Capitalistic Economic System

*Don’t Answer these questions only consider them**

Chapter 7–What obligations if any, do domestic companies owe the countries that they are located in? As you review the readings below, you should consider the following:

a. What is the purpose of corporations—too maximize shareholder return vs the new philosophy announced by the Business Roundtable?

b. What happens if the corporation’s goal conflicts with your moral compass—for example, shareholder return and maximizing profits versus better costlier health care for the employees? Or not exploiting child labor in Africa. Or not paying taxes?

c. Can capitalism exist morally, without government establishing boundaries of what is and is not acceptable behavior?

d. When I state the following company names to you, do you think of them in a positive or negative light–Google, Amazon, Apple, Walmart and Facebook?

e. Do you want to change the rules for corporations and if so, what would you change and why?

Prepared remarks for Congressman Danny Davis Town Hall Meeting

October 15, 2008

By Robert S. Kallen

The overall questions being raised from the subprime loans, the credit swaps and the financial bailout is whether our democratic capitalistic economic system is broken and, if so, how do you want to fix it? Our U.S. economic system in my opinion is Darwinism at its best. “Survival of the fittest.” There are winners and by the very nature of competition, the U.S. economy will create individuals who cannot compete successfully. Thus, the objective for individuals and corporations is to win—hopefully within the rules defined by government and without violating individual or corporate codes of ethics.

In today’s market, from a business perspective, winning was defined by how much credit could be generated in the market place and how could the liabilities be shifted off the balance sheet so that even more loans and thus more bonuses and financial rewards could be generated? That was the game. The business community was not considering the ramifications of their actions on the people who could not really afford the houses they were financing or the people who would be holding the paper which had no value if the housing prices started to go down. From Bears-Stern, to Lehman Brothers, to Fannie and Freddie to AIG, they were all caught-up in the process of maximizing shareholder and individual returns.

This is not unusual and throughout our U.S. history, corporations have attempted to push the envelope, with government then reacting to redefine acceptable business practices when these actions have caused harm to our economy or have caused the exploitation or abuses to others. For example, in the late 1800’s, the U.S. government reacted to the concentration of wealth and power by businesses and individuals such as Rockefeller, Vanderbilt, Carnegie, and Mellon, and responded by passing the Sherman Act and other antitrust laws to reign in this undue influence. As the industrial revolution continued government again intervened in reaction to the exploitation of labor, especially women and children, passing legislation covering child labor laws and the number of hours individuals could work.

During the 20th century, Congress reacted to the first stock market crash in 1929 by subsequently passing the SEC Act and trying to cure the abuses of trading on margins with the assumption that stock prices would always continue to rise—just like we thought housing values would always continue to rise over the last few years.

In the 1960’ and 1970’s Congress again saw how businesses were pushing the competitive envelop and reacted by enacting the Civil Rights Act, the Equal Pay Act and even the Clean Air and Water Acts to contain the negative action’s by businesses to minorities, women and the environment. All of the legislation pertaining to businesses was in reaction to business competing and trying to gain a competitive advantage over the competition. After the effect!

The argument can also be made for the rise in Federal agencies such as OSHA, CPSC, EEOC, EPA and the SEC. All of these agencies are responsible for trying to keep corporations from pushing the envelope too far. Finally, we can look back to the most recent abuses by a major corporation which was Enron and again see that Congress had to react to the events and eventually passed Sarbanes Oxley to try to reign in the accounting abuses that were occurring by Enron and other corporate entities.

Another contributing factor to the events of today is the marketplace and how dramatically it has changed over the last 28 years. The Reagan revolution, combined with the influence of the Chicago School of Economics and the free market philosophy of the early 1980’s was the beginning of a new economic system. The rules of business changed dramatically when it was decided that companies would be allowed to merge with competitors, as long as they could show that economies of scale existed and that the combined entity would be more efficient and consumer welfare would not be harmed.

This new economic revolution prompted phenomenal consolidation in most industries and an unprecedented level of merger and acquisition activity. Consequently, this lower level of government scrutiny led to a consolidation of power and wealth and made it much more difficult for Government to monitor the abuses that were occurring in the marketplace.

In addition, MBA and Law Schools were teaching a new generation that the number one responsibility of corporations was to maximize shareholder return and profits. We also trained and rewarded the students to find the exceptions to the basic rules and finding the “loop-holes” in order to compete. In fact, I remember numerous courses in law school that rewarded the students who could find the exceptions with the highest grades in the class rather than reward those students who followed the intent of the law.

Throughout U.S. economic history we know that capitalism and the free market left unencumbered will eventually create behavior that in certain cases will cause economic harm and that society will find unacceptable. In other words, there is a natural tug of war between winning, survival and pushing the envelope too far: like subprime mortgages and the credit swaps that are responsible for today’s economic environment. Thus, the question becomes how should government react to this new corporate model and how much will it cost?

I have great faith in Ben Bernankee and Secretary Paulson. I do believe that they are attempting to act in the best interest of the US and also trying to secure their places in the history books as the two individuals who help prevented us from a financial meltdown. However, the events are moving very quickly and they do need the advice and consent of the legislative branch and it is extremely important for meetings like this to occur so that Congressman Davis can provide the necessary oversight to ensure that the bailout plan can work.

I am predicting that the financial crisis is likely to become more severe; housing prices are likely to decline by at least five to ten percent more at the national level. The impending recession is likely to lead to a significant decline in corporate profits, which is almost certain to impact stock prices even more and further weaken consumer confidence. The number of individuals at work has declined for ten successive months, and by a cumulative total of more than 700 thousand. Add in several hundred thousand undocumented workers who have lost their jobs in construction, and the total approaches over one and one-half million people. Thus, it is imperative to get credit and liquidity into the market place and unfortunately, the quickest way is through our new banking system which is dominated by a few large players.

