Monday, June 8, 2009

Changing Corporate Royalty

In the 90’s management realized it was more profitable to screw the employees than to sell more product- Scott Adams ”The Joy of Work”

Employee happiness and the company’s stock price are inversely related- Scott Adams “The Joy of Work”

I don’t know about you but I’m tired of today’s heartless multinational/global corporations that don’t seem to care about anything other than generating profit that is largely unsustainable and unrealistic. Companies seem to be running on Dilbert logic and common sense seems to have been thrown out the door with the bathwater. In an era where General Motors and its one-time subsidiaries are taking drastic actions in their fight for their very survival, we have other companies laying off workers (and moving the work to cheaper off-shore locations) when they’re making decent profits and it isn’t necessary for the company’s survival, but only to make profit look better this quarter. The larger the companies get, the less innovative they become and the more focused they get on gobbling up competition.

Remember back when the Berlin Wall and communism fell? I was probably naive back then to think that the world had evolved into a better place. While I never really thought that one of the two super powers would push the “button”, it was a big relief to know that the U.S.S.R was no longer trying to “bury” us. The euphoria of the demise of Communism (Soviet style anyways) has given way to panic induced by globalization and the quest for profit at any cost and a quest to “maximize shareholder value” no matter the cost and long term ramifications and Wall Street speculation has shown that it needs more regulation or at least regulators that are doing their “jobs”.

For a while now I have felt that there is more to life than the functional economic terms that we’re all labeled with. After all, don’t we all feel that we’re more than “consumers”, “workers”, and “tax payers”? Don’t we all want to be more than “users”? Before drug use permeated our society, being a “dealer” wasn’t a bad thing. People could argue that Communism as practiced by the Soviets and Chinese was not what Marx had in mind, but Communism minimizes the role of capital and without people willing to take a chance and invest their capital in the hopes of being rewarded for their investment, many of the things that we’ve taken for granted over the years might not have come to fruition (or would they?) But Capitalism tends to belittle the contribution of the “worker”, who is largely responsible for the creation of many of the products and services that we all need and use. The system largely creates an “us” and “them” between management and the employees, with management more and more focused on reducing the cost of employee compensation and benefits, more and more moving work to “off shore” locations where labor is generally cheaper and there are less protections and rights for such workers, in an effort to “maximize profits” and “reduce the bottom line”. Management seems to have forgotten what an “asset” their employees can be and tends to look at them solely as a resource or a commodity needed to create their product or service, one of the largest expenditures on the cost side of the ledger.

Capitalism is largely Darwinism (survival of the fittest) applied to economics and largely an aristocracy based on the divine right of kings, where the king has the largest say in government. At the center of today’s economic aristocracy is the corporation, whose authority is based on the divine right of capital. Shareholders are king and their interests dictate and control all (along with the greed of top executives). The primary goal for sometime has been to pay shareholders (and executives) as much as possible while paying employees as little as possible, moving work to cheaper and cheaper labor markets (whenever possible, regardless if it is truly a good idea or not and if it is even in the long-term interest of the company) and all the while the public good is ignored. Stepping outside of the forest, it can be seen as quite a departure from democracy and often at odds with it.

There has been a lot of discussion about executive compensation in the last several months. Dirty deeds…done by chiefs discusses how the Government requirement to disclose CEO pay has resulted in more comparisons between CEO pay and more and more CEOs comparing up and driving up the compensation. It also pointed out how shareholder votes held over CEO compensation packages are non-binding and it is hard to get a no vote among the institutional investors. Malcolm Turnbull has suggested that the shareholder vote be binding and that over turning it would require a special (and expensive) shareholder session where the directors come back with a more acceptable package. This would act as a deterrent, making directors present something more acceptable the first time. New CEOs would be hired on what the previous made pending shareholder approval. The article also mentioned that governments could voice their community’s disapproval for excessive pay by removing the company's tax deduction for salaries in excess of (the desired limit) or salaries in excess of (set limit) could be taxed in the executive's hands at the penalty rate (the desired rate).

