Corporation and Nation

What’s good for America’s largest firms is not necessarily good for America. This inversion of an old dictum captures one of the new economic realities of our time


IF THE CORPORATIONS AMERICANS OWN AND WORK FOR succeed, the American economy will too—or so we were brought up to believe. This assumption was given its most brazen expression thirty-five years ago, by Charles Erwin Wilson, who was then the president of General Motors; he was nicknamed “Engine Charlie,” in order to distinguish him from another Charles E. Wilson, “Electric Charlie,” who was the president of General Electric through the 1940s. During the Senate hearing on his confirmation as Eisenhower’s nominee for Secretary of Defense, Wilson was asked whether he could make a decision in the interests of the United States that was adverse to the interests of General Motors’s shareholders. Wilson said that he could, but that such a conflict would probably never arise. “I cannot conceive, of one because for years I thought what was good for our country was good for General Motors, and vice versa. The difference did not exist.”

Engine Charlie’s statement was widely criticized at the time as an example of corporate America’s arrogance, but in fact it simply expressed principles already codified in American law and policy: The corporation existed for its shareholders, and as they prospered, so would the nation.

This root principle of our political economy is no longer valid. The corporations Americans own and work for are becoming disconnected from the national economy. The overall success of these corporations has less and less to do with America’s continued growth and prosperity. Corporation and nation are growing apart, and American law and politics must adapt to this new reality.

The Assertive Shareholder

WHEN ENGINE CHARLIE UTtered his dictum, it was easy to believe that what was good for corporations and their shareholders was also good for the national economy. At least, shareholders’ interests were not so narrowly defined as to seem inconsistent with the nation’s broader economic objectives. Shareholders were typically too widely dispersed to exert any real control over the corporation. Most shareholders faithfully held on to their shares, treating them as long-term investments, and trusting that share values would continue to rise over time.

Top corporate executives thus enjoyed wide discretion to do whatever they pleased, including what they deemed to be socially responsible, as long as their expenditures could be justified as benefiting shareholders over the long term. This rationalization was capacious enough to encompass almost any activities that might improve the corporation’s image. In fact, some of the expenditures they made—on basic research, the development of new products and technologies, employee training, various educational and philanthropic activities— had little positive effect on the corporation’s bottom line, because the new knowledge easily spread to other firms. But these activities did help spur broader economic development within the regions the corporations inhabited. And many of the executives relished the role of the “corporate statesman" who mobilized private resources for further public gains.

These activities should not be romanticized. Managerial discretion was not always put to such noble purposes. But it could be, and the prevailing ideology held it to be an appropriate exercise of corporate power.

In the past few years, however, the stock market has become far more efficient at keeping the executives’ attention fixed on the bottom line. First, the dispersed individual shareholders of yore have largely been replaced by a relatively few professional investment managers, who are responsible for investing enough billions of dollars of pension funds, mutual funds, and insurance funds to make up at least a third of all the equity in corporate America. These investment managers are responsible tor some 70 percent of the trading on the New York Stock Exchange. They compete against one another, and are quick to shift funds from one corporation to another, depending on whose share prices are rising or falling at the moment. Second, the deregulation of brokerage fees and new technologies linking computers to trading floors have reduced the costs and increased the speed of such transactions; the computer linkages also give investment managers up-to-the-minute data on share prices. Third, financial entrepreneurs have refined techniques for acquiring controlling blocks of shares, sometimes even using the corporation’s own assets as collateral. Because of these three developments, it has become relatively easy for an aggressive company or a few audacious individuals to seize control of even the largest of American corporations when they sense a failure by the corporation’s executives to exploit some opportunity for increasing the value of their shares.

To deter raiders, every major American corporation is busily “restructuring” itself, to use the Wall Street euphemism. This has required eliminating or drastically cutting back on discretionary spending. No longer are corporations investing in long-term development. Even before last October’s crash, research budgets had been slashed. Investments in education and training were down. In 1986 the rate of increase in corporate donations to charity dropped for the first time in fifteen years. “There are very few corporate statesmen anymore,” laments James Joseph, the president of the Council on Foundations, which monitors corporate giving. “CEOs no longer want to spend their time on social issues.”As one executive put it recently, “It becomes positively un-American to look at anything except their own bottom line.”