04/01/2020 comment by author: In reaction to the abuses of 2008, Congress did pass Dodd-Frank and then during the last 4 years have amended the legislation and loosened the requirements.

Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’ AUG 19, 2019

Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders

WASHINGTON – Business Roundtable today announced the release of a new Statement on the Purpose of a Corporation signed by 181 CEOs who commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.

Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders. With today’s announcement, the new Statement supersedes previous statements and outlines a modern standard for corporate responsibility.

“The American dream is alive, but fraying,” said Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. and Chairman of Business Roundtable. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.” “This new statement better reflects the way corporations can and should operate today,” added Alex Gorsky, Chairman of the Board and Chief Executive Officer of Johnson & Johnson. “It affirms the essential role corporations can play in improving our society when CEOs are truly committed to meeting the needs of all stakeholders.” The Business Roundtable Statement on the Purpose of a Corporation is below

Statement on the Purpose of a Corporation

Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.

Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.

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.

Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.

Top CEOs are reclaiming legitimacy by advancing a vision of what’s good for America By Steven Pearlstein August 19, 2019

What most distinguishes America’s brand of capitalism is the widely held belief that the first duty of every business is to maximize value for shareholders. The benign version of this credo is that there is no way to deliver maximum value to shareholders over the long term without also satisfying the needs of customers, employees and the society at large. But in its more corrosive application — the one that is inculcated in business schools, enforced by corporate lawyers and demanded by activist investors and Wall Street analysts — maximizing shareholder value has meant doing whatever is necessary to boost the share price this quarter and the next. Over the years, it has been used to justify bamboozling customers, squeezing workers and suppliers, avoiding taxes and lavishing stock options on executives. Most of what people find so distasteful about American capitalism — the ruthlessness, the greed, the inequality — has its roots in this misguided notion about what business is all about.


Which is why today’s statement by the Business Roundtable disavowing shareholder primacy is so significant and so welcome. In the Roundtable’s new formulation of corporate purpose, delivering value to customers, investing in employees, dealing fairly and honestly with suppliers, supporting communities and protecting the environment all have equal billing with generating long-term value for shareholders. The statement rejects the whole idea of “maximizing” one value to the exclusion of all the others. Instead, it acknowledges the need for balance and compromise in serving all of a company’s stakeholders. Skeptics will likely see the announcement by the country’s leading corporate executives as a public relations gimmick that will do little to change the way American corporations are managed. But the significance is not so much that it will change corporate behavior, but rather that it confirms a shift in attitude that has already occurred.

In many ways, the Roundtable’s new policy represents a return to a view of corporate purpose that prevailed during the era of “managerial capitalism” of the 1950s and 60s. “For years, I thought what was good for our country was good for General Motors, and vice versa,” Charles Wilson, the carmaker’s chief executive, declared at his confirmation hearing to be defense secretary in 1952.

But after the decade of the 1970s — a decade during which stock prices failed to keep up with inflation and American businesses started to lose out to foreign competition — investors began demanding a new focus on profits and share prices. And executives who refused to get with the new program soon found themselves at the receiving end of a hostile takeover bid by “corporate raiders” or competitors who promised to send them packing.

Indeed, by the time the Roundtable issued a new statement of corporate purpose in 1997 declaring that “the principal objective of a business enterprise is to generate economic returns to its owners,” it was merely acknowledging what had already become the new norm. Executives had become so fixated on maximizing shareholder value that some (Remember Enron and WorldCom?) even began cooking the books to prevent those same shareholders from learning the true state of the business. Although chief executives were happy to get fabulously rich on stock options meant to focus their minds on the share price, many chafed under regime. They resented analysts and traders who punished them for missing an earnings target and feared and loathed the plaintiff lawyers and “activist investors” who were ready to pounce at the first sign of trouble. They despaired at the loss of respect they had suffered from employees, the media and the public, as well as their own children. My hunch, however, is that what finally led members of the Roundtable to jettison the idea of shareholder primacy has been the growing recognition that there is a new generation of employees and consumers who will not work for, or do business with, companies they believe to be socially irresponsible.

This is one area where social media seems to have had the effect of improving norms of behavior, even at companies as powerful as Facebook, Disney, Uber, Walmart and Amazon (whose chief executive, Jeff Bezos, owns The Post). Executives also have discovered what Warren Buffett and Steve Jobs learned long ago — namely, that refusing to bow to Wall Street’s incessant demands for double-digit earnings growth can actually attract a larger and better class of investors. Still, while norms of business behavior can sometimes be altered by pressure from below, business institutions rarely change without leadership from above. The Roundtable’s chairman, Jamie Dimon of JPMorgan Chase, its president, Josh Bolten, and the chairman of its governance committee, Alex Gorsky, deserve lots of credit for initiating this rethink of corporate purpose. It is also noteworthy that all but a dozen or so of the Roundtable’s 180-odd members stepped forward to sign the statement.

There is, as you may imagine, a political context to all of this. Two of the leading Democratic presidential candidates — Sens. Bernie Sanders (Vt.) and Elizabeth Warren (Mass.) — have made curbing corporate greed the centerpiece of their campaigns, while in the Democratic House of Representatives, much of the energy has shifted to a liberal wing that is determined to raise wages, raise taxes and strengthen environmental regulation. With Republicans in control of Congress or the White House for most of the past 20 years, the business community has been able to achieve much of its policy agenda by playing an inside game. But with Democrats now threatening to retake the White House and possibly the Senate in 2020, and the Republican Party lining up behind a Republican president spouting populist rhetoric, business leaders feel some urgency to re-engage in the public debate. By disavowing shareholder primacy and embracing a broader vision of corporate purpose, the Roundtable has now enhanced the political legitimacy of such efforts.

