The idea for this blog came from the serendipitous arrival of two things. A September 3, 1916 letter from the Dodge brothers to Henry Ford. And then a column by George Will.
The letter comes courtesy of a service that my wife enrolled me in as a birthday present over a year ago. It publishes letters from American history that illustrate various aspects of our history and then provides a short synopsis of what was happening. The Letterjoy Company. The earliest letter I have received is a January 30, 1775 letter (handwritten, which can make reading it interesting) from Mercy Ottis Warren – a prominent pamphleteer and satirical political playwright – to John Adams. The latest I have is from April 7, 1942, an FBI memorandum for Assistant Attorney General Wendell Berge about possible denaturalization proceedings for Fritz Julius Kuhn, head of the German – American Bund that served as a propaganda and intelligence service for Hitler. As I mentioned, the current letter that was one of the starts of this blog was a September 3, 1916 letter from the Dodge brothers to Henry Ford. I received it yesterday (as I am writing this).
This morning I read the other half of the impetus for this blog – a George Will column “Business beware, ‘stakeholder’ capitalism is progressivism”.
The letter was about the Dodge Brothers, as shareholders in Ford’s company, feeling that even though the company was becoming more profitable and making a good deal of money that their share of that profit had not increased. Instead, Ford was putting the money back into the company and not increasing the shareholder’s profits, saying that the shareholders were doing well as it is. Ford ignored them and in 1916 they went to court over this.
The Dodge brothers argued “that officers of a corporation had a duty to act in the best financial interest of the shareholders”. This was a new concept at the time. Ford though, in addition to having fun creating new types of plants and processes, also “expressed disgust at the idea of making an “awful” profit on each car and insisted that the company’s goal should be to keep prices low so as to expand its market. In an interview Ford stated that “his goal by ‘putting the greatest share of our profits back into the business’ was to “spread the benefits of the industrial system to the greatest possible number, to help them build up their lives and their homes.” Note, quotes are from the Postscript provided by Letterjoy explaining what happened during and after the letter.
The court decided that while laudable Ford’s primary goals were misplaced. That “a business corporation is organized and carried on primarily for the profit of the stockholders”. The court allowed Ford to proceed with building the new plant he wanted, but it also ordered him to pay out 50% of the company’s profits – about $330 million in today’s dollars – as a special dividend.
Fast forward to July 2, 2022 and George Will’s column. In it he argued against this idea that business should be concerned about social issues and should instead only be about business. In this column he takes the same view as this earlier court does – that the creation of “wealth and opportunity” is the ony real business of business. That the idea that businesses should also be concerned about environmental, social and governance issues is not only of “dubious legality” due to fiduciary duty but also dangerously wrong.
He compares this idea of socially aware companies to being a type of feudalism. Referring to Phill Gramm writing in the Wall Street Journal, Will states “…that in feudalism’s ‘communal world’, workers had obligations to the church, the local aristocracy, the guild and the village: These ‘stakeholders’ leeched away portions of what workers produced.”
Will then goes on to reference Gramm and Solon that how much of the revenue goes to labor and how much of the value of companies is “owned by pensions, 401(k)s, individual retirement accounts, and insurance companies funding life insurance policies and annuities.” From this Will then argues that by “sacrificing” the “goal of maximizing economic value to noneconomic, generally political goals” would be to also sacrifice our economy. That it is only in allowing corporate management to continue with their primary goal of “maximizing shareholder value” can economic resources be “efficiently disposed”.
Before discussing the problems with Will’s column let me first take a moment to briefly talk about what should the proper goal of a business be, should it always be purely profit, or should social and other issues also play a role?
Let me first state that the greatly preferred goals of almost all businesses is to make profit. It is the livelihood for whoever owns the business, whether an individual or a group. Which means that profit is also very much a necessity. However, this leads to a natural pressure to make as much profit as possible, even if the results may be sometimes questionable. After all, who among us would turn down a pay raise? The question then becomes how much of a profit and how best to distribute it, especially within larger companies with shareholders.
