The Plutocrats Are Getting Nervous

A few months ago, there was cacophony of complaints from the country’s business leaders, the Trump campaign, and even some Democrats about the “socialism” of some of the policies being offered by the current crop of Democratic presidential candidates. Donald Trump made sure to declare in his State of the Union speech that “Tonight, we renew our resolve that America will never be a socialist country”. Michael Bennet, John Delaney, and John Hickenlooper also chimed in with similar opinions, attacking Medicare for All, the Green New Deal, and Bernie Sanders directly.

Hickenlooper at least admitted the obvious, “Republicans may call Democrats ‘socialists’ no matter how moderate we truly are” and the Trump campaign regularly proves the truth of that statement. Trump’s 2020 campaign manager, Brad Parscale, recently accused both Pelosi and Biden, of all people, of being “socialists”. Nikki Haley recently chimed in with a similar critique of Democratic proposals about education and health care. But that charge has lost its impact as the younger generation of voters associate “socialism” with the liberal democratic socialist governments of Europe and their strong safety nets with protections for workers as opposed to the totalitarian Soviet state that the older generation recalls when hearing the phrase.

Far more interesting, however, was the reaction of American business leaders who also jumped on the bandwagon decrying the Democrats’ “socialism”. Jamie Dimon, CEO of JPMorgan Chase, wrote in his annual letter to the shareholders, “Socialism inevitably produces stagnation, corruption and often worse – such as authoritarian government officials who often have an increasing ability to interfere with both the economy and individual lives – which they frequently do to maintain power. This would be as much a disaster for our country as it has been in the other places it’s been tried”. That is truly an epicly ironic statement when you consider the rampant corruption and autocratic tendencies of the Trump administration and the attendant silence from virtually every US business leader about that at the same time they are pocketing billions from his tax cut. But, as I wrote at the time, Dimon’s statement reflected a real concern among the plutocratic class that the Democrats were really going to use the power of government to rein in the unconstrained form of crony capitalism that has allowed those business leaders to suck billions of dollars from the American middle and working class.

Just to show how rattled Dimon and the plutocrats have become, the Business Roundtable, represented by nearly 200 business leaders, some from America’s largest companies, just put out a revised Statement on the Purpose of a Corporation. The new Statement declares “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”.

This is a major departure from the group’s prior definition which focused on Milton Friedman’s belief in the primacy of the shareholder and stated the “principal objective of a business enterprise is to generate economic returns to its owners” that has existed for the last twenty years. Decrying any societal responsibilities for corporations, Friedman himself wrote in the 1970s that “What does it mean to say that ‘business’ has responsibilities? Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades”.  That attitude has resulted in a massive growth in inequality with an exponential growth in wealth for capital and stagnant wages for labor over the last four decades. That definition of the purpose of a corporation in itself departed from an earlier Roundtable Statement from before the Reagan era that declared that a corporation has a “responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy”, an approach that proved profitable for both companies and workers in the post World War II US economy. The new Statement is an attempt to return to those principles that pre-date Reagan and Friedman.

As Farhood Manjoo noted, the new Statement of Purpose is filled with nice sounding words but it is  actually intended to ensure that the stated goals are never really implemented. Says Manjoo, “[T]heir statement lacks any call for greater structural changes in the American economy – changes to how companies are taxed or regulated, or how executives are paid, or how they should be judged. And because a public corporation’s most direct incentives – including the C.E.O.’s pay – remain tied to stock performance, there’s no reason to believe that corporations will voluntarily move away from pleasing shareholders alone, despite the new, high-minded ideals. In fact, the fanfare surrounding the Roundtable’s empty statement could be read as an effort to stave off structural economic reform rather than accelerate it. It’s a way for the C.E.O.s to tell us that they’re on the case, so we don’t have to resort to something unthinkable, like a Warren presidency”. And, in fact, another major business group that includes some of the same companies in the Roundtable, the Council of Individual Investors, immediately refuted the Roundtable’s principles, writing, “Accountability to everyone means accountability to no one. It is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value”.

Another, larger problem for those handful of CEOs who largely do support the Roundtable’s new Statement of Purpose and truly believe in socially responsible capitalism is that, over these last 40 years, the principle of the primacy of the shareholder has become an enforceable legal doctrine that has been written into corporate law and, importantly, the laws of Delaware, one of the most popular states for incorporating a business. The enshrinement of Friedman’s ideas into law was largely accomplished at the insistence of the investor class and with the acquiescence and even support of corporate leaders.