If Business Roundtable CEOs are serious about reform, here’s what they should do

By Lawrence H. Summers September 2, 2019

The Business Roundtable recently announced a major policy change declaring that the purpose of a corporation is not just to serve shareholders (its official position since 1997) but “to create value for all our stakeholders.” At a time of considerable disillusionment with U.S. capitalism, this is a significant statement that could signal meaningful change in the operation of the American economy. Certainly the recognition by leading chief executives that they need to look beyond the narrow metric of their stock price is to be welcomed.

But there are some questions that Business Roundtable members will need to wrestle with going forward. This is crucial, because initiatives of this kind can be not just ineffective but also counterproductive if they weaken the impulse to address problems through government policy.

First, who will watch CEOs going forward? Under what authority do CEOs have the role of declaring the purposes of the corporations as broader than just shareholders, when they were appointed by boards of directors representing shareholders? It’s legendary that whenever you serve multiple masters, you serve none. With shareholders disempowered and no other form of vigilance empowered, how will the risk that stakeholder capitalism becomes an agenda of CEO empowerment be avoided?

Second, will the roundtable act on its professed principles? For example, I have no idea whether recent grievances against General Electric, Boeing or Johnson & Johnson are warranted, but if they are valid, they represent blatant violations of the roundtable’s principles. Will companies or CEOs ever be forced to leave the Business Roundtable? How will this be adjudicated? Third, while the statement references communities, consumers and customers, what role does the United States have as a stakeholder for roundtable companies? Are roundtable companies that act according to the group’s principles supposed to be indifferent between locating new plants in the United States and other countries? What obligation are roundtable companies now under not to subvert American democracy with campaign contributions or extensive lobbying operations? What is their obligation to speak out against presidential words or deeds that undermine the United States’ standing in the world or offend core values of their employees or customers?

Fourth, is it as clear as the Business Roundtable seems to assume that standing up for stakeholders is the right thing to do in a dynamic economy? Consider, for example, a firm debating whether to relocate some or all of its operations out of super-prosperous, fully employed Silicon Valley to a disadvantaged area to reduce labor costs. On “shareholder” grounds, this would likely be desirable. Its employee stakeholders would likely object. Yet I would argue that broad American egalitarian values would be well-served by the move. We generally celebrate disruptive innovation such as digital photography, but it often comes at the expense of some employees and customers with traditional skills and tastes. How are stakeholder capitalists supposed to decide about pursuing disruptive innovation? Fifth, what role does the roundtable imagine for public policy? The idea that companies should be run for the benefit of stakeholders is a powerful one. But for it to work, companies that practice stakeholder capitalism must be protected by law from excessively ruthless competition from companies run only in shareholders’ interests.

If the Business Roundtable is serious about stakeholder capitalism, and if responsible firms are to flourish and spread their benefits, it will not just decree principles according to which its firms will operate but will also push for laws and regulations that support firms’ ability to stand up for their stakeholders. These might include minimum-wage and benefits requirements and broader mandates to protect companies that want to do right by their workers from those competing companies that are ruthlessly pursuing shareholder interests. Or they might include rigorous restrictions on advertising and promotion practices, so firms who are honest and transparent are not placed at a competitive disadvantage. Or universally high capital standards on financial institutions, so that imprudent willingness to take on risk cannot be a competitive advantage. Most CEOs want to do the right thing by all their stakeholders, and most shareholders want to support them in being responsible. But in a world of fierce competition, good intentions are not enough. All companies do right some of the time. Some companies do right all of the time. But even the Business Roundtable should know that all companies do not do right all of the time. That is why a serious Business Roundtable program in support of stakeholder capitalism will include legislation and regulation.

How corporations can be a force for good: By Tom Wilson September 29, 2016

Tom Wilson is chairman and chief executive officer of the Allstate Corporation and vice chairman of the U.S. Chamber of Commerce.

For decades, corporations have been expected to concentrate on one mission: Maximizing profits for shareholders. While that might have been appropriate decades ago, it isn’t now. The emphasis on profits has widened the trust gap between corporations and society, resulting in an adversarial relationship between the private and public sectors. Let me be clear: Shareholders must get a good return, but at the same time corporations must work to be a force for good in society.

This single-minded focus on profits is largely due to the late Milton Friedman, Nobel Prize-winning economist. In his 1962 book “Capitalism and Freedom,” Friedman declared, “There is one and only one social responsibility of business . . . to increase its profits.” That argument has shaped the thinking of business leaders and created the corporations we have today. But now it’s in danger of diminishing the very capitalist system Friedman promoted. Corporations always have adapted to the times. They came into being 500 years ago to handle tasks beyond the abilities of sovereign states, such as facilitating trade between England and Asia. Over time, the roles of corporations evolved as society’s needs changed — accumulating capital for mega-projects such as railways; introducing technological innovations and, in the process, creating the mass market; and rebuilding Europe after World War II. Society’s needs are changing yet again. The role of corporations needs to change, too.

The corporation of the next 100 years must take on societal problems. On their own, governments, social service and charitable organizations simply do not have the capabilities and resources to solve the problems of inadequate education, poverty or public fiscal insolvency. And most people agree: In a recent survey, 87 percent of young Americans said corporations should do more than just make money. Corporations should be encouraged and rewarded for stepping up to solve society’s problems. That will require a change in mind-set. Today, corporate leaders are graded on stock price, not on the amount of good their companies do. We must broaden our evaluation of corporations beyond share prices to provide space, light and water for their role to grow. Shareholders should be asking how corporations are building intangible assets such as customer relationships, their employee bases and their reputations, not just pushing for share buybacks. Shareholder activists who care only about short-term profits should be called out by the pension funds and endowments who, after all, have a vested interest in taking a long view of building a better America. Corporate leaders must have the fortitude to resist having their performance reduced to a single measure.

