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Business Last Updated: Jun 10, 2019 - 12:15:13 PM


How America’s Business Leaders Lost Their Way
By Leo Hindery, Jr, Washington Monthly, June 3, 2019
Jun 9, 2019 - 9:29:49 AM

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They once cared about promoting social welfare. Now they only care about making bigger profits.

In 1970, just as I was starting my second year at the Stanford Business School, Milton Friedman authored an opinion piece in the New York Times Sunday Magazine entitled, “The Social Responsibility of Business is to Increase Its Profits.” In it, Friedman argued that the only obligation corporations have is to increase profits for their owners, the shareholders. “The use of the cloak of social responsibility,” Friedman wrote, “does clearly harm the foundations of a free society.”

Fortunately when Friedman’s piece was first published, there were prominent business leaders who took immediate exception. Arjay Miller, former President of Ford Motor Company and then the new Dean of Stanford Business School, felt that Friedman’s narrow perspective ignored business schools’ obligation to train leaders who are well versed in policy and in social issues—and who were firmly grounded in ethics. Reginald Jones of GE and Edmund Littlefield of Utah International also objected to Friedman’s claim. They prominently advanced the premise that a responsible CEO actually has equal and concurrent responsibility to his employees, shareholders, customers, communities and the nation. In 1981, the Business Roundtable criticized Friedman’s view, formally adopting the position that “shareholder returns need to be balanced against other considerations, specifically including employees and customers.”

These leaders were from an era when the privilegeand status of being a large public company’s CEO or director was as much of a reward as the cash compensation that came with it. That’s part of why starting in the twentieth century with J. P. Morgan and continuing through the 1970s, the average public company CEO in the U.S. earned about fifteen to twenty times what his average employee made.

But things have changed. According to the Economic Policy Institute’s most recent report, the average CEO pay ratio is now 271 times what his or her average employee earns. Much of it comes in the form of low-taxed capital gains. Increasingly, Americans see business leaders as part of what’s ailing the United States.

Today’s CEOs and directors—and business school students—would therefore do well to learn from the honorable individuals who preceded them. CEOs of the past felt an overriding obligation to responsibly preserve their companies into the long term. And most also felt that a vibrant middle class, growing from the bottom up, was the very best thing for their companies, for the rest of corporate America, and thus for the nation. Without a strong middle class, they knew that the social fabric which allowed their businesses to thrive would start to tear apart.

As a young businessman, I worked for Ed Littlefield and under Reg Jones. Both strongly believed that success for their companies required a prosperous and strong American populace. I will never forget Jones, with his very public sense of obligation to reduce unemployment and protect human rights, saying that, “What will be expected of managers in the future [will be] intellectual breadth, strategic capability, social sensitivity, political sophistication, world-mindedness, and above all, a capacity to keep their poise amid the crosscurrents of change” (italics added).

Unfortunately, beginning in the early days of the Reagan administration, Friedman’s narrow sense of corporate responsibility, centered entirely around shareholders and senior management, began to displace this more expansive view. The advent of “trickledown” economics suggested that greater wealth at the top would make everyone more prosperous. Making money was increasingly seen as a social good in and of itself.

In 1997, the same Business Roundtable that earlier had rebuked Milton Friedman’s work spun on its heels and endorsed it. The “job of business is in fact only to maximize shareholder wealth,” they declared. In 1998, the once lauded Jack Welch, Jones’ successor at GE, haughtily agreed. “Ideally, you’d have every plant you own on a barge to move with currencies and changes in the economy.” In other words, the ideal business would constantly switch jurisdictions in pursuit of cheaper and cheaper labor, fostering a race to the bottom while laying people off.

This view of business, and the role of business leaders, is wrong. As the late Cornell Law professor Lynn Stout showed in “The Shareholder Value Myth,” profits are only one metric of corporate achievement. The law doesn’t define shareholders as the employers of business executives. Instead, it says that they are more akin to contractors or debt holders. Company executives and directors are not required to give them all business profits. Instead, they can allocate money in the way they want. That includes in research and employee salaries.

Friedman’s thesis is massively destructive. Once it became dominant, corporate governance was whittled back and compromised. Scandals at Enron, WorldCom, and Tyco—where thousands of employees lost their jobs, and California experienced power cuts, because of corporate wrongdoings—exemplify its consequences. In all three cases, the boards of directors were overly supportive of the CEO and senior management, looking the other way despite glaring financial red flags. The rest of the corporate ecosystem did little to help. Why would they?  Major public accounting and law firms now frequently compromise their independence for lucrative consulting and advisory work.

Enron, WorldCom, and Tyco are some of the most notorious cases of business malpractice. But plenty of boards have helped executives enrich themselves at the expense of the company’s regular employees, and the country as a whole. Over the last forty years, the bulk of executive compensation has quickly shifted from all-cash compensation, which was progressively taxed as ordinary income, to stock options and massive grants of restricted stock, each taxed at a fraction of the ordinary income tax rate. Given all of this, it’s little wonder that far-right populism is running stronger or that many young progressives are turning against capitalism.

For our nation to prosper in a balanced way, we need executives to embrace all-encompassing “corporate responsibility contracts,” which put the needs of employees, customers, communities and the nation equally alongside the interests of shareholders. We need business schools that imbue students with a sense of fairness and fair play; teach them to properly balance corporate political activity with fiduciary responsibility; and show them the imperative of acknowledging multiple constituencies and responsibilities.

Above all, we need statesman CEOs who are as committed to a prosperous nation as they are committed to their own wealth accumulation. And we need CEOs who live their lives with a lot more grace than seems to be the norm today.


Source:Ocnus.net 2019

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