The Corporate Obligations Debate

How should businesses balance shareholder interests with obligations to their workers, communities, and nation?

Jul 15, 2020

Patrick Deneen @PatrickDeneen

Patrick J. Deneen is the David A. Potenziani Memorial College Chair of Constitutional Studies and a professor at the University of Notre Dame. He is the author of Why Liberalism Failed.

Andy Puzder @AndyPuzder

Andy Puzder is the former CEO of CKE Restaurants, Senior Fellow at the Pepperdine University School of Public Policy, and the author of The Trump Boom: America’s Soaring Economy and the Left’s Plot to Stop It.

Entries in the Series

Corporations Do Good by Doing Well

After opening statements, each participant posed three questions to the other. Here, Andy Puzder answers Patrick Deneen.

Patrick Deneen: You state that corporations are not the “primary agents” for various communal goods, with which I would agree. In what ways could corporations be encouraged or even required to support more formally “secondary” goods, particularly in relation to the local communities where they exist? There seemed once to be an ethos of corporations extensively supporting the cities, towns, and regions where they developed and grew. For instance, I grew up in Hartford, Connecticut, which was once extensively the beneficiary of civic and philanthropic support from such companies as Travelers Insurance Co. As those corporations were bought up by larger conglomerates (e.g., Citigroup), evidence of a local bond and support has significantly diminished, and places like Hartford have declined precipitously. Further, can corporations be encouraged to be more explicitly supportive of the primary agents for those communal goods, that is, supporting local institutions and even families?  What forms might that take?

Andy Puzder: In your first question I see three related questions — (i) how can corporations better support “secondary goods” (social or community “goods”), (ii) how can corporations better support the “primary agents” who implement those goods, and (iii) what forms could that support take?

Profit-focused businesses already support “primary agents” and “secondary” or “communal” goods. In fact, they produce 100% of the necessary financial support. Businesses create the jobs that generate incomes enabling employees to support themselves and their families, support charities, pay taxes, and purchase homes. Corporations also pay income taxes and generate dividends, which are again taxed when distributed.

If profitable, every private-sector business also creates jobs, incomes, and tax revenue beyond its core business. For example, most businesses create jobs in their supply chains, the transportation sector, and maintenance industries. They create jobs in ancillary businesses that support their employees, such as restaurants, hardware stores, grocery stores, and movie theatres. These businesses then create jobs and tax revenue and overlapping ripples of their own.

This tax revenue funds everything government undertakes – including national defense, welfare, infrastructure, schools, and public safety.

Businesses create this wealth, tax revenue, and social benefit not by theft or oppression. Rather, capitalism relies on the natural desire of people to better their lives and channels it into focusing on the needs of others – their customers.

Grocery stores are a good example of this dynamic in action. Their shelves are lined with literally thousands of products, each one representing a business trying to convince you that they have what you want at a price you can afford.

Far from encouraging a self-centered outlook, capitalism is a constraint on that evil. Businesspeople cannot succeed unless they look outward and try to understand their customers. When they do that well, they make a profit and better their own lives, with the enormous added benefits of creating prosperity and abundance, jobs and incomes, tax revenue and secondary or communal goods for society.

When government imposes additional responsibilities on corporations, it puts all of this at risk. It hobbles the creation of the wealth that funds every secondary or community good and supports every primary agent.

Regulation is important to accomplish goals the government deems more worthy than economic growth. But, when enacting new regulations, the government should closely consider that the business’s basic mission – the creation of profit, jobs, and wealth – is absolutely vital to the health of our society, and take that equity into account in its decision making.

If the objective is to incentivize businesses to further support primary agents and secondary goods, we must do so without diverting the essential focus on profit – or you put all the benefits from the profits businesses create at risk. For example, consider the tax deduction for charitable contributions. It neither mandates that corporations act charitably nor diverts their proper focus on profit. Rather, it encourages charity, and it works. Corporate giving in 2018 totaled $20 billion.

