Foster Inclusive Capitalism
Foster Inclusive Capitalism
Confronting “The Capitalist Threat to Capitalism”
In the five years since Occupy Wall Street raised the cry of the 99% against the 1%, economic inequality has shot to the top of America’s political agenda. To make a real dent on reducing inequality, we need to move away from the dogma of shareholder capitalism that has captured Corporate America and fueled our growing inequality for three decades. Fortunately, moves are already afoot to foster a more inclusive, share-the-wealth brand of capitalism, both through public policy and through more flexible ideas percolating in business circles.
Shareholder capitalism may be institutionally entrenched but it is ideologically on the defensive. Even at the pinnacle of the business pyramid, there is angst about what Paul Polman, CEO of Unilever, has called “the capitalist threat to capitalism” – a nagging worry that drew major global investors who control $30 trillion in assets to London in May 2014 for a conference on “Inclusive Capitalism,” organized by Lynn Forester de Rothschild.
In a keynote essay, Paul Polman and Lady Rothschild observed that market capitalism “has often proved dysfunctional in important ways. It often encourages shortsightedness, contributes to wide disparities between the rich and the poor, and tolerates the reckless treatment of environmental capital. If these costs cannot be controlled, support for capitalism may disappear.”
Stop Catering to Shareholders, Think Long-Term
An even stronger critique of Corporate America’s short-term focus on profits and stock prices has come from Larry Fink, CEO of Blackrock, one of the world’s largest investment funds. In a blunt letter to 500 U.S. CEOs in April 2015, Fink told them to stop catering to shareholders and spending so much of their profits on stock buybacks because that was hurting their businesses and hampering overall U.S. economic growth. “Returning excessive amounts of capital to investors,” Fink asserted, “sends a discouraging message about a company’s ability to use its resources wisely” and to develop a long-term growth strategy.
Fink said that when Blackrock invests, it seeks out CEOs and corporate boards that think longer-term and invest more in “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.” By February 2016, frustrated by the poor response of U.S. corporations, Fink shot out a follow-up letter declaring: “Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need.”
Echoing earlier American business leaders during the post-war era of stakeholder capitalism, Dow Chemical CEO Andrew Liveris warns that a U.S. capitalism too focused on high returns to shareholders is in danger because of high inequalities and its survival depends on shaping “a new paradigm” that is “more open and inclusive.” As a member of President Trump’s manufacturing council, Liveris asserts that what’s needed is collaboration among business, government and civil society to develop smarter growth policies that “will level the playing field” and create an “economy that truly drives prosperity for all.”
New academic and market studies also throw cold water on a favorite tactic of shareholder capitalism – buying back company stock to jack up share prices. Recent studies show that the nearly $570 billion that American corporations spent in 2015 on buying back their own shares worked out poorly for most investors. Some fast-moving hedge funds and billionaire activist investors made a quick killing, but over time companies that bet heavily on buybacks typically go sour, whereas the stocks of companies that avoid buybacks actually enjoy better longer-term performance.
Some analysts see corporate buybacks as a warning flag to ordinary investors. “If the board doesn’t think it’s worth investing in the company’s future,” asserts Gary Lutin, head of Shareholder Forum, an investor education group, “how can a shareholder justify continuing to hold the stock, or voting for directors who’ve given up?” It’s time, some economists say, for the SEC to revoke rule 10B-18, which since 1982 has allowed buybacks at any time, and to restore earlier limits on when buybacks are allowable.
Worker-Friendly CEOs Change Direction
Already some high-profile CEOs at companies like Costco, Aetna, Patagonia, McKinsey, Ben & Jerry’s and Avon Products have shifted away from the dictates of shareholder capitalism in favor of a more inclusive brand of business leadership. Popular pressure, too, pushes in that direction, with shareholder revolts breaking out at many corporate annual meetings.
In the summer of 2014, when a worker-friendly, consumer-friendly CEO in the New England supermarket chain Market Basket was ousted by owners demanding higher shareholder returns, it touched off a revolt. Grocery store workers walked off the job and shoppers boycotted the chain in a show of grass roots power until the old CEO was put back in charge.
