A Dying Concept

The Demise of Corporate Citizenship

One of the interesting questions that resulted from the Supreme Court decision in the Citizens United case in 2010, which assigned political personhood to corporations, is whether this corporate personhood carries responsibilities. It used to, in another age, but does it now?

in the past, the notion of the business corporation as a person was a legal fiction useful in the formation of business enterprises, but it was never thought to confer political rights and protections equivalent to those of human beings. But the Supreme Court has changed all that, thereby turning American business into an unprecedentedly powerful political actor and unchecked financial contributor to electoral politics.

Certain responsibilities of “corporate citizenhood” were commonly spoken of in the past, between the Progressive Era (notably the Theodore Roosevelt presidency) and the events preceding the present global recession. Corporate responsibility was a major consideration following the Second World War period of national unity, until America’s seeming triumphal exit from the Cold War and the increasingly frenzied performance of Wall Street underwrote a second Gilded Age, comparable to the original one (between the presidencies of Ulysses Grant and Theodore Roosevelt) in its celebration of rampant greed and speculative finance.

In June Remapping Debate published the results of an inquiry among eighty American multinational corporations. The question asked was whether as corporations they possessed citizen-like obligations to the American nation. Most refused to answer.

Remapping Debate’s Mike Alberti reported that “among the corporate representatives who did comment, most were unwilling to say that their corporation had any obligations to the United States, let alone to define any such obligations with specificity. Moreover, representatives of some American multinationals said that their companies do not even identify themselves as being American in any sense except that they are legally incorporated and physically headquartered in one of the states of the U.S.”

This response is no doubt influenced by the fear that overt identification with the United States risks tax complications for American business organizations whose largely successful efforts to avoid paying taxes anywhere is a large, if not the largest, contribution to net reported corporate profits today—and thus to the remuneration of corporate management.

An Apple executive told the New York Times in 2012, “We don’t have an obligation to solve American problems. Our only obligation is to make the best product possible.” Apple has accumulated more than $100 billion held untaxed outside the United States. The company borrows from banks to pay dividends demanded by stockholders rather than using some its profits, which would be subject to tax once brought back to the United States. It’s cheaper to borrow and hoard the lucre abroad.

The conviction is new that the exclusive purpose of the business corporation is to profit its professional managers and stockholders (in recent years the American corporation has usually been controlled all but entirely by hired managers rather than by its founders or original owners). Its current owners, or rather its stockholders, are usually an amorphous body of fractional investors incapable of seriously influencing, much less dominating, a board of directors nominated by company executives and beholden to current management. Both stockholders and managers tend to be far more interested in private enrichment than in the character, corporate interests, and future of the company.

Ralph Gomory, a professor of management at New York University, says that “the idea that a corporation exists solely to make money is actually quite new. ... Even in the early 1980s you would be more likely to hear a chief executive officer talking about his responsibilities to the country or to his employees than to his duty to the shareholders.”

William Lazonick, a professor of economics at the University of Massachusetts in Lowell, is quoted as saying, “CEOs were extremely reluctant to shut down factories and lay off a large number of workers ... seen as a serious abnegation of corporate responsibility. It was understood that the company had a responsibility to its workers, and that if it failed, society at large would be on the hook for that failure.”

This Remapping Debate paper also quotes Margaret Blair, a professor of law at Vanderbilt, who says that executives formerly believed strongly in the connection between corporate business and the nation, and “saw the corporate sector as one of the major forces that was working in the best interests of the country.... It was not corporations versus the government. It was much more about everybody being in it together.”

Part of the reason for the dramatic change that has taken place in American business opinion obviously is globalization of business and production. A second is the onset of globalization-induced opportunities for tax minimization or sheer tax evasion. A third, as I have noted before, is the shift of corporate control from owners, now frequently powerless, to opportunistic professional management.

