Tag Archives: ownership

A Quibble Over Robert Reich’s “CEO” Statesman

JDZellerbach

J.D. Zellerbach

One of the posts on this blog with consistently high traffic is The First CEO, which was my first attempt to track down the earliest instances of the acronym “CEO.” With a little help from the people at Webster’s Dictionary and the Harvard Business Review, I found that those came in the 1970s. In subsequent posts on this theme, I tried to make some historical sense of the literary evidence I’d uncovered.

So I have a quibble with Robert Reich’s polemic in The American Prospect (and elsewhere; he’s syndicated), comparing the CEOs of today and their “shameful,” self-serving silence in the face of Trumpian authoritarianism to the “CEOs” of the 1950s:

I’m old enough to recall a time when CEOs were thought of as “corporate statesman” [sic] with duties to the nation. As one prominent executive told Time Magazine in the 1950s, Americans “regard business management as a stewardship,” acting “for the benefit of all the people.”

That prominent executive, held up here as a model corporate statesman, was pulp and paper executive J. D. Zellerbach. Zellberbach was not a CEO — he could not have been in the 1950s — but the President of Crown Zellerbach. Reich is using the term “CEO” loosely, then, but in this piece that seems to prevent him from thinking historically about the CEO as an institution.

Perhaps he should have instead asked whether the institution of the CEO in the 1970s represented a rejection of “socially-conscious” business leadership for which he’s calling.

Remarkably enough, in Saving Capitalism, Reich himself quotes Zellerbach’s statement to Time Magazine just before he discusses the shift from the benevolent managerialism advocated by industrialists like Zellerbach to “a radically different vision of corporate ownership” that set in during the 1970s (and brought with it, among other things, the institution of the CEO). It’s worth reading this passage to the bitter end:

In the early 1950s, Fortune magazine urged CEOs to become “industrial statesmen,” which in many respects they did—helping to pilot an economy generating broad-based prosperity. In November 1956, Time magazine noted that business leaders were willing to “judge their actions, not only from the standpoint of profit and loss” in their financial results “but of profit and loss to the community.” General Electric, noted the magazine, famously sought to serve the “balanced best interests” of all its stakeholders. Pulp and paper executive J. D. Zellerbach told Time that “the majority of Americans support private enterprise, not as a God-given right but as the best practical means of conducting business in a free society….They regard business management as a stewardship, and they expect it to operate the economy as a public trust for the benefit of all the people.”

But a radically different vision of corporate ownership erupted in the late 1970s and early 1980s. It came with corporate raiders who mounted hostile takeovers, wielding high-yield junk bonds to tempt shareholders to sell their shares. They used leveraged buyouts and undertook proxy fights against the industrial statesmen who, in their view, were depriving shareholders of the wealth that properly belonged to them. The raiders assumed that shareholders were the only legitimate owners of the corporation and that the only valid purpose of the corporation was to maximize shareholder returns.

This transformation did not happen by accident. It was a product of changes in the legal and institutional organization of corporations and of financial markets—changes that were promoted by corporate interests and Wall Street. In 1974, at the urging of pension funds, insurance companies, and the Street, Congress enacted the Employee Retirement Income Security Act. Before then, pension funds and insurance companies could only invest in high-grade corporate and government bonds—a fiduciary obligation under their contracts with beneficiaries of pensions and insurance policies. The 1974 act changed that, allowing pension funds and insurance companies to invest their portfolios in the stock market and thereby making a huge pool of capital available to Wall Street. In 1982, another large pool of capital became available when Congress gave savings and loan banks, the bedrocks of local home mortgage markets, permission to invest their deposits in a wide range of financial products, including junk bonds and other risky ventures promising high returns. The convenient fact that the government insured savings and loan deposits against losses made these investments all the more tempting (and ultimately cost taxpayers some $124 billion when many of the banks went bust). Meanwhile, the Reagan administration loosened other banking and financial regulations and simultaneously cut the enforcement staff at the Securities and Exchange Commission.

