corporate social responsibility

Time for Congress to Stop Hollering at CEOs and Take Action

Last week, Congress engaged in a bipartisan barrage of CEO bashing.

The Senate Banking Committee assailed Wells Fargo CEO John Stumpf for pushing employees to create as many as two million bogus bank and credit card accounts without customer’s consent – making customers pay overdraft and late fees on accounts they never knew they had.

Louisiana Republican David Vitter pressed Stumpf on when he knew about the wrongdoing. “In 2011, about 1,000 employees were fired over this,” said Vitter, incredulously, “and you were never told about that?”

Meanwhile, the House Committee on Oversight and Government Reform criticized Mylan Pharmaceutical’s CEO Heather Bresch for raising the price of its Epipen, an emergency allergy treatment, by 500 percent – forcing customers to pay $608 for a two-pack that had cost $100 in 2009.

Noting that Mylan had sought legislation to increase the number of patients who receive prescriptions for EpiPens, Representative Mick Mulvaney, Republican of South Carolina, angrily told Bresch: “You get a level of scrutiny and a level of treatment that would ordinarily curl my hair, but you asked for it.”

Such shaming before congressional committees tends to reassure the public Congress is taking action. But – especially with Republicans in charge – Congress is doing nothing to prevent the wrongdoing from recurring.

Can we be clear? CEOs have only one goal in mind – making money. If they can make more money by misleading or price gouging, they’ll continue to do so until it’s no longer as profitable.

For years we’ve watched Congress grill CEOs of Wall Street banks about bank fraud.

If it’s not John Stumpf’s sham accounts, it’s JPMorgan Chase’s Jamie Dimon, whose bank failed to report trading losses (remember the “London Whale?”). Or it’s Goldman Sachs’s Lloyd Blankfein, whose bank defrauded investors.

Wells Fargo’s Strumpf made $19 million last year, partly because all those new accounts helped maintain the bank’s profit machine. Sure, the bank was fined $185 million by the Consumer Financial Protection Bureau for the fraud, but that’s chicken feed relative to what the bank pulls in. Between April and July, 2016 alone it had revenues of $22.16 billion.

Why should we expect Wells Fargo or any other big bank to stop such frauds, when they’re so lucrative?

For years we’ve watched Congress condemn CEOs of pharmaceutical companies for price gouging: If not Mylan’s Heather Bresch, it’s Turing Pharmaceutical’s Martin Shkreli, who jacked up the price of Daraprim – used to treat HIV patients – from $13.50 to $750 a pill.

Or Valeant Pharmaceutical’s Michael Pearson, who quadrupled the price of Syprine, used to treat an inherited disorder that can cause severe liver and nerve damage. Or Amphaster Pharmaceuticals CEO Jack Y. Zhang, who hoisted the price of naloxone, used in cases of heroin overdoses, to more than $400 a pop.

Heather Bresch made $18.9 million last year. Mylan’s incentive plan will bestow additional bonuses of $82 million on top executives if they hit certain high profit targets by 2018.

Why should we expect Mylan or any other pharmaceutical company to refrain from yanking up the price of lifesaving drugs as high as the market will bear?

Republicans may rage at the CEOs who appear before them, but they haven’t given the Justice Department enough funding to pursue criminal charges against corporations and executives who violate the law.

They haven’t even appropriated enough money for regulatory agencies to police the market. Funding for the Consumer Financial Protection Bureau, for example, is capped at 12 percent of the Federal Reserve’s operating expenses. Even now, Republicans are trying to put the CFPB’s funding into the appropriations process where it can be squeezed far more.

Meanwhile, Congress has allowed Wall Street banks and pharmaceutical companies to accumulate vast market power that invites wrongdoing.

Wall Street’s five largest banks (including Wells Fargo) now have about 45 percent of the nation’s banking assets. That’s up from about 25 percent in 2000. 

This means most bank customers have very little choice. Nearly half of American households have a Wells Fargo bank within a few miles of home, for example.  

Every big Wall Street bank offers the same range of services at about the same price – including, most likely, services that are unwanted and unneeded.

Similarly, Mylan and other pharmaceutical companies can engage in price gouging because they’re the only ones producing these lifesaving drugs.