However, no business exists in a vacuum. There are areas where such a vacuum does exist and the results are not good for businesses at all. By vacuum I mean transportation services, communication services, educational services for the workforce, law enforcement and justice system. And disaster services such as fire stations and emergency relief in the event of an emergency. A company or business who is at least moderately far sighted should keep this in mind when designing its business plan. Then there is the fact a business requires customers, people to pay for their services or buy their products. Things that actively harms customers harms the business too. And the harm does not have to be by the business itself, but from other threats – political turmoil, legal and financial inequalities, disasters due to climate change, and so forth.
So, because of both these supports – that of services, infrastructure, and customers – needed for a successful business diverting some of those profits into a benefit for society makes practical sense. So, for a business with even a modicum of medium range thinking would do so. However, most businesses are geared for an extreme focus on short term profits – rather like humans in general are. Which is where two things come into play, or should come into play; social pressure and government action.
Social pressure in terms of letters, boycotts, word of mouth, social media, etc. Government in the form of regulations. And yes, government regulations are needed. You can see what it would be like today if there were none by looking at the turn of the 20th century – businesses making profits by producing not only unsafe but dangerous products whether food or machinery, producing such goods in extremely unsafe environments, growth of monopolies and the restriction of the free market, child labor, and so forth.
I am for a free market system. It is the most efficient means of distrusting goods and services in the face of change. But, a totally free market system will destroy itself and can greatly harm society. So, a free market system with some guidelines. And the same with profit – a reasonable profit yes. Even a bit unreasonable is fine too. But not the out of control system we have now. That needs to change.
And no, this is not a type of feudalism as Will and Graham and such claim. That is such a superficial claim I am amazed it is even tried. Doing so will not “leech” away what the workers are producing. That is already being done by the shareholders. Look at my letter from the Goodrich brothers where even though Ford was given the go ahead and build the new factory he wanted the shareholders still managed to get 50% of the profits ahead of this.
Or look at the growing wealth inequality in the United States today. The middle class in America, a clear majority of most Americans at one time, is shrinking. And the loss by that shrinkage is going to the rich and richer. In 1971 61% of Americans were in the middle class. In 2019 it was 51%. And falling. By contrast the top 5% of families saw the greatest increase in income. In 1965, a typical corporate CEO earned about twenty times that earned by a typical worker; by 2018, the ratio was 278. CEO’s saw their income rise by 900% between 1978 to 2018. Worker compensation increased by just 11.9 percent.
Companies, even during these times when so many people are struggling, are seeing increased profits. Even with inflation. After tax profits as a share of gross value added for non-financial corporations improved 14% in the first quarter. This is up from the 13.8% of the last quarter and marks the fourth straight quarter in which margins were wider than any time since the 1950s.
Corporations and big business profits are up. The wealthy are becoming wealthier. Yet the workers are not. This directly contradicts Will’s assertion on who actually is leeching workers.
As for why this matters. Well, first there is the moral aspect of this. And morals are important and not to be blown off, even in cases of business. But there are also practical aspects of income inequality. Income inequality creates social dysfunction and unrest. It also creates a drag on the economy as those with less wind up getting even less and so cannot consume either goods nor services the way they once did. Or at all. What makes this worse is that the rich and well off spend less of their income than do those who are not and so contributes to this economic drag.
Towards the end of Will’s column he states “Furthermore, in a congenial society, boundaries are respected: Most people say about most things, ‘this is none of my business.’”
To the contrary, the public good is very much part of the business of business. Or should be. And it is the business of the public to be concerned about business, and to use social pressure as well as promote government action if needed.
We have already decided that profit is not a good reason to engage in actions and produce products that harm the public. And that it is most definitely part of the business of the public. Now we need to do something similar in regard to profits and social responsibility too.
Leave a comment