The Battle Over Corporate Responsibility

Creating A New Social Contract

Robert L. Kutner
Contributing Columnist to Business Week's Economic Viewpoint

It's a real pleasure to be here. I can think of a number of communities where you could get the CEOs of the most important firms in town in a hotel ballroom like this, but I can't think of too many where you could gather such a group around the subject of corporate responsibility and a new social compact. This community, of course, has a very well deserved reputation for enlightened business leadership.

The Rhetoric of Responsibility

I want to try to be very provocative tonight because as I look at this issue, I see a kind of real schizophrenia. On the one hand, this is a time when there is genuine enlightenment in how CEOs think about reconciling the goal of serving shareholders and earning a profit, with the goal of empowering their people and treating them as valued employees. All you have to do is pick up a business publication, any of the dozens of management books that come out every year, and you see the same kinds of arguments made that the corporation has a responsibility not just to shareholders, but to stakeholders, to the community, and the society, and that investing in people is good business. On the other hand, it is a time when it is harder and harder to carry that out. That's really the subject of my talk.

As an example, Robert Haas, the CEO of Levi Strauss, said "if companies are going to react quickly to changes in the marketplace, they have to put more authority, accountability, and information into the hands of the people who are closest to the product and the customers. Values provide a common language for aligning a company's leadership and its people." Haas goes on to say that on occasion they have even chosen not to shut down plants that were the high cost plants because of concerns for the community. I don't think this is simply rhetoric I think this is meant from the heart, and I think a lot of CEOs and other executives in companies practice this.

Can Business Deliver?

The question I want to pose is whether, in this competitive environment, business is really capable of delivering on those principles. I think the risk is that both the business community and its critics will take this rhetoric seriously and try to do things that business, in the end, may not be capable of fulfilling. Liberal critics of business are no longer able to use public spending in order to achieve greater equality and greater economic security. Regulation is out of fashion; deficit reduction largely precludes public outlay. This leaves the corporations. It's very tempting for both the corporate leaders and for others who have social objectives to treat the corporation as if it were a kind of private welfare state, where health benefits, pension benefits, lifetime learning, education, training, and family-friendly policies are all supposed to co-exist somehow with the bottom line.

In mid-May President Clinton had an event at the White House, very much in this spirit. Bob Allen of AT&T and Aaron Feuerstein of Malden Mills were both invited. Feuerstein of course, is the poster child for this cause. He is the chief executive of Malden Mills, the company that chose not to lay off its two thousand and some workers after it had a fire the week before Christmas. Feuerstein has been lionized. You really have to read the fine print to notice that he has a product that is a virtual monopoly, as well as a strong union, and very good interruption of business insurance coverage.

Secretary of Labor Robert Reich, talks extensively about responsible corporations. Reich has said that if we want to do something about the inequality problem we need greater wage growth, but we're only going to get wage growth if we have more education and training. Also, says Reich, "Government can't do it, government is saddled with a four trillion dollar debt. It's saddled with the imperative of deficit reduction, but," says Reich, "here's where the private sector comes in. If Corporate America doesn't step up to the plate it will have to contend with far worse than proposed tax incentives to promote training. It will have to contend with nativism and protectionism."

Corporate leaders are talking about new social compacts. And liberals, for better or for worse, are taking this rhetoric seriously. Senator Jeff Bingaman, Democrat of New Mexico, the head of a Democratic Task Force on Living Standards, came up with the idea of what he calls an "A" Corporation, that is a "good guy" corporation. Bingaman's idea is to use tax policy and regulatory policy to benchmark corporations that are good corporate citizens. By this he means that the corporation shall pay fifty percent of the cost of a health-insurance policy, it shall pay two percent of its payroll for education and training, three percent of its payroll for a portable pension. It shall have above average records on health, safety and the environment. I guess this will be a Lake Wobegon corporation--though I don't know how all corporations are going to be above average. In addition, just to get rid of the famous short termism that is said to be the disease of American business, Bingaman also provides for a turnover-tax on the sales of securities so that Wall Street doesn't excessively drive Main Street. Well, most of this is perfectly benign, I think, and yet, I wonder how realistic we are being in setting forth this ideal of the social compact, which in many respects is at odds with the competitive environment in which corporations increasingly find themselves.