Attitudes are starting to thaw. With strong bipartisan political support, 27 states have enacted laws in the past few years to legitimize the formation of Benefit Corporations, providing legal protection for CEOs and company boards to pursue goals other than maximizing profits, such as protecting the environment, serving society, and making decisions that serve workers and local communities as well as shareholders.
In Portland, Oregon, the city council voted on Dec. 7 to impose a 10% surtax on companies whose CEO is paid more than 100 time as much as an average worker, and a 25% surtax when the CEO’s pay is more than 250 times the average workers’s pay. The tax is to go into effect in 2017, after the federal Securities and Exchange Commission implements its requirement that public companies calculate and report on how their chief executives’ compensation compares with their median workers’ pay. Portland’s corporate surtax was the brainchild of City Commissioner Steve Novick, a Democrat. “When I first read about the idea,” Novick said, “I thought it was a fascinating idea. It was the closest thing I’d seen to a tax on inequality itself.”
Hide and Seek on CEO Pay
One of the major reforms mandated by the 2010 Dodd-Frank financial regulatory law ordered the Securities and Exchange Commission to adopt a rule requiring every company to report the ratio of its CEO’s pay to that of an average employee. Business lobbyists fought for five years to prevent that rule from being issued. Finally, on Aug. 5, 2015, the SEC voted 3-2 to require publicly listed companies to disclose the details of CEO pay and show the huge pay gaps between CEOs and average employees.
That rule was scheduled to take effect in January 2017. But as President Trump took office, his acting chair of the SEC, Republican Commissioner Michael Piwowar, ordered postponement on grounds that companies were having “unanticipated compliance difficulties” – echoing the business lobbyists’s line for the previous seven years. Piwowar called for a new comment period on the rule.
Piwowar’s delay triggered howls on Capitol Hill. Seven Democrats, led by Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts, sent Piwowar a stinging letter saying that were “alarmed” by the delay and demanding that the SEC “allow full implementation of the CEO-to-worker pay ratio disclosures” at once. The SEC, they noted, had already gotten 287,400 comment letters, “the vast majority of which strongly supported the rule.”
Moreover, the Democrats’ letter comment that the yawning gap between CEO and worker pay had widened sharply during the seven years that the public had been waiting for the rule. In 2015, they emphasized, the CEO of an S&P 500 company made 335 times the pay of an average employee . In other words, CEO made nearly as much in one day as the worker made in an entire year.
The SEC’s delay on the CEO-to-worker pay rule left in question other measures put in place by the Obama Administration. The financial collapse of 2008 had spawned a public outcry for controls on runaway pay packages for CEOs of Wall Street’s super banks and astronomically paid market traders. Not only was there criticism of lopsided economy inequality but regulators and lawmakers contended that that lucrative bonus system on Wall Street posed a danger to the nation’s economy by motivating some bankers to take excessive risks.
In April 2016, regulators issued new rules aimed at curbing the casino mentality on Wall Street by regulating how major financial firms structure their pay packages. New restrictions would require the highest paid executives and bank traders to wait at least four years to receive parts of their bonuses to make sure that highly touted deals actually generate long-term gains. In some cases, banks would be required to claw back bonuses from traders and executives who took risks that seemed profitable in the short-run but eventually caused big losses. But President Trump’s promises of deregulation has put a cloud over those regulations.
“You Cannot Let Wall Street Run Your Business”
But a shove for more equitable and inclusive capitalism has already come from one of America’s most powerful capitalists, Warren Buffett, the multi-billionaire chair of Berkshire Hathaway holding company. In his 2015 report to investors, Buffett openly derided ego-driven, power-hungry CEOs and the aggressive, self-serving financial “acrobatics” and “dubious maneuvers” of Wall Street banks. The best CEO, opined Buffett, stays humble, admits personal mistakes, “knows his limits,” recognizes that “character is crucial” and gives credit to people far down the line for corporate success.
“You cannot let Wall Street run your business,” asserts Sinegal, a roly-poly marketing genius with a quick, jowly smile and the open, friendly manner of the butcher at your corner grocery. “Business is supposed to be about more than making money. You have an obligation to the communities where you live to provide good jobs, good careers, and be honest with your customers, so that these communities can count on you.”
“Employee Friendly Is Smart Business.”
