American big business invites European-style, more intrusive regulation

Robert Robb, Arizona Republic

One of the big questions looming over the 2020 presidential election is whether Americans are ready to move toward becoming a European-style social democracy. The Democratic nominee is all but certain to be pledged to so doing.

One somewhat surprising group recently signaled no problem with that: big business, or at least the big businesses that are members of the Business Roundtable.

The 181 corporate chieftains who signed the pretentiously titled statement, “The Purpose of a Corporation,” probably didn’t intend to so signal. But that is the practical effect of the tenets expressed in the statement.

Heretofore, the purpose of a corporation was generally acknowledged, and recognized in law, as making money for its owners, or its shareholders.

CEOs demote shareholder interests

The roundtable big cigars pointedly downgraded the importance of that. According to them, shareholders are only one of the stakeholders it is the purpose of a corporation to serve, and is no more important than the others: customers, employees, suppliers and the community in which it is located.

The true purpose of a corporation, the press release accompanying the statement grandiosely pronounces, is to promote “An Economy that Serves All Americans.”

The most striking thing about the statement is its impertinence. The CEO signatories aren’t the owners of their corporations. They are hired hands. Fabulously compensated hired hands, but ultimately worker bees nonetheless.

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They work for the actual owners, the shareholders, whose interests they have demoted to being no more worthy of their attention than the supplier of the toilet paper for the executive bathroom.

Confusing purpose with effect

The statement confuses purpose with effect.

The purpose of a corporation is to make money for its owners, the shareholders. It does that best for the longest by serving customers well, attracting and retaining good employees, and treating suppliers fairly. The effect of that is “an economy that serves all Americans.” And benefits the community in which the business is located.

The political significance of big business abandoning the position that their principal purpose is to make money for its owners is subtle but profound.

If the purpose of a corporation is private — making money for the owners — then an argument can be made that government regulation of them should be limited. And compared to most European countries, businesses in the United States are more lightly regulated.

There are government rules about employment and fair treatment of consumers. And a few, very limited laws related to the community effects of corporate decisions beyond the run-of-the-mill zoning requirements and restrictions.

What European-style regulation means

But, compared to Europe, the United States has free and flexible labor and capital markets, and few restrictions on things such as corporate relocations or moving production around the country and even the globe.

But if corporations aren’t principally private enterprises with a private purpose, to make money for the owners, but social organizations with equal obligations to other stakeholders, then there really isn’t an argument against much more intrusive and restrictive government regulation.

If the obligation a corporation owes to customers, employees, suppliers and the community equals the obligation to shareholders, why should corporate bigwigs be the ones deciding how to meet those obligations and whether they have done it adequately or properly?

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In Europe, corporations are treated more as such social organizations. Generally, labor markets are much more tightly regulated. Hiring and firing is more difficult and complicated. Government does more to allocate capital. There are diktats about the composition of corporate boards. Large businesses can’t just pick up sticks and relocate to a more promising location.

In general, the American system produces a better result, more of an economy that serves everyone. The European approach works to a point. Historically speaking, Europeans have a high standard of living.

But overall economic growth is more sluggish. Unemployment is higher, particularly among young adults. Capital is less efficiently allocated. Corporate managers have less elbow room to run their enterprises.

Political consequences of virtue-signaling 

Elizabeth Warren has developed her ideas for transforming the United States into a European-style social democracy more fully than the other aspirants in the Democratic field. And one of her proposals is to redefine the American corporation very similarly to the virtue-signaling indulged in by roundtable worthies.

Sen. Elizabeth Warren addresses a crowd on August 21, 2019 in Los Angeles.

I’m sure the roundtable CEOs just wanted to put out a statement making themselves look less grubby, more woke. They don’t really want European-style regulation of how they run their businesses and interact with various stakeholders. But they are now left without a principled argument against it.

Fortunately, American small businesses are made of sterner stuff.

Robert Robb is a columnist for the Arizona Republic, where this column originally appeared. Follow him on Twitter: @RJRobb

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This article originally appeared on Arizona Republic: American business, Democratic candidates invite European regulation