Executives no longer argue that what is good for shareholders is necessarily good for the nation. In fact, many are now insisting that the stock market’s unrelenting demand for higher share value is actually harmful to the nation, and that raiders should be restrained. Their warnings are being heard. In one recent Business Week— Harris poll 64 percent of the people surveyed favored new government restrictions on hostile takeovers. States are taking the lead in protecting their corporations. Earlier this year Delaware—where almost half the firms on the New York Stock Exchange are incorporated—became the twentyninth state to limit takeovers, thus in one swoop effectively shielding half of corporate America. Congress is considering legislation to discourage hostile mergers nationwide.

What may have escaped notice by Americas business leaders is the logical consequence of their new argument. One of the great advantages of the Engine Charlie principle to American business was its implicit rejection of any formal means of holding corporations accountable for the nation’s continued prosperity. In benefiting shareholders, the corporation would necessarily spur the economy forward. But once it is granted, even by business leaders, that this is not always the case—indeed, that too much attention to shareholders’ demands may in fact detract from the nation’s long-term vitality—then the presumptive link between corporate executives’ responsibilities to their shareholders and to the nation is severed. What is good for the shareholders is not necessarily good for the nation.

The question that in Engine Charlie’s day had been submerged under the vague rubric of “long-term” shareholder interests thus arises: By what means should corporations be held accountable to the public for contributing to the nation’s prosperity?

The Foreign Shareholder

AS EVER MORE OF CORPORATE AMERICA IS BOUGHT BY foreign nationals, another divergence appears between the interests of the corporation and its shareholders and the interests of the nation.

In Engine Charlie’s time virtually all major corporations doing business in America were owned by Americans. Thirty years later this situation has changed. Other national economies are catching up with that of the United States; a few are on the verge of surpassing it. Americanowned corporations are no longer the only global enterprises of significant power and scale, nor even the largest ones. Arid in a historic reverse, foreign ownership of American capital now stands at over $200 billion, more than double what it was in 1980, and it is rising rapidly.

The low dollar has made bargains of American corporations, as if corporate America were having a fire sale, with every company marked 35 to 50 percent off its regular price. The companies that have been bought include some sporting familiar names, like Doubleday, CBS Records, Purina Mills, Mack Truck, Allis-Chalmers, and Firestone. Foreign capital is also pouring into the American stock market, last October’s crash notwithstanding. Indeed, the tenacity of foreign investors prevented the Dow Jones Industrial Average from falling even further. Major banks and investment houses—BankAmerica, Shearson Lehman, PaineWebber, and Goldman, Sachs—are now partly owned by Japanese banks intent on breaking into the American financial market.

The wave of foreign acquisition of corporate America is having an effect in the United States similar to that felt in other nations when they faced American investment years ago—when charges of American “imperialism" were in the air and fears that American multinational corporations would exploit host nations were acute. Already a Republican Administration in Washington, which is ideologically committed to free markets, has warned of the dangers of allowing foreigners to take over economically “strategic" American corporations. Meanwhile, would-be foreign buyers are coming under increasing scrutiny. A new trade bill recently passed by the House of Representatives would require foreign investors to report to the government any “significant" interest they had acquired in an American corporation. The version passed in the Senate would authorize the Administration to review any proposed acquisition of an American corporation by foreigners. American business leaders, although delighted to have foreign investors bid up the prices of their own shares, have expressed mounting concern about the number of foreign-owned corporations popping up in their midst.

Here, too, the implication is that the interests of the shareholders of the corporations in our midst are no longer the same as the nation’s. In this instance, it is not enough that a corporation produces goods and services within the United States and employs American workers. To guarantee that corporate success will translate into national success, the corporation must also be firmly under the control of American citizens—so the argument goes. American shareholders and executives, it is assumed, can be trusted to act in the nation’s interest under circumstances in which foreign shareholders and executives cannot be trusted. But a step is missing from this argument, just as a step was missing from the previous argument, that corporations protected from takeovers will act in the longterm interest of the economy. Here the unanswered question is, Why and under what circumstances should American citizens be expected to forgo profits in pursuit of national goals?

The Cosmopolitan Shareholder

IN ENGINE CHARLIE’S TIME ALMOST everything that American-owned corporations sold here or abroad— particularly anything involving the slightest complexity in design or manufacturing—was produced in the United States. This is no longer the case. American-owned corporations are now doing all sorts of technologically sophisticated work outside the United States. A significant proportion of America’s current trade imbalance is due to this tendency.

