promoted.  Corporations always have adapted to the times. They came into being 500 years ago to handle tasks beyond the abilities of sovereign states, such as facilitating trade between England and Asia. Over time, the roles of corporations evolved as society’s needs changed — accumulating capital for mega-projects such as railways; introducing technological innovations and, in the process, creating the mass market; and rebuilding Europe after World War II. Society’s needs are changing yet again. The role of corporations needs to change, too.   The corporation of the next 100 years must take on societal problems. On their own, governments, social service and charitable organizations simply do not have the capabilities and resources to solve the problems of inadequate education, poverty or public fiscal insolvency. And most people agree: In a recent survey, 87 percent of young Americans said corporations should do more than just make money.  Corporations should be encouraged and rewarded for stepping up to solve society’s problems. That will require a change in mind-set. Today, corporate leaders are graded on stock price, not on the amount of good their companies do. We must broaden our evaluation of corporations beyond share prices to provide space, light and water for their role to grow.  Shareholders should be asking how corporations are building intangible assets such as customer relationships, their employee bases and their reputations, not just pushing for share buybacks. Shareholder activists who care only about short-term profits should be called out by the pension funds and endowments who, after all, have a vested interest in taking a long view of building a better America. Corporate leaders must have the fortitude to resist having their performance reduced to a single measure.   I certainly do not intend to gauge the success of my leadership at Allstate on one measure. Most other corporate leaders feel the same way. None of us want to be remembered as a “Chainsaw Al” Dunlap, a now-retired executive known for downsizing companies.  But no one has to, because fully integrating social good into a corporation’s purpose is also good for business. Helping communities raises a company’s reputation among customers, which supports growth and helps them attract, develop, motivate and retain the best workers. This year, for example, we raised Allstate’s minimum starting wage to the equivalent of $15 per hour because it was good business to do so; stronger, more prosperous communities with better-educated workers and customers also provide a much better economic and business climate.  We must reject narrow definitions of what corporations can and should do — and get on with making the world a better place.       The right formula for managing a socially responsible company? There is none. Now that shareholder capitalism is on its way out, let’s not replace one management straitjacket with another. By Steven Pearlstein  Oct. 5, 2020 Fifty years ago, free-market economist Milton Friedman ushered in the era of “shareholder capitalism” in the United States with an influential essay arguing that the only “social responsibility” of a business is to increase profits for shareholders.  That era ended last summer when the nation’s most respected business organization, the Business Roundtable, issued a statement repudiating shareholder primacy and declaring that companies needed to balance their obligation to serve shareholders with obligations to other stakeholders, including customers, employees, suppliers and the communities in which they operate.   In the year since, top executives at big corporations have tried to demonstrate their commitment to the new “stakeholder” capitalism. In an op-ed for the Wall Street Journal marking the anniversary, Roundtable President Joshua Bolten characterized the short-term investors who dominate trading on Wall Street as a “malignant influence” on business and politics, “undermining public confidence in the free-market system and fueling support for politicians who oppose it.” And last month, revising its somewhat hedged policy on climate change, the Roundtable threw its support behind putting a price on carbon to reduce greenhouse gas emissions by 80 percent by 2050.   Yet there remains considerable skepticism about whether this rhetorical commitment will actually change the way chief executives manage their companies — or whether it was simply a PR stunt. Earlier this month, a watchdog group calling itself the Test of Corporate Purpose issued a report, complete with a ranking of company performance, purporting to show that companies that signed the BRT statement have been no more socially responsible during the coronavirus pandemic than those that didn’t. It was an unconvincing piece of work, methodologically flawed and ideologically driven, that was at odds with other more reliable and objective analyses (here and here) by advocates of a kinder, gentler capitalism. And like much of the news coverage it generated, it revealed a fundamental misunderstanding about what the Roundtable’s statement and stakeholder capitalism is all about.   The Roundtable statement was, first and foremost, a declaration of independence from Wall Street. Beginning in the 1980s, after a decade of negative returns, a group of “activist investors” set out to use the threat of hostile takeovers to impose the single-minded focus on shareholders of publicly traded companies. The 2008 financial crisis exposed the economic folly and moral bankruptcy of a system that relied on bribing executives with stock options to squeeze workers, bamboozle customers, despoil the environment and dodge taxes. Socially conscious workers, customers and investors began to take their talent and money elsewhere, while even lavishly compensated executives came to see that the relentless demand for higher profits and stock buybacks had starved their companies of needed investments, saddled them with too much debt and undermined the value of their brands. The BRT’s message to Wall Street was that Main Street’s new focus would be on creating value for long-term investors by creating value for all stakeholders.   What the chief executives surely did not promise, however, was to run their companies as if the AFL-CIO, Sierra Club, Sen. Elizabeth Warren (D-Mass.) and Black Lives Matter were in charge. Yet if you look at most of the analyses and rankings by the growing number of ESG advocates — that’s shorthand for environment, society and governance — they are rooted in unabashedly liberal criteria and assumptions hidden behind a thick veneer of data and arcane statistical formulas to give them the look of scientific objectivity.       In the recent Test of Corporate Purpose study, companies appear to have been marked down for laying off workers or cutting their pay during the pandemic, no matter how much their revenue had declined. Companies that filed for bankruptcy were favored over companies that furloughed workers, on the dubious assumption that bankruptcy distributes more of the financial pain to shareholders, creditors and suppliers and less to workers. Facebook’s ranking suffered because some of its employees publicly disagreed with the company’s decision not to censor President Trump’s posts. And rather than winning praise for hiring 175,000 workers in the middle of a recession while keeping tens of millions of households stocked with the things people couldn’t shop for in person, Amazon was dinged because too many of those new $15 an hour jobs did not guarantee a minimum number of hours worked.   Other ESG advocates and research groups use better and better formulas, but even theirs wind up being highly subjective and value laden. The Drucker Institute’s ranking of “effective companies,” gives lots of weight to innovation, which explains why Amazon, Microsoft, Apple, Google and Facebook were at the top. Another group, Just Capital, uses a formula derived from public opinion polls that bases 35 percent of its ranking on how fairly and equally employees are treated while giving only a 1.2 percent weight to long-term profitability. That hardly sounds to me like a realistic balancing of stakeholder interests.  Everyone is free, of course, to use whatever criteria they want in assessing the performance of individual companies. But all such models of good corporate behavior are,