Will: In lame defense of tax inversions

In defense of foreign tax inversions by U.S. corporations, conservative George Will is obliged to argue that company managers have an obligation to company shareholders to maximize returns. Yet this is an assumed obligation, not a legal obligation, and not necessarily a moral one either, as the case of social enterprises proves. 

Moreover, I haven't heard about any shareholders' meetings where the crowd clamored for the corporation to abandon America and set up shop in Ireland or the Bahamas. Or about a Wall Street corporate analyst who ever urged such? Have you?  

The public's urging corporations like Walgreen's to remain in the U.S. and pay taxes where they actually operate and retain their headquarters is likewise a moral argument. Which is a stronger moral argument, patriotism or maximizing shareholder value? That's for individual companies' directors to decide; but nobody should dismiss patriotism as irrelevant. Nor should conservatives like Will, so fond of moralizing in other contexts, criticize our leaders such as President Obama for first exercising moral suasion to curb tax inversions before resorting to the big hammers of legislation or executive orders.

Next, Will labels the "race to the bottom" (something I have written about often) as "entrepreneurial federalism." This term is the acme of goobledygook: take two unrelated words that mean something, cram them together, and forfeit the meaning of both. Conservatives like Will assure us all the time that government cannot be entrepreneurial; that's business's turf. And federalism refers to various forms of political organization where national sub-units are subordinated to the national government in some matters, but retain their right to act freely in others. Federalism has nothing to do with states' respective policies and incentives meant to attract capital investment; nor does federalism refer to interstate economic competition. So, put these two terms together and you get... nothing. (Tom Friedman probably wishes he'd thought of it first.)

Also, Will summarily dismisses the idea that corporations that get rich partly thanks to U.S. roads, ports and other infrastructure, the U.S. legal system, patent protection, U.S. trade negotiations, not to mention U.S. public schools that educate their workers to be the most productive in the world, have some moral obligation to the U.S. to pay taxes or give something back. Corporations aren't people! say progressives. So Will replies, Then non-people cannot have any moral obligations!  Such petulance is typical of Will. 

Moral obligations are of the company's directors, primarily, and secondarily of the shareholders to keep the directors in line. Moral obligations are not necessarily legal obligations. Whereas the Citizens United and the Hobby Lobby cases turned on whether corporations had some of the same legal (First Amendment) rights as people: to make political donations and practice religion, respectively. Morality and law should not be conflated.

Beyond that, Will unwittingly offers up two contradictions in his own op-ed, and perfectly illustrates why the U.S. cannot win the race to the bottom. 

First, he tells the story how Airbus located a subsidiary in Alabama, a right-to-work state, "because capital, being mobile, goes where it is wanted and stays where it is treated well." Will picked an unfortunate example, because Airbus, as a consortium of European aviation firms, is heavily dependent on EU subsidies and contracts for its survival. Moreover it is headquartered in France. And Airbus employs over 60,000 workers in pro-union, "socialistic" Europe.  So Airbus would never dare to "invert" outside the EU to win some tax benefits! Obviously, multinational companies make their plans based on much more than tax rates and cost of wages.

Second, he tells the story how Maytag moved its production from Illinois to Mexico because, allegedly, Illinois was not a right-to-work (read: anti-union) state. Yet he doesn't attempt to explain why Maytag didn't move to a right-to-work state instead. Because he can't. Because no matter how low wages and taxes will be in Alabama or elsewhere, they will always be lower in some poorer, developing nation.  The U.S., the largest economy in the world, cannot hope to attract and retain businesses by trying to be "poorer" than poorest nations; or lower its taxes to the rates of tiny islands like Bermuda or New Zealand.  That's idiotic. Yet that's just what conservatives like Will advise: "the sensible corporate tax rate would be zero." Whoa! "This is so because," explains Will, "corporations do not pay taxes, they collect them, necessarily passing on the burden as a cost of doing business."

Hmm... I suppose that likewise, ordinary citizens do not actually pay taxes; they simply collect them from their employers, passing on the burden as a cost of staying alive.

