“Neglecting Human Costs”: Harvard Business School’s Role In Widening Inequality
No institution is more responsible for educating the CEOs of American corporations than Harvard Business School – inculcating in them a set of ideas and principles that have resulted in a pay gap between CEOs and ordinary workers that’s gone from 20-to-1 fifty years ago to almost 300-to-1 today.
A survey, released on September 6, of 1,947 Harvard Business School alumni showed them far more hopeful about the future competitiveness of American firms than about the future of American workers.
As the authors of the survey conclude, such a divergence is unsustainable. Without a large and growing middle class, Americans won’t have the purchasing power to keep U.S. corporations profitable, and global demand won’t fill the gap. Moreover, the widening gap eventually will lead to political and social instability. As the authors put it, “any leader with a long view understands that business has a profound stake in the prosperity of the average American.”
Unfortunately, the authors neglected to include a discussion about how Harvard Business School should change what it teaches future CEOs with regard to this “profound stake.” HBS has made some changes over the years in response to earlier crises, but has not gone nearly far enough with courses that critically examine the goals of the modern corporation and the role that top executives play in achieving them.
A half-century ago, CEOs typically managed companies for the benefit of all their stakeholders – not just shareholders, but also their employees, communities, and the nation as a whole.
“The job of management,” proclaimed Frank Abrams, chairman of Standard Oil of New Jersey, in a 1951 address, “is to maintain an equitable and working balance among the claims of the various directly affected interest groups … stockholders, employees, customers, and the public at large. Business managers are gaining professional status partly because they see in their work the basic responsibilities [to the public] that other professional men have long recognized as theirs.”
This view was a common view among chief executives of the time. Fortune magazine urged CEOs to become “industrial statesmen.” And to a large extent, that’s what they became.
For thirty years after World War II, as American corporations prospered, so did the American middle class. Wages rose and benefits increased. American companies and American citizens achieved a virtuous cycle of higher profits accompanied by more and better jobs.
But starting in the late 1970s, a new vision of the corporation and the role of CEOs emerged – prodded by corporate “raiders,” hostile takeovers, junk bonds, and leveraged buyouts. Shareholders began to predominate over other stakeholders. And CEOs began to view their primary role as driving up share prices. To do this, they had to cut costs – especially payrolls, which constituted their largest expense.
Corporate statesmen were replaced by something more like corporate butchers, with their nearly exclusive focus being to “cut out the fat” and “cut to the bone.”
In consequence, the compensation packages of CEOs and other top executives soared, as did share prices. But ordinary workers lost jobs and wages, and many communities were abandoned. Almost all the gains from growth went to the top.
The results were touted as being “efficient,” because resources were theoretically shifted to “higher and better uses,” to use the dry language of economics.
But the human costs of this transformation have been substantial, and the efficiency benefits have not been widely shared. Most workers today are no better off than they were thirty years ago, adjusted for inflation. Most are less economically secure.
So it would seem worthwhile for the faculty and students of Harvard Business School, as well as those at every other major business school in America, to assess this transformation, and ask whether maximizing shareholder value – a convenient goal now that so many CEOs are paid with stock options – continues to be the proper goal for the modern corporation.
Can an enterprise be truly successful in a society becoming ever more divided between a few highly successful people at the top and a far larger number who are not thriving?
For years, some of the nation’s most talented young people have flocked to Harvard Business School and other elite graduate schools of business in order to take up positions at the top rungs of American corporations, or on Wall Street, or management consulting.
Their educations represent a substantial social investment; and their intellectual and creative capacities, a precious national and global resource.
But given that so few in our society – or even in other advanced nations – have shared in the benefits of what our largest corporations and Wall Street entities have achieved, it must be asked whether the social return on such an investment has been worth it, and whether these graduates are making the most of their capacities in terms of their potential for improving human well-being.
These questions also merit careful examination at Harvard and other elite universities. If the answer is not a resounding yes, perhaps we should ask whether these investments and talents should be directed toward “higher and better” uses.
By: Robert Reich, The Robert Reich Blog, September 13, 2014; This essay originally appeared in the Harvard Business Review’s blog.