I certainly do not intend to gauge the success of my leadership at Allstate on one measure. Most other corporate leaders feel the same way. None of us want to be remembered as a “Chainsaw Al” Dunlap, a now-retired executive known for downsizing companies. But no one has to, because fully integrating social good into a corporation’s purpose is also good for business. Helping communities raises a company’s reputation among customers, which supports growth and helps them attract, develop, motivate and retain the best workers. This year, for example, we raised Allstate’s minimum starting wage to the equivalent of $15 per hour because it was good business to do so; stronger, more prosperous communities with better-educated workers and customers also provide a much better economic and business climate. We must reject narrow definitions of what corporations can and should do — and get on with making the world a better place.

The right formula for managing a socially responsible company? There is none.
Now that shareholder capitalism is on its way out, let’s not replace one management straitjacket with another. By Steven Pearlstein Oct. 5, 2020

Fifty years ago, free-market economist Milton Friedman ushered in the era of “shareholder capitalism” in the United States with an influential essay arguing that the only “social responsibility” of a business is to increase profits for shareholders. That era ended last summer when the nation’s most respected business organization, the Business Roundtable, issued a statement repudiating shareholder primacy and declaring that companies needed to balance their obligation to serve shareholders with obligations to other stakeholders, including customers, employees, suppliers and the communities in which they operate.

In the year since, top executives at big corporations have tried to demonstrate their commitment to the new “stakeholder” capitalism. In an op-ed for the Wall Street Journal marking the anniversary, Roundtable President Joshua Bolten characterized the short-term investors who dominate trading on Wall Street as a “malignant influence” on business and politics, “undermining public confidence in the free-market system and fueling support for politicians who oppose it.” And last month, revising its somewhat hedged policy on climate change, the Roundtable threw its support behind putting a price on carbon to reduce greenhouse gas emissions by 80 percent by 2050.

Yet there remains considerable skepticism about whether this rhetorical commitment will actually change the way chief executives manage their companies — or whether it was simply a PR stunt. Earlier this month, a watchdog group calling itself the Test of Corporate Purpose issued a report, complete with a ranking of company performance, purporting to show that companies that signed the BRT statement have been no more socially responsible during the coronavirus pandemic than those that didn’t. It was an unconvincing piece of work, methodologically flawed and ideologically driven, that was at odds with other more reliable and objective analyses (here and here) by advocates of a kinder, gentler capitalism. And like much of the news coverage it generated, it revealed a fundamental misunderstanding about what the Roundtable’s statement and stakeholder capitalism is all about.

The Roundtable statement was, first and foremost, a declaration of independence from Wall Street. Beginning in the 1980s, after a decade of negative returns, a group of “activist investors” set out to use the threat of hostile takeovers to impose the single-minded focus on shareholders of publicly traded companies. The 2008 financial crisis exposed the economic folly and moral bankruptcy of a system that relied on bribing executives with stock options to squeeze workers, bamboozle customers, despoil the environment and dodge taxes. Socially conscious workers, customers and investors began to take their talent and money elsewhere, while even lavishly compensated executives came to see that the relentless demand for higher profits and stock buybacks had starved their companies of needed investments, saddled them with too much debt and undermined the value of their brands. The BRT’s message to Wall Street was that Main Street’s new focus would be on creating value for long-term investors by creating value for all stakeholders.

What the chief executives surely did not promise, however, was to run their companies as if the AFL-CIO, Sierra Club, Sen. Elizabeth Warren (D-Mass.) and Black Lives Matter were in charge. Yet if you look at most of the analyses and rankings by the growing number of ESG advocates — that’s shorthand for environment, society and governance — they are rooted in unabashedly liberal criteria and assumptions hidden behind a thick veneer of data and arcane statistical formulas to give them the look of scientific objectivity.

In the recent Test of Corporate Purpose study, companies appear to have been marked down for laying off workers or cutting their pay during the pandemic, no matter how much their revenue had declined. Companies that filed for bankruptcy were favored over companies that furloughed workers, on the dubious assumption that bankruptcy distributes more of the financial pain to shareholders, creditors and suppliers and less to workers. Facebook’s ranking suffered because some of its employees publicly disagreed with the company’s decision not to censor President Trump’s posts. And rather than winning praise for hiring 175,000 workers in the middle of a recession while keeping tens of millions of households stocked with the things people couldn’t shop for in person, Amazon was dinged because too many of those new $15 an hour jobs did not guarantee a minimum number of hours worked.

Other ESG advocates and research groups use better and better formulas, but even theirs wind up being highly subjective and value laden. The Drucker Institute’s ranking of “effective companies,” gives lots of weight to innovation, which explains why Amazon, Microsoft, Apple, Google and Facebook were at the top. Another group, Just Capital, uses a formula derived from public opinion polls that bases 35 percent of its ranking on how fairly and equally employees are treated while giving only a 1.2 percent weight to long-term profitability. That hardly sounds to me like a realistic balancing of stakeholder interests. Everyone is free, of course, to use whatever criteria they want in assessing the performance of individual companies. But all such models of good corporate behavior are, by their nature, value laden and based on debatable assumptions.

One faulty assumption made by many in the ESG community is that companies never have to choose between business success and social responsibility — that treating workers, customers and the environment well and giving back to the community will always enhance long-term value for shareholders. They even have the data to prove it. But logic and experience suggest that’s true only up to a point.