Look closely at almost any major American corporation that sells complex gadgets and you are likely to see a foreign producer in disguise: in 1986 IBM imported $1.5 billion worth of data-processing equipment and General Electric half a billion dollars’ worth of cassette recorders, microwave ovens, room air-conditioners, and telephones. Apple Computer’s Asian plants make all Apple II computers, which in 1986 accounted for more than half of the company’s sales. Eastman Kodak now sells, under its own name, Canon photocopiers, Matsushita video cameras, and TDK video tape, and it has farmed out the production of its 35-millimeter cameras to Haking Industries, in Hong Kong, and Chinon Industries, in Japan. And so on.

All such goods that American corporations buy or make abroad and then sell in the United States are counted as American imports. The current frenzy in Washington over allegedly unfair foreign trade practices has obscured this reality. Consider Taiwan, which now exports some $19 billion more to the United States each year than it imports from the United States. The imbalance has provoked the indignation of American politicians, some of whom are demanding that Taiwan take steps to improve the balance or incur stiff penalties. But on closer examination the real culprit emerges. Several of Taiwan’s top exporters are American-owned corporations—RCA, Texas Instruments, and General Instruments. All told, more than 30 percent of Taiwan’s trade imbalance with the United States, and more than half of its imbalance in high-technology goods, is attributable to American-owned corporations’ buying or making things in Taiwan and exporting them back to the United States. Taiwan’s only sin is to have a highly skilled population that is willing to work for relatively low wages (Taiwanese engineers earn a quarter of the salary of American engineers, and Taiwanese technicians a fifth of their American counterparts’ wages).

Even Japan’s notorious trade surplus with the United States is in substantial part the handiwork of American-owned corporations. Fully $17 billion, or about 40 percent, of Japan’s $39.5 billion trade surplus with the United States in 1985 (the last year for which such data are available) was the result of American corporations’ buying or making things in Japan to be sold in the United States under their own brand names. One of the ironies of our age is that an American who buys a Ford automobile or an RCA television is likely to get less American workmanship than if he had bought a Honda or a Matsushita TV.

Americans who live and work in the United States continue to consume more than they produce and to import more than they export—hardly the path to prosperity. But American-owned corporations are doing quite well, regardless. They are not only raking in nice profits by buying or making things abroad for sale here but also doing well by buying or making things abroad for sale everywhere else. In 1985 American-owned corporations sold the Japanese over $53 billion worth of goods that they made in Japan—a sum greater than the American trade deficit with Japan that year (Japanese companies, meanwhile, sold us only $15 billion worth of goods that they made in the United States). IBM Japan is huge and prosperous in its own right, with 18,000 employees, annual sales of $6 billion around the world, and research and production facilities that are among the most advanced anywhere.

In fact, American-owned corporations have remained competitive worldwide. A recent study by Robert Lipsey and Irving Kravis, of the National Bureau of Economic Research, suggests that while the fraction of world markets held by U.S. corporations exporting from the United States has steadily dropped during the past twenty-five years, such losses have been offset by the gains of American-owned corporations exporting from other nations.

One conclusion that might be drawn from all this is that America’s competitive decline does not stem from any inherent deficiency in the top management of American corporations. The stream of books exhorting managers toward excellence notwithstanding, American managers have done well by their shareholders (although not so well by America). Unsurprisingly, this insight has been welcomed by American business leaders eager to shift the blame for our competitive woes onto someone else. Mobil Oil Corporation made the argument succinctly in a recent pronouncement:

American multinational companies can, and do, compete successfully all over the world. While the U.S. trade balance became a shambles, these companies continued to operate successfully in world markets. They did so by producing in those countries with the best business climates. . . .

So to argue that American businessmen have lost their management and technological skills, or grown fat and lazy, is neither true nor relevant. We should be looking to ourselves to learn why this country has provided a less favorable business environment than some of our trading partners. And then we should act to improve the climate.

Stripped to its brutal essentials, Mobil’s message is this: American corporations and their shareholders can now prosper by going wherever on the globe the costs of doing business are lowest—where wages, regulations, and taxes are minimal. Indeed, managers have a responsibility to their shareholders to seek out just such business climates. If America as a whole wants to be a successful exporter, it must compete with other nations to be the location where American corporations find it profitable to set up shop.

