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As corporations grow more powerful, they should become more transparent
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America today is very different from the country that fought the Revolutionary War and framed the Constitution. Then, it was a nation of farmers; today, it's a nation of corporations. Most Americans now work for corporations, the largest of which command resources and money on a scale beyond that of many nations.
As President Theodore Roosevelt noted in his first annual message to Congress: "Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with those institutions." The key to doing this is to hold corporations accountable by ensuring that their activities are made visible.
From the end of World War II until about 1980 -- even through the economic travail of the '70s -- it was generally considered normal for large corporations to acknowledge all of their constituencies. But not everyone agreed. One view came from Milton Friedman, who in 1971 wrote that corporations' only responsibility was to maximize the value of shareholder equity.
On the other side, notably, were Edmund Littlefield of Utah International and Reginald Jones of General Electric, who argued that they and their fellow chief excecutives were equally responsible to their employees, customers, communities and the nation. In 1981, at their urging, the Business Roundtable, made up of the nation's most prominent CEOs, formally embraced this view.
Real-life interests tend to ignore such intellectual pronouncements. Large shareholders came to realize that if they gave top management unprecedented quantities of options on company stock, executives would single-mindedly focus on raising the stock price. By 1997, the Business Roundtable reversed itself, saying in effect that corporate responsibility extends only to shareholders.
One way to boost profits and stock prices was to hold wages down. And so management and shareholders each came to stand against the interests of employees.
In the 1980s, management compensation rose sharply, while wage earners were left out of the benefits of growth. The average CEO of a public company, who had for a century earned about 15 to 20 times what his average employee earned, began taking a bigger and bigger piece of the pie. Today, that earnings ratio is about 400-to-1.
In trying to understand the consequences of corporations focusing only on shareholder value, it's important to know who the shareholders are. If they are mainly ordinary people with invested pensions, then working to give them as much value as possible, even if there is an adverse effect on wages, doesn't seem so bad. But if shares are concentrated in only a few hands, then the stock price is a less-appealing goal.
While many people do have small stakes in corporations through their pension funds and 401(k) plans, the bulk of equities are held by the wealthiest individuals. In 2007, the richest 5 percent of Americans held more than two-thirds of the value of all corporate shares, and more than half those shares belonged to the top 1 percent. In their pursuit of shareholder value only, corporations are now in fact dedicated to making the nation's wealthy wealthier.
The effects are visible. From 1980 until the onset of the recession in December 2007, almost all economic growth benefited the upper 10 percent of Americans. Maximizing profits also excuses the offshoring of millions of U.S. jobs and of American technology. It explains many of the perverse financial industry practices that contributed to the crash, as well.
Making matters worse, it has led many large companies to spend more and more money on lobbying. Congress has tried to counteract the influence of money on politics -- for example, by passing the Bipartisan Campaign Reform Act of 2002, widely known as McCain-Feingold. However, in 2010, with its decision in the Citizens United case, the Supreme Court struck down the provisions of the act that had barred corporations and unions from running advertisements mentioning candidates within 60 days of a general election or 30 days of a primary. This ruling handed a small group of CEOs and billionaires (unions don't have as much money) nearly limitless powers of persuasion in the democratic process.
At the same time, the court authorized super-PACs to raise unlimited amounts of money from corporations, unions and wealthy individuals for candidates or causes, without needing to identify the contributors.
We can hope that the Supreme Court, seeing the effect of its rulings, will find a way to reverse or limit them. But while we are waiting, efforts should be made to make corporate political activity transparent.
The Securities and Exchange Commission should use its existing authority to protect investors by requiring that corporations disclose their political contributions. Corporations should voluntarily disclose their political dealings to consumers in any case. When we choose a bank or buy a car, we should be able to tell if our money will help push a political agenda that we might oppose.
Common Cause and other organizations should rate corporations on their political activities and post the ratings on their websites. One such scale already exists, the Zeitlin & Schroder CPA Index, which assesses the political activities of 32 major corporations.
This is only the beginning. Corporations also affect our lives through their influence on jobs, offshoring, health care and wages. These actions, too, should be disclosed and rated.
As this effort gathers momentum, it will be important for rating organizations to be clear about their own funding. We would not want to find that ratings were effectively for sale (as once were the financial gradings of Moody's Investors Service and Standard & Poor's).
As a nation, we have reached a point where we must decide how much power we will allow large corporations and the extremely wealthy to have over our lives and our political system. Making their activities transparent is a first step toward ensuring that we don't become a nation for the rich but rather one that works to provide for all.
First Published March 16, 2012 12:00 am
