Corporations, Governance, and Government: Not All Firms Are Created Equal

DeLong’s heart is usually in the right place, but I think he’s wrong when he kinda defends Romney and Bain Capital:

I don’t think it’s Bain Capital’s business to worry about the overall level of employment in the country, or about whether the labor market is tight enough and the educational system strong enough to provide labor with the appropriate bargaining power vis-a-vis capital. Bain Capital is not the Federal Reserve, and it is not responsible for funding and staffing America’s educational system.

I do think that there is every sign that while at Bain Capital Mitt Romney became convinced that the only real stakeholders in the economy are investors, financiers, and top executives. That’s an OK attitude to have if you are running Bain Capital–and if the Federal Reserve is doing its monetary-policy job and if the legislature of California is doing its education-system staffing-and-funding job.

Here’s the problem with this statement: Bain Capital has a lot of power. If I run a small business–and I mean that colloquially, not ‘less than 500 employees’–my concerns about my employees welfare, my local community, joblessness, and so on don’t matter. I simply, with rare exception, don’t have the power to disrupt things. If I fire five or ten people, it simply doesn’t devastate a local community (unless it’s really small). I’m probably not setting the bar for wages either.

But when Bain causes hundreds or thousands of job losses, or disrupts an industry (and disruption isn’t always for the better), like it or not, Bain is now in the governance, albeit not government, business. It can depress wages, at least locally or in a subsector, and destroy some communities. And likewise, the profits made–and in the case of Bain, the profits often extracted–can be used to exert political power, either for additional profit (e.g., the Koch Brothers), or to pursue political agendas (e.g., educationreform‘).

That’s the odd thing about this belief: until the 1980s, many CEOs argued that their companies did have responsibilities other than wealth-extraction (boldface mine):

In his 1943 “Credo,” a somewhat modified version of which can be found on the company’s Web site today, Robert Wood Johnson II identified five distinct constituencies and established an order of priority in which they would be served by his firm. Johnson & Johnson’s “first responsibility,” he wrote, was to its customers: “the doctors, nurses, hospitals, mothers, and all others who use our products.” In second place came employees; in third, management; and in fourth, “the communities in which we live.” The interests of the stockholders, the corporation’s “fifth and last responsibility,” appear subordinate in his mind both to the firm’s sound operation, which depends on attention to the interests of the other constituencies, and to its long-term welfare:

“Business must make a sound profit. Reserves must be created, research must be carried on, adventurous programs developed, and mistakes paid for. Adverse times must be provided for, adequate taxes paid, new machines purchased, new plants built, new products launched, and new sales plans developed. We must experiment with new ideas. When these things have been done the stockholder should receive a fair return.”

The reality is that we have ceded a lot of our infrastructure (or the use of it) to private corporations. If maximizing returns is their first priority, then we have turned the governance of our society over to sociopaths.

I do agree with DeLong, though, when he argues we also shouldn’t elect them to office.

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