Moreover, the Maytag example betrays Will's muddled thinking: he starts out discussing tax inversions, then switches to unions and labor. These are completely separate issues! Indeed, Walgreen's and other tax inverters have not publicized any plans to shut down their U.S. locations; they simply wish to re-locate on paper, for the tax benefit. And in fact Whirlpool Corporation, which owns Maytag, is based in Benton Harbor, Michigan, not Bermuda or Ireland.

Will's lame defense of tax inversions betrays an inverted worldview unfortunately shared by many conservatives: Government is but a burden and an annoyance barely tolerated by corporations, for whom the nation exists.  

This is not to say that the nation exists to serve the government. No.  Even so, I'll put Big Government above Hobby Lobby, Walgreen's or the Kochs any day, because at least I have some say in what my government does; and government is legally accountable to all its citizens, not just the wealthy.

In a stew over inversions

By George Will

August 15, 2014 | Washington Post

URL: http://wapo.st/Vt8dhN

Meyerson: The myth of shareholder capitalism

I can testify that business schools teach Shareholder Value Maximization not as theory, not as an option, but as the only "responsible" method of corporate governance.  

However, as Meyerson correctly notes, corporations' making all their decisions based on SVM is an ideological choice, not a legal or even moral obligation.  

Nor is there proof that SVM is even in the best long-term interests of the corporation, or the shareholders. Indeed, great American companies like Coca-Cola, General Electric, Procter & Gamble and Ford Motor Co. operated profitably for decades before SVM came into vogue in the 1980s.

The myth of maximizing shareholder value

By Harold Meyerson

February 12, 2014 | Washington Post

URL: http://wapo.st/1feDkk3

What's good for a business is not necessarily good for Business, or for Us

Since the 1980s, business schools have taught future executives that shareholder value maximization (SVM) is the best way to structure the operations of a firm and measure its performance.  Yet a few years ago, precipitated by the financial crisis, something changed.  Even Businessweek, one of the biggest cheerleaders of b-school since its ratings and admissions info is a cottage industry for the publication, acknowledged it in 2010: "How Business Schools Lost Their Way."  

No less than former GE CEO Jack Welch, the hero of many a business school case study, has seen the light and fallen from his high horse, calling SVM "the dumbest idea in the world."  Perhaps that's because GE lost 60 percent of its market value since Welch left in 2001?  Is GE that much worse now, or was it overvalued then?

Explaining what Welch meant, Forbes' Steve Denning argued that in practice, SVM is not so much about executives' maximizing the firm's value, but rather managing (or manipulating) investors' expectations of the firm's value.  Citing the example of GE, he concluded that Welch & Co. were clearly managing the firm's earnings with uncanny precision.  Denning argues for regulatory changes that could thwart the influence of managed earnings and managed expectations, and get business back to the previous dogma of management guru Peter Drucker that, "There is only one valid definition of a business purpose: to create a customer."  

Using other words, celebrated business leader Steve Jobs echoed Drucker's classic sentiment to biographer Walter Isaacson.

Meanwhile, alternative theories like the Triple Bottom Line and Porter's Shared Value have started to gain credence.  More companies are at least paying lip service to it, and the related concept of Corporate Social Responsibility (CSR).  Personally, I believe CSR is bunk.*  Expecting firms to focus on something other than their bottom line is misguided and naive, no matter what they state on their websites and annual reports.  It's not what they're made to do.  What are the internal incentives for firm employees to promote CSR?  Few or none.  Meanwhile, CSR gives irresponsible firms PR cover for their misdeeds.

(*When CSR really works is when consumer watchdogs, labor unions, environmentalists and other organizations shine the light of public scrutiny on the firm's lofty stated aspirations.  Yet this is just public regulation by other means -- and arguably not the most efficient means -- not the result of public altruism by the firm. And crucially, these public critics are often not even the firm's customers, shareholders or employees, but rather "stakeholders" in the most amorphous sense of CSR, meaning they may have no direct economic stake in the firm's performance.)

But I want to talk about the public arena.

