Wednesday, June 26, 2013

Tax justice and a short history of the decline of corporate responsibility

The Corporation
June 26: updated from the original blog, with additional details and links.

"We especially need statesman CEOs who are as committed to a prosperous nation as they are committed to themselves and their shareholders and who live their lives with a lot more grace than seems to be the norm today." 
- Leo Hindery, Jr.

The U.S. site Remapping Debate is carrying a long article entitled Citizens without obligations? which looks at changes in corporate citizenship over the years. (Hat tip: Adam Kanzer.)
"In an effort to find out whether American corporations are the kind of “citizens” that believe that they have national obligations, Remapping Debate contacted the representatives of more than 80 corporations.
Most had no comment, a striking finding in and of itself. And among the corporate representatives who did comment, most were unwilling to say that their corporation had any obligations to the United States, let alone to define any such obligations with specificity. "
Although this article focuses on the United States, it seems likely that if similar conclusions would be reached in many other countries. Richard Sylla, economics professor at the Stern School of Business at New York University (NYU), commented on the findings:
"it’s revealing that the benefits they cite are so self-serving. It shows that they think of themselves as opportunistic entities, not participatory members of society.”
Readers of the book The Corporation, by the Canadian law professor Joel Bakan, from which the above image is drawn, would hardly be surprised to hear this. As his book summary notes:
"The corporation lies, steals and kills without remorse and without hesitation when it serves the interests of its shareholders to do so. It obeys the law only when the costs of crime exceed the profits. Corporate social responsibility is impossible except insofar as it is insincere."
That book, though several years old now, is still well worth reading.

But there is still plenty more to be said.

A box early in the story published by Remapping the Debate, entitled "When obligations went with benefits," notes that for most relevant history, U.S. corporations were perceived by both the public and by corporate executives themselves as having a broad range of obligations — including national obligations — that competed with the goals of making profit or creating value for shareholders. This is obviously central to any tax justice agenda: a narrow "shareholder value" approach to corporate responsibility would see managers fighting aggressively to dodge taxes and shirk other responsibilities, while a 'stakeholder value' approach would see a far more balanced responsible approach.

The article also refers to a 2013 paper by Gomory and Richard Sylla, entitled The American Corporation, which says:
"The most recent era is marked by a shift away from a stakeholder view of corporate interests and purposes to one dominated by profit and shareholder-value maximization."
Remapping Debate continues:
“The idea that a corporation exists solely to make money is actually quite new,” explained Ralph Gomory, a professor of management at New York University. The broader sense of corporate responsibility was starkly apparent during World War II, when many U.S. companies dramatically changed their operations to aid the war effort, Gomory said, but it also extended through the 1950s, 1960s, and 1970s. “Even in the early ’80s, you would be more likely to hear a CEO talking about his responsibilities to the country or to his employees than his duty to the shareholders.”
Gomory cites main reasons for the erosion in corporate responsibility, starting in the 1970s: the end of the Cold War and the onset of rapid globalization; the alignment of the interests of corporate executives with shareholders through stock-based compensation; and an ideological shift in economics and business schools towards the idea that the purpose of a corporation was the maximize shareholder value.  Milton Friedman's 1970 article in New York magazine, entitled "The Social Responsibility of Business is to Increase its Profits," was an important trigger for the changes that were to come.
"Businessmen [who] speak eloquently about the "social responsibilities of business in a free-enterprise system," Friedman wrote, "are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades."
Though experience has revealed Friedman's arguments to be fatally flawed, his was an influential argument at the time. It was certainly contested: a speech in February by Leo Hindery notes:
Ed Littlefield was my first boss, and indisputably he is the ‘author’ of the view – which Reginald Jones of GE later carried into the broad public domain in 1972 in his inaugural speech as GE’s CEO – that a responsible CEO actually has equal and concurrent responsibility to his employees, shareholders, customers, communities and nation. That’s five constituencies at once, not just the one which Friedman was espousing.
. . .
The ‘70s and early ‘80s was generally an era when simply the privilege of being a CEO or a large public company director rewarded these individuals every bit as much as the cash compensation they received. The proof of this is the fact that dating back to the start of the twentieth century the average public company CEO in the U.S. earned only about 15 to 20 times what his average employee earned.
And Hindery, in a presentation that is well worth reading in full, makes a further point:
"While this sense of broad corporate responsibility was being established for American industry, managers in Europe and Japan were saying the same things and acting similarly. And they continue to do so even today." 
Comments by the head of the UK's Sainsbury's yesterday, who said corporate tax payments are a matter of morality, not just legality, is a case of this old and honourable tradition.

Despite the profound ideological shift that took place, especially from the latter years of Ronald Reagan's presidency, our recent blog on this subject confirms, in fact, that corporations do in fact still have official responsibilities to society, beyond a narrow focus on delivering returns for shareholders. It cites Lynn Stout,  Distinguished Professor of Corporate and Business Law at Cornell Law School, as saying:
"The ideology of shareholder value maximization lacks any solid foundation in corporate law, corporate economics, or the empirical evidence. Contrary to what many believe, U.S. corporate law does not impose any enforceable legal duty on corporate directors or executives of public corporations to maximize profits or share price."
More specifically, in the UK, directors are required to have regard to the long-term consequences of their decisions, the interests of employees, relationships with suppliers and customers, the impact of corporate activities on the community and the environment, the company’s reputation for high standards of business conduct and the need for fairness between different members of the company.

Remapping Debate quotes William Lazonick, a leading business thinker at the University of Massachusetts, Lowell.
“Up until the 1980s, CEOs were extremely reluctant to shut down factories and lay off a large number of workers,” Lazonick said. “Mass layoffs were actually seen as a serious abnegation of corporate responsibility. It was understood that the company had a responsibility to it workers, and that if it failed, soci- ety at large would be on the hook for that failure.”
It also cites Margaret Blair, a law professor at Vanderbilt University, who notes that in the period from World War II to the 1980s, it was far less common to see corporate executives lobbying the government for special rights and benefits, including lower taxes.
“It was accepted that, if the United States was going to be a powerful economy and have a high quality of living, then the corporate sector needed to do its part to supply financial resources to the government,” she said. “There was no sense of it being the corporations versus the government. It was much more about everybody being in it together.
And, we hasten to add, that period was one of high, broad-based economic growth. One can see the change in two statements from the U.S. Business Roundtable, cited by Sylla and Gomory. The first, from 1981, states that corporations have a responsibility to “each of the corporations constituents.” It continues:
"Responsibility to all these constituents in toto constitutes responsibility to society...Business and society have a symbiotic relationship: The long term viability of the corporation depends upon its responsibility to the society of which it is a part. And the well-being of society depends upon profit- able and responsible business enterprises."

By 1997, the Business Roundtable's position had changed to:
"The principal objective of a business enterprise . . . is to generate economic returns to its owners,” that is, its shareholders."
This has been accompanied by a rise in corporations' sense of entitlement, without corresponding obligations: a classic recipe for (among many other things) tax-dodging:
"Sylla said the fact that many American corporations see themselves as entitled to the benefits of citizenship — without incurring reciprocal obligations — is reflective of a fundamental disjunction between how individual and corporate citizenship are perceived.
“We’ve determined that a corporation is legally like a person in lots of ways,” Sylla said. “They have rights, including the right to free speech, and they enjoy an array of benefits. Don’t most of us think that those rights and benefits come attached to obligations? When they say they don’t have any national obligations, it shows we have a double standard.”
Quite so. One for our corporate responsibility page.


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