Congress has made it illegal for Americans to shop at foreign pharmacies for cheaper versions of same drugs sold in U.S., and hasn’t appropriated the Food and Drug Administration enough funds to get competing versions of lifesaving drugs to market quickly.

So instead of setting up further rounds of CEO perp walks for the TV cameras, Congress should give the Justice Department and regulatory agencies enough funding to do their jobs.

While they’re at it, break up the biggest banks. And regulate drug prices directly, as does every other country.

It’s easy to holler at CEOs. It’s time for to stop hollering and take action.

The Outrageous Ascent of CEO Pay

The Securities and Exchange Commission approved a rule last week requiring that large publicly held corporations disclose the ratios of the pay of their top CEOs to the pay of their median workers.

About time.

For the last thirty years almost all incentives operating on American corporations have resulted in lower pay for average workers and higher pay for CEOs and other top executives.

Consider that in 1965, CEOs of America’s largest corporations were paid, on average, 20 times the pay of average workers. 

Now, the ratio is over 300 to 1.

Not only has CEO pay exploded, so has the pay of top executives just below them. 

The share of corporate income devoted to compensating the five highest-paid executives of large corporations ballooned from an average of 5 percent in 1993 to more than 15 percent by 2005 (the latest data available).

Corporations might otherwise have devoted this sizable sum to research and development, additional jobs, higher wages for average workers, or dividends to shareholders – who, not incidentally, are supposed to be the owners of the firm.

Corporate apologists say CEOs and other top executives are worth these amounts because their corporations have performed so well over the last three decades that CEOs are like star baseball players or movie stars.

Baloney. Most CEOs haven’t done anything special. The entire stock market surged over this time. 

Even if a company’s CEO simply played online solitaire for thirty years, the company’s stock would have ridden the wave.  

Besides, that stock market surge has had less to do with widespread economic gains than with changes in market rules favoring big companies and major banks over average employees, consumers, and taxpayers.

Consider, for example, the stronger and more extensive intellectual-property rights now enjoyed by major corporations, and the far weaker antitrust enforcement against them. 

Add in the rash of taxpayer-funded bailouts, taxpayer-funded subsidies, and bankruptcies favoring big banks and corporations over employees and small borrowers.

Not to mention trade agreements making it easier to outsource American jobs, and state legislation (cynically termed “right-to-work” laws) dramatically reducing the power of unions to bargain for higher wages.

The result has been higher stock prices but not higher living standards for most Americans.

Which doesn’t justify sky-high CEO pay unless you think some CEOs deserve it for their political prowess in wangling these legal changes through Congress and state legislatures.

It even turns out the higher the CEO pay, the worse the firm does.

Professors Michael J. Cooper of the University of Utah, Huseyin Gulen of Purdue University, and P. Raghavendra Rau of the University of Cambridge, recently found that companies with the highest-paid CEOs returned about 10 percent less to their shareholders than do their industry peers.

So why aren’t shareholders hollering about CEO pay? Because corporate law in the United States gives shareholders at most an advisory role.

They can holler all they want, but CEOs don’t have to listen. 

Larry Ellison, the CEO of Oracle, received a pay package in 2013 valued at $78.4 million, a sum so stunning that Oracle shareholders rejected it. That made no difference because Ellison controlled the board.

In Australia, by contrast, shareholders have the right to force an entire corporate board to stand for re-election if 25 percent or more of a company’s shareholders vote against a CEO pay plan two years in a row.

Which is why Australian CEOs are paid an average of only 70 times the pay of the typical Australian worker.

The new SEC rule requiring disclosure of pay ratios could help strengthen the hand of American shareholders.

The rule might generate other reforms as well – such as pegging corporate tax rates to those ratios.

Under a bill introduced in the California legislature last year, a company whose CEO earns only 25 times the pay of its typical worker would pay a corporate tax rate of only 7 percent, rather than the 8.8 percent rate now applied to all California firms.

On the other hand, a company whose CEO earns 200 times the pay of its typical employee, would face a 9.5 percent rate. If the CEO earned 400 times, the rate would be 13 percent.

The bill hasn’t made it through the legislature because business groups call it a “job killer.” 

