By James McCusker Herald Columnist
Presidential election campaigns bring out some of the best and worst of our thoughts. This particular campaign, despite its repeated descents into the darkness where attack ads dwell, has more economic philosophy at stake than most of our recent contests.
One of important issues gaining momentum is about what we should expect from corporations. Are they persons, or what? What should their role in the economy be? What should their role in our society be?
These questions didn’t just arrive on the latest UFO, of course, and they didn’t become important because of their philosophical content. Like most issues in political economy, questions about the role of corporations have a history, and they gather momentum by joining other issues – like streams flowing together to form a powerful river.
The first big league challenge to the growing corporate role in the American economy came when President Theodore Roosevelt effectively used the Sherman Anti-Trust Act to force a restructuring of the financial and industrial sectors. This reduced the economic power of multi-corporate trusts and eventually led to the restoration of more competitive markets.
Half a century later, the spirit of Teddy Roosevelt’s role in wilderness preservation despite commercial economic interests was felt in the next big challenge to corporations, which coalesced as the environmental movement beginning in the 1960s.
Unlike the anti-trust movement, the environmental movement was a hot potato for economists and was the source of many energetic arguments about economic theory. Was a corporation’s only responsibility to maximize profits, or were there other responsibilities which economic theory should take into account? What would be the effect on economic growth? An entire branch of economics developed to calculate and analyze the externalized costs – social costs in most cases – of corporate production facilities.
While the heat of the arguments died down, the core issue, the role of corporations, was never resolved, and now reappears four decades later in two streams of thought: corporate legal status; and corporate responsibility.
The legal status part of the “corporate personhood” issue has a history that is nearly two hundred years old, beginning with a U.S. Supreme Court decision, Dartmouth College v. Woodward, which said that corporations had the right to enter into enforceable contracts. Decades later, the court’s decision in the Santa Clara County v. Southern Pacific Railroad case expanded the “personhood” concept by including corporations under the Fourteenth Amendment’s “equal protection under the laws” provision.
More recently, the Court’s decision in Citizens United v. Federal Elections Commission in 2010 held that corporations were covered by the First Amendment’s free speech provision, and could spend money to express their political opinions. Welcome super PACs.
The corporate responsibility part of the “corporate personhood” issue is now taking the form of challenging the concept of “maximizing shareholder value.”
The “shareholder value” idea began as a way to justify hostile and friendly corporate takeovers that busted up companies and sold the parts for more than the initial organization was worth. In the beginning, the process made more market sense than economic sense, but redistributed wealth like crazy. More than a few homes in the Hamptons were built on that version of the “shareholder value” concept.
There is an inherent limit to the amount of economic damage that the “shareholder value” concept could do in its corporate takeover role, though, and the truth is that the idea is not all bad. Corporate buyouts, many of them invited by the existing management, creditors, or stockholders, have largely replaced hostile takeovers, and they frequently offer a second life to a business based on re-capitalization and a better-focused business plan.
As a continuing driving force for American corporations, though, there are two economic issues embedded in the “shareholder value” concept. The first is whether shareholder value – measured by share price – forces an emphasis on short-term stock market prices at the expense of long-run profitability. The second is whether management’s devotion to stock market share prices crowds out all other values in corporate thinking.
At heart, the now joined streams of thought regarding “shareholder value” and “personhood” are really the same unresolved issue that the environment movement raised in the 1960s – should corporations be driven by anything other than the profit motive? If so, what should those other drivers be, and who should decide them?
The “shareholder value” concept in many respects is as bad an idea as its critics claim it to be. Its history over the past few decades suggests that it has been a negative influence on our economic growth and stability. Still, the alternatives we have seen so far are even less attractive. To paraphrase Winston Churchill’s comment on democracy, shareholder value is the worst possible system to drive the U.S. economy…except for all the others.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.