The Realities of a Changing Economic Environment

Today's corporation, of course, is under much more fierce competitive pressure. It's more global, more footloose, more fragmented. In some respects this notion of a social compact is the sound of one hand clapping. Abraham Maslow, the psychologist, used to talk about a hierarchy of needs. In that hierarchy, having a family-friendly workplace, having a workplace that values input from employees, teams, total quality and all of that, is pretty high on the hierarchy. But having a job is more fundamental. The question is whether America's corporations are in a position competitively where they can guarantee employees the most fundamental kind of reciprocity: that they will continue to be employed. I would submit that that is getting harder and harder. You know that better than I do, not because America's CEOs today are less enlightened than their brethren of a generation ago -- if anything they are a great deal more enlightened -- but because the competitive environment has changed so much. I promise you I'm not going to end on this note, I'm going to segue back to a more upbeat conclusion.

Let me start by ticking off the reasons why the environment has changed so fundamentally. Some will be obvious to this group, but all may not be. The corporation of a generation ago (this is true of the big corporations) offered a tacit social contract, or compact, to its employees, that assumed the presumption of career-long employment and promotion if you did your job reasonably well, and the presumption of good fringe benefits, pensions, and health care, in of community organizations. Some addition to contributions to all kinds called it an era of benign paternalism.

Now, what about that era made it possible for corporations to offer this tacit social compact?

• For one thing, there was much less global competition, something like five percent of America's gross domestic product was traded. It's about fifteen percent today, but even that underestimates the reality. Even where you are not in direct competition, the fact that somebody over the next hill influences the way you market and price your product.

• In addition to a degree of insulation from trade, an enormous fraction of the American economy was either regulated by the government, was a monopoly or an oligopoly. The phone company, the electric company, the auto company, the steel company, airlines, the broadcasting companies, hospitals, you can go on and on. Industries substantially sheltered from cut-throat competition added up to about half of the Gross Domestic Product. These were industries and companies that were able to earn reliable profits over the years, (economists call them "rents") slightly excess profits. That could translate into lifetime compacts with their employees.

• In addition, the defense sector was about twice as large, relative to the total economy as it is today. This lead to companies and industries with very long term planning horizons which could make commitments to their employees.

In this environment, companies like IBM prided themselves not only on listening to their employees, on being knowledge companies, but on having a No Lay-off Policy. It's very easy to have a No Lay-off Policy. All you have to do is be a monopoly, have twenty five percent growth year after year, and you can have a No Lay-off Policy and be a good guy. The problem is that we are trying to project 1990's values as if there were a 1950's operating environment.

Conflicting Visions

I go to conferences where in the same paper, or in the same inspirational speech, you can hear two almost diametrically opposed conceptions of the corporation. On the one hand, the gospel is to treat your people the way that you would like to be treated, to view employees as assets, to foster a culture of learning and a culture of teamwork. In the same breath you hear that the purpose of a corporation is to add value, that the individuals worth to the corporation is defined in terms of his or her ability to add value. The "virtual corporation" with a very small core of entrepreneurs and a periphery of people who are low level or high level casual labor is celebrated as the epitome of the new economy. Lamentably there is a contradiction between these two visions because in the hierarchy of needs, the top need is "Do I have a job next week?" In this competitive economy, you cannot guarantee that because you do not know what the competitive conditions or what the order book is going to look like next year or next month or even next week.

There is a company called YOU Incorporated. The gospel of this company is that you, in the labor market, have only the human capital that you carry around with you. You are your own marketing vice president. You are your own training vice president. You are your own human resources vice president. You are worth whatever the economy tomorrow morning says you are worth. More and more of us I think, are living in that kind of world; it's a 1990s version of a 19th century hiring hall. Some people absolutely thrive on this. I would venture to say most people in this room thrive on this kind of world and commend it to others as exhilarating. But some people are thrive in that hypercompetitive environment: risk averse and some professions do not doctors, nurses, school teachers, librarians, etc. You can think of a whole range of professions that do not optimize their output when they view themselves as one lone entrepreneur against the world.

