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Financial Times, April 21 2019
Why American CEOs are worried about capitalism
by Andrew Edgecliffe-Johnson
When Roger Williams got his turn at the microphone earlier this month,
his question for the bank CEOs lined up before the House committee on
financial services seemed an unusual one to put to seven sharp-suited
financiers. “Are you a socialist or are you a capitalist?” the Texas
Republican asked each of them, from Citigroup’s Mike Corbat to David
Solomon of Goldman Sachs.
None struggled to assure him of their free market bona fides, but the
fact the question was even asked reflected a remarkable change in the
discussion about business in Washington and beyond in recent months.
America’s decades-old system of corporate capitalism is suddenly up for
debate. One reason is the rising prominence of self-described democratic
socialists such as Alexandria Ocasio-Cortez, Mr Williams’ fellow
committee member, which has put a spotlight on critics who were once
outside the political mainstream. Yet some of the most influential
voices calling for change are the very chief executives who have
arguably benefited most from the current model.
Days before his appearance at the congressional hearing, one of the
seven bank leaders offered some more nuanced thoughts on capitalism than
his one-word affirmative answer to Mr Williams. Jamie Dimon, who earned
$30m as chairman and chief executive of JPMorgan Chase last year,
devoted several pages of his 23,000-word annual letter to shareholders
to a reflection on the “fraying” of the American dream and the role
business could play in stitching it back together.
Capitalism had lifted billions out of poverty, he wrote, but “this is
not to say that capitalism does not have flaws, that it isn’t leaving
people behind and that it shouldn’t be improved”.
Companies — like governments, unions and special interest groups — may
have become too self-interested, he conceded, ticking off loopholes in
the corporate tax code. Having long been able to “almost literally drive
by” many of society’s problems, they should now do more to address them,
he argued. America needed to step up its spending in areas such as
infrastructure and education, “and that may very well mean taxing the
wealthy more”.
In the same week the billionaire founder of the world’s largest hedge
fund delivered a similar message — with a sterner warning. Bridgewater
Associates’ Ray Dalio, worth almost $17bn by Bloomberg’s calculations,
issued a manifesto arguing that the capitalist system he had embraced as
a precocious 12-year-old investor was now reinforcing inequality and
must “evolve or die”. Part of that evolution, he said in the
near-8,000-word piece, would involve raising “more from the top” in taxes.
“I’m a capitalist and even I think capitalism is broken,” Mr Dalio said
as he tweeted out his essay. Expanding on the theme to a mass audience
on 60 Minutes, the CBS current affairs television show, he said
capitalism was “at a juncture”. Americans could reform it together, “or
we will do it in conflict”.
Few other capitalists have said so publicly that they share Mr Dalio’s
fear of “some form of revolution”, but more and more of his peers are
echoing his concerns about inequality and the populist backlash it has
fed. Globalisation and technological change have “led to increased
stress and declining living standards for many and created enormous
wealth for a few,” Chubb chief executive Evan Greenberg wrote in the
insurer’s latest annual report. The system was “failing a large portion
of the population,” warned Weston Hicks of Allegheny, the reinsurance
company owner. Companies from General Electric to Honeywell have begun
to list populism and negative sentiment toward multinationals in the
“risk factors” section of their corporate filings.
Those arguing for reform range from Rose Marcario, chief executive of
environmentally-conscious retailer Patagonia, to Larry Fink, who as
chairman and chief executive of BlackRock has pushed the companies the
giant asset manager invests in to show they serve a social purpose
beyond making profits for their shareholders.
Why now, 10 years on from the global financial crisis, after seeing
stock markets and profits hit new highs and a Republican president cut
corporate tax rates and regulations at their urging, do America’s
leading capitalists sound so uneasy? One answer, according to some in
the thick of the debate, is fear.
“Part of what scares them is the politics,” says Darren Walker,
president of the $13bn Ford Foundation. “What really scares them is when
they look at the data showing younger people are increasingly
comfortable with socialism as a way of organising the economy. That is
incredibly frightening to them.”