“Corporate Artful Dodgers”: We’re Heading Toward A World In Which Only The Human People Pay Taxes
In recent decisions, the conservative majority on the Supreme Court has made clear its view that corporations are people, with all the attendant rights. They are entitled to free speech, which in their case means spending lots of money to bend the political process to their ends. They are entitled to religious beliefs, including those that mean denying benefits to their workers. Up next, the right to bear arms?
There is, however, one big difference between corporate persons and the likes of you and me: On current trends, we’re heading toward a world in which only the human people pay taxes.
We’re not quite there yet: The federal government still gets a tenth of its revenue from corporate profits taxation. But it used to get a lot more — a third of revenue came from profits taxes in the early 1950s, a quarter or more well into the 1960s. Part of the decline since then reflects a fall in the tax rate, but mainly it reflects ever-more-aggressive corporate tax avoidance — avoidance that politicians have done little to prevent.
Which brings us to the tax-avoidance strategy du jour: “inversion.” This refers to a legal maneuver in which a company declares that its U.S. operations are owned by its foreign subsidiary, not the other way around, and uses this role reversal to shift reported profits out of American jurisdiction to someplace with a lower tax rate.
The most important thing to understand about inversion is that it does not in any meaningful sense involve American business “moving overseas.” Consider the case of Walgreen, the giant drugstore chain that, according to multiple reports, is on the verge of making itself legally Swiss. If the plan goes through, nothing about the business will change; your local pharmacy won’t close and reopen in Zurich. It will be a purely paper transaction — but it will deprive the U.S. government of several billion dollars in revenue that you, the taxpayer, will have to make up one way or another.
Does this mean President Obama is wrong to describe companies engaging in inversion as “corporate deserters”? Not really — they’re shirking their civic duty, and it doesn’t matter whether they literally move abroad or not. But apologists for inversion, who tend to claim that high taxes are driving businesses out of America, are indeed talking nonsense. These businesses aren’t moving production or jobs overseas — and they’re still earning their profits right here in the U.S.A. All they’re doing is dodging taxes on those profits.
And Congress could crack down on this tax dodge — it’s already illegal for a company to claim that its legal domicile is someplace where it has little real business, and tightening the criteria for declaring a company non-American could block many of the inversions now taking place. So is there any reason not to stop this gratuitous loss of revenue? No.
Opponents of a crackdown on inversion typically argue that instead of closing loopholes we should reform the whole system by which we tax profits, and maybe stop taxing profits altogether. They also tend to argue that taxing corporate profits hurts investment and job creation. But these are very bad arguments against ending the practice of inversion.
First of all, there are some good reasons to tax profits. In general, U.S. taxes favor unearned income from capital over earned income from wages; the corporate tax helps redress this imbalance. We could, in principle, maintain taxes on unearned income if we offset cuts in corporate taxes with substantially higher tax rates on income from capital gains and dividends — but this would be an imperfect fix, and in any case, given the state of our politics, this just isn’t going to happen.
Furthermore, ending profits taxation would greatly increase the power of corporate executives. Is this really something we want to do?
As for reforming the system: Yes, that would be a good idea. But the case for eventual reform basically has nothing to do with the case for closing the inversion loophole right now. After all, there are big debates about the shape of reform, debates that would take years to resolve even if we didn’t have a Republican Party that reliably opposes anything the president proposes, even if it was something Republicans were for just a few years ago. Why let corporations avoid paying their fair share for years, while we wait for the logjam to break?
Finally, none of this has anything to do with investment and job creation. If and when Walgreen changes its “citizenship,” it will get to keep more of its profits — but it will have no incentive to invest those extra profits in its U.S. operations.
So this should be easy. By all means let’s have a debate about how and how much to tax profits. Meanwhile, however, let’s close this outrageous loophole.
By: Paul Krugman, Op-Ed Columnist, The New York Times, July 27, 2014
“Magically Becoming Irish”: If Corporations Are People, Shouldn’t They Have To Expatriate Like People?
It’s a common complaint among American expatriates: no matter how far away you go, you can’t escape Uncle Sam’s taxes.