The reality is the opposite. CEOs don’t create jobs. Their customers create jobs by buying more of what their companies have to sell.

So pushing companies to put less money into the hands of their CEOs and more into the hands of their average employees will create more jobs.

The SEC’s disclosure rule isn’t perfect. Some corporations could try to game it by contracting out their low-wage jobs. Some industries pay their typical workers higher wages than other industries.

But the rule marks an important start.

The Conundrum of Corporation and Nation

The U.S. economy is picking up steam but most Americans aren’t feeling it. By contrast, most European economies are still in bad shape, but most Europeans are doing relatively well.

What’s behind this? Two big facts.

First, American corporations exert far more political influence in the United States than their counterparts exert in their own countries.

In fact, most Americans have no influence at all. That’s the conclusion of Professors Martin Gilens of Princeton and Benjamin Page of Northwestern University, who analyzed 1,799 policy issues – and found that “the preferences of the average American appear to have only a miniscule, near-zero, statistically non-significant impact upon public policy.”

Instead, American lawmakers respond to the demands of wealthy individuals (typically corporate executives and Wall Street moguls) and of big corporations – those with the most lobbying prowess and deepest pockets to bankroll campaigns.

The second fact is most big American corporations have no particular allegiance to America. They don’t want Americans to have better wages. Their only allegiance and responsibility to their shareholders – which often requires lower wages  to fuel larger profits and higher share prices.

When GM went public again in 2010, it boasted of making 43 percent of its cars in place where labor is less than $15 an hour, while in North America it could now pay “lower-tiered” wages and benefits for new employees.

American corporations shift their profits around the world wherever they pay the lowest taxes. Some are even morphing into foreign corporations.

As an Apple executive told The New York Times, “We don’t have an obligation to solve America’s problems.”

I’m not blaming American corporations. They’re in business to make profits and maximize their share prices, not to serve America.

But because of these two basic facts – their dominance on American politics, and their interest in share prices instead of the wellbeing of Americans – it’s folly to count on them to create good American jobs or improve American competitiveness, or represent the interests of the United States in global commerce.

By contrast, big corporations headquartered in other rich nations are more responsible for the wellbeing of the people who live in those nations.

That’s because labor unions there are typically stronger than they are here – able to exert pressure both at the company level and nationally.

VW’s labor unions, for example, have a voice in governing the company, as they do in other big German corporations. Not long ago, VW even welcomed the UAW to its auto plant in Chattanooga, Tennessee. (Tennessee’s own politicians nixed it.) 

Governments in other rich nations often devise laws through tri-partite bargains involving big corporations and organized labor. This process further binds their corporations to their nations.

Meanwhile, American corporations distribute a smaller share of their earnings to their workers than do European or Canadian-based corporations. 

And top U.S. corporate executives make far more money than their counterparts in other wealthy countries.

The typical American worker puts in more hours than Canadians and Europeans, and gets little or no paid vacation or paid family leave. In Europe, the norm is five weeks paid vacation per year and more than three months paid family leave.

And because of the overwhelming clout of American firms on U.S. politics, Americans don’t get nearly as good a deal from their governments as do Canadians and Europeans.

Governments there impose higher taxes on the wealthy and redistribute more of it to middle and lower income households. Most of their citizens receive essentially free health care and more generous unemployment benefits than do Americans.

So it shouldn’t be surprising that even though U.S. economy is doing better, most Americans are not.

The U.S. middle class is no longer the world’s richest. After considering taxes and transfer payments, middle-class incomes in Canada and much of Western Europe are higher than in U.S. The poor in Western Europe earn more than do poor Americans.

Finally, when at global negotiating tables – such as the secretive process devising the “Trans Pacific Partnership” trade deal – American corporations don’t represent the interests of Americans. They represent the interests of their executives and shareholders, who are not only wealthier than most Americans but also reside all over the world.  

Which is why the pending Partnership protects the intellectual property of American corporations – but not American workers’ health, safety, or wages, and not the environment.

The Obama administration is casting the Partnership as way to contain Chinese influence in the Pacific region. The agents of America’s interests in the area are assumed to be American corporations.

But that assumption is incorrect. American corporations aren’t set up to represent America’s interests in the Pacific region or anywhere else.

