Among the many charges levelled against Democratic Presidential candidate Joe Biden on the editorial page of the Wall Street Journal, the attack against his position on stakeholder capitalism stands out. Andy Puzder, a former CEO of CKE Restaurants, sounds the alarm in an op-ed under the title, “The Trump Boom and the Left’s Plot to Stop It.” He asks, “Is Joe Biden a moderate or a radical?” He answers his questions with, “He says businesses ‘have a responsibility to their workers, their community, to their country’—a truism. But he has also called for ‘an end to the era of shareholder capitalism.’ He adds it’s ‘untrue and a farce’ that a company’s primary responsibility is to generate returns for shareholders. In reality, corporations do enormous social good precisely by seeking to generate returns for shareholders.”
The thesis that CEOs should be accountable not only to shareholders, who purchase stocks, but also to all others involved in their corporations—and to society at large—comes in two rather different versions. One holds that businesses would benefit if their leaders would take into account the needs of their workers and of the communities in which they operate. Such considerations would fatten the bottom line by making the workers more loyal and creating goodwill in the community. Few disagree with this version, though Amazon is an example of a corporation that seems to be succeeding financially without abiding by these precepts; it is charged with trying to squeeze its employees and those who seek access to the market it provides.
The other version, the one Biden alluded to, is a moral thesis, namely that corporations have a moral obligation to all of their stakeholders, and that this obligation should have legal implications. For instance, workers should have representatives on the boards of directors of corporations, a policy known as codetermination. In Germany, for example, workers’ representatives must hold up to 50% of the seats of large corporate boards.
I first learned about the moral version of stakeholder theory when I served for two years as a visiting professor at the Harvard Business School. The faculty included professors from a wide range of political backgrounds, and many served as consultants for major corporations in their time off and were quite wealthy. However, there was a wide consensus among the faculty that “corporations should belong to all who invest in them.” At first, that line seemed to refer merely to shareholders; however, my colleagues explained that it also applies to workers who spend a chunk of their lives laboring to make the corporations more profitable, as well as to communities that dedicate major resources to the corporations, from paving roads they need to tax abatements.
Those who doubt that society has a right to have a say in determining to which people heads of corporations should be accountable should consider the fact that allowing people to invest in corporations while maintaining a limited liability (in the sense that whatever the corporation does, they cannot be held responsible) is a privilege that did not exist until the 18th century. Typically, in their petition for incorporation, the organizers of the first manufacturing company in Massachusetts in 1789 asked “to be incorporated ‘with such immunities and favors’ as the legislators should think necessary…” What the legislators have given, the legislators can modify.
Actually, there are few—granted, very few—indications that, as the GOP is considering its post-2020 agenda, some voices are calling for a stakeholder-like view of capitalism. In “The Case for Common-Good Capitalism,” published in November 2019, Senator Marco Rubio puts it well when he states that we must stop “priz[ing] economic efficiency over resiliency, financial gains over Main Street investment, [and] individual enrichment over the common good.” He argues that businesses should treat workers and the community—and not only investors—as partners. A total of 183 CEOs signed a “Statement on the Purpose of a Corporation” in which they promise to “deliver value to all” stakeholders, in order to promote “the future success of our companies, our communities, and our country.” In a different article, Rubio adds, “On the political right, we have become defenders of the right of businesses to make a profit, the right of shareholders to receive a return on their investment…But…we have neglected…the obligation of businesses to act in the best interest of the workers and the country that have made their success possible.”
Still, under current conditions, all these ideas seem on the visionary side. As I see it, capitalism requires a major, urgent increase in accountability, however of a rather different kind. When one reads about corporations that are breaking the law, their defenders often argue that these crimes were committed by some employees in the mailroom (or in charge of the IT systems), or that, although this or that corporation may have acted nefariously, most are good citizens; one can “find some rotten apples in every barrel.”
To check this argument, I randomly looked at the barrel, that is, various American corporations and industries. The result of this study will be published in the next issue of Society. In every industry I examined, I found significant instances of illegal and/or immoral conduct, often involving major corporations—and managed from the top.
-Banks and other financial institutions played a major role in the 2008 financial crisis and the subsequent Great Recession. Twenty-six million Americans became unemployed, underemployed, or too discouraged to continue looking for work. Eight and a half million families lost their homes. Eleven trillion dollars of household wealth evaporated from Americans’ life savings and retirement accounts.
-Several books written by doctors tell about Big Pharma. These books find that the drug industry has polluted the scientific basis of modern medicine with rigged market-driven clinical studies that inflate the effectiveness of new, high-priced drugs while concealing their risks to patient safety. Drug companies put hurdles in the way of marketing low-cost generics and jack up the prices of medications for which patients cannot find alternative treatments.
-The U.S. Department of Justice has charged all five of the largest for-profit nursing home chains in the country with engaging in fraudulent practices. The cases involve medically unnecessary therapies (for the purpose of inflating reimbursement) and providing inadequate care.
-The processed-food industry draws on scientific studies of eating to create recipes and marketing strategies that are harmful to individuals’ health and overall public health. Adding sugars, fats, and salts to products is a cheap way for these companies to make their packaged foods and drinks more appealing, as well as to increase the likelihood that people will eat the products to excess.
-Among industries, coal mining stands out for its riskiness. These companies had hundreds of safety violations.
-The quest for higher profits has led for-profit prisons to cite prisoners for more infractions in order to keep them locked up longer, while the drive to cut costs has led to overcrowding and severe reductions in the quality of life of the inmates.
-The Government Accountability Office investigated fifteen for-profit institutions of higher education. It found that all fifteen utilized misleading or dubious claims in their efforts to enroll students and four promoted fraud.
-Volkswagen cheated on U.S. emissions tests by using a special software ensuring that diesel-reliant vehicles passed emissions tests. Actual emissions were up to forty times the level allowed under U.S. regulations.
-Two Boeing 737 Max jets crashed within less than six months of each other, killing 346 people. Nearly two years before the first crash, the then-chief technical pilot for the 737 referred to an “egregious” problem with the new flight control system. Boeing did not fix the issue before delivering the planes to its airline customers.
To outline what must be done, the following analogy seems helpful: consider capitalism as akin to nuclear energy. If it is well-contained in a strongly fortified capsule, it can benefit society by providing an abundance of low-cost energy (in the form of massive production of goods and services). However, if allowed to break out of its mooring, it can cause great harm (to workers, customers, the social order, and the environment). The “capsule” (the system of which capitalism is a subsystem) is the social and political order. The social element of the capsule is first of all a set of values that provides legitimacy for capitalism (e.g., defined property rights and limited liability), and that sets normative limits to market forces (e.g., abhorring sex trafficking). The political element of the capsule provides public policies that set coercive boundaries to capitalism (e.g., in the form of regulations).
Biden does not need Congress to enact many new laws but, rather, to fight for the kinds of budget allocations that enforcement requires and to remove the hurdles that Congress has previously, under the pressure of lobbyists, often put in the way of enforcement.
For instance, oversight agencies should not be required to inform nursing homes and meatpackers that they are about to be inspected. In the time leading up to the Boeing crashes, the Federal Aviation Administration (FAA) turned over much of its regulatory control to Boeing, accepting the company’s word to stand as the final account of the safety of its products. The FAA has been so weakened that the acting director stated that it would need 10,000 new employees and $2 billion if it is to be able to resume fulfilling its duties.