But that’s not the case with American corporations that move their putative “headquarters” overseas, as President Obama noted the other day:
In his toughest comments yet on the subject, he accused big US corporations of trying to play “the system” by “magically becoming Irish” through so-called tax inversion deals.
“I don’t care if it’s legal, it’s wrong,” Mr Obama said. “It sticks you for the tab to make up for what they’re stashing offshore.”
There has been a raft of such deals in recent months which have seen big American companies become “Irish” for tax purposes through buying smaller firms registered here. The same trend is happening in the UK and Switzerland. Fears America is losing out on taxes have made the deals controversial.
It’s understandable if businesses have a different tax code that subjects them to different rules to a certain extent, though shady tax dodging is still an enormous moral and financial problem.
But the issue starts to become even more open and shut once we start claiming that corporations are people. If a corporation has “free speech rights” to buy elections, then it should be subject to American taxes even if it “moves” overseas just like actual American people are. If a corporation like Hobby Lobby has personal “religious rights” not to cover its employees’ contraception, then it’s enough of a person to pay expatriate taxes if it decides to move to Ireland.
It has to be one or the other. You can’t become a person when it’s convenient to your bottom line, but not when it isn’t.
By: David Atkins, Washington Monthly Political Animals, July 26, 2014
“The Limits Of Corporate Citizenship”: Why Walgreen Shouldn’t Be Allowed To Influence U.S. Politics If It Becomes Swiss
Dozens of big U.S. corporations are considering leaving the United States in order to reduce their tax bills.
But they’ll be leaving the country only on paper. They’ll still do as much business in the U.S. as they were doing before.
The only difference is they’ll no longer be “American,” and won’t have to pay U.S. taxes on the profits they make.
Okay. But if they’re no longer American citizens, they should no longer be able to spend a penny influencing American politics.
Some background: We’ve been hearing for years from CEOs that American corporations are suffering under a larger tax burden than their foreign competitors. This is mostly rubbish.
It’s true that the official corporate tax rate of 39.1 percent, including state and local taxes, is the highest among members of the Organization for Economic Cooperation and Development.
But the effective rate – what corporations actually pay after all deductions, tax credits, and other maneuvers – is far lower.
Last year, the Government Accountability Office, examined corporate tax returns in detail and found that in 2010, profitable corporations headquartered in the United States paid an effective federal tax rate of 13 percent on their worldwide income, 17 percent including state and local taxes. Some pay no taxes at all.
One tax dodge often used by multi-national companies is to squirrel their earnings abroad in foreign subsidiaries located in countries where taxes are lower. The subsidiary merely charges the U.S. parent inflated costs, and gets repaid in extra-fat profits.
Becoming a foreign company is the extreme form of this dodge. It’s a bigger accounting gimmick. The American company merges with a foreign competitor headquartered in another nation where taxes are lower, and reincorporates there.
This “expatriate” tax dodge (its official name is a “tax inversion”) is now at the early stages but is likely to spread rapidly because it pushes every American competitor to make the same move or suffer a competitive disadvantage.
For example, Walgreen, the largest drugstore chain in the United States with more than 8,700 drugstores spread across the nation, is on the verge of moving its corporate headquarters to Switzerland as part of a merger with Alliance Boots, the European drugstore chain.
Founded in Chicago in 1901, with current headquarters in the nearby suburb of Deerfield, Walgreen is about as American as apple pie — or your Main Street druggist.
Even if it becomes a Swiss corporation, Walgreen will remain your Main Street druggist. It just won’t pay nearly as much in U.S. taxes.
Which means the rest of us will have to make up the difference. Walgreen’s morph into a Swiss corporation will cost you and me and every other American taxpayer about $4 billion over five years, according to an analysis by Americans for Tax Fairness.
The tax dodge likewise means more money for Walgreen’s investors and top executives. Which is why its large investors – including Goldman Sachs — have been pushing for it.
Some Walgreen customers have complained. A few activists have rallied outside the firm’s Chicago headquarters.
But hey, this is the way the global capitalist game played. Anything to boost the bottom line.