The most important reason, however, is the profound change that has taken place in economic ideology. Both monetarism and market theory remove from economic management voluntarism, political intelligence, and moral responsibility, by describing economic function as objective and automatic. Thus the customer always makes the most advantageous choice, so the market presents a perfect and efficient mechanism dictating the choices that must be made by businesses, while always tending toward perfect competition. Labor is a mere commodity, and unions and wage demands obstacles to the free function of markets. Governments by nature are obstacles to economic freedom. The labor market will always seek full employment, which always tends to produce inflation and reduce the value of money. The overall market always seeks equilibrium. It is a machine and, when you know how, you need merely to pull the right levers. Or such is the theory.

(c) 2013 Tribune Media Services, Inc.

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William Pfaff raises interesting questions about corporate citizenship. His examples are large, publicly-traded companies, but the issues he raises involve smaller companies as well, as many companies (corporations and partnerships) serve customers in many countries and manufacture  components or complete products in foreign lands. 

Pfaff writes that "The conviction is new that the exclusive purpose of the business coproration is to profit its professional managers and stockholders." This misses an existential point: no business will survive long if it fails in its purpose of providing customers with a product or service they find meets their need. Thus the huge sums spent on market research. Pfaff points to Apple Inc.'s financial arrangements, but fails to recognize that even Apple Inc., would disappear from the Fortune 500 list (and possibly from existence) if it failed to deliver useful products to real, decision-making customers. And in doing so, Apple is fulfilling a "corporate responsibility"--one that encyclicals have consistently acknowledged. Consider that today a school student can carry all her school books in an iPad that weighs less than two pounds. Fewer heavy backpacks, fewer trees converted to pulp, fewer nights of "I forgot to bring that book home." Consider that medical students now use iPods to learn the subtleties of heart sounds, which has improved their ability to use their stethescopes. These benefits, and so many others, accrue to customers around the world, not just in America. Apple's financial success is a symtom--a result--of its focus on customers. So it is with the vast majority of businesses. Pfaff is not alone in missing that critical point. 

There is irony in the sentence "representatives of some American multinationals said that their companies do not even identify themselves as being American in any sense except that they are legally incorporated in one of the states of the U.S." What other attributes define a multinational as "American"? Is a firm American only if more than fifty percent of its workers are located in this country? Or, is a firm that has customers in many lands considered American if fifty percent or more of its sales are to American customers? Should we consider tha nationality of the company's shareholders? I'm not sure what answer Pfaff would have considered correct. This takes us to some important questions that Pfaff only hints at. Does a corporation have some higher duty to the country in which its home office is located? Or does a multi-national have duties equally to its customers, workers, and owners in their respective countries? To be specific, if an America-headquartered firm sells its goods abroad, should it not employ residents of the customer countries to produce, or at least assemble, those products, or does Pfaff argue that American-headquartered firms need to keep those jobs in the U.S.? That, by the way, would mean that some U.S.-based firms would lose business to foreign firms that could more quickly respond to local customers. 

Pfaff quotes from Ralph Gomory and William Lazonick about the early 1980s to support his thesis. The quotes are interesting. I am sure there were CEOs then who talked more about their responsibilities to country and employees, and who were extremely reluctant to close plants or lay off workers. But these quotes ignore a larger historical truth. From the end of world War II until the 1980s American tax policy favored overseas investment in plants and equipment. This was part of rebuilding Europe from the war's destruction. That was a noble purpose. But the effect was, as John F. Kennedy noted, discouragement of investment at home, which contributed to low job growth. By the early 1980s, America's industrial heartland was referred to as the Rust Belt. Whatever benevolent attitudes may have influenced American CEOs, the evidence makes clear that after-tax profits were a factor in their decisions then, as they are today. 

At the heart of Pfaff's complaint is the concept of corporate "personhood" as extended in the Citizens United case. Robert Reich, who served as Secretary of Labor in President Bill Clinton's administration, offers a cure for the problems of corporate lobbying, tax avoidance, etc. In his book, Supercapitalism, he proposes eliminating the corporate income tax entirely. The lost tax revenue can simply be collected from the owners of the corporations, on their personal income taxes, as they receive those profits via dividends or capital gains. It's an elegantly simple solution, with no downside. With that one change, foreign profits could be repatriated efficiently, capital might more readily be invested in the U.S., and most reponsive to Pfaff, a key element of "personhood" would be removed, thus inviting a revisit of the corporate personhood issue at the heart of Citizens United. 

