How can we restore public trust, self-confidence and optimism?
There is a way to nudge the nation back to public trust, self-confidence and optimism. It is to restore the “rising tide raises all boats” and democracy-friendly form of capitalism that dominated our economy in the decades following WWII.
If Main Street as well as Wall Street were once again to benefit from corporate profitability, Americans would have faith that the nation’s traditional social mobility (the American Dream) had been restored.
I am convinced that this is an achievable goal, especially if the public is fully engaged in making it happen.
It would constitute a huge win for everyone: it would raise public morale; business would regain the public trust it craves; our institutions of governance could once again be counted on to “do the right thing,” just as they had in earlier decades; our consumer-driven economy would achieve the higher levels of growth we need to sustain productivity and prosperity.
There is nothing mysterious about the strategy needed to make this happen. But it does require building a new national consensus about how to manage our form of capitalism.
Capitalism and democracy do not coexist automatically and effortlessly. We have learned from China and others how flexible capitalism can be. It can take many forms and flourish under both democratic and non-democratic governments.
It takes considerable effort to achieve and maintain democracy-friendly capitalism. We know from our own national history that, left to its own devises, capitalism drifts toward monopoly. It took our nation years of strife to channel capitalism toward competition rather than monopolistic trusts, greatly strengthening our free enterprise system.
We have, I believe, reached a comparable tipping point in the current tendency of our great corporations to put the interests of shareholders ahead of other stakeholders: customers, employees and the broader society. If you stand back and reflect on the fact that the interests of short-term traders take precedence over consumers, employees, citizens and the larger society, you see a travesty of democracy. And yet it is today the dominant doctrine of the vast majority of America’s corporations.
This is a relatively new development. I clearly remember that my firm’s corporate clients in the 1970s and 1980s believed that the main task of the company CEO was to balance the competing claims of all stakeholders, and not give priority to any one, certainly not shareholders.
This prioritizing of shareholders is wreaking havoc on our society. In an earlier blog, I wrote:
This means that a casual day trader with no stake in the company other than some shares he bought yesterday and may sell tomorrow is given precedence over all of the company’s employees, however committed and effective they may be. The company’s obligations to the larger community are likewise shoved to the side in favor of shareholders. The long-term interests of the company are subordinated to the trading manipulations of hedge fund managers who don’t give a damn about the company and want only to add to their unimaginably huge, tax-advantaged profits.
It is hard to conceive of a more irrational, shortsighted and frankly self-defeating doctrine for a nation that prides itself on maintaining a democracy-friendly form of capitalism.
This Wall-Street-first doctrine is largely responsible for the economic stagnation that has paralyzed middle-class worker incomes over the past 15 years. It is at least partly responsible for the persistently slow growth of the economy. It was a major cause of the Great Recession of 2008-9.
Our economy, unlike that of China and other countries, is mainly consumer driven. More than 70 percent of our GDP reflects consumer buying. That is why growth in company profits and consumer income marched hand in hand for so many years.
In recent decades, however, companies began to learn how to be profitable without relying on steady increases in consumer incomes. Through exporting jobs and reducing labor costs through technology, they were able to maintain their profitability without passing on these gains either to employees or consumers.
Of course, these practices began to stir up public resentment. Ordinarily, such resentment would have motivated business to restore the older balance. Instead, American business became obsessed with the doctrine known as “shareholder value.” This doctrine came to justify business practices that would otherwise have been plainly seen as unethical, irresponsible and in the long run unsustainable.
The gist of this doctrine is that the interests of shareholders always come first. They are to be given priority over the interests of employees, consumers, the larger society and any other stakeholder. The inference is that companies can’t be profitable unless they privilege shareholders.
But this is clearly nonsensical. Companies were quite profitable in the post WWII era when profitability depended on the rising incomes of average Americans.
A new national consensus that all stakeholders are important to our economy and society is politically inevitable.
These applications of shareholder value are utterly contrary to the intentions of the two economists—Michael Jenson and William Meckling—who first promulgated the doctrine. They were scrupulous in insisting that they were speaking about long-term shareholder value, not short term. And from a long-term perspective, their theory may have some merit. But short-term traders dominate Wall Street, not long-term investors.
It is my conviction that if the doctrine of shareholder value were to lose its credibility, business would be free to return to the sensible view that the role of the CEO is to find the right balance among the claims of all stakeholders, including shareholders. This would break the stranglehold that our financial institutions have over the majority of America’s great companies.
Indeed, I believe many thoughtful CEOs would put traders and shareholders after the company’s employees or customers. I was recently reminded of this more traditional point of view while listening to an interview with Bill George, the former CEO of Medtronics. George said flat out: “Customers come first, employees second, shareholders third.”
A new national consensus that all stakeholders are important to our economy and society is politically inevitable. Once average citizens understand that overprioritizing the interests of some traders and bankers are undermining the nation’s growth, productivity and social mobility, a new consensus will quickly form. Indeed, if we wait too long for it to happen, it will be difficult to prevent it from becoming extreme and punitive, rebalancing too far in the other direction.
If it can happen sooner rather than later, the nation’s economy would be free to return to the form in which it mightily thrived.
Public trust would be restored.