All this made it possible for corporate raiders to get the capital and the regulatory approvals necessary to mount unfriendly takeovers. During the whole of the 1970s there had been only 13 hostile takeovers of companies valued at $1 billion or more. During the 1980s, there were 150. Between 1979 and 1989, financial entrepreneurs mounted more than 2,000 leveraged buyouts, each over $250 million. (The party was temporarily halted only when raider Ivan Boesky agreed to be a government informer as part of his plea bargain on charges of insider trading and market manipulation. Boesky implicated Michael Milken and Milken’s junk bond powerhouse, Drexel Burnham Lambert, in a scheme to manipulate stock prices and defraud clients. Drexel pleaded guilty. Milken was indicted on ninety-eight counts, including insider trading and racketeering, and went to jail.)

Even where raids did not occur, CEOs nonetheless felt pressured to maximize shareholder returns for fear their firms might otherwise be targeted. Hence, they began to see their primary role as driving up share prices.

Liability? Responsibility? No, Sustainability.

I’ve been looking for a transcript of the remarks Johan Lubbe made yesterday, on behalf of the National Retail Federation — a trade association representing about 9000 American retailers and the chief and most vocal proponent of an “alternative” to the legally-binding global pact to ensure the safety of clothing factories in Bangladesh. The global pact has won pretty widespread support in Europe, but so far there are only two American signatories. The Americans won’t sign up because, they say, the global pact would expose them to litigation, or what one spokesperson for The Gap called “unlimited litigation,” should something go wrong at one of the factories they use.

Yesterday they brought out Lubbe. Here is how today’s AP report summarizes his remarks:

On Friday, the retail trade group made available for the media an international labor lawyer who rebuked the global pact and said that it is too vague for retailers to sign. At the heart of the criticism: the contract would expose retailers to legal liability for the failure of factories to comply with the set standards even though merchants don’t own the facilities.

In rejecting the global pact, Lubbe and the NRF are trying to limit the scope of legal liability to ownership — in this case, brick and mortar property ownership. I can’t tell if the claim here is that with outsourcing comes immunity, or that liability does not extend in any way down through the global manufacturing supply chain. For the moment, however, I’m less interested in all that than in knowing whether Lubbe or the NRF have made any kind of statement acknowledging their responsibility for conditions in the Bangladesh garment factories.

Responsibility is a word that applies, or should apply here, no matter how the debate about liability gets resolved. It is not a “vague” word of the sort that the NRF would reject. It’s a word that entails specific human rights commitments, which have been carefully enumerated and articulated in connection with the UN’s Guiding Principles for Business and Human Rights. It comes with ownership, but it also extends beyond ownership to business partnerships and relationships — all the way to Bangladesh.

I imagine there is anxiety that acknowledging responsibility might be misconstrued as admitting liability. The word and the idea of responsibility are certainly nowhere to be found in the statement the National Retail Federation issued on Wednesday. Instead, the NRF focused on how applying “a legal standard” would limit the ability of retailers and brands “to respond” to an “ever-changing environment.”

Given the global nature of the apparel and retail industry, applying a legal standard is a very complex proposition. The Safer Factories Initiative understands that flexibility is required to address a broad array of worker safety issues and enables brands and retailers to respond swiftly and effectively to an ever-changing environment.

Let’s forgive the sloppy confusion (“flexibility is required to…enables”?) of the second sentence, and hope that in future the NRF hires a PR firm with grammarians in its employ. Just have a look at the language they’re floating here. These are such well-worn business tropes that we barely notice them: complexity, flexibility, responding swiftly to an ever-changing environment. Here, the big, giant brand, the multinational with suppliers and partners all around the world, is both powerful agent and vulnerable patient: capable of responding, at least if not bound or restricted by law, but subject to forces far beyond its control.

Sidestepping obligations and commitments, the NRF statement opts for “flexibility” and (as the statement continues) “sustainability,” an already-overused and much-abused word that appears in nearly every statement the Federation makes. Talk about vague. The NRF want “sustainable solutions” to make the Bangladesh garment industry “a sustainable manufacturer.” They offer a “sustainable action plan” now and “will continue to pursue a sustainable industry-wide solution,” and so on. The word and its variants appear 9 times in the course of a single statement.

You get the idea. As companies respond to rapidly changing conditions — or flee from one disaster to the next — they need flexibility to fashion a sustainable way forward. Otherwise they might be engulfed by their own blunders, or held responsible or liable for their part in the whole mess before they can run to the next country.