Embracing an unrealistic vision of its responsibility to society business maybe setting itself up for a fall. I want to quote my good friend, Bernard Avishai, who is a management consultant, entrepreneur and formerly an editor of the Harvard Business Review. He argues that those who expect the corporation to play certain social roles, such as education and training, have it backwards, because of the limited capacity of even "values-driven" companies to be faithful to employees. It's true that corporations that have a vision larger than the bottom line are contributing something terribly important to society. It's very important that corporations be allies of public schools. But there is a difference between being an ally of the public school system, helping it modernize, helping it shake off bureaucracy so that the next generation of kids can become productive members of the work force, and thinking that that task ought to be brought inside the corporation.

Avishai tells the story of Motorola, which in 1985 built a new greenfield plant in Illinois. The company hired about three thousand hourly workers and had visions of hiring a lot of kids from Chicago and giving them a start on the corporate ladder. But Motorola realized to its chagrin that something like forty percent of the people it hired did not have the junior high math skills to do the kind of quality work and statistical monitoring that was expected of them. By the late '80s Motorola was spending about three million dollars a year, seemingly an exemplary corporate citizen, on remedial education. But then you fast forward a few more years and those jobs have mostly disappeared because they've been automated. One Motorola executive was quoted as saying "we now have a career ladder with no bottom rungs."

So, in its role as an enlightened corporate citizen concerned about education and training, Motorola is focusing less on trying to be a surrogate high school. The kind of training that goes on in Motorola now is really more like a surrogate graduate school. It's devoting its energies, appropriately, as a corporate citizen to working with the public schools. But to expect to bring this inside the corporation and to impose on the corporation an education and training mission, as my friend Bob Reich would like to do, is unrealistic.

Bernie Avishai also says, and this is a quote I particularly like, "the command and control company may be on its way out, but the love 'em and leave 'em company is taking its place." I want to quote Al Dunlap, "Chainsaw Al" of Scott Paper. He's the guy who invited existing employees to bid for pay cuts against people on the street who would do the same job for less. [How many of you, by the way, think that is an ethical thing to do? No, really. Anybody? How many would do it if that's what it took to save the company? Well this is Minnesota: three people.] This quote, by the way, is from last month's Harper's in a round table called "Does America Still Work?" The subject is turbulent energies of the new capitalism with Robert Reich, Al Dunlap, George Gilder, Ron Blackwell, the chief economist of the textile union, and Edward Luttwack. They really went at it hammer and tongs for about two hours. At one point Dunlap said, "the responsibility of the CEO is to deliver shareholder value, period. It is the shareholders that own the corporation, they take all the risk, and how does the CEO maximize value if he does that by focusing on profit? ... and sometimes yes, you do have to get rid of people. Nobody wants to get rid of people, it's the most unpleasant thing by far."

I am a little chagrined to say that I think Dunlap is basically right. This is the world in which we find ourselves. Frank Doyle, Executive Vice President for Human Resources of GE, a model enlightened human resource executive, this was a speech he gave at a conference I attended at the Levy Institute in upstate New York. Doyle spoke about the GE turn-around, the success story:

"We now have revenues of sixty-five billion dollars, we have profits of almost five billion, we do that business with 215,000 direct employees. When we were less than a third of that economic size fifteen years ago, we had 435,000 direct employees. How did we get there? I will acknowledge that most of what we did in the 1980s was under duress and that the quick, sometimes draconian, actions we took with regard to our competitive position churned the work force, certainly the US work force; we did a lot of violence to the expectations of the American work force." He goes on to say this: "outsourcing was in many ways the most critical piece of understanding to come out of those actions. If you think about the job structures in the 1970s and early 1980s, large corporations were overpaying low end workers and under paying high end workers."

For Doyle, the problem in the '70s and '80s was that there was not enough inequality. To pay people according to what they were worth, we need more inequality, and of course, to look at some of the CEO salaries that seems to be the conclusion in a lot of board rooms.

