After it failed to meet for nearly a year, President Obama disbanded his Council on Jobs and Competitiveness at the end of January. An elite group of business leaders, the Council met only four times in the two years of its existence, and although it advocated for improvements in education, manufacturing, and energy independence, the group’s primary goal appeared to be to prevent the taxation of the foreign earnings of American firms.
Meanwhile, another recently-formed group of business leaders, “Fix the Debt,” has advocated a reduction in tax rates, without specifying how this would reduce the deficit. And the Business Roundtable, picking up where it left off in the summer of 2011, has continued its ineffectual pleas for the president and Congress to find a solution to the deficit, while failing to offer a single concrete solution.
What has happened to the American business community to cause such weakness, shortsightedness, and irrelevance?
At one time, corporate leaders played a major role in developing pragmatic and moderate solutions to the nation’s problems. In the three decades after World War II, a group of businessmen representing large companies — the Committee for Economic Development — played a central role in both Democratic and Republican administrations, advocating full employment, increased funding for education and academic research, universal health care, and — at numerous points — tax increases, including surcharges on big business. What was the source of this corporate statesmanship, and why has it largely disappeared?
American corporations operated in a very different environment in the postwar period. Organized labor was strong in the private sector. The government had a high degree of legitimacy with the broader population, and as a legacy of the New Deal, its role in providing a social safety net for the poor and programs for the middle class experienced broad support. It was also a period of strong managerial control of the corporation. Corporate CEOs enjoyed a high degree of autonomy from stockholders, which gave them a high degree of job security. Having lived through the Great Depression and the War, the postwar generation of corporate leaders seemed to understand the need to be concerned about the interests of the larger society, as well as those of the firms they administered.
This situation began to change in the 1970s. As Europe and Japan rebuilt themselves from the ashes of the War, their companies began to provide serious competition for the top American firms. The energy crisis and subsequent recession of 1974 created further pressures, as did the inflationary spiral of the decade, the result of the simultaneous pursuit of the Vietnam War and an ambitious set of social programs during the 1960s. The aftermath of Vietnam and the Watergate scandal left major American institutions, including business, mired in a legitimacy crisis. And stricter regulations, promulgated especially by the Environmental Protection Agency and the Occupational Safety and Health Administration, placed further constraints on American companies. In response to this, American corporations organized politically, allying themselves with the laissez-faire conservatives they had renounced in earlier years. Big business became increasingly aggressive in its confrontation with both organized labor and government regulatory agencies. By the time Ronald Reagan was elected president in 1980, corporations had achieved a series of victories that severely weakened these institutions.
Three developments during the 1980s proved to be pivotal. First, perhaps as a result of its success in weakening labor and government, big business found itself becoming less cohesive. Having won the war against its adversaries, large companies were now free to pursue their own aims, without the need for cross-sector unity. Second, due to developments in financial technology that weakened their ability to profit from lending, the large commercial banks turned toward fee-for-service activities, morphing increasingly into quasi-investment banks. One consequence of this was that the banks stopped inviting the CEOs of nonfinancial corporations to join their boards, which led to the fragmentation of the network among large companies.
Finally, and perhaps most importantly, there was a massive acquisition wave between 1984 and 1989, which greatly reduced the autonomy of corporate CEOs. Well into the 1970s, American corporate managers had enjoyed an exalted status as respected professionals, at the pinnacle of power. The economic crisis of the 1970s, however, left in its wake a stock market filled with undervalued companies. The Reagan administration, meanwhile, filled its ranks with officials steeped in a new economic model — agency theory — which suggested that the single primary purpose of the corporation was to maximize shareholder value. This, along with the widespread depressed stock market prices, created a fertile environment for acquisitions. A form of low-grade debt known as “junk bonds” provided a new source of funds. The result was that after almost a century of enormous stability, nearly one-third of the Fortune 500 disappeared during the 1980s, mostly through acquisitions, many of them hostile.
The outcome of this shakeout was a new corporate CEO, vulnerable to the capital market in a way that his postwar forerunners were not. CEO tenure dropped precipitously, more than 25 percent between 1980 and 2000. As a result, contemporary CEOs, although increasingly well-compensated, are less secure in their positions. It is difficult to sit back and ponder the long-term concerns of the business community and the larger society when one could be out of a job next month. Shareholder value, and survival, has become the name of the game.
It is no wonder, then, that American CEOs no longer exhibit the statesmanship of their predecessors. There are exceptions, of course. Warren Buffett, Robert Rubin, and Howard Schultz have been outspoken about the role of business in American society, and companies from Wal-Mart to Chevron have engaged in socially responsible activities. What is missing is an organized effort by the leaders of large American corporations to develop a series of policies that reflect not the narrow interests of their respective companies, but rather what Paul Hoffman, the co-founder of the CED, called “enlightened self-interest” — the understanding that the well-being of American business is ultimately determined by the well-being of the society within which it operates.