What’s the answer to this basic conundrum? Either we lessen the dominance of big American corporations over American politics. Or we increase their allegiance and responsibility to America.

It has to be one or the other. Americans can’t thrive within a political system run largely by big American corporations – organized to boost their share prices but not boost America.

Harvard Business School's Role in Widening Inequality

No institution is more responsible for educating the CEOs of American corporations than Harvard Business School – inculcating in them a set of ideas and principles that have resulted in a pay gap between CEOs and ordinary workers that’s gone from 20-to-1 fifty years ago to almost 300-to-1 today.

survey, released on September 6, of 1,947 Harvard Business School alumni showed them far more hopeful about the future competitiveness of American firms than about the future of American workers.

As the authors of the survey conclude, such a divergence is unsustainable. Without a large and growing middle class, Americans won’t have the purchasing power to keep U.S. corporations profitable, and global demand won’t fill the gap. Moreover, the widening gap eventually will lead to political and social instability. As the authors put it, “any leader with a long view understands that business has a profound stake in the prosperity of the average American.”

Unfortunately, the authors neglected to include a discussion about how Harvard Business School should change what it teaches future CEOs with regard to this “profound stake.” HBS has made some changes over the years in response to earlier crises, but has not gone nearly far enough with courses that critically examine the goals of the modern corporation and the role that top executives play in achieving them.

A half-century ago, CEOs typically managed companies for the benefit of all their stakeholders – not just shareholders, but also their employees, communities, and the nation as a whole.

“The job of management,” proclaimed Frank Abrams, chairman of Standard Oil of New Jersey, in a 1951 address, “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.” 

This view was a common view among chief executives of the time. Fortune magazine urged CEOs to become “industrial statesmen.” And to a large extent, that’s what they became. 

For thirty years after World War II, as American corporations prospered, so did the American middle class. Wages rose and benefits increased. American companies and American citizens achieved a virtuous cycle of higher profits accompanied by more and better jobs.

But starting in the late 1970s, a new vision of the corporation and the role of CEOs emerged – prodded by corporate “raiders,” hostile takeovers, junk bonds, and leveraged buyouts. Shareholders began to predominate over other stakeholders. And CEOs began to view their primary role as driving up share prices. To do this, they had to cut costs – especially payrolls, which constituted their largest expense.

Corporate statesmen were replaced by something more like corporate butchers, with their nearly exclusive focus being to “cut out the fat” and “cut to the bone.”

In consequence, the compensation packages of CEOs and other top executives soared, as did share prices. But ordinary workers lost jobs and wages, and many communities were abandoned. Almost all the gains from growth went to the top.

The results were touted as being “efficient,” because resources were theoretically shifted to “higher and better uses,” to use the dry language of economics.

But the human costs of this transformation have been substantial, and the efficiency benefits have not been widely shared. Most workers today are no better off than they were thirty years ago, adjusted for inflation. Most are less economically secure.

So it would seem worthwhile for the faculty and students of Harvard Business School, as well as those at every other major business school in America, to assess this transformation, and ask whether maximizing shareholder value – a convenient goal now that so many CEOs are paid with stock options – continues to be the proper goal for the modern corporation.

Can an enterprise be truly successful in a society becoming ever more divided between a few highly successful people at the top and a far larger number who are not thriving?

For years, some of the nation’s most talented young people have flocked to Harvard Business School and other elite graduate schools of business in order to take up positions at the top rungs of American corporations, or on Wall Street, or management consulting.

Their educations represent a substantial social investment; and their intellectual and creative capacities, a precious national and global resource.

But given that so few in our society – or even in other advanced nations – have shared in the benefits of what our largest corporations and Wall Street entities have achieved, it must be asked whether the social return on such an investment has been worth it, and whether these graduates are making the most of their capacities in terms of their potential for improving human well-being.

These questions also merit careful examination at Harvard and other elite universities. If the answer is not a resounding yes, perhaps we should ask whether these investments and talents should be directed toward “higher and better” uses.

[This essay originally appeared in the Harvard Business Review’s blog, at http://blogs.hbr.org/2014/09/how-business-schools-can-help-reduce-inequality/]

How the Peoples Party Prevailed in 2020

Third parties have rarely posed much of a threat to the dominant two parties in America. So how did the People’s Party win the U.S. presidency and a majority of both houses of Congress in 2020?