The Solution: More Conservative and More Radical

What's my point? Yes, it's very important for there to be a new social contract. And yes, it's very important for business to lead, particularly in this competitive environment, producing a new social compact which values employees, and which offers some long term reciprocity. But get from here to there we have to both be more conservative and more radical. We have to be more conservative in the sense of recognizing the core purpose of a business is to make a profit and stay in business. At the same time, we have to be more radical in thinking about how we guarantee, if not employment security, employability security. It seems to me that employability security, for the most part, is something that cannot be guaranteed in one corporation. In the 1950s it was possible to guarantee employability and employment security simultaneously. In the 1990s with a more turbulent competitive environment, more outsourcing, more downsizing, if we want to guarantee the employee the other side of the social compact, we're going to have to do that socially not company by company.

What does that mean? Well, it may mean some mix of codes of conduct and regulations that preclude certain kinds of races to the bottom. For example, forswearing the strategy of saying to someone who is a loyal employee, "I can get someone to do your job for fifty percent less; you're out of here." I have a very good friend who is the CEO of a hospital that will not be in business next year if he does not shave his costs dramatically. He has done this by terminating dozens and dozens and dozens of employees. I think the only way to preclude certain kinds of races to the bottom is to get everybody not to do it. Otherwise, the low road becomes too tempting. That may require some regulation, as well as some voluntary codes of conduct.

I think one of the absolute best guarantees of employability security is tight labor markets. I know one of the commentators on the panel is from the Fed. and we can debate this, but I'm in good company with the National Association of Manufacturers and the Business Roundtable, both of which are to the left of the Federal Reserve on this point. We have got to be able to grow at more than 2.2% a year. I don't know how, in an environment of very low inflation, Alan Greenspan thinks that ten million people out of work is full employment. It's certainly isn't full employment if you're one of those ten million people. One of the reasons that employees were treated better in the 1950s and 1960s, given not only regular wage increases with productivity increases, but pension plans and health plans and all kinds of other benefits in order to attract top people. One reason thatemployees had more bargaining power then was tighter labor markets.

In my state, former governor Michael Dukakis got a lot of favorable press in the 1980s for talking about the "Massachusetts Miracle." The dirty little secret to that was, of course, that Reagan's defense build up produced the "Massachusetts Miracle." One side effect was an employment rate in our state of 3 or 4% unemployment. Given that unemployment rate, Dukakis was able to have great success with a program called ET Choices, Employment Training Choices, which encouraged employers to take people off the welfare roles, mostly women who did not have a college degree, or even a high school diploma, and trained them for back office jobs in banks and insurance companies and other jobs that paid an average of seven or eight dollars n hour and this was in 1986 dollars. The reason that employers were willing to take on these trainees, albeit with a subsidy from the state, was not that they suddenly acquired a social conscience that they didn't have in 1979. The reason was that the unemployment rate was 3% and you couldn't get anyone to fill those jobs, and so people coming off the welfare rolls started looking pretty good.

We may need a blend of regulations and codes of conduct to prevent downward competitive races. We should have full employment. We certainly should have more education and training, but I think there are limits on how much you can expect the corporation to do inside the corporation. By all means let's have family-friendly workplaces, but again if you are a hard nosed business person and you take a look at family-friendly policy it starts looking a lot like a cost center. You have to be in a situation where you're pretty confident of your bottom line next year to spend that kind of money.

Business Can't Do It All

It all adds up to this: if we want a better social compact between the corporation and the employee, some of it has to be done socially. Some of it has to be done outside the corporation. Your capacity as local civic leaders, as well as CEOs of your companies, you have a role to play in bringing about a society that does provide employability security, if not employment security. The tricky part, the paradoxical part, is the fact that it sometimes involves embracing policies that are philosophically repugnant to major segments of the business community.