In 1985, Delaware’s Supreme Court ruled that a firm’s board of directors must be focused on maximizing the share price to the exclusion of other interests when involved in a merger or acquisition. In 2010, in a case involving Ebay and Craigslist, the Delaware Court of Chancery made clear that the principle extended to corporate decisions beyond simply mergers and acquisitions but to all corporate policies. The Court’s opinion, written by Chancellor William B. Chandler, III, explicitly stated, “Indeed, I personally appreciate and admire Jim’s and Craig’s [the owners of Craigslist] desire to be of service to communities. The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The ‘Inc.’ after the company name has to mean at least that. Thus, I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders—no matter whether those stockholders are individuals of modest means or a corporate titan of online commerce”.

Yet, despite what these rulings may imply, corporate boards have always had some leeway with the idea of maximizing shareholder value. The so-called business judgement rule has allowed directors to take actions that are in the best interest of the company that may not explicitly maximize shareholder value in the short term but improve the longer-run prospects of the corporation and its shareholders. This rule, as well as specific statutes in some states, allows corporations to engage in philanthropic behavior, usually supporting the arts or some specific interest of the CEO, and providing positive PR for the firm. As long as that giving does not materially damage the shareholder, it will pass muster under existing law. Similarly, a decision to raise employee salaries can be couched in the idea that it will lead to better productivity and higher retention rates for the company, thereby satisfying the longer-run interests of the corporation at the expense of short-run share price maximization.

The latitude provided by the business judgement rule can often be wider than one would think, For instance, in a case from 2011, the Delaware courts permitted Airgas to simply refuse a purchase offer from a competitor even though that sale would have provided a substantial profit for its existing shareholders, basing its decision largely on the business judgement rule. That would seem to directly conflict with the 1985 decision that demanded share price maximization in mergers and acquisitions. Similarly, the Supreme Court, in the Hobby Lobby decision that essentially gave corporations First Amendment religious rights, openly declared, “Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not”.

Whatever actions are taken under the business judgement rule still has to have the interests of the shareholders as its primary consideration. As another Delaware justice wrote, “It is true that the business judgment rule provides directors with wide discretion, and that it enables directors to justify by reference to long run stockholder interests a number of decisions that may in fact be motivated more by a concern for a charity the CEO cares about, or the community in which the corporate headquarters is located, or once in a while, even the company’s ordinary workers, than long run stockholder wealth. But that does not alter the reality of what the law is…If a fiduciary admits that he is treating an interest other than stockholder wealth as an end in itself, rather than an instrument to stockholder wealth, he is committing a breach of fiduciary duty”.

What the conflict between the primacy of the shareholder and the business judgement rule creates is an enormous source of shareholder lawsuits. That exists even today. Now imagine a corporation that tries, as the new Roundtable Statement declares, to deal “fairly and ethically with our suppliers” by refusing to use suppliers that don’t provide a livable minimum wage. Or another company that, as the Roundtable Statement also states, tries to “protect the environment by embracing sustainable practices across our businesses” by using only products created with sustainable sources of electricity such as wind or solar. In each of these cases the costs of production would rise and profits and/or market share would presumably shrink, potentially triggering shareholder lawsuits that the company would then have to spend even more money trying to fight. It’s easy to see how all the current incentives work against a CEO actually trying to fulfill the obligations of a corporation under the new Roundtable Statement. The Statement is more of an aspirational document than an actual attempt to seriously change the current goals of corporations.

I have no doubt that there are a substantial number of well-meaning CEOs who see that the current form of American capitalism is probably unsustainable. Fortune’s CEO highlighted this when he said, “More and more C.E.O.s worry that public support for the system in which they’ve operated is in danger of disappearing”. At the same time, they also fear the emergence of a Warren-like administration that will radically alter how they have to do business and provide the structural economic reforms they probably know are needed. But the fact of the matter is that CEOs and their plutocratic class have themselves created a corporate governance and legal framework over the last forty years that seemingly precludes them from reforming this failing system from within. They are left with simply spouting meaningless words, saying they will try to do better while at the same time criticizing any real reform as “socialism”.