This lesson is well understood by state governments. Consider, for example, the Hvster Company, an American-owned corporation that makes forklift trucks used to shuttle things around factories and warehouses. In 1983 Hyster informed public officials in five states and four nations where it built trucks that some Hyster plants would close. Operations would be retained wherever they were most generously subsidized. The bidding was ferocious. Within six months Hvster had collected $72.5 million in direct aid. Britain is reported to have offered $20 million to ransom 1,500 jobs in Irvine, Scotland. Several American towns—including Kewanee, Illinois; Sulligent, Alabama; and Berea, Kentucky—surrendered a total of $18 million in direct grants and subsidized loans to attract or preserve around 2,000 jobs.

The same underlying problem emerges. Subsidies and tax breaks are offered with no strings attached—no means of holding corporations accountable to the public. Executives of the Hyster Corporation are under no more legal obligation to direct corporate efforts toward spurring the American economy than are the executives of companies shielded from takeovers by recent state laws such as those passed by Delaware, or than are the executives of American-owned corporations in general. Hyster can take the subsidies and tax breaks and do with them whatever it wants. Indeed, just last August, Hyster announced another wave of closings. The Engine Charlie principle, as this example illustrates, is no longer valid, but nothing has replaced it to re-establish the link between corporation and nation.

Beyond Engine Charlie

THE PRIVILEGED PLACE OF THE corporation in America has been justified for more than a century by the assumption that corporations automatically fuel the nation’s economic growth—that what is good for shareholders is necessarily good for America. In the past few years, however, as corporate America has become simultaneously more attentive to the immediate demands of shareholders for high returns and more international in its ownership and operations, its links to the national economy have seriously weakened.

How should the corporation be bound to the nation in the future? Should it be bound at all? The struggle to define a new relationship between corporation and nation will be one of the central economic and political tasks of our era, and it will defy easy solutions. Only the contours of the emerging debate can be seen.

On the one side will be those who argue that any divergence between corporate strategies and national goals is perfectly okay. The world economy as a whole will be stronger if corporations are free to attract investors from anywhere and undertake production anywhere, with the sole objective of rewarding their shareholders with the highest possible returns. In this view, any special relationship between particular corporations and a particular nation will result in an inefficient use of resources overall. As the world economy grows ever more integrated, the nation-state is becoming outmoded and irrelevant anyway. A nation’s only legitimate concern with corporations doing business within its borders should be to guard its citizens from harmful side effects of corporate activity, such as pollution, unsafe products, monopolization, and fraud.

But this view fails to take into account the positive side effects of corporate activity for a nation—in particular, the training of a nation’s work force in new skills applicable outside the company, and technological discoveries with broader potential. Such corporate investments in the skills and knowledge of a nation do not necessarily benefit shareholders, as has been noted, because the benefits often leak out of the company as the new knowledge spreads and as employees take their skills elsewhere. But they are critical for moving an economy forward. Positive side effects like these are as relevant to the welfare of a nation’s citizens as are the potential harmful side effects. In a world in which nation-states continuously compete for economic power and the influence that flows from it, decisions about where investments are undertaken, by whom, and of what sort, can have profound political consequences as well.

On the other side of the debate will be those who argue that corporations should be tightly bound to the nation. In this view, large corporations in particular should be firmly under public control. It will be urged, for example, that representatives of the public be placed on corporate boards; that some corporate shares be held by publicly appointed trustees or by public authorities; that American corporate investments in other nations, and foreign investments here, be reviewed to ensure compatibility with national economic goals; and that transfers of American capital or technology across the border be carefully monitored.

But this view suffers from the opposite infirmity—it sacrifices market efficiency for public accountability. Without the hope of maximizing profits, the spur of competition, and the fear of loss, enterprises have a tendency to stagnate. Too much of this, and entire economies can decline. There is a growing consensus, now apparently extending all the way to the Kremlin, that public ownership and centralized controls are not the path to progress either.

Recent efforts in the United States to deter hostile corporate takeovers, limit foreign ownership of corporations, and improve the business climate through indiscriminate tax breaks and subsidies represent the worst of both worlds—less efficiency and less accountability to the public. On the one hand, these initiatives can be costly: the regulation of takeovers may simply give job security to incompetent managers, limits on foreign ownership may only worsen our balance of payments, and tax breaks and subsidies thrown willy-nilly in the direction of corporations may induce them to do things they could do better and more cheaply elsewhere.