A problem that I’ve noticed at many of the publicly traded companies is that the CEO and Board of Directors are only looking to “maximize shareholder value” but this means that nobody is really looking after the long-term interests of the company. In companies where an owner or owners exist, the owners care about the long-term success of their companies because they’ve invested their lives into the company. But in publicly traded companies, the CEO and other top executives are compensated for driving up the company’s stock price (often this is done on a short term basis); where investments, research and development, and the company’s long term health are often stymied. Companies also don’t seem to care for the communities where they’re located and do business as well as their customers and clients. Many companies don’t even think twice about off-shoring thousands of jobs and what effect that will have back home (and the families that can be devastated by those lost jobs). They also don’t seem to take into account the quality of service that they provide to their customers will likely be degraded, at least while the new location gets the necessary experience to do the job. Many of these companies have squeezed their communities for tax brakes, only to move the workforce away when the tax breaks and other incentives were near expiration and the community might actually see a return on those tax breaks. Never mind, that the communities needed to find their tax revenue elsewhere while waiting for the tax breaks and incentives to end and now they need to find other revenue (something more and more challenging for communities today).

Toppling the Corporate Aristocracy is an interview with Marjorie Kelly, author of the “Divine Right of Capital: Dethroning the Corporate Aristocracy” as well as the cofounder and publisher of the bimonthly Business Ethics publication (, in it she explains how she believes that corporate law will be changed and Democratizing economics is inevitable. Kelly says that corporations exist today only because we have passed laws that allow them to. The Declaration of Independence asserted America’s right to change or eliminate government that doesn’t serve the public interest any longer and that this same right can and should be applied to corporations: to change the rules governing the corporate form itself, making corporate governance more democratic rather than aristocratic.

Marjorie Kelly indicates that there can be a difference between publicly traded companies and private companies, saying “I prefer to make the distinction between private companies and public companies. When an individual or a family own all the shares of a company they have the option of managing in a humane way, putting quality of life for employees or the good of the community ahead of shareholder gain. But when a company goes public and its shares are widely held, managers don't have this option. Managers reluctant to make layoffs, for example, can be forced out in a hostile takeover or fired by the board. Public companies often pursue profits even if at the expense of the public interest and employee interests. Private companies can do the same, but at least they have the option of something else.”

When talking about socially responsible business, Marjorie Kelly says, “Over and over again I've seen the failure of voluntary change by individual companies. They might announce family-friendly policies only to turn around and lay off tens of thousands of workers. They pursue environmental stewardship, but only to the extent that it enhances their bottom line. Companies become generous corporate citizens, but then demand far more in tax breaks. I had hoped socially responsible business would have caught fire by now, but in fact, the reverse is happening. Companies are becoming more ruthless, more focused on the bottom line. After more than a decade of seeing the promise of socially responsible business thwarted, I came to ask myself, "What is blocking this change?" I believe there is one obstacle-the legal mandate to maximize returns to shareholders. When the interests of capital are primary, it's wealth discrimination. Until we turn and challenge this premise as illegitimate, and change the institutions that support this premise, all our efforts of social responsibility will fail.”

When asked how legally mandating maximizing shareholder profit stopped companies from being socially responsible, Marjorie Kelly says “Corporate law as enforced by state courts dictates that corporations maximize profits for shareholders. This law requires directors and officers to put shareholders' interests before all others. The law says nothing about companies protecting the public interest, the health of the environment, employees or the community. Executives who want to manage responsibly can find themselves fired or subject to hostile takeover-so the idea that enlightened CEOs can really manage in a responsible way is a fantasy. It's a system-design issue, and we are all caught in it…The premise is that good people using the tools of ethical analysis will make socially responsible decisions. But moral individuals only take us so far when the rules they are legally bound to follow say they must put shareholder interests above all others. At some point you have to look at system ethics: what behavior does the system encourage or require? To rest our hope with ethical leaders is like waiting for the philosopher king. At some point you wake up and realize aristocracy itself is the problem-and you move to democracy-you don't wait for justice and equality to show up in some noble leader, you build them into social structures.”