Tragically, the theory of SVM has been accepted by many policy-makers and academics as the best model not only for individual firms, but also the model around which to structure our economy.  In effect, these public-sector cheerleaders of SVM gave up their prerogative and obligation to engage in precisely the kind of long-term planning for the common good that firm-level SVM is a incapable of doing.  What is good for the firm is the firm's decision; what is good for society is not.  It's ours, the people's.  

Yet too many have swallowed the Kool-Aid that the "invisible hand," i.e. the mystical, untraceable aggregate of millions of individual business decisions, leads to the best outcomes in all respects for society.  Taken to its logical conclusion, this misguided belief compels policy-makers and regulators not to meddle at all; they should get out of business's way and let the magical accounting of economic debits and credits do its thing.  Because better outcomes for society simply aren't achievable.  Nay, a committed group of human beings with a singular purpose has no purpose, in their view, outside the confines of the firm.  

(The one exception to this rule of human endeavor, conservatives tell us, is private charity, which they believe should replace publicly-funded safety nets.  Yet a simple look at poverty statistics pre- and post-LBJ show us that charity never was, and never can be, nearly adequate to "mop up" the Dickensian poor among us.  Indeed, the key failing of private charity -- with its high overhead, wasteful duplication, lack of scale, and most importantly, non-reporting on performance -- is that it is at its weakest when it's needed most: during economic downturns.)

Certainly, we must strive for a delicate balance between impeding business and giving it free dominion over society.  Unfortunately, today we hear many thinkers and politicians on the Right calling for chainsawing regulations and giving polluting industries and exploitative labor practices free reign over our economy -- all in the name of creating jobs.  Indeed, I have no doubt that gutting regulations would boost those firms' bottom lines in the short and even medium term, and even create jobs.  What worries me is the long term.  When our productivity suffers from lack of skills and capital that have been exported, never to return.  When unaccounted-for pollution creates enormous health costs which nevertheless exist in the real economy yet are absent in polluters' financial statements.  When we have privatized every government service and public asset until we are at the mercy of executives whose primary motivation is this year's bonus, and next year's "golden parachute."  

To whom then do we appeal for amelioration, when there is nobody to appeal to but impersonal market forces?

"The Dumbest Idea in the World": Corporate America's False - and Dangerous - Ideology of Shareholder Value

By Lynn Stout  

August 29, 2012 | AlterNet

URL: http://www.alternet.org/economy/dumbest-idea-world-corporate-americas-false-and-dangerous-ideology-shareholder-value?paging=off

B Corporations: The synthesis of Adam Smith?

Adam Smith Was Not Schizophrenic

By Kyle Westaway

December 1, 2011 | HBR Blog Network

Despite the recent crackdowns in New York and Los Angeles, it's not surprising that the Occupy Wall Street movement has exploded into 900 chapters. The Occupy movement — as well as The Tea Party — are both "mad as hell" about the current state of affairs. Both sides share a general dissatisfaction with our current capitalist system. The left wants to end capitalism. The right says if we could just get the government out of the way, then the capitalist system would work.

I think both groups' conception of capitalism is off the mark. To gain some clarity, we need to consult Adam Smith.

Adam Smith, the father of modern economics, was the first to assert the concept of free market capitalism. In his most popular work The Wealth of Nations he wrote about the oft-quoted "invisible hand." But in his first work, The Theory of Moral Sentiments — which he considered his most meaningful contribution — he writes about our duty to fellow members of society. Pundits on either end of the political spectrum quote whichever work suits their argument. Predictably, the right quotes Wealth of Nations and the left quotes The Theory of Moral Sentiments. Given the gap between modern capitalism and the morals-based approach from his first book, one can't help but wonder if Smith was an intellectual schizophrenic, essentially promoting two competing theories.

I don't think he was. In fact, I see his two preeminent works amounting to a unified theory, a blueprint for a more stable and sustainable version of capitalism; a conscious capitalism. The Wealth of Nations presupposed actors in the capitalist system operating on the moral framework he laid out in the Theory of Moral Sentiments. The free market has no conscience of its own: it is made up of billions of people transacting. Though Smith asserts that each of these people are guided by their self interest, he presupposes that each of the actors in the marketplace are guided by some internal morality and an awareness of one's place within the broader context of his community — locally and globally.

