Making the “Boss” More Accountable: Reigning in Corporate Inversions, Offshoring, Baseless Shutdowns and Worker Fatalities

As the presidential primary campaigns are rounding the bend toward their summer fireworks (bring the popcorn), the news of the angry voter and the pissed-off worker, suddenly unearthed like a million zombies rising from the dead by Donald Trump and Bernie Sanders, continues to puzzle the mainstream media.  How is it, they ask, that after thirty or more years of consistent recessions, bad trade deals, corporate hegemony and a weakened labor voice, a damaged industrial base and infrastructure, and, finally, millions of layoffs and lost homes, Americans are still “mad?”

 

You might look to a handful of horrifying headlines this past week and recent weeks, if you want to explain this anger:

  • U.S. pharmaceutical giant Pfizer and Dublin-based Allergan announced on April 6 they would abandon a mega-merger after new US Treasury regulations scuttled some of the tax advantages of the cross-Atlantic deal.  The move is a huge victory for the Obama Administration in its campaign against inversions, in which U.S.-based companies buy or merge with smaller foreign firms and move their headquarters overseas to lower their tax bills.  The Administration’s defensive regulatory action came in reaction to what would have been the largest proposed inversion in history that would have netted Pfizer a cool $35 billion in tax savings.[1] 

  • Donald L. Blankenship, whose leadership of Massey Energy Company “transformed him into one of the wealthiest and most influential men in Appalachia,” was sentenced April 6 to a year in prison for conspiring to violate federal mine safety standards. He goes to jail six years and one day after an explosion in Massey’s Upper Big Branch mine killed 29 people. Somehow Blankenship was not accused of direct responsibility for the accident even after a history of blatant safety negligence, anti-worker behaviors, jury fixing, etc.[2]  While its shocking Blankenship could be convicted in West Virginia, the sentence is still too lenient for the “crime.”

  • The Carrier Corporation, a subsidiary of United Technologies, coldly announced that two factories in Indiana would be shut down and moved to Monterrey, Mexico, leaving approximately 2,100 Indiana workers jobless in the near future.  The Steelworkers, who represent 1,400 of the workers, are fighting the move.  Carrier took in over $7 billion in profits in 2015 and their financial success, according to the union, came about because workers have been efficiently baking a quality product. Meanwhile, Carrier earlier raked in $5.3 million in state and city incentives to stay in Indianapolis.[3]  Then, Nabisco’s corporate parent, Mondelez International, began layoffs of bakery workers in Chicago in a move that will relocate 600 good-paying jobs to Mexico. The Bakery Workers Union has launched a boycott against Nabisco products made in Mexico. The minimum wage in Mexico is about $4 an hour. 

  • “The Panama Papers” were released this week, an unprecedented leak of 11.5m files from the database of the world’s fourth largest offshore law firm, Mossack Fonseca. The records were obtained as part of the work of the International Consortium of Investigative Journalists (ICIJ).  The documents showed the myriad ways in which the rich can exploit secretive offshore tax regimes.  Yet, one of the surprises about the Panama Papers – the largest leak from an offshore tax adviser in history – is how few Americans have so far been exposed. The reason? It may be because creating a shell company in the US is easier than obtaining a library card. [4]

 

The campaigns of Bernie Sanders, Hillary Clinton and even Donald Trump all rushed to protest some of these bad, unilateral corporate decisions:

 

“No more Oreos! No more Oreos!” chanted Republican front-runner Donald Trump at a rally earlier this year.  Bernie Sanders and Hillary Clinton also denounced the layoffs, with Clinton stopping by to meet with affected workers. Union members protested Irene Rosenfeld, CEO of Nabisco’s parent company Mondelez outside a conference downtown. And the bakery workers’ union is calling for a boycott of Oreos made in Mexico.

 

But neighborhood advocates aren’t just thinking about laid-off workers...“The loss of jobs is not only a loss of jobs for Nabisco,” said Ghian Foreman, executive director of the Greater Southwest Development Corporation. “Where do those people go eat lunch? Where do they go to the bank on their lunch break?” Foreman wants to see Nabisco jobs stay in Chicago. He says there was a time when the bakery had a closer relationship with the community, before a series of mergers, acquisitions and corporate spinoffs.[5]

 

But the chest-thumping, some of it well-meaning and some opportunistic, may not get to the meat of the matter.  While some pundits gush over the lower cost of goods and the Walmartization of the town commons made possible by “free trade,” the Times notes that “a chronic trade deficit and an overvalued dollar have caused factory jobs to dry up, contributing to a deep divide between the political and economic elite and the rest of the nation. Perhaps a clash was inevitable.[6]”  You think?