One final point: You mention that Hartford “was once extensively the beneficiary of civic and philanthropic support from such companies as Travelers Insurance Co.,” but that there has been a decline in the “ethos of corporations extensively supporting the cities, towns, and regions where they developed and grew.” The $20 billion in corporate charitable giving for 2018 suggests that this “ethos” still has some life in it. Hartford’s problem is Connecticut’s fiscal policies.

Hartford’s, and Connecticut’s, economic decline has certainly been profound. It’s an example of precisely the danger I’ve warned against – the danger of government burdening businesses so much that they cannot create the jobs and opportunities upon which society depends for all its activities.

Connecticut has one of the highest tax rates and poorest business climates in the country. In a sense, you blame business for what’s happened to Hartford, when the real problem is what Connecticut did to business.

Connecticut once had a vibrant economy, standing as an economic oasis between New York and Massachusetts. Connecticut sacrificed its advantage by creating a hostile business environment, resulting in anemic long-term growth while simultaneously increasing government spending.

General Electric, Aetna, and Travelers, each headquartered in Connecticut at the time, warned of the dangers of tax increases (one aspect of a negative business climate) and that they had options. GE and Aetna later moved their headquarters out of state. The “ethos of corporations extensively supporting” the areas in which they are located hasn’t diminished. It just moves with the corporations.

To date, Travelers has at least stayed in Connecticut and tried to help the struggling Hartford area. In 2017, the local leaders of Aetna, The Hartford and Travelers pledged $50 million to the city.

The best way for Hartford and Connecticut to encourage corporate giving is to encourage corporate growth by adopting policies that recognize the tremendous benefits businesses provide to citizens. There are plenty of places, like Texas, Florida, and Tennessee, that have done that, and they are prospering.

PD: You fault me for not attending to the “opportunity costs” of corporate obligations that detract from a focus on investment and profit. I wonder whether you don’t discount gathering “political costs” of not doing so, particularly in light of growing criticisms of corporate social irresponsibility on both the Left and, increasingly, the Right. Does not such a political response represent a more profoundly costly “opportunity cost” if the outcome is a much more interventionist and even antagonistic political and regulatory environment?

Andy Puzder: The essence of your second question seems to be whether corporations should voluntarily adopt more social “obligations” in light of growing political antagonism to business on the Left and Right, and to avoid “a much more interventionist and even antagonistic political and regulatory environment.”

The current “political and regulatory environment” is already very interventionist and antagonistic to business.

A big part of every CEO’s job is to figure out how to avoid government-imposed roadblocks to success. There are, literally, volumes of personnel regulations, safety regulations, environmental regulations, insurance regulations, consumer protection regulations, securities regulations, zoning regulations – the list goes on.

I will never deny the importance of regulation to accomplish goals that the government deems worthier than the economic growth, which regulation tends to inhibit. But the government often doesn’t even understand what the impact of its actions on real people will be.

So, rather than try to curry favor with the government by taking on “obligations” irrelevant to the needs of their businesses, I think business leaders should do three things:

First, always keep in mind what their customers value. For example, as customers have come to value environmental concerns more, many corporations have made their offerings more green. Many of those changes have reduced costs, which again shows how there can be positive social change without negatively impacting the profit motive. In addition to being the right thing to do and an integral part of capitalism, this also helps reduce the risks of a “more interventionist and even antagonistic political and regulatory environment.”

Second, business leaders should make sure that the government knows the impact of its proposals on the profitability and health of their companies. It’s important that government officials understand what their proposals mean in terms of lost jobs and opportunity, and they won’t know unless business tells them.

Third, top business executives should use their platform to explain how capitalism actually works and why it produces such incredible benefits around the world. Our education system basically indoctrinates students to distrust and despise capitalist economies.

I suspect that this is primarily because most of the higher education system has been taken over by individuals with leftist views and little understanding of the economy.

None of this will convince the committed socialists of capitalism’s importance. They are not urging “social responsibility” because they want corporate social responsibility. Rather, they are using the idea to delegitimize and destroy the free market system and replace it with a state-owned, or at least a state-run, economy.

Statists or socialists will never concede that millions of consumers making millions of decisions – Adam Smith’s “invisible hand” – can better guide an economy than government elites. It is inconceivable to them that businesses striving to make a profit can be acting in society’s best interests. If the definitive history of socialism’s utter failure and capitalism’s unequaled success is insufficient to alter their views, no concession is ever going to convince them.

