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September 2, 2016


Once upon a time in the days of Teddy Roosevelt to and through the administrations of his fifth cousin, Franklin and to about 1980, corporations were organized and operated for the benefit of all their stakeholders and were not just in business for the sole purpose of enhancing “shareholder value” (i.e., profit). It was what some call “stakeholder capitalism” as opposed to the current “shareholder capitalism.” Before 1980, large corporations were in effect owned by all their stakeholders as it was assumed that stakeholders as well as shareholders had legitimate claims on corporate activities. In 1914, for instance, Walter Lippmann called on America’s corporate executives to be stewards of America. He wrote that “The men connected with the large corporation cannot escape the fact that they are expected to act increasingly like public officials. . . .  Big businessmen who are at all intelligent recognize this. They are talking more and more about their ‘responsibilities’ and their ‘stewardship.’”

Per Robert Reich in his book, Saving Capitalism, Adolf A. Berle and Gardiner C. Means published a highly influential study in 1932 which noted that some top executives of America’s giant companies were not even accountable to their own shareholders but operated the companies “in their own interest, and diverted a portion of the asset fund to their own uses.” To solve this problem, they recommended that we enlarge the power of all groups within the nation who were affected by the large corporation, including employees and consumers. They saw the corporate executive’s role as that of a professional administrator who dispassionately weighed the claims of investors, employees, consumers and citizens and allocated benefits accordingly. They wrote, “It seems almost essential, if the corporate system is to survive – that the “control” of the great corporations should develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning each a portion of the income stream on the basis of public policy rather than private cupidity.”

In a Truman-era (1951) address Frank Abrams, chairman of Standard Oil of New Jersey, stated that “The job of management 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.” Then in an Eisenhower-era note in 1956 Time Magazine the editors wrote that business leaders were willing to “judge their actions, not from the standpoint of profit and loss” in their financial results but “of profit and loss to the community.” GE, noted Time, famously sought to serve the “balanced best interests” of all its stakeholders, and finally, and my favorite quote of all is that of J.D. Zellerbach, a pulp and paper executive who told Time that “The majority of Americans support private enterprise, not as a God-given right but as the best practical means of conducting business in a free society. . .  They regard business management as a stewardship, and they expect it to operate the economy as a public trust for the benefit of all the people.”

Zellerbach is (or was) right. God was not involved in corporate roles in society; they (like our economy) were and are purely human constructs but, unfortunately, the bottom has fallen out of the public stewardship view of corporate conduct with the advent of corporate raiders in the 1970s and the likes of corporate butchers such as “Neutron” Jack Welch (CEO of GE in the 1980s and 1990s) and “Chainsaw” Al Dunlap of Scott Paper (who tried to outdo Welch with draconian cuts in employment later on). These two and many others since then have totally ignored any idea of public stewardship in their myopic and uncaring mania to “increase shareholder value”(in tandem, of course, with their personal rewards for doing so – see bonuses, stock options, retirement payments, use of company jets etc.).

Per Reich in his book, Saving Capitalism, Welch was a leader in the 1980s-1990s era of corporate butchers whose meat-ax mission was to “cut out the fat” and “cut to the bone” philosophy. When Welch acceded to the CEO helm of GE in 1981, the company had a stock market value of less than $14 billion; when he retired in 2001, the company was worth almost $400 billion.

This huge increase in value was accomplished primarily by cutting payrolls. Before Welch came on the scene, most GE employees had spent their entire careers with the company, but between 1981 and 1985, one quarter of them (100,000) lost their jobs, and Welch earned his title of “Neutron” Jack. Even when times were good and GE was profitable, Welch encouraged his senior management to replace 10 per cent of their subordinates every year “in order to keep GE competitive.”

Not to be outdone, “Chainsaw” Al Dunlap (CEO of Scott Paper) laid off eleven thousand workers, including 71 per cent of headquarters staff. Wall Street paper shufflers were impressed and the company’s stock rose promptly by 225 per cent. Dunlap thereafter moved to Sunbeam and promptly laid off half of Sunbeam’s twelve thousand employees. However, his story did not end so well as that of Welch. Dunlap was caught cooking Sunbeam’s books, was sued by the SEC for fraud, and he settled for a half million dollars, agreeing never again to serve as an officer or director of any publicly traded company.

The two cited here are the tip of the iceberg. Among many others, Hewlett-Packard and IBM (which had formerly been known for their policies of lifetime employment and high wages) emulated the Welch example and wielded similar axes. In all such cases, Wall Street paper shufflers and other drones saw to it that such companies’ stock prices went through the roof (accounting in part for today’s historic Dow) and, of course, the compensation packages of the CEOs and other corporate executives soared as well, albeit on the backs of fired career employees. Human costs of the firing of hundreds of thousands of employees apparently were not factored into the orders from on high, nor to the perhaps millions who depended upon the greatly decreased demand of such previously well-paid but now laid off employees (which adversely affected and deflated aggregate demand in the general economy).

The theory is that such firings were efficient because the savings occasioned thereby were available for higher and better uses irrespective of the human costs. I will write on this and how these and other corporations have strayed so far from the “public trust” and responsibility to stakeholders as well as shareholders of corporations as envisioned by Zellerbach in Part III. Stay tuned.     GERALD      E


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