Companies can certainly earn a profit while offering generous pay, benefit and working conditions to attract and retain the best talent. At the same time, if they get too far ahead of the market, they can wind up with cost structures that eventually make them uncompetitive. That’s exactly what happened to the unionized auto and steel companies, railroads, airlines and phone companies in the 1980s.

It’s also true that while most companies can remain competitive while eliminating their carbon footprint, not all industries can move toward that goal at the same pace. A software company could easily do it by 2025, but it would be impossible for airlines, truckers, oil refiners and electric utilities to do so without sacrificing sales and market share, to the detriment of both shareholders and workers. What is gained by treating them as corporate pariahs?

And what of Amazon’s ambitious plans to use of robots, drones and driverless vehicles. Over time, this new technology will lower prices and speed delivery for consumers while boosting Amazon’s profits and market share, but it will also put tens of thousands of workers out of a job. What would the ESG crowd say about that? (Amazon founder Jeff Bezos owns The Washington Post. Yes, companies can become more socially responsible while still delivering above-average returns to investors, but doing so requires a balancing act that won’t completely satisfy any group of stakeholders or outside critics.

The required trade-offs and compromises can’t be made — and shouldn’t be evaluated — simply by collecting the right data and running them through the some one-size-fits all moral algorithm.

It took the better part of two decades for American business to fully embrace shareholder capitalism, and it will take at least that long to transition out of it. Last year’s BRT statement “represented a real reset in terms of intentions and rhetoric,” as Judy Samuelson of the Aspen Institute puts it, but it will take at least a decade to make the necessary changes in incentive pay structures, corporate cultures and government regulations to make stakeholder capitalism a reality. BRT members point to lots of things they have done during the pandemic to demonstrate their newfound social responsibility. The fact that they haven’t fully lived up to norms of corporate conduct that are still evolving hardly makes them hypocrites. Unfairly painting them as such will only discourage them from trying.

The problem with shareholder capitalism was not that some companies were run in a ruthless, profit-maximizing way — human nature being what it is, some of that will always be with us. No, the problem was that it forced all public companies — and plenty of private ones, too — to be managed that way. Now that American business has freed itself (and us) from that straitjacket, it would be a mistake to replace one straitjacket with another.

Under a more flexible version of enlightened capitalism, some companies might choose to make themselves a worker paradise, while others might prioritize customer service or social justice or protecting the environment. Some might aim for modest profitability while others might promise shareholders maximal returns. The only requirement should be that each company clearly define its purpose and goals up front, along with a simple set of metrics by which everyone can assess how well it is achieving them.

Freed from shareholder primacy, American capitalism has the opportunity for companies with different models and purposes to compete for talent, customers and capital. We shouldn’t short-circuit that process by allowing self-appointed ESG activists peddling value-laden rankings to decide which model should prevail. Better to let a thousand flowers bloom and let the markets decide which ones work best.

World’s largest money manager to CEOs: You must do good for society

By Jena McGregor Jan. 16, 2018

More than 1,000 global CEOs received a letter Tuesday from one of the world’s most influential money managers with a pointed message: Simply posting good financial returns is no longer enough. You must have a positive impact on society, too. In his annual letter to CEOs sent Tuesday, Laurence Fink, the chairman and CEO of BlackRock, which manages nearly $6.3 trillion in investments, put CEOs on high alert that they would be expected to answer questions about their long-term strategy, how they plan to use savings from the tax reform law, what role they play in their communities and whether they are creating a diverse workforce that is being retrained for opportunities in a more automated future. “Society is demanding that companies, both public and private, serve a social purpose,” Fink wrote in his letter, which was first reported by the New York Times. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

Fink’s letter used stronger language, experts said, than his recent annual letters to CEOs, which have focused on long-term strategies and the environmental, social and governance practices (often called “ESG” factors) of the companies in which they invest. In this year’s letter, Fink said he would double the size of BlackRock’s team that engages with companies to try to get them to do more on such issues. “We are seeing a paradox of high returns and high anxiety,” Fink wrote, expressing concern about income inequality, infrastructure and automation. “Since the financial crisis, those with capital have reaped enormous benefits. At the same time, many individuals across the world are facing a combination of low rates, low wage growth and inadequate retirement systems.” He noted the growing expectation that the private sector play a role in resolving concerns, writing that “we also see many governments failing to prepare for the future.”

The letter comes amid a greater recognition in corporate boardrooms and money management offices about the importance of issues like climate change, leadership diversity and income inequality for the long-term health of the bottom lines of companies. One recent survey by the investment consulting firm Callan found that just 39 percent of investors said the payoff for considering ESG issues in investment decisions was unclear, down from 63 percent in 2016. Once the domain of socially responsible mutual funds or a major focus of activist pension funds, such factors have grabbed the attention of a broader array of shareholders as they evaluate where to invest.

“We used to talk about ‘social investing,’ which made it sound like we were talking about a debutante pavillion,” said Nell Minow, vice chair of the governance consulting firm ValueEdge Advisors. Now, Minow said, as such issues have gotten new vocabulary and focus from more investors — and as the government is increasingly rolling back its involvement in issues like climate change — there’s a greater expectation that private sectors pick up the slack. “It’s a mistake to think there’s any tradeoff here between financial returns and social goals. All of this is very much factored in to making sure that the company makes money.”

“Passive” investments such as index funds or exchange traded funds allocate investments to an entire market index or industry. Unlike managers of actively managed funds, where managers buy and sell stocks, passive money managers are not able to sell the shares of companies with which they disagree. But they can vote their shares against negligent directors, hold meetings with board members to discuss their disagreements, and vote their shares on investor proposals that aim to change other practices, such as outsized CEO compensation or a company’s environmental policies.