The current version of capitalism is not the one envisioned by Smith at all. He was seeking to create a system defined by efficient allocation of resources driven by self-interest, but guided by self-restraint. This is conscious capitalism.

The current version of capitalism's guidance from self-interest in the corporate world is evidenced in the legal duty to maximize shareholder value, which opens directors up to a lawsuit from their shareholders if they make a decision that fails to make the highest possible profit for their shareholders. Thus, the duty to maximize shareholder value handcuffs directors that want to make decisions that seek to create benefit for people and planet as well as financial returns.

There is debate whether this duty exists, but it is such a dominant perception among directors that it is the practical reality. In order for corporations to be free from the shackles of maximizing shareholder value, the fiduciary duties must be broadened.

Fortunately, many state legislatures in the United States are seeing the need for a new legal structure that embraces conscious capitalism by broadening the fiduciary duty from maximizing shareholder value to maximizing stakeholder value — the legal mandate to take make decisions that pursue not only a positive benefit on the bottom line of the shareholders, but also the community, environment, employees and suppliers. This broadening of fiduciary duty is a fundamental shift at the very core of the corporation. This new type of corporation that embraces conscious capitalism by broadening fiduciary duty is known as a Benefit Corporation.

The Benefit Corporation embodies the theories of both The Wealth Nations and the Theory of Moral Sentiments, and ushers in a version of conscious capitalism that promotes both self-interest and the benefit of society. Adam Smith would be proud.

Economist: Bosses who don't play golf earn 17% less

"The same study found that although golfing bosses are paid more, they do not produce better results for shareholders."

Clearly, golf distorts the free market and right-thinking companies should discourage their employees from playing it.

Why golfers get ahead

By R.G.

November 21, 2011 | The Economist

URL: http://www.economist.com/blogs/gametheory/2011/11/golf-and-business?fsrc=scn/tw/te/bl/whygolfersgetahead

Shareholder value maximization (SVM) & the financial crisis

How Business Schools Lost Their Way

If business school were a church, shareholder value maximization would be its religion. Two INSEAD professors say it's time to find a new one

By N. Craig Smith and Luk Van Wassenhove

January 11, 2010 | BusinessWeek

Business schools have been blamed for the economic crisis. Their MBA students are said to be responsible for wreaking the havoc in the financial markets we are all now suffering from and business schools are chastised for not training them better, not least in failing to instill a clear sense of right and wrong.

Are they to blame? To the extent that MBA graduates have been closely associated with many of the spectacular failures of financial institutions witnessed over the last 18 months, they may justifiably be criticized for the mispricing of risk in relation to specific financial products and an underestimation of systemic risk more generally. They may also be criticized for failing adequately to question the assumptions of the financial models being used and, with hindsight at least, for following the crowd and gambling that they could continue to dance, to borrow the unfortunate phrase of Citibank's (C) Chuck Prince (not an MBA), when it was way past time to be off the dance floor.

In some cases, where perverse incentives of compensation systems were at work, the criticism also seems warranted that these individuals focused solely on serving their own self-interest and gave scant regard to their obligations to others, even shareholders. Much like a dodgy second-hand car salesman, it seems, they knowingly sold flawed products—such as the mortgage-backed securities they knew would blow up because of unsound origination processes. Worryingly, these practices were evident in the financial institutions that have survived—and some that have prospered—in the crisis, as well as those that failed.

INDIRECT ROLE

It would be a mistake to say that business schools are directly to blame, even when their graduates were closely involved; there are more basic drivers. But business schools have played a role indirectly, due fundamentally to their adherence to and perpetuation of an ideology that has contributed significantly to the crisis, albeit unintentionally. That is the ideology of Shareholder Value Maximization (SVM). In most business schools, SVM is the leitmotif of finance teaching and implicit throughout the rest of the curriculum.