 

As we pointed out in “A Tale of Two Cities,” while some cities and regions have recovered from the Great Recession, other cities, like Flint and Detroit, Michigan, are still suffering from high unemployment rates and horrid poverty rates (not to mention poisoned water), creating a “patchwork” of economic recovery.  New reports indicate that as many as 50 million Americans are still hanging on the phone for the news of good times.  In 36 out of the 50 states, unemployment rates are still higher than they were before the recession.  One in seven men between the prime working years of 25 and 54 is not working.[7]

 

A half-decade after workers who lost their jobs and homeowners who lost their homes (in the sub-prime mortgage disaster) colonized new tent cities, or “Hoovervilles,” in places like Sacramento, Tampa and other burgs, the hurt hasn’t disappeared.  Not even from burgeoning megalopolises like LA, as of last summer:

 

The deepening gap between rich and poor is both a sociological fact and a state of mind. The cost of housing is up dramatically, and so is homelessness. “If it feels like there are people living on the streets and under bridges everywhere you look, it’s because there are,” Bianca Barragan wrote for the website L.A. Curbed last month, after a survey by the Los Angeles Homeless Services Authority found an 85 percent increase in the number of people living in tents and cars over the past two years.

 

“The problem is not gone,” wrote a resident on a neighborhood website in May, after city officials cleared out scores of homeless people. “Saw 6 people or more on the hillside. Tents and cooking! Looks like more work needs to be done.”

 

California has both the most “ultra-rich” (people worth more than $30 million) and the worst poverty rate in America. Even though San Francisco recently overtook Los Angeles in ultra-rich residents, ostentatious affluence and permanent poverty live side by side here.[8]

 

Good Corporate Citizenship

As we reiterate in the new Responsible Investor Handbook, forthcoming from Greenleaf Publishing, there is a new corporate citizen paradigm developing, driven partly by a global alliance of national governments, unions, companies, pension funds and other investors.  This paradigm encourages more responsible investment decisions that incorporate environmental, social and governance factors.  This means, among other things, that corporate decisions that affect corporate behavior, labor and human relations systems, environmental processes and products, and participation in decision-making will be challenged.  Governments, shareholders, workers and stakeholders and/or the marketplace will eventually test companies in America.

 

The requirements of business in the 21st century are changing, as new national and international policy dynamics pose limits to unfettered, fraudulent growth and tax avoidance, worker exploitation and blatant pollution.  Enlightened companies are striving to build a longer-term relationship with workers, requiring new team-building skills and other forms of labor-management collaboration.  So, these more enlightened managers are providing more strategic information to workers; in return, workers take more responsibility on the shop floor or in the office.  Hopefully, workers then also share in the profit made possible by their labors.

 

This ideal is not new; utopian visions of economic democracy, shared ownership, participatory management and labor-management partnerships have been promoted by a succession of economic theorists (across disciplines) and movements, from John Stuart Mills to Demming to Mayo and Argyris to Tom Hayden to the Mondragon co-ops and US ESOPS to today’s open office practices (with some of these being more utopian and some not).

 

Unfortunately, many corporations make risky, short-term corporate governance and investment decisions because of the profit motive.  So, fundamentally, do responsible investment considerations enhance or detract from the financial value of investments? Is there a strong financial and competitive case for corporations to include sustainable practices in the management of their business? Can a corporation positively serve all stakeholders – customers, employees, shareholders, suppliers, communities, and the environment they inhabit – while simultaneously pursuing its business mission?

 

These are some of the oft-posed questions in relation to investing responsibly – that is, investments that take into account sound environmental, social and governance (ESG) considerations, and that drive good corporate citizenship policies in their portfolio firms. And the answer is a resounding “yes”, a conclusion that is based not only on anecdotal references supplied by investors and corporations, but also on an increasing number of rigorous research studies conducted by academics and industry experts.

 

Since the formation of the UN-backed Principals of Responsible Investment (PRI) in 2006, a ream of meta-studies has clearly demonstrated a positive link between responsible investments, good corporate governance and financial performance.  Further, core findings from two meta studies by Deutsch Bank and Arabesque Asset management reveal the following:

  • Companies with high ratings in Corporate Social Responsibility (CSR) and ESG factors benefit from a lower cost of capital (debt and equity). Such companies are also a lower-risk investment opportunity.