When asked how the law could be changed to allow corporations to be more socially responsible, Marjorie Kelly said “Ultimately, we must design a corporate system in which all economic rights are equally protected, not only the rights of shareholders. In keeping with genuine free market principles, we should put wealth in the hands of those who create it, which is employees, and we need a new economic principle that says corporations have a responsibility to the public good. Ironically, our system now discourages public corporations from service to the common welfare. In the future we must require such service. At the very least we must require that the public good not be harmed. As for how we accomplish this, our laws need not prohibit every possible means of harm-pollution, relocation, unfair termination, and so forth. Instead, they can stipulate broad loyalty to sets of interests and subject corporations that violate those interests to lawsuits. That's how shareholders enforce their rights, and we could extend the same tool to others.”

When asked what people can do to make corporations more responsible, Marjorie Kelly said, “We start by changing our minds, by changing our internal pictures of reality that tell us shareholder primacy is normal and legitimate. The way to do that is with pranks. How did the American Revolution start? Not with writing laws, but with folks dressing up like Indians and throwing tea off ships. It started with a prank. Same with the feminist revolution, where women crashed the Miss America pageant, and did a sit-in at The Ladies' Home Journal. We need some great pranks. I'd love to see some folks stage a sit-in at Business Week or Fortune, and refuse to leave until they put out a special issue on economic democracy. Or, in the spirit of Rosa Parks, refusing to sit in the back of the bus. How about employees running John Q. Employee for the board of directors? They could put up bogus campaign posters all over the company and wear sandwich-boards at the stockholders meeting: "No Governance Without Representation." It might lead to some interesting conversations with the press: why can't employees run for the board? Aren't employees part of the corporation? We can think of these as Tea Parties, like the Boston Tea Party. At our web site,, we're hoping to encourage Tea Parties like these around the country. I would encourage your readers to visit the site and share their ideas. Pranks help us wake up. And they allow us to have fun along the way-which is the only way to do things, when you are a marginalized group fighting a huge entrenched power. You've got to be light-hearted. You need esprit-de-corps, so you don't feel overwhelmed. The aim is to educate people that the problem isn't greedy executives or evil individual corporations like Exxon. The problem is the system design. The problem is state law that says corporations exist only to maximize gains for shareholders. In the end, we need to get activists focused like lasers on these laws. Most of all, we need hope. We need to know in our heart that economic democracy will prevail, because it will.”

Marjorie Kelly is optimistic about business being able to evolve and be more socially responsible saying “I am optimistic, because democracy is an unstoppable historical force. To quote Alexis de Tocqueville, ‘Can it be believed that the democracy which has overthrown the feudal system and vanquished kings will retreat before tradesmen and capitalists?’ It may seem that financial powers are omnipotent today, but the power of kings was once as great. The monarchy was a nearly universal form of government for two millennia, until a tiny band of revolutionaries in America dared to stand up and speak of equality. They created an unlikely and visionary new form of government which has since spread throughout the world, and today the power of kings can be measured in a thimble. Democratizing economics is no more unlikely a task than democratizing government-in a sense it's only finishing the task. It won't happen overnight, but it's a good bet it will happen. Major system-wide change is possible. It happened when the monarchy fell, and it can happen again. The lesson of history is clear: democracy always wins in the end.”

Like Marjorie Kelly, I too hope that we can see more economic democracy and that we can see some common sense and a focus on the long-term health of our companies and concern for the communities they exist in as well as the people that employ and the companies’ customers. Companies that don’t care about their employees (paying outrageous bonuses to their top executives while getting ride of or off-shoring their workforce en masse) and don’t care about their customers need to be given the message that we won’t stand for this any longer.

Photo Credit: New York courtesy of createsima.
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