In my last post, I posited that the proximate cause of our current dysfunctional democracy, in particular the severe dysfunction of Congress, has been our violation of the Brandeis law of democratic society over the past 40-50 years.
To recap, Louis D. Brandeis was a U.S Supreme Court Justice from 1916 to 1939. By the Brandeis law of democratic society, I'm referring to his statement:
“We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can't have both.”
So how did we end up violating this law and why? Did a bunch of wealthy individuals get together one day and decide to revamp the rules of American political economy to their own benefit and the detriment of everyone else? I doubt it.
(I know, I know, what about the Koch brothers and their allies? But I don't think even they started out with the intention of re-engineering the political economy. I think that came later.)
My theory is that the shift to the shareholder value (or shareholder maximization) model of corporate governance in the 1970s and 80s, particularly within large corporations, was what ultimately led to violation of the Brandeis law.
The shareholder value/maximization model measures corporate success by equating it with the degree to which shareholders are enriched. Under this model, the job of the CEO is to consider the interests of the shareholders above all else and run the business in a way which maximizes the share price (public corporations) or the net value of the business (private corporations).
Under the previous model of corporate governance, the CEO of a large corporation was more akin to a statesman whose job was to promote broad-based economic prosperity over the long term, not just maximize share price or net value in the short term.
This corporate statesmanship approach is nicely summarized in a quote which Robert Reich included in his book, Saving Capitalism: For the Many, not the Few. On page 119, Reich quotes Frank Abrams, then chairman of Standard Oil of New Jersey, who said in 1951:
“The job of management is to maintain an equitable and working balance among the claims of the various directly affected interest groups … stockholders, employees, customers, and the public at large. Business managers are gaining professional status partly because they see in their work the basic responsibilities [to the public] that other professional men have long recognized as theirs.”
The “equitable and working balance” between stakeholders which Abrams describes is the key to ensuring corporations deliver broad-based prosperity rather than just enriching those at the top. It's the corporate analog of the political system of checks and balances which was written into the United States Constitution.
The shift to the shareholder value model may have seemed reasonable at the time, particularly given the economic stagnation of the late 1970s, but it created a climate in which it became acceptable, even advisable, for the CEO to neglect the interests of the other stakeholders. Meeting or exceeding the quarterly expectations of external financial analysts became the overriding concern. Succeeding meant large financial rewards for the CEO (which became larger and larger as the years went by). Failing risked job loss and invited hostile takeover. In this environment, it was inevitable that the interests of other stakeholders would take a beating.
Employee pay, pensions, and other benefits were an obvious target. Unions stood in the way of the exploitation of this target so they had to go. The campaign by Corporate America to eliminate unions as a source of countervailing power for employees has been remarkably effective. The public was sold on the concept of “right to work” (vs union shops) and this was codified into the laws of many states. Millions have discovered since that this “right” means the right to work very long hours for very low wages.
The demise of union power also led to an over-representation of corporate management interests, and a corresponding under-representation of worker interests, in the negotiation of global trade agreements. The “race to the bottom” to minimize labor costs and the resulting loss of jobs in the U.S. was the predictable outcome.
Pensions were replaced by today's ubiquitous 401k plans, with most opting to put money into the inherently unstable stock market in the hopes of accumulating enough to retire on. Millions have lost substantial amounts of money in this way, and retirement has become the impossible dream for many, but this transition has been a big win for the corporate bottom line.
Taxes and regulation were other obvious targets of corporate management, taxes because they directly constrain corporate profits and regulation because it limits the types of actions which corporate management can take to maximize profits and shareholder value. The campaign by Corporate America to convince the public and Congress that taxes and regulation are drags on the economy has also been remarkably successful.
The result has been repeated tax cuts, which have mostly benefited large corporations and wealthy individuals, and a reduction of regulations that protected employees, consumers, and the environment from corporate excesses. Repeated funding cuts for regulatory agencies have been another effective tactic used by Congress. Regulatory laws are meaningless if the responsible agency has too little budget to enforce them.
In his book, Reich provides numerous other examples of the less obvious ways in which the American political economy has been retooled to achieve the financial results required by the shareholder value model. In every case, the willingness to sacrifice the interests of other stakeholders has led to a negative outcome for society as a whole.
Far and away, though, the worst of these negative outcomes has been the concentration of incredible wealth in the hands of a small economic elite and the hollowing out of the middle class. The self-serving claim that delivering vast wealth to large shareholders and CEOs would result in widespread prosperity via the fabled “trickle-down” effect has been shown to be patently false. What has been proven instead is that the shareholder value model of corporate governance is toxic for a democracy.
I think what we need now is a return to the statesmanship model of corporate governance. These days, this model is experiencing some degree of resurgence under the labels “conscious business” or “conscious capitalism.” As with the mid 20th century version, these newer approaches emphasize the balancing of stakeholder interests to achieve the best possible outcome for all. The key difference is the inclusion of the environment as a corporate stakeholder. Given the increasingly precarious state of the environment due to the impact of human activity, its addition as a stakeholder seems very wise.
For those who would like further detail about these more enlightened approaches to corporate governance, I would recommend the book, Conscious Capitalism: Liberating the Heroic Spirit of Business, by John Mackey (co-founder of Whole Foods) and Rajendra Sisodia. The website, www.consciouscapitalism.org, is also a good source of information.
