How Should the Role of American Business Be Defined?

A great deal of attention has been given in recent years to the role of American commerce, and rightly so.  But the role has been increasingly narrowed in the view of key actors.  Generally, business leaders and their political allies recognize two purposes---job creation and increasing shareholder value, although only the latter seems to inform corporate decision making. 

This narrow focus generates frequent economic turmoil and is the source of current threats to US economic stability.  It would be useful to examine more broadly the legitimate purposes of business in a democratic society.

The obvious first objective of commerce is the provision of affordable products and services needed and desired by consumers.  Improving such access furnished the initial impetus for moving from a barter system to a market system based on the division of labor. 

Generally speaking, customers dictate through the process of supply and demand what the market should produce.  Of course, some needs require government intervention, such as national defense, education, law enforcement and health care.

The authority of American consumers is undermined, however, by the extraordinary extent of advertising in this country on both traditional and social media.  US business spends more on advertising than any other country, nearly $200 billion in 2017.  China, with more than four times our population, spent $80 billion.

Consumers are barraged with commercials touting the latest technological enhancement, miracle cure or “essential” fad.   

Just how many apps do you need on your recently purchased, upgraded smartphone to stay in touch with friends and neighbors as well as the latest streaming service?  And will your doctor really remain ignorant of current medical developments without those drug ads on the evening news, even though health professionals in every other country in the world---except New Zealand---seem to be able to care for their patients successfully without them?

Job creation was a major justification for the recently approved tax cuts.  In the euphoria immediately after passage, a number of companies announced one-time bonuses and modest wage increases for employees, but there is no indication the 40% reduction of the corporate tax rate or the other cuts benefiting the wealthy will produce more and better jobs. 

Even with some recent job increases, the percentage of the American workforce employed remains at 63%---where it was in the late 1970s.   

Recent annual reports from US corporations reflect a lack of appreciation for the value and needs of their workforce.  Thanks to Dodd-Frank, companies must provide a comparison of CEO pay with that of the companies’ median employees.  The pay ratios are outlandish. Illustrative is the pay ratio of the Honeywell CEO---333-1.  Duke Energy’s CEO---was only 175-1 in 2017, but her compensation has doubled since 2015.

While individual companies may consider labor only a cost, for the overall economy, workers also should be recognized as consumers.  In the long run marginalizing the interests of employees is likely counterproductive.

As for the goal of enhancing “shareholder value,” obviously, to survive any business must be profitable.  The recent obsession with “shareholder value” among corporate managers, however, is unrealistic.  Not only does this sometimes conflict with creating jobs, but it appears also to result in customers and their needs being barely tolerated.  Both employees and customers are viewed as easily replaced.

Compensating corporate senior executives and board members with generous stock options in the name of maximizing shareholder value is another misguided practice.  Supposedly this ties their interest to that of shareholders. 

A study reported in Harvard Business Review challenges this claim.  It found that 449 companies in the S&P 500 index over a ten-year period (2003-2012) used 54% of their earnings for buybacks, and another 37% for dividends.  This left little for investments in productive capabilities or for increasing incomes of nonexecutive employees. 

 

Another drawback of excessive use of stock options is the probable impact on product quality.  A trio of Notre Dame Business School professors concluded in a study, Throwing Caution to the Wind, CEOs receiving significant stock options are more likely to ignore safety problems with the products the company sells.

Finally, all businesses should keep in mind that the environment in which it operates is an important factor in its success.  Good transportation insures access to available markets, a sound legal system protects contractual integrity, educational institutions provide skilled workers, and decent health care keeps those workers on the job.  The existence of well-ordered communities where the quality of life guarantees a desirable lifestyle for workers is essential to the operation of prosperous enterprises.

Providing this environment may mean that paying taxes could be more important than negotiating the maximum tax break from state and local governments.  And it may mean paying taxes as expected instead of hiring an army of accountants to exploit all possible loopholes.