Although other retailers have copied the cost-cutting, low-wage, fast labor-turnover model of Wal-Mart, Sinegal took Costco in the opposite direction. He offered higher pay, better benefits, steady work and a middle class career path. In 2011, when Wal-Mart cut back its health benefits, saying that costs had become prohibitive, Sinegal maintained Costco’s more generous benefits.
“We try to provide a very comprehensive health-care plan for our employees,” he said. “Costs keep escalating, but we think that’s an obligation on our part. We’re trying to build a company that’s going to be here 50 and 60 years from now. We owe that to the communities where we do business. We owe that to our employees, that they can count on us for security.”
To Sinegal, a company’s ethical values, its culture, is paramount. “It drives every decision you make,” he asserts. He recalls, for example, when he negotiated a great bargain on a mass shipment of Calvin Klein jeans and could have reaped a huge profit by sticking to Costco’s regular price of $29.99. Instead, Sinegal dropped the price to $22.99, passing along his savings to customers. “That’s company culture. It’s also discipline,” he explains. “Going for the quick profit is easy. It’s like heroin. But once you decide to make the extra $7 a pair on jeans, then it’s open season on everything else. Your culture is gone. It’s our commitment to our customers.”
True to Costco’s culture, Sinegal took an annual salary of $2 million while Wal-Mart’s CEO got paid $20 million. And he treated Costco’s 140,000 workers well. “Employee friendly is smart business,” Sinegal insists. “We pay the highest wages and charge the lowest prices and still make money. So we must be doing something right. We’re getting high productivity. Employees are motivated. We get better performance.” Over the long run, that pays off for shareholders, too. Since 1985, he says, Costco sales are up 13% a year and stock value up almost 17% per year, compounded.
Brand Integrity, Human Relations Before Profits
Other modern American CEOs, too, have made their mark by pursuing inclusive capitalism and visibly putting brand integrity and human relations ahead of profits – James Burke at Johnson & Johnson, Ken Melrose at Toro, David Packard at Hewlett Packard, Dominic Barton at McKinsey & Company, Doug Conant at Campbell’s Soup and Avon Products, and most recently Mark Bertolini at Aetna, the insurance firm.
After reading French economist Thomas Piketty’s tough-minded analysis, Capitalism in the Twenty-First Century that documents the link between investor-first capitalism and the rising tide of inequality, Bertolini decided to try to stem the tide. In early 2015, he gave Aetna’s lowest-paid employees, mostly customer service agents and claims administrators, a 33% raise, from $12 to $16 an hour.
And by giving the Piketty book to all his senior executives, Bertolini signaled that more reform was coming at Aetna. “Companies are not just money-making machines,” Bertolini told The New Yorker. “For the good of the social order, these are the kinds of investments we should be willing to make.”
Hedge-fund billionaire Paul Tudor Jones II has launched a new movement, Just Capital, to rate major companies not on their profits but on how “justly” they treat their workers, society and the environment. “The wealth gap, that’s the single most important issue in this country,” says Jones, as he puts moral pressure on CEOs to provide better pay, more generous benefits and a happier workplaces and to shame those who resist those goals.
Individual entrepreneurs like Hamdi Ulukaya, a Turkish immigrant who founded the yogurt company Chobani, get the message and take action. In early 2016, Ulukaya sprang a huge surprise on his 2,000 rank-and-file employees – news that he was sharing the wealth by giving them 10% ownership in the company, when it goes public or is sold. “I’ve built something I never thought would be such a success,” Chobani explained, “but I cannot think of Chobani being built without these people.”
The Swift Rise of ‘Benefit Corporations’
But rather than relying solely on the philosophical epiphanies or natural inclinations of individual CEOs like Sinegal, Bertolini or Ulukaya, a burgeoning grass roots movement has emerged to institutionalize more inclusive capitalism by enacting laws that encourage business leaders to adopt broader, more socially oriented goals and strategies.
The movement has risen swiftly. Since 2010, 27 states have enacted laws, usually with wide bipartisan support, that authorize so-called Benefit Corporations, giving them legal authority and protection against any lawsuit claiming that management is neglecting its fiduciary responsibility to maximize profits if it pursues other parallel goals as well. More than 1,500 companies are already registered under these laws.