Joseph J. Dunn  Author of After One Hundred Years: Corporate Profits, Wealth, and American Society

 

 

Well, Joseph, no.  In much the same way as it is possible for a very informative discussion, or even a debate, to occur at a meeting of CPA's without ever raising the issue of justice, fair play, or human consequences, it is possible to accept the suggestions you make to refute much of Pfaff's points.  Corporations as discussed in this post claim to adhere to an economic model we call capitalism. Problem is capitalism is an economic model devised by mere mortals.  There is nothing whatever divine in either its tenents or its implemenation in the real world and, yet, all too often those who praise capitalism neglect to point out that very fact.  If profit is the goal is there such a thing as exorbitant profit?  If so, how does one define exorbitant?

Only an extremely naive person would believe corporations never make efforts to hide negative effects of their profit making endeavors or spend large sums on marketing campaigns designed primarily to stretch the truth a bit.  Useful products are not the only way to gain new customers and not lose existing ones.

How about a less academic and more real world example.  I suggest a spin around the internet gaining information about the goings on in the "business" of gaining profits from Zimbabwe's extensive mineral resources.  Yes, Mugabe continues to play a signficant and tragic role but, by golly, he's got plenty of help.  Is it not altogether reasonable for a real world capitalist to assume an equitable distribution of that nation's mineral wealth to its citizens would have served us all much better?  In the long term, are not healthy nations better markets?

Confusing an economic model (capitalism) with a philosophical model (survival of the fittest) simply is not acceptable in anyone beyond adolescence.  Wars are made of such stuff. 

Lastly, how exactly does one define "the fittest"?  Surely it is not simply the one who wins.

Thanks for your note. I would like to respond, and perhaps I should have made my points more clearly. I'm not sure that I understand your issue about capitalism being an economic model devised by humans, since every economic model ever tried on earth, and every institution, have been devised by humans. We can find dissappointment (and sin and crime) in every venue of human interaction, so if your point is that capitalism, or corporations, have flaws, that is self-evident.

One would have a difficult time finding any company on the Fortune 500 list (more efficient than spinning around on the internet) that survives without providing some product or service that customers find useful. So, feel free to look for an example. You may find any number of companies that formerly occupied the Fortune 500 list and have gone out of business precisely because they no longer provide a desireable product or service. And remeber all the dot-com companies? Most of them were unable to develop and sell real products to real customers, and thus they disappeared from the scene. I'm not at all sure what "survival of the fittest" has to do with what I wrote, or the original article.And I have never seen a definition of exorbitant profits by any economist or otherwise.

If you want to quote one or several of the points that I made, and your disagreement or question about each, I would be happy to respond. 

All the best,

Joe Dunn

Joesph, thanks for your response.  Problem is, I am not addressing the issues you raise rather the issues you do not raise but are an indisputable aspect of corporate endeavors.  You mention Fortune 500 companies no longer around and attribute that fact soley to their failure to provide a product or service useful to its customers.  True enough.  What you do not mention is the clearly avoidable damage some did on there way out the door.  Enron and Lehman Brothers come to mind.

Capitalism in practice relies upon the notion competition is healthy.  True enough but not in all circumstances.  Competition relies upon the notion of "survival of the fittest".  I truly do not see how that reality can be successfully disputed in any situation other than a largely theoretical debate.  A few minutes of observing the activity on the stock market floor would, I believe, suffice to make the point.

I worked for several small, locally owned and several large publicly owned dot-com companies.  And yes, many failed.  In my experience one could have easily seen the failure coming without any consideration whatever of the anticipated product or service.

Market research is not a tool soley used to identify potential customer needs.  As often as not it is used to identify products or services potential customer can be convinced they need.  Quite often the primay purpose of market research is to identify the most likely successful parameters for an advertising campaign.  Need is not always the primary much less only reason we purchase products or services.

