Lift the Veil on Corporate Money in Politics

corp politcs
Originally published by Bloomberg

America today is very different from the country that fought the Revolutionary War and framed the Constitution. Then, it was a nation of farmers; today, it’s a nation of corporations. Most Americans now work for corporations, the largest of which command resources and money on a scale beyond that of many nations.

Yet when it comes to public issues like jobs, the distribution of wealth or even plain old politics, we still talk as we did 200 years ago. Remarkably, too few citizens discuss the effects of corporate behavior on jobs, health care and the economy, even though corporations affect all of these through their influence on elections and the actions of government.

As President Theodore Roosevelt noted in his first annual message to Congress:

Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with those institutions.

The key to doing this is to hold corporations accountable by ensuring that their activities are made visible.

From the end of World War II until about 1980 -- even through the economic travail of the ’70s, as the U.S. faced the Arab oil embargo, rampant inflation, significant growth in foreign competition and the aftermath of the Vietnam War -- it was generally considered normal for large corporations to acknowledge all of their constituencies.

Maximizing Equity

Still, the public debate about the role of corporations began during these years. One view came from Milton Friedman, who in 1971 wrote in the New York Times Sunday Magazine that corporations’ only responsibility was to maximize the value of their shareholders’ equity.

On the other side, notably, were Edmund Littlefield of Utah International and Reginald Jones of General Electric Co., who argued that they and their fellow chief executive officers were equally responsible to their employees, customers, communities and the nation. In 1981, at their urging, the Business Roundtable, made up of the nation’s most prominent CEOs, formally embraced this view.

Real-life interests tend to ignore such intellectual pronouncements, however. Large shareholders came to realize that if they gave top management unprecedented quantities of options on company stock, the executives would single-mindedly focus on raising the stock price.

By 1997, the Business Roundtable reversed itself, saying in effect that corporate responsibility extends only to shareholder value.

Of course, one way to boost profits and stock prices was to hold wages down. And so management and shareholders each came to stand against the interests of employees.

In the 1980s, management compensation rose sharply, while wage earners were left out of the benefits of growth. The average CEO of a public company, who had for a century earned about 15 to 20 times what his average employee earned, began taking a bigger and bigger piece of the pie. Today, that earnings ratio is about 400-to-1.

In trying to understand the consequences of corporations focusing only on shareholder value, it’s important to know who the shareholders are. If they are mainly ordinary people with invested pensions, then the idea of working to give them as much value as possible, even if there is an adverse effect on wages, doesn’t seem so bad. But if corporate shares are concentrated in only a few hands, then the stock price is a less-appealing goal.

Wealthy Stockholders

While many people do have small stakes in corporations through their pension funds and 401(k) plans, the bulk of equities are held by the wealthiest individuals. In 2007, the richest 5 percent of Americans held more than two-thirds of the value of all corporate shares, and more than half those shares belonged to the top 1 percent. In their pursuit of shareholder value only, corporations are now in fact dedicated to making the nation’s wealthy wealthier.

The effects are visible. From 1980 until the onset of the recession in December 2007, almost all economic growth benefited the upper 10 percent of Americans. The lot of the remaining 90 percent barely changed at all.

Maximizing profits excuses the offshoring of millions of U.S. jobs and of American technology. It also explains many of the perverse financial industry practices that contributed to the crash.

Making matters worse, it has led many large companies to spend more and more money on lobbying. Congress has tried to counteract the influence of money on politics -- for example, by passing the Bipartisan Campaign Reform Act of 2002, widely known as McCain-Feingold. However, in 2010, with its decision in Citizens United v. Federal Election Commission, the Supreme Court struck down the provisions of the act that had barred corporations and unions from running advertisements mentioning candidates within 60 days of a general election or 30 days of a primary. This ruling handed a small group of CEOs and billionaires (unions don’t have as much money) near-unlimited powers of persuasion in the democratic process.

At the same time, the Court paved the way for the formation of super-PACs --“independent-expenditure only committees” -- to raise unlimited amounts of money from corporations, unions and wealthy individuals for specific candidates or causes. Super-PACs are required to identify their contributors, but too often the individual givers are masked through the use of shell corporations.

We can hope that the Supreme Court, seeing the effect of its rulings, will find a way to reverse or limit the decision. But while we are waiting, efforts should be made to make corporate political activity transparent.

The Securities and Exchange Commission should use its existing authority to protect investors by requiring that corporations disclose their political contributions. To be effective, this requirement would also need to apply to donations to intermediaries, such as the U.S. Chamber of Commerce.

Labels for Corporations

Corporations should also voluntarily disclose their political dealings to consumers. When any of us chooses a bank or buys a car, we should be able to tell if our money will go to push a political agenda that we might oppose.

Common Cause and other civic organizations committed to transparency could rate corporations on their political activities, and post the ratings on their websites. One such scale already exists, the Zeitlin & Schroder CPA Index, and has been used to assess the political activities of 32 major corporations.

This is only the beginning, however. Corporations also affect our lives through their influence on jobs, offshoring, health care and wages. These actions, too, should be disclosed and rated.

As this effort gathers momentum, it will be important for the rating organizations to be clear about the source of their own funding. We would not want to find that ratings were effectively for sale (as were once, apparently, the financial gradings of Moody’s Investors Service and Standard & Poor’s).

As a nation, we have reached a turning point where we must decide how much power we will allow large corporations and the extremely wealthy to have over our lives and our political system. Making their activities visible and transparent is a first step toward ensuring that we don’t become a nation for the rich but rather one that works to provide a good life for all.

About the Authors:

Ralph Gomory, a research professor at New York University’s Stern School of Business, was formerly senior vice president for research and technology at IBM. Leo Hindery Jr. is chairman of the New America Foundation’s U.S. Economy/Smart Globalization Initiative and former chief executive of AT&T Broadband.