It started four years before, with the election of 2016.

As you remember, Donald Trump didn’t have enough delegates to become the Republican candidate, so the GOP convention that summer was “brokered” – which meant the Party establishment took control, and nominated the Speaker of the House, Paul Ryan.

Trump tried to incite riots but his “I deserve to be president because I’m the best person in the world!” speech incited universal scorn instead, and he slunk off the national stage (his last words, shouted as he got into his stretch limousine, were “Fu*ck you, America!”)

On the Democratic side, despite a large surge of votes for Bernie Sanders in the final months of the primaries, Hillary Clinton’s stable of wealthy donors and superdelegates put her over the top.

Both Republican and Democratic political establishments breathed palpable sighs of relief, and congratulated themselves on remaining in control of the nation’s politics.

They attributed Trump’s rise to his fanning of bigotry and xenophobia, and Sanders’s popularity to his fueling of left-wing extremism. 

They conveniently ignored the deeper anger in both camps about the arbitrariness and unfairness of the economy, and about a political system rigged in favor of the rich and privileged.

And they shut their eyes to the anti-establishment fury that had welled up among independents, young people, poor and middle-class Democrats, and white working-class Republicans.

So they went back to doing what they had been doing before. Establishment Republicans reverted to their old blather about the virtues of the “free market,” and establishment Democrats returned to their perennial call for “incremental reform.”

And Wall Street, big corporations, and a handful of billionaires resumed pulling the strings of both parties to make sure regulatory agencies didn’t have enough staff to enforce rules, and to pass the Trans Pacific Partnership.

Establishment politicians also arranged to reduce taxes on big corporations and simultaneously increase federal subsidies to them, expand tax loopholes for the wealthy, and cut Social Security and Medicare to pay for it all. (“Sadly, we have no choice,” said the new President, who had staffed the White House and Treasury with Wall Streeters and corporate lobbyists, and filled boards and commissions with corporate executives).

Meanwhile, most Americans continued to lose ground. 

Even before the recession of 2018, most families were earning less than they’d earned in 2000, adjusted for inflation. Businesses continued to shift most employees off their payrolls and into “on demand” contracts so workers had no idea what they’d be earning from week to week. And the ranks of the working poor continued to swell.

At the same time, CEO pay packages grew even larger, Wall Street bonus pools got fatter, and a record number of billionaires were becoming multi-billionaires.

Then, of course, came the recession, along with bank losses requiring another round of bailouts. The Treasury Secretary, a former managing director of Morgan Stanley, expressed shock and outrage, explaining the nation had no choice and vowing to “get tough” on the banks once the crisis was over.

Politics abhors a vacuum. In 2019, the People’s Party filled it.

Its platform called for getting big money out of politics, ending “crony capitalism,” abolishing corporate welfare, stopping the revolving door between government and the private sector, and busting up the big Wall Street banks and corporate monopolies.

The People’s Party also pledged to revoke the Trans Pacific Partnership, hike taxes on the rich to pay for a wage subsidy (a vastly expanded Earned Income Tax Credit) for everyone earning below the median, and raise taxes on corporations that outsource jobs abroad or pay their executives more than 100 times the pay of typical Americans.

Americans rallied to the cause. Millions who called themselves conservatives and Tea Partiers joined with millions who called themselves liberals and progressives against a political establishment that had shown itself incapable of hearing what they had been demanding for years.

The rest, as they say, is history.

What Is "Stake"?

Stakeholder theory, which has been described by Edward Freeman and others, is the mirror image of corporate social responsibility. Instead of starting with a business and looking out into the world to see what ethical obligations are there, stakeholder theory starts in the world. It lists and describes those individuals and groups who will be affected by (or affect) the company’s actions and asks, “What are their legitimate claims on the business?” “What rights do they have with respect to the company’s actions?” and “What kind of responsibilities and obligations can they justifiably impose on a particular business?” In a single sentence, stakeholder theory affirms that those whose lives are touched by a corporation hold a right and obligation to participate in directing it. (Flatworld)