Despite the newly fashionable populist rhetoric of this campaign season--Al Gore hectoring oil companies, HMOs, clothing manufacturers that run sweatshops abroad, and cigarette and gun manufacturers; Joe Lieberman berating media corporations for their moral offensiveness; and yes, even George W. calling on corporations to be "responsible to leave the air and waters clean"--the Democrats' core constituencies are becoming ever more insistent that companies generate higher returns regardless of their social responsibility.
America's teachers, civil servants, unionized workers, college professors, and similar core Democrats have their savings in giant funds like TIAA-CREF, the $290-billion teachers' retirement system, and CalPERS, the $175-billion health and retirement fund for California state employees. And these large institutional investors increasingly are demanding that companies produce higher returns. That's their job. If they failed to get the best possible returns, the teachers, civil servants, unionized workers, professors, and other stalwart Democrats would park their savings elsewhere.
In recent years, institutional investors have been active in ousting chief executives at IBM, AT&T, Sears, General Motors, Xerox, Coca-Cola, Aetna, Compaq, and other blue-chip American corporations that didn't boost shareholder returns enough. TIAA-CREF has even ousted an entire board that failed to fire an underperforming CEO. Do not cry for these departing executives; they were nicely compensated for leaving. And they are more than nicely compensated when they generate high returns.
Not surprisingly, these incentives have been pushing CEOs to do whatever's necessary within the law to boost their share prices--even if it means pandering to the carnal appetites of teenage moviegoers, messing up the environment, raising oil prices, marketing guns and cigarettes, using sweatshops in east Asia, laying off platoons of employees, and treating patients like they were at fast-food drive-ins.
It's called cognitive dissonance when one part of your brain wants one thing and the other wants something different. While the frontal lobes of loyal Democrats are delighted by populist campaign rhetoric that scolds corporations for being socially irresponsible, their hypothalami still want hefty returns on the savings in their pension plans--and the two aren't necessarily compatible. The board of directors of CalPERS recently rejected a proposal from one board member to dump the shares of tobacco companies and to refrain from investing in nations that didn't meet some minimally humane political and social criteria. The board's chairman feared a slippery slope. "Do we one day ban investments in alcohol, handguns, and rap music?" he asked rhetorically. (CalPERS's investment staff noted that just the sale of the fund's tobacco stocks would cost it upwards of $56 million in transaction costs alone.)
Mild-mannered Democrats, like California's public retirees--tens of thousands of gentle, elderly people who spent their careers working for the state and are improbably cast as rabid promoters of free market capitalism--are also quietly undermining what remains of European social democracy. They are not alone in doing so, of course, but given the extensive holdings of their retirement funds in European-based companies, their influence should not be underestimated. When Alcatel, a mostly French-owned telecommunications company, announced that its annual profit would be less than had been forecast, its management was driven to the distinctly un-French solution of restoring profits by laying off some 12,000 employees. CalPERS was not the sole instigator, although French President Jacques Chirac testily noted in his Bastille Day address last year that the layoff was triggered when "California retirees suddenly decided to sell Alcatel."
Europe's much-vaunted "stakeholder" capitalism makes European companies sensitive to multiple constituencies, which is precisely why it doesn't sit well with shareholders intent on making companies attentive only to them--and why stakeholder capitalism is under attack. CalPERS recently complained that a German utility gave the cities it served too much control over its board, thereby diminishing the value of the utility's shares owned by CalPERS. Utility executives explained that its system of city representation maintained a bond with the utility's customers, but when CalPERS then threatened to dump its shares, the utility promptly scrapped the system.
As power shifts away from governments to global investors, political rhetoric about corporate social responsibility is meaningless. Companies won't voluntarily become socially responsible if that means sacrificing earnings and share values; investors can easily punish them by putting their money elsewhere. So laws and regulations are needed to back up such rhetoric.
But even government's power to regulate is weakening as highly mobile capital can find better deals elsewhere around the world, where profits are higher because regulations are meeker. So, ultimately, many such laws and regulations will have to be international. The question for the coming decade is what sorts of global agreements can be reached on the environment, energy, and labor, and on the production and marketing of dubious products like guns, cigarettes, and smut.
Unless good Democrats face head-on the cognitive dissonance in their brains, they'll continue to practice a politics that has little or nothing to do with the personal economic choices they're making, even though the latter are trumping the former. And they'll fail to insist that their candidates talk realistically about how to redress the balance between the desires of voters and the demands of investors. ¤