The presumption is that Fink’s letter could open the door for BlackRock — and other big money managers — to more frequently vote against management’s wishes when shareholders push for such changes if discussions don’t produce the needed results. In the past, BlackRock and others have been criticized for siding largely with management; according to data reported by Morningstar, the investment giant voted with management 91 percent of the time over the past three years. One pension fund put BlackRock on a “watch list” a year ago for what it called its “reticence to oppose management” and “inconsistency between their proxy voting record with their policies and public pronouncements.” (A BlackRock spokesman declined to comment on that criticism but said in an emailed statement that “we are willing to be patient with companies when our engagement affirms they are working to address our concerns” but that if no progress is seen, “we will vote against management.”)

Yet in 2017, BlackRock, along with other big money managers, sided with shareholders for the first time on proposals about gender diversity on the board and others related to climate change. One of those instances was at ExxonMobil, where it cast its shares this year against the oil giant on a measure instructing the company to disclose more on its climate change efforts. Some observers raised questions about Fink’s letter. Charles Elson, the director of a corporate governance center at the University of Delaware, asked how BlackRock would measure the concept of societal good: “What kind of metric do you come up with, and how do you act on that metric? And what happens if that metric affects long term value to the negative?”

The impact of the letter will depend, of course, on how much “muscle” BlackRock puts behind the letter’s demands, Minow said. If it holds managers accountable, and votes when it needs to against proposals, its heft and influence could create real change. “If you’ve got like 5, 10 or 15 percent of the holdings, [management] is going to pay attention,” said David Larcker, a professor at the Rock Center for Corporate Governance at Stanford University. ” They’re not going to blow it off when an investor like that comes forward. It ratchets up the debate to a very serious level.”

Companies Shouldn’t Be Accountable Only to Shareholders: My new bill would require corporations to answer to employees and other stakeholders as well. By Elizabeth Warren Aug. 14, 2018

Corporate profits are booming, but average wages haven’t budged over the past year. The U.S. economy has run this way for decades, partly because of a fundamental change in business practices dating back to the 1980s. On Wednesday I’m introducing legislation to fix it. American corporations exist only because the American people grant them charters. Those charters confer valuable privileges—such as limited legal liability for their owners—that enable businesses to turn a profit. What do Americans get in return? What are the obligations of corporate citizenship in the U.S.?

For much of U.S. history, the answers were clear. Corporations sought to succeed in the marketplace, but they also recognized their obligations to employees, customers and the community. As recently as 1981, the Business Roundtable—which represents large U.S. companies—stated that corporations “have 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.” This approach worked. American companies and workers thrived. Late in the 20th century, the dynamic changed. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns. By 1997 the Business Roundtable declared that the “principal objective of a business enterprise is to generate economic returns to its owners.”

That shift has had a tremendous effect on the economy. In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other priorities. But between 2007 and 2016, large American companies dedicated 93% of their earnings to shareholders. Because the wealthiest 10% of U.S. households own 84% of American-held shares, the obsession with maximizing shareholder returns effectively means America’s biggest companies have dedicated themselves to making the rich even richer. In the four decades after World War II, shareholders on net contributed more than $250 billion to U.S. companies. But since 1985 they have extracted almost $7 trillion. That’s trillions of dollars in profits that might otherwise have been reinvested in the workers who helped produce them.

Before “shareholder value maximization” ideology took hold, wages and productivity grew at roughly the same rate. But since the early 1980s, real wages have stagnated even as productivity has continued to rise. Workers aren’t getting what they’ve earned. Companies also are setting themselves up to fail. Retained earnings were once the foundation for long-term investments. But from 1990 to 2015, nonfinancial U.S. companies invested trillions less than projected, funneling earnings to shareholders instead. This underinvestment handcuffs U.S. enterprise and bestows an advantage on foreign competitors.

The problem may get worse, because executives have a strong financial incentive to prioritize shareholder returns. Before 1980, top CEOs were rarely compensated in equity. Today it accounts for 62% of their pay. Many executives receive additional company shares as a reward for producing short-term share-price increases. This feedback loop has sent CEO pay skyrocketing. The average CEO of a big company now makes 361 times what the average worker makes, up from 42 times in 1980. Corporate charters, which define the structure and obligations of U.S. companies, are an obvious tool for addressing these skewed incentives. But companies are chartered at the state level. Most states don’t want to demand more of companies, lest they incorporate elsewhere.

That’s where my bill comes in. The Accountable Capitalism Act restores the idea that giant American corporations should look out for American interests. Corporations with more than $1 billion in annual revenue would be required to get a federal corporate charter. The new charter requires corporate directors to consider the interests of all major corporate stakeholders—not only shareholders—in company decisions. Shareholders could sue if they believed directors weren’t fulfilling those obligations. This approach follows the “benefit corporation” model, which gives businesses fiduciary responsibilities beyond their shareholders. Thirty-four states already authorize benefit corporations. And successful companies such as Patagonia and Kickstarter have embraced this role.

My bill also would give workers a stronger voice in corporate decision-making at large companies. Employees would elect at least 40% of directors. At least 75% of directors and shareholders would need to approve before a corporation could make any political expenditures. To address self-serving financial incentives in corporate management, directors and officers would not be allowed to sell company shares within five years of receiving them—or within three years of a company stock buyback. For the past 30 years we have put the American stamp of approval on giant corporations, even as they have ignored the interests of all but a tiny slice of Americans. We should insist on a new deal.