Yet it doesn’t have to be the way American democracy is played.
Even if there’s no way to stop U.S. corporations from shedding their U.S. identities and becoming foreign corporations, there’s no reason they should retain the privileges of U.S. citizenship.
By treaty, the U.S. government can’t (and shouldn’t) discriminate against foreign corporations offering as good if not better deals than American companies offer. So if Walgreen as a Swiss company continues to fill Medicaid and Medicare payments as well as, say, CVS, it’s likely that Walgreen will continue to earn almost a quarter of its $72 billion annual revenues directly from the U.S. government.
But as a foreign corporation, Walgreen should no longer have any say over the size of those payments, what drugs they cover, or how they’re administered.
In fact, Walgreen should no longer have any say about how the U.S. government does anything.
In 2010 it lobbied for and got a special provision in the Dodd-Frank Act, limiting the fees banks are allowed to charge merchants for credit-card transactions — resulting in a huge saving for Walgreen. If it becomes a Swiss citizen, the days of special provisions should be over.
The Supreme Court’s “Citizens United” decision may have opened the floodgates to American corporate money in U.S. politics, but not to foreign corporate money in U.S. politics.
The Court didn’t turn foreign corporations into American citizens, entitled to seek to influence U.S. law and regulations.
Since the 2010 election cycle, Walgreen’s Political Action Committee has spent $991,030 on federal elections. If it becomes a Swiss corporation, it shouldn’t be able to spend a penny more.
Walgreen is free to become Swiss but it should no longer be free to influence U.S. politics.
It may still be the Main Street druggist, but if it’s no longer American it shouldn’t be considered a citizen on Main Street.
By: Robert Reich, The Robert Reich Blog, July 6, 2014
“In A Partisan League Of His Own”: Alito, Doing Everything He Can To Be ‘A Corporation’s Best Friend’
On Monday morning, around 10 a.m. ET, much of the nation’s political and legal world turned to Scotusblog to learn the outcome of two of the year’s biggest Supreme Court cases. Moments later, the blog told us that Justice Samuel Alito was delivering both rulings.
And it was at this point that everyone immediately knew that conservatives had won both cases.
What about the possibility of a surprise? How could everyone be absolutely certain that Alito would side with the right? Was it really so inconceivable that Alito would honor precedent and play against type?
Actually, yes, it was inconceivable.
Ian Millhiser made a compelling case today that Alito is “the most partisan” justice on the bench, making it pretty clear what to expect when he’s written a ruling.
According to data by Washington University Professor Lee Epstein, Alito is more likely to cast a conservative vote than anyone else on the Court.
To be fully precise, that does not make Alito the Court’s most conservative member. That honor belongs to Justice Clarence Thomas, who is the only member of the Court who openly pines for the days when federal child labor laws were considered unconstitutional. Yet, while Alito can’t match Thomas’s radicalism, he is far and away the most partisan member of the Court.
To explain this distinction, Thomas is not a partisan. He is an ideologue. His decisions are driven by a fairly coherent judicial philosophy which would often read the Constitution in much the same way that it was understood in 1918. While this methodology typically leads him to conservative results, it does occasionally align him with the Court’s liberals…. What makes Alito a partisan is that there is no similar case where his judicial philosophy drove him to a result that put him at odds with his fellow conservatives.
To put this in perspective, note that Millhiser highlighted a striking detail: Alito is the only sitting justice who has never crossed over – in effect, breaking ranks with the usual ideological allies – in a closely divided case.
Nine years ago, you’ll recall that Alito was not George W. Bush’s first choice. Rather, the Republican president initially nominated Harriet Miers, the White House counsel at the time, for the lifetime appointment on the high court.
It was among the more foolish decisions Bush made, which ended in an embarrassing withdrawal.
Miers was obviously unqualified, but Bush’s second choice, Sam Alito, is in many ways worse.
Millhiser’s indictment on Alito’s partisanship, his activism, his reliance on a raw political perspective, his desire to be “a corporation’s best friend,” makes a persuasive case and is worth checking out.
By: Steve Benen, The Maddow Blog, July 2, 2014
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