But there are good people across the political spectrum who could see the benefits of capitalism, and the importance of the profit motive, if we gave them half a chance to understand.

PD: I find your passing claim that the decline of private-sector service unions being due to worker satisfaction to be a striking example of “motivated reasoning,” especially in light of the ever-present threat of outsourcing and venue shopping for “right to work” locations. While stating support for forms of worker ownership (which I was very pleased to see), what do you think of a more formal voice of the workforce in corporate governance – particularly in light of what you say earlier about the bond of workers and their corporate employer? Might we then have a better idea of whether to interpret the decline of organized labor as satisfaction, and not fear (that is, a “silence” not unlike the condition for many conservatives on college campuses today)?

AP: I read your third question in two parts: (i) what do you think of a more formal voice for the workforce in corporate governance – particularly in light of what you say earlier about the bond of workers and their corporate employer, and (ii) might the decline of organized labor be caused by employee fear of how their employer will respond to unionization (perhaps by outsourcing or changing locations) rather than worker satisfaction with management or distrust of unions?

While workers and employers do have a bond, they also have distinct, although somewhat overlapping, objectives that must stay in balance for the business to succeed.

Employers are focused on keeping a business profitable. That includes compensating employees fairly – both because it’s the right thing to do and because good employees are essential for business success. But management must balance that equity against other uses of capital resources such as investing in growth, research to stay ahead of the competition, or advertising to promote products. Management must accommodate all of those interests (and others) if the business is to generate a return for shareholders – who invested their capital in the company on the basis that they would participate in its success.

Workers also want the company to stay in business, but are understandably less focused on balance. They prefer increasing their compensation to expending capital for other purposes.

Union organization allows workers to advance their more narrow and immediate interests, and unions are often quite effective in achieving that result. But if the union becomes so powerful that its demands constrain the company’s ability to remain competitive – if labor costs become prohibitive, or work rules too restrictive – the business can become uncompetitive, as occurred in the once-dominant U.S. garment, steel, and auto industries.

In the long run, tipping the balance in favor of increased worker compensation and against the company’s other needs benefits neither workers nor the businesses that employ them. Imagine putting management on the union’s governing body. It would change the institution’s perspective and inhibit its main mission.

Thus our labor laws strictly separate management and unions. Companies may not lawfully sponsor or control unions nor may unions insist on bargaining over management prerogatives unrelated to the terms and conditions of employment.

Conversely, I favor employee stock purchase plans and employee stock options. Giving workers a role as shareholders expands their perspective so that they are motivated not only to increase their compensation but also to see that the business succeeds. They garner a better understanding of management’s motives and participate as shareholders in the business’s success.

There is little evidence to support your concern that workers are rejecting unions out of fear. In America, employees have a government-protected right to join or not join a labor union. Unions have for decades been losing most representation elections not because employees are afraid of their employers, but because they are afraid that union representation will, at best, cost them money (dues) without providing any real benefit, and at worst threaten their livelihoods by creating unreasonable and unsupportable demands that disrupt their workplaces.

For example, in 2014 the United Auto Workers attempted to unionize workers in Volkswagen’s Chattanooga, Tennessee, manufacturing plant. Volkswagen’s management did not oppose the attempt. “This vote was essentially gift-wrapped for the union by Volkswagen,” a Detroit-area labor lawyer told the Wall Street Journal.

Nonetheless, the workers voted it down.

The Volkswagen workers rejected the union again in 2019. Workers also rejected unionization in 2017 at Nissan’s plant in Canton, Mississippi, and at Boeing’s plant in North Charleston, South Carolina. There are even union issues in far-left California, where in 2018 farm workers rejected a unionization bid by a 5-1 margin. Last year, hospital workers in Los Angeles voted to decertify their union.

Unionization remains an important option for employees and provides an incentive for management not to undervalue the importance of robust compensation for current employees. Nonetheless, it appears that many of today’s workers prefer having a good-paying job with a healthy employer over having a union.