Ms. Warren, a Democrat, is a U.S. senator from Massachusetts

Seattle council votes to repeal tax to help homeless amid opposition from Amazon, other businesses: By Jeff Stein June 12, 2018

The Seattle City Council on Tuesday voted to repeal a tax hike on large employers that it instituted less than a month ago, backing down from a plan fiercely opposed by and much of the city’s business community. With Amazon and Starbucks funding a ballot challenge to repeal the tax, the city’s Democratic council struck down the tax levy they approved about four weeks ago. Seattle Mayor Jenny A. Durkan (D) is expected to approve the repeal. The new tax would have raised $48 million annually to combat Seattle’s homelessness and affordable housing crises. The Seattle area has the third-largest homeless population in the country, according to federal statistics.


“It’s immensely disappointing,” said Seattle City Council member Mike O’Brien (D), who voted for the tax before voting for its repeal. “[But] it has become more and more clear that the people of Seattle seem to agree with Amazon — and at least part of the narrative they and the Chamber of Commerce have been putting out.” The abrupt reversal enraged some supporters of the “head” tax, who argued that wealthy corporations in the city can afford to pay more to address homelessness. The measure, passed unanimously by the city council last month, levied a $275-per-employee tax on companies with at least $20 million in gross annual revenue. Seattle’s council voted 7 to 2 to repeal the tax. The vote capped more contentious debate at Seattle City Hall, in which several speakers accused the local government of bending to the whims of Amazon.

“The people who are being disruptive are being disruptive because they are angry,” said Tae Phoenix, one of the activists. “The system is not working for them, and disrupting it is the only thing they can do. They are desperate, and they are angry, and they have a right to be.” Tax experts say the reversal underscores the limited leverage that cities across the country have over corporations such as Amazon, which helped wage an intense public relations campaign to turn the public against the tax. (Amazon chief executive Jeffrey P. Bezos owns The Washington Post.) “There’s a bargaining power problem here, and cities are on the wrong side of it,” said Matthew Gardner, a tax policy analyst at the Institute on Taxation and Economic Policy, a left-leaning think tank. “When Amazon decides to be bullies and make this kind of threat, it’s really hard for officials to know how seriously to take it. Nobody on Seattle’s city council wants to be the one who chased Amazon out of town.”
A spokesman for Amazon declined to comment.

The tax was scheduled to go into effect in 2019 and hit almost 600 businesses, said Louise Chernin of the Greater Seattle Business Association, a business group that helped fight the tax along with the Seattle Metropolitan Chamber of Commerce. Critics accused Seattle officials of bending to pressure from Amazon, but Chernin stressed broad opposition to the proposal from across the city’s business community. Republicans in the Washington legislature also said they were preparing legislation to strike down Seattle’s head tax. Washington’s state government is narrowly controlled by Democrats, but at least one moderate Democrat in the legislature also opposed the head tax, calling it bad for the party’s brand. About two-thirds of the new revenue from the tax would be directed toward housing in the city. Most of the rest would help fund homeless services, including emergency shelters.

The city council approved the tax despite months of public feuding between local officials and businesses. Seattle officials initially pitched a $500-per-employee tax on large businesses. In a show of opposition, Amazon stopped construction on a new tower in the city.

The online retail giant also criticized the final tax package when it was passed, saying in a statement that the company was “very apprehensive about the future created by the council’s hostile approach and rhetoric.” Seattle’s business community launched a campaign to repeal the tax by putting it to the voters through a ballot referendum. Starbucks and Amazon each kicked in $25,000 for the effort, and supermarket groups put in $80,000, according to the Seattle Times.

“Repeal makes sense,” John Kelly, a spokesman for Starbucks, said in an email. “Together we must work to bring families inside, once and for all.” In a statement, Mayor Durkan and seven council members vowed to continue searching for a solution for the homelessness problem. But to the mayor’s progressive critics, Durkan gave up the fight too soon. “I have a news flash for council members who capitulated to this in lightning speed: This was never going to be easy in the face of mass corporate misinformation,” Kshama Sawant, a council member and a member of Socialist Alternative, a socialist political party, said in an interview. “It’s a complete betrayal of working people.”

Seattle tried raising money last year by passing an income tax on its wealthiest residents. But that measure was struck down by the courts as illegal under state law, according to Richard Auxier, an analyst at the nonpartisan Tax Policy Center. “There’s nothing but political, tough decisions for cities trying to raise money,” Auxier said. “A lot of localities are in a tough spot because states have limited their options.” The number of homeless people in the county surrounding Seattle has jumped by 4 percent, to 12,112, according to a Seattle Times report from May, while housing prices in the city have continued to soar. The city declared a state of emergency over its homeless population in 2015.

O’Brien, the council member, said that he did not have an immediate plan for how to address the city housing shortage but that the risks of losing the ballot fight were too great. He noted that opponents of the head tax had “unlimited resources” to spend on advertising and voter mobilization, and he feared moderate Democrats in the state legislature would join Republicans to outlaw the tax hike even if it survived a ballot challenge.

“I was thinking there’s a decent likelihood we spend millions of dollars beating each other up, and months from now have no new revenue and a homeless problem we haven’t even begun to work on,” O’Brien said in an interview Monday night. “It’s a very uncomfortable position to be in. But when I sit down and close my eyes, I think we’re better off stepping back.”

U.S. report: Much of the world’s chocolate supply relies on more than 1 million child workers: Despite cocoa industry promises to eradicate the practice, child labor is on the rise.