For example, if you are going to have a situation where employees do not have lifetime job security, but typically move from one corporation to another corporation, or work for virtual corporations where they are essentially independent contractors, it makes no sense to have health benefits tied to the corporation. If you try to do something like the Kennedy Kassebaum bill, where you mandate portability of insurance, you create a nightmarish situation with all kinds of inefficiencies where somebody who moves from Boston to Minneapolis takes with him an insurance policy indigenous to Massachusetts and the poor hospital or the poor doctor in Minneapolis has to figure out what the terms of coverage of that policy are. Then you get into a whole second-order and third-order set of inefficiencies. It would make much more sense to provide health insurance socially. I think the Clinton Health Bill, in that respect got a rather bad rap. I think business kind of sniffed around that bill, and liked the fact that it would cap businesses costs, but at the end of the day decided that it was too much government meddling, too much intervention and decided not to support it.

So the paradox is that in order to prevent public outcries and public policies from trying to turn each corporation into a mini welfare state, you need to provide some things socially: education, training, and health care are three things that come to mind. But that probably involves a larger role for the public sector, and here business tends to get off the bus. You may need to be supportive of tighter labor markets in order to have employability security. Tighter labor markets tend to increase the bargaining power of employees. As a matter of philosophy, most business leaders tend to resist that. You find yourselves at times between a rock and a hard place, where philosophically much of the business community is opposed to doing this socially, but it's not really practical to do it inside the individual corporation. The risk is that we end up with a rhetoric of corporate responsibility, a rhetoric of social compacts that business can't really deliver on, and then the public just becomes cynical, it's one more bit of rhetoric, it's one more bit of defensive atmospherics and they don't really mean it.

To conclude -- you must always say "to conclude" to give the audience hope -- I admire the fact that groups like this, which are far too rare, are acknowledging that business has a broader social role to play. I would hope that you would expand that social role beyond the corporation itself to public policy generally, because I think that's where the solution is.

Roseabeth Moss Kantor, at the Harvard Business School, author of a new book called World Class, uses the software industry as an example of employability security. Here is a high end industry were a lot of people find it challenging and exhilarating not to be working for the same company year after year. She cites a number of very creative things that different companies in the software industry do to facilitate employability security and yet points out that the software industry is not exactly typical. If we want to use it as a role model, we need a much higher level of education and training in society and a greater degree of full employment.

Third Try At House Breaking Capitalism

This after all, is the third time this century that we have faced the challenge of house breaking capitalism. A market economy is the most turbulent, dynamic, inventive force known to man. The economist Joseph Schumpeter referred to it, all too accurately, as "creative destruction."

In the 1880s and 1890s when the first wave of industrial capitalism hit, people came off the farm to the factory. Immigrants came to the United States. There was a tremendous amount of social turbulence, some of the same kinds of social problems that plague us today -- high rates of illegitimacy, high rates of crime in the cities, high rates of social dislocation. Most of the voluntary organizations that have become part of our accumulated stock of social capital were founded in the late 19th century, in large part a response to the dislocations caused by the first wave of industrialization: the Grange, the early trade union movement, building and loan societies, immigrant self help societies, the American Red Cross, the Boy Scouts, and if you think about it, most of the fraternal organizations. Slightly afterwards, public policy sought to tame the dislocations of the market economy through things like Anti-Trust, the Pure Food and Drug Act, child labor laws, etc.

Then in the '30s we had to do it all over again and most of the legislation of the Depression can be understood as a strategy for trying to stabilize the turbulence and the instability of a market economy run rampant. This included securities legislation, banking legislation, public works, collective bargaining, Social Security, and then World War II became the greatest public works program in the history of the world.

It's more than half a century later and we have yet another incarnation of the turbulence of a market economy ripping up settled social compromises and being very good for the people who know how to ride the waves and being very bad for the people who are submerged by the waves. I submit that we've only begun to think about what sort of strategies for domesticating and taming this turbulent market economy will work in the 1990s. I think self-conscious corporate responsibility on the part of enlightened corporate leaders is the beginning of the story, but not the end of it.

Thank you very much.

Robert L. Kuttner is contributing columnist to Business Week's Economic Viewpoint," founder and co-editor of The American Prospect, former economics editor of The New Republic, and founder of the Economic Policy Institute -- currently serving on its board. Kuttner's speech was given at the 1996 Annual Meeting.

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