  • Companies with high ratings in CSR and ESG factors exhibit positive correlation with market and accounting-based outperformance.

  • Good corporate governance principles (such as transparency, board independence, management oversight and auditor independence), and management practices (such as positive employee relations, promotion of job satisfaction and improved environmental management), lower the cost of capital and are positively correlated with improved operational and stock market performance.

  • Active responsible investment approaches such as proxy voting and shareholder engagement, along with the integration of material ESG factors in the valuation of securities, positively impact corporate behavior and performance when compared with passive approaches (such as negative screenings).

The Trade Union Advisory Committee (TUAC)[9] to the OECD asserts that corporate governance principles should not accept the status quo standards that contributed to the 2008 financial market crisis, but should instead aim for aspirational governance standards to achieve the long-term interests of a company.

 

As TUAC notes, “various mechanisms exist across OECD and G20 economies to ensure workers’ voices in the governance of the firm. These rights are recognized and upheld by several ILO conventions and by the OECD Guidelines for Multinational Enterprises (MNE). The most fundamental form of contractual governance consists of collective bargaining between senior management and worker representatives... But other important mechanisms to participate in company decision-making also exist, such as works councils and board-level employee representation (TUAC, 2007).”  TUAC’s proposals to strengthen corporate governance principles and practices include the following fundamental principles.

 

TUAC’s Governance Principles for Corporations[10]

 

Why Good Corporate Governance is Important

It’s clear that investors and pension trustees, for their part, should demand good corporate governance.  Here are just a few reasons:

 

1. There is a strong business case for good corporate governance

Investment performance studies, again, have shown that responsible governance can lower the cost of capital and encourage more efficient use of resources. In addition, being a good corporate citizen and responsible business – that is, taking into account the firm’s impact on society and environment as well as the economy – can provide over 60 business benefits, including brand value and reputation, operational effectiveness and efficiency, risk reduction and management.

Businesses that embrace such practices will survive and thrive; those that do not – think Enron, Massey Coal – may not.

 

2. Well governed companies are more likely to respect workers’ rights

At the international level, there is a growing set of conventions and guidelines to protect workers’ rights.  But who’s watching the company store, so to speak.  In many parts of our country and around the world, workers feel powerless or are afraid to utilize these protections.  So, as a result, thousands of workers die from mining disasters and textile supply chain catastrophes, such as the tragic collapse of the RANA Plaza garment factory in Bangladesh killing 1100.  Good corporate governance helps to promote accountability throughout the company’s operations, including the company’s obligations to respect the human rights of workers.  Shareholder and stakeholder coalitions are also fighting to prevent future disasters.

 

3. It pays to give workers a voice in the governance of corporations, both as employee stakeholders and as investors

CEOs claim that their staff and employees are the most valuable “asset.” According to TUAC, “Workers’ firm-specific investments are an essential source of corporate wealth creation through human capital development and intangible assets. Workers, as employees of the firm, however, are equally exposed to firm-specific risk, including market and production risks but also occupational, health and safety risk (TUAC, 2014).” Workers are stakeholders and investors, and their human “capital” should be respected, rewarded, cared for and protected.

 

More recently, the Human Capital Management (HCM) Coalition, launched by the UAW Health Fund and joined by dozens of institutional investors representing several trillion dollars in assets, is working to “further elevate human capital management as a critical component in company performance.” In line with research-based evidence demonstrating a correlation between strong HCM and shareholder returns, the Coalition “engages with companies with the aim of understanding and improving how human capital management contributes to the creation of long-term shareholder value.”

 

In the Massey disaster, shareholder anger from a coalition of pension funds over safety and risk management failures forced the firm’s board of directors to strip Blankenship, the former CEO of his board chairmanship position.[12]  This allowed for responsible shareholders to play a significant role in restructuring the company, and made it easier for a jury of his peers in West Virginia to ultimately convict Blankenship.

 

As Michael Garland, Assistant Comptroller for Corporate Governance and Responsible Investment at New York City Office of the Comptroller explained, “Ultimately, the company was a Rorschach Test for everything that can go wrong in business. The firm had a long history of egregious health, safety and environmental problems that led to fines and investor-led lawsuits.  This tells us why companies with environmental practices in place are more sustainable.  It is not just about values, it is about protecting and creating long-term value.  At minimum, it is about managing risk.”