Although the movement is nationwide, California has become a particular hotbed for Benefit Corporations, like Patagonia, the high profile outdoor wear company founded in 1973 by rock climber and environmentalist Yvon Couinard. Dozens of other small and mid-sized California based companies have followed suit. One major advantage of legally registering as a Benefit Corporation is that the company’s core values and social purposes are protected long-term, even if company ownership changes.
“A Model That People Can Believe In”
In a parallel development, hundreds of other companies have sought certification as B Corps, cousins of Benefit Corporations that are not legally registered but are technically pedigreed by an independent nonprofit team of technical experts called B Lab. The B-lab team measures each company’s actual performance against specific yardsticks such as treatment of their workforce, relations with their local community, impact on the environment, and the accountability and transparency of management.
If a company gets high enough grades, it is certified as a B Corp. That is a benchmark, giving the company credibility with consumers, investors, employees and job-seekers that management is serious about pursuing social goals as well as profits. More than 1,200 companies have passed muster to be certified as B Corps, among them Ben & Jerry’s, Warby Parker, the eyeglass firm, Etsy, an on-line marketplace, and Seventh Generation, a sustainable manufacturer of cleaning and paper products.
Why does B Lab’s seal of approval matter? “I think we’re seeing in society right now the need for corporations to stand for something more,” replies Rob Michalak, a spokesman for Ben & Jerry’s. “The B Corp Movement is an answer to that. It’s a model that can ensure companies provide benefits to society in a way that is transparent, is balanced, and people can believe in.”
That concept got market-tested in April 2015 when Etsy ventured into the lion’s den, daring to raise capital on Wall Street with an initial public offering. To the keepers of Wall Street’s profits-first-last-and-always orthodoxy, Etsy’s generous-to-workers-and-communities business model smacked of ludicrous heresy, doomed to failure. But as one market wag impishly suggested, Etsy’s IPO was “a beautiful test …to see if it’s possible to have a mission beyond money.” Etsy, the B Corp, passed with flying colors. Its stock price nearly doubled on opening day. Even on Wall Street, it seemed, some investors love the idea of a company with a heart.
ESOPs – Fostering Shareholder Democracy
For decades, one time-tested strategy aimed at making American capitalism more democratic has been to empower rank and file employees as significant part-owners of companies, a stratagem that directly confronts the concentration of power at the top of business and also enables family business owners to sell their companies to employees. The concept originated with the “shareholder democracy” stock bonus plans of the 1920s when well-known companies such as Sears Roebuck and Lowe’s invested funds within their employee profit-sharing plans in company stock.
In the 1950s, San Francisco lawyer Louis Kelso pioneered a more far-reaching strategy. He used the first ESOP – Employee Stock Ownership Plan – to transfer ownership of his Peninsula Newspapers, Inc. in Palo Alto, California to his managers and rank-and-file employees. “The employee stock ownership plan was invented to democratize access to capital,” Kelso explained. “In human terms, it is a financing device that gradually transforms labor workers into capital workers. It does this by making a corporation’s credit available to the employees, who then use it to buy stock in the company.” That is how Kelso’s own employees bought him out – a formula later applied at hundreds of other firms.
ESOPs – Anchor for the Middle Class
Today, roughly 9,000 U.S. firms have ESOP-type plans representing 14.7 million workers and assets totaling close to $1 trillion, according to National Center for Employee Ownership. Such plans exist mainly in small and medium-sized businesses though a handful have workforces running into the thousands. Typically, employees receive allocations of stock from the company, based on longevity and pay level. They build up employee ownership over time. Today 40% of the ESOP plans now own 100% of the company or are on track to take over full ownership.
ESOP advocates contend that the employee-owned firms get higher performance than conventional firms because they generate greater employee commitment, loyalty, willingness to put in extra effort, and more input on company improvements. ESOPs also give employees greater job security. During the Great Recession, employees in ESOP-related firms were four times less likely to be laid off than those at conventional companies, according to the National Center for Employee Ownership.
Rutgers Professor Joe Blasi, a life-long specialist and advocate for ESOPs, contends that worker ownership is more necessary today as an anchor for the middle class than ever before because middle class economic power and interests have been so marginalized by top-heavy shareholder capitalism. “The sustaining of a middle class,” Blasi asserts, “requires a capital ownership and a capital income strategy” that gives middle class employees more say in how companies are run and how the gains of economic growth are shared.