On the other hand, these initiatives offer no assurance that the corporations that benefit from them will in turn help the broader economy. Indeed, they leave corporate executives free to do whatever they wish with the protections, tax breaks, and subsidies they receive. These measures are predicated on a blind trust that corporate executives shielded from takeovers will invest in the economy’s long-term development, that American executives and shareholders will make sacrifices for the nation which foreign executives and shareholders will not, and that tax breaks and subsidies will automatically induce corporations to produce the kinds of goods in America that w ill strengthen the overall economy.

The best solution would be to focus specifically on what things we want corporations to do that are apt to be unprofitable to shareholders, and then to induce corporations to do them. What is it we want corporations to do? Not to preserve jobs in the 1’nited States that can be done far more cheaply by foreign workers eager to do them. The costs of trying to keep such jobs here—as reflected in higher prices for consumers and onerous burdens on Third World workers deprived of work—would far exceed the benefits. We should ask corporations instead to help propel the American economy forward by training American workers in new skills and investing in new knowledge. America’s economic future depends not on the old jobs we used to do but on the new contributions we can make to an increasingly integrated world economy.

Our overriding goal should be to ensure that America is a place where enterprises of whatever nationality perform sophisticated tasks, and thus give large numbers of Americans valuable experience. There are several ways of inducing corporations to undertake complex production in America. The first and most obvious is to ensure that our citizens are capable of learning quickly on the job, so that Americans will be the kind of workers global corporations want to train. This will require that we as a nation invest more than we do now in education—in pre-school programs, in basic literacy and numeracy, in scientific and technical competence, and in foreign-language training, to name only the most critical areas. Numerous recent studies reveal the ignorance of American schoolchildren relative to those in Japan and other industrialized nations, and the extent of illiteracy and innumeracy in the society. In the past five years there has been much handwringing over reading and math scores in certain locales, and even some progress in raising them. The important point is that America’s future productivity is directly related to our collective capacity to learn on the job, which depends in turn on how well we are prepared to learn. No corporation, however well intentioned, can afford to make up for a lack of basic education.

In addition to the general lure of a competent work force, however, we will need more-substantive inducements. They could take several forms. We might, for example, subsidize corporations that do certain kinds of advanced design and manufacturing in the United States, with the amount of the subsidy depending upon the numbers of employees so engaged. Or the inducement might take the form of a tax credit, similarly structured. Or it might be a “domestic content” rule, requiring that the highest-valued steps in the production of certain goods sold here be undertaken in America.

Inducements like these would also be costly, resulting in higher taxes or prices for most Americans. But unlike the open-ended initiatives now commonplace, these inducements would feature a quid pro quo: corporations receiving them would be delivering benefits to the American economy, through on-the-job training and new knowledge. And the greater the benefits to the economy, the greater the inducements to the corporation.

These inducements would not hobble international trade or shelter American corporations from competition. They would be made available to any corporation—headquartered anywhere, owned by anyone. Corporations would thus be held accountable for what we as a public sought from them, yet would have a continued incentive to allocate resources to their most profitable uses. Such inducements would have the additional virtue of pushing us to clarify our long-term development strategy—forcing our government representatives to define the categories of experience and skills we think will be most important to the nation’s future.

The difficulties in the way of administering such inducements, or even gaining sufficient political support to launch them, should not be underestimated. It has been hard enough to strengthen public education and ensure a minimal level of competence in the American work force; this program of on-the-job training and research is far more ambitious. Moreover, many Americans lack confidence in government’s capacity to accomplish public purposes wisely and efficiently, and already feel overwhelmed and overtaxed by public needs.

But the alternatives are even less attractive. Our national strategy for economic development clearly must be more than, and different from, the sum of the strategies used by the corporations our citizens own or work for. To repeat: this is not because these corporations are irresponsible or unpatriotic but because their widening global opportunities for making profits—and shareholders’ mounting demands that they exploit such opportunities—are coming to have no direct or unique bearing on the nation’s continued growth. The direction in which we are heading—blocking takeovers, hobbling foreign owners, and granting tax breaks and subsidies indiscriminately—seems far riskier and costlier than the direction I have proposed.

The growing divergence between corporation and nation is part of a larger quandary. As our economy becomes so entwined with the world’s that the nation’s borders lose their commercial significance, Americans need to understand and recognize the subtle ways in which our citizens are connected to one another—not through the corporations we own but through the skills and knowledge we absorb. Without this understanding we cannot expect to elicit the sacrifices required to gain greater skills and knowdedge. Corporations are no longer the building blocks of the U.S. economy; our citizens are.