 

In terms of the other headlines of bad bosses, an avalanche of financial and economic literature is increasingly pointing to the failures of offshoring, for decades the object of mighty myth-making among corporate leaders and economists (similar to other fallen myths, such as the profitability of mergers and acquisitions and the certainty among financial leaders like Greenspan in the late 2000s that “there is no bubble”).  More astute company leaders are bringing jobs back to America, not sending them away.

 

But, the problems of corporate flight and offshoring, bailing on taxes and negligent or criminal behavior are likely not going away anytime soon. Embryonic efforts at combating the addiction to short-termism (quarterly earnings reports) and financialization (continued de-industrialization) are a step in the right direction. So, we need to fight unhealthy or risky corporate strategies through:

  • Smarter, long-term investment decisions;

  • Stronger government regulations at the national and international level;

  • Clawbacks at the state and local level (and a keener eye with respect to corporate subsidies;

  • Corporate campaigns and the actions of shareholders and stakeholders alike, as well as everyday citizens; and,

  • The continued brilliant work of muckrakers and investigative journalists. 

In summary, yes, it pays to be a good corporate citizen, but when dealing with a mule that won’t cross a tiny creek, it sometimes takes a stick to "persuade" it over the stream.  It may take, similarly, a large baseball bat to push companies beyond myopic, short-term decisions that in the end may not even be in their best interests.  As the presidential campaigns are discovering, the masses are revolting; let’s make sure they know they have the right tools at their disposal, and the right alliances to join.

 

[1] https://www.washingtonpost.com/news/business/wp/2016/04/06/pfizer-andallergan-call-off-their-merger-after-u-s-move-to-block-inversions/?hpid=hp_hp-banner-low_pfizer-655am%3Ahomepage%2Fstory

 

[2] http://www.nytimes.com/2016/04/07/us/donald-blankenship-sentenced-to-a-year-in-prison-in-mine-safety-case.html?emc=edit_na_20160406&nlid=63678093&ref=headline

 

[3] http://www.nytimes.com/2016/03/20/business/economy/carrier-workers-see-costs-not-benefits-of-global-trade.html?ref=todayspaper&_r=0

 

[4] http://www.theguardian.com/us-news/2016/apr/06/panama-papers-us-tax-havens-delaware

 

[5] http://chicagotonight.wttw.com/2016/03/21/nabisco-layoffs-and-chicagos-manufacturing-future

 

[6] NYTimes

 

[7] http://thedianerehmshow.org/shows/2016-03-01/a-patchwork-of-economic-recovery-why-unemployment-remains-high-in-many-zip-codes

 

[8] http://www.nytimes.com/2015/07/06/opinion/welcome-to-hooverville-california.html?action=click&pgtype=Homepage&module=opinion-c-col-right-region&region=opinion-c-col-right-region&WT.nav=opinion-c-col-right-region&_r=0&mtrref=undefined&gwh=D0B8B653B7EE368FE53FF9A769F69B91&gwt=pay&assetType=opinion

 

[9] http://www.tuac.org/en/public/tuac/0812_TuacRole.pdf.  The Trade Union Advisory Committee to the OECD (TUAC) is a key partner of the OECD, as the official voice of the labor movement at the Organization, representing more than 60 million workers in 30 countries in the work of the OECD. The OECD represents the governments of its 30 member countries, but it does not work for them in a vacuum. The major stakeholders of democratic societies – business, trade unions and other members of civil society – also have an important role in OECD work.

 

[10] In its efforts to strengthen the 2014 revisions of the 2004 OECD Principles of Corporate Governance, TUAC presented its corporate governance priorities.as part of the OECD’s review process. TUAC’s submission can be found at http://www.tuac.org/en/public/e-docs/00/00/0E/49/document_doc.phtml. In a recent addition to its submission, TUAC designated the suggestions that the Principles had “stood the test of time” and therefore that a limited review would be appropriate.

 

[11] As the TUAC notes, in the case of a bankruptcy, best practice includes setting workers’ creditor claims - unpaid wages, severance, unemployment, pension, and other benefits - over the firm to have senior status and precedence over other creditors.

 

[12] See, for instance, the opening salvo: Lublin, J.S. and Maher, K. (2010, April 21). Funds Turn Up Heat on Mine Firm's CEO. Wall Street Journal. Interview with Michael Garland, New York City Assistant Comptroller for Corporate Governance and Responsible Investment, December 17, 2014.

 

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