Ideologies often appear to be serving society as a whole while advancing the interests of particular sectors. So it is with SVM. The economic theory of the corporation holds that SVM results in the best social outcome: societal wealth maximization. But at the same time it serves the interests of shareholders and the managers who are its adherents and its beneficiaries, at least when their compensation is pegged to shareholder returns. This criticism of SVM is not to suggest shareholders are unimportant; they warrant a return on the capital they provide that reflects the financial risk incurred. However, this is not the same as maximizing shareholder value.

A theory advanced in business schools to justify SVM says shareholders are the "residual claimants." Shareholders, the theory goes, should be uppermost in the minds of management, because they receive their returns only after the claims of other stakeholders have been met. This is evident in companies meeting their contractual and legal obligations to stakeholders such as employees, but it is also evident in companies meeting noncontractual obligations determined by economic factors. For example, these might be obligations beyond legal or statutory requirements to a local community affected by a plant closure, where the company identifies that its reputation might be harmed and it might suffer an economic loss if the obligations are left unattended. As this example might suggest, however, not all ethical obligations would be reflected in a potential economic loss, even in the long term. Consider a management practice of engaging in bribery when one can get away with it. This might be consistent with shareholder value maximization, but not advancing societal welfare.

FAULTY ASSUMPTIONS

The theory also relies on assumptions amply demonstrated as lacking in recent months. For example, it assumes effective government regulation to ensure everybody plays by the rules and to manage externalities (outcomes not readily susceptible to market sanctions, such as pollution). It also presumes effective corporate governance such that shareholders hold management to account. More technically, it relies on various economic assumptions, such as the efficient market hypothesis (that share prices reflect all relevant information on the stock).

Aside from the assumptions required in subscribing to the SVM model and the potential ethical issues left unaddressed, there are major practical considerations in the teaching and application of the SVM ideology. While professors might explain in detail how the underlying theory of SVM treats shareholders as residual claimants, what matters is the message students take away. That message is shareholder primacy—that their purpose in business is to make decisions that put the interests of shareholders above all others.

When they go into their jobs—in finance and elsewhere—they find an environment that marches to the same tune and is incentivized to do so. The theory of SVM generally translates into practice through the mechanism of the share price. This flawed and often easily manipulated measure of long-term company value is then used as a basis for business decision-making. This has huge potential consequences for the individuals involved (rich bonuses they may not deserve) and their organizations (short-term decisions that harm long-term viability), as well as society.

DIFFERENCES IN THE DEVELOPING WORLD

If SVM is problematic from a developed world perspective, it can be disastrous from the perspective of the developing economies where global business and MBAs increasingly are to be found—as well as most of the 1 billion people going hungry in the world. Many large companies today operate in countries with little or no government and a huge potential for corruption, and, given such technologies as the Internet and mobile phones, how they operate can be instantly broadcast worldwide. Today's global business environment is not the simple U.S.-centric world of free-market economist Milton Friedman. It is far more complicated.

What should business schools do? While late in the day, perhaps, Jack Welch was right when he described SVM as "a dumb idea." Business schools need to stop worshipping at the altar of SVM and teach it with greater intellectual honesty and with attention to its many deficiencies, both theoretical and practical. They also need to do a better job of developing its most plausible contending framework: stakeholder theory. This is a more complex but current and realistic view of management, one that recognizes that the task of managers is to serve multiple stakeholders—giving shareholders their due, but not to the exclusion of others with legitimate claims.

Finally, business schools should give more attention to their input as well as output. With starting salaries for MBA graduates often well in excess of $100,000, business schools need to be careful not to attract narrow-minded, self-centered people who might see a way to get rich quickly by eagerly and unquestioningly embracing an ideology that serves that end. Business schools should look to attract and properly train people to be responsible leaders who are well-rounded and have the capable minds and the courage to ask the critical questions that went unasked for too long.

N. Craig Smith is a professor of ethics and social responsibility at INSEAD. Luk Van Wassenhove is a professor of operations management and academic director of the Social Innovation Centre at INSEAD.