By Peter Whoriskey Oct. 19, 2020

The world’s chocolate companies depend on cocoa produced with the aid of more than 1 million West African child laborers, according to a new report sponsored by the Labor Department. The findings represent a remarkable failure by leading chocolate companies to fulfill a long-standing promise to eradicate the practice from their supply chains. Under pressure from Congress in 2001, some of the world’s largest chocolatiers — including Nestlé, Hershey and Mars — pledged to eradicate “the worst forms of child labor” from their sources in West Africa, the world’s most important supply. Since then, however, the firms have missed deadlines to eliminate child labor in 2005, 2008 and 2010. Each time, they have promised to do better, but the new report indicates that the incidence of child labor in West African cocoa production has risen.


A Washington Post investigation of the use of child labor in the cocoa industry found that representatives of some of the biggest and best-known brands could not guarantee that any of their chocolate was produced without child labor. One reason is that 20 years after pledging to eradicate the practice, chocolate companies still could not identify the farms where all their cocoa comes from, let alone whether child labor was used in producing it. Mars, Nestle and Hershey pledged nearly two decades ago to stop using cocoa harvested by children. Yet much of the chocolate you buy still starts with child labor. The prevalence of child labor among agricultural households in cocoa-growing areas of Ivory Coast and Ghana, the two primary suppliers, increased from 31 percent to 45 percent between 2008 and 2019, according to the Labor Department survey conducted by NORC at the University of Chicago.

Nearly 1.6 million children were engaged in child labor in cocoa production, according to the survey, and most of those were involved in tasks considered hazardous, such as wielding machetes, carrying heavy loads or working with pesticides. Because of changes in methodology, the number of child laborers in the new survey is not comparable with that of the first survey, researchers said. The surveyors defined child laborers as those children working below the age of 12, or children between 12 and 18 years old who work beyond allowable hours, or any children taking part in hazardous tasks.

“As this report shows, there are today still too many children in cocoa farming doing work for which they are too young, or work that endangers them,” according to a statement from Richard Scobey, president of the World Cocoa Foundation, an industry group representing companies handling about 80 percent of the world’s cocoa supply chain.


In addressing the report, Scobey identified no industry failures. Instead, he suggested that the goals for reducing child labor may have been too lofty. The targets “were set without fully understanding the complexity and scale of a challenge heavily associated with poverty in rural Africa,” he said in his statement. “Companies alone cannot solve the problem,” he said, noting also that cocoa production has increased. Several nonprofit groups blame the companies, however, for falling far short of the responsibilities they assumed under their pledge in 2001. They question how an industry that rings up an estimated $103 billion in annual sales could have made so little, if any, progress over 20 years.

In December, the Supreme Court is expected to hear arguments in a case against Nestlé and Cargill involving a group of Malians who say that as adolescents, they were forced to work on Ivory Coast cocoa farms. Although the lawsuit and the Post investigation focus on forced child labor, often from children brought in from other countries, the figures in the new report do not count those workers.

The “issue of forced child labor in cocoa production is important and deserves attention,” the report said, but counting forced child laborers would require a different methodology. After The Post’s article was published, officials with U.S. Customs and Border Protection opened an investigation into forced child labor on Ivorian cocoa farms, and sent personnel there. The outcome of that inquiry is unknown.

Terrence Collingsworth, one of the attorneys representing the Malian plaintiffs, said the problem of child labor — forced or not — arises because the 2001 pledge from the companies entailed no enforcement. “These serious human rights violations require mandatory rules with serious penalties, not empty promises from cocoa companies profiting from the exploitation of children,” he said.

Regarding the lawsuit, a Nestlé statement said: “All involved agree that Nestlé never engaged in the egregious child labor alleged in this suit. This lawsuit does not advance the shared goal of ending child labor in the cocoa industry because it does not address the root causes of the issue and will not improve the conditions in West Africa.” Cargill likewise has said it has taken steps to monitor for and eradicate child labor from its West African suppliers.

In response to the new report, the chocolate companies point to programs they’ve set up to try to monitor farms for child labor, and say they aim to expand those. Jeff Beckman, a Hershey spokesman, said that another study by NORC shows that “where company programs are in place, child labor was reduced by one-third, showing these programs are having a positive impact and emphasizing the need to further scale these programs.” He added that the programs by “larger industry players … touch about 60% of the cocoa produced in West Africa, which means their positive impact does not reach the other approximately 40% of cocoa produced.” Other smaller players must get involved, Beckman said. In response to the new survey, Mars noted in a statement that it has committed $1 billion to “help fix a broken supply chain.” “The problem of child labor is bigger than any one entity, and the solution must be grounded in an unwavering commitment to action and collaboration between farmers, communities, civil society, business, and government,” the company said.

The new report, however, stands as a dismal conclusion to the high hopes inspired by the 2001 company pledge, which was negotiated by Sen. Tom Harkin (D-Iowa) and Rep. Eliot L. Engel (D-N.Y.) and has become known as the Harkin-Engel protocol. It is unclear whether the United States will continue to monitor company efforts to reduce child labor. The Harkin-Engel protocol is set to expire next year.

Go to next page to address the prompt questions.

Answer These Question

Each response should be approximately 2 paragraphs in length.


Based on the material above discuss the following:

1. Do you believe in a Laissez-Faire economic system as it pertains to business and why?

2. What do you believe the purpose of a corporation should be in 2021 and cite the readings above to support your thoughts?

3. Critique Senator Warren’s proposal and whether you would be for it or against it and why?

4. Do you believe that Amazon actions were appropriate as it related to the actions by the Seattle City Council and why?

5. Should any further actions be taken regarding the methodology used to harvesting of cocoa and explain why or why not?

6. What percentage of net profits should a US corporation headquartered in the US pay in taxes and why? You should research taxes paid by major US corporations and cite in your response.

7. What obligations if any, do domestic companies owe the countries that they are located in? You can also reference and address the other questions posed on page 1.

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Capitalistic Economic System

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