I am not opposed to capitalism largely because I have no idea how to define a better economic model in a democracy.  However, to describe its useful aspects without regard to its destructive aspects seems to be the very type of reasoning that has led this nation astray on a number of occasions.

As for the issue of exorbitant profits being a question raised by economist, I suggest starting with Joseph Stiglitz.

Best of luck in your endeavors in the publication world.  Competition surely has risen in that arena!

 

It seems we may be more in agreement than disagreement. Enron's rise and fall were the result of criminal acts for which at least one executive is serving a very long prison sentence. That is hardly an indictment of capitalism, any more than cheating on one's taxes is an indictment of the income tax system. The Lehman  failure seems attributable to taking excessive amounts of risk to boost profits, and having those risks turn into losses. After all the investigations by attorneys general, Congress, the SEC, etc., no criminal charges were filed. Stupidity? Greed? Poor judgement? All of those are part of the human condition, and the consequences are sometimes disasterous (consider driving-while-texting, excessive gambling, etc.). Interesting that in both cases there were people inside and outside the corporation who saw the danger building, and pointed to it, but their cautions were not heeded. Both cases emphasize the need for laws and regulation, and for due diligence on the part of investors, trading partners, etc. 

At your invitation, I checked Stiglitz's books for any formula on excessive or exorbitant profits. He really doesn't offer one. He does write that "Competitive forces should limit outsize profits" and "Effective enforcement of competition laws can circumscribe monopoly profits" and "The laws of competition...say that profits (beyond the normal return to capital) are supposed to be driven to zero, and quickly. But if profits are zero, how can fortunes be built? Niches in which there isn't competition...offer one avenue. But that goies only a little way to explaining excessive (beyond the competitive level). Success will attract entry, and profits will quickly disappear." The Price of Inequality , pp. 31-43.  Now, here's the problem: research of corporate profits over many years indicates that (1) different industries generate very different returns on equity and (2) whether a particular industry is marked by intense competition (many players, low barriers to entry) or little competition, individual companies within that industry earn vastly different ROEs.  Competition to earn customer purchases in the most efficient manner (which often involves hiring really smart, capable employees and keeping them happy) obviously drives behavior. 

In the article that gave rise to this discussion, Pfaff menions Apple, Inc., as a corporation that sees its obligation as "to make the best product possible." That is very interesting. Stiglitz complains: "While some (of the top 1 or 0.1 percent) gained their wealth producing value, others did so in no small part by one of the myriad forms of rent seeking that we described earlier. At the top...the end of the twentieth century saw Bill Gates and Microsoft's domination of the PC software industry." I have great admiration for Stiglitz's work on developing country economies, this statement falls apart when we acknowledge that (1) Steve Jobs and Bill Gates were born within a year of each other, (2) both developed operating systems and software for PCs, (3) the two founders, and their respective companies, followed different strategies to appeal to their customers, and (4) every day, millions of people individually decide whether they want to buy a PC or a Mac. Walter Isaacson's biography Steve Jobs presents this competition over several decades in highly readable form. 

Finally, if we believe that there are, in some cases, excessive profits or excessive wealth accumulations (however defined), then it would be valuable to know what happens to all those profits, and all that wealth, and who benefits, and how? Those are the questions I pursued in After One Hundred Years. The answers are empowering for those committed to promoting the general welfare and building a preferential option for the poor. 

Peace,

Joe Dunn

 

Very likely we are, perhaps well expressed by Stiglitz in his preface to "Freefall".  "I believe that markets lie at the heart of every successful economy but that markets do not work well on their own."    Thanks for the well considered remarks allowing me to look better informed than I likely am.   Peace indeed.

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About the Author

William Pfaff, a former editor of Commonweal, is political columnist for the International Herald Tribune in Paris. His most recent book is The Irony of Manifest Destiny: The Tragedy of America's Foreign Policy (Walker & Company).