According to a Gallup poll last year, the percentage of 18 to
29-year-old Americans who have positive views of socialism has held
steady at 51 per cent, but the percentage saying they have positive
views of capitalism has fallen from 68 per cent to 45 per cent since 2010.
The 2020 US election campaign is also expected to feature a long list of
candidates with strong views on the subject, from Senator Elizabeth
Warren, who has proposed breaking up big companies and imposing a
“wealth tax” on individuals with assets over $50m, to Howard Schultz,
the former Starbucks chief eyeing an independent run, who has talked of
a “growing crisis of capitalism” even as he has questioned whether other
candidates have the business experience to fix it. Several are testing
out messages on earnest topics such as quarterly earnings guidance,
share buybacks and a financial transaction tax that rarely light up
presidential debates but have this year found an audience.
“I think there’s a real fear that it’s legitimate now to talk about
socialists’ and the left’s ideas of much higher taxes, corporate
regulation, corporate reform and the stifling of free market
enterprise,” says Martin Whittaker, chief executive of Just Capital, a
charity that aims to build a more just marketplace by measuring how
companies reflect Americans’ real priorities.
“In private emails and discussions [business] people have been
diagnosing the problem and I think everyone recognises we have a real
problem,” he says, but the solutions are still up for grabs. “People are
trying to find traction for a sensible middle way of capitalism reform
but it’s not there yet.”
For Morris Pearl, a former BlackRock managing director, the pressure
capitalists are feeling is just a consequence of the “gross inequality”
that has shaken many voters’ faith in the free market. Mr Pearl chairs
Patriotic Millionaires, a group of self-professed “traitors to their
class” who have been lobbying since 2010 for higher taxes on the rich.
Their message has attracted much more attention this year than before,
Mr Pearl says, because “a lot of smart people suddenly realised there
are a lot of people in the middle parts of the country that have just
sort of had enough. Capitalism, if it’s going to survive, is going to
have to address that.”
As the public’s anger about inequality mounts, he ventures, capitalists
should be thinking of preserving themselves, not just their system:
“Given the choice between pitchforks and taxes, I’m choosing taxes.”
His group has attracted few public company chief executives, however,
and he sees “hubris” in some of their prescriptions, particularly on
tax. Mr Dimon may favour higher personal taxes, yet he has been a vocal
supporter of Republicans’ cuts to corporate tax rates, Mr Pearl says.
“It’s good if you own stock in JPMorgan but that doesn’t do a lot of
good to a lot of people. It’s kind of like saying . . . they want stuff
like schools and bridges but they want somebody else to pay for it.”
Similarly, when Amazon founder Jeff Bezos challenged retail rivals
earlier in April to beat its $15 minimum wage, one Walmart executive
responded on social media: “Hey retail competitors out there (you know
who you are) how about paying your taxes?”
Mr Dimon’s letter acknowledged that America’s business leaders “are not
generally viewed with high levels of trust”, and some of his peers
recognise that many people will tune out the prescriptions of people
earning hundreds of times their median employee’s salary.
Any boss launching into a discussion of inequality risks inviting an
uncomfortable discussion about their own wealth. Equilar, an executive
pay consultancy, calculates that the median chief executive of a large
US company received 254 times as much as his or her median employee in
compensation last year, with about one in 10 earning more than 1,000
times as much. The multiple 40 years ago, according to Economic Policy
Institute research, was under 30.
“Jesus Christ himself isn’t worth 500 times his median worker’s pay,”
Abigail Disney, the film-maker, Disney heiress and Patriotic
Millionaires member, told CNBC earlier this month.
Richard Edelman, whose eponymous public relations firm publishes an
annual study of trust (or the lack of it) in business, government and
other institutions, says there are “relatively few” business leaders who
can talk broadly about reforming capitalism and expect to be heard. But
he believes many more can speak effectively about how their own
businesses can improve their supply chains, retrain their employees or
participate in their local communities.
Another hurdle for the reformers is the fact that business remains far
from unified on the argument that capitalism must change. For every
initiative like Lady Lynn Forester de Rothschild’s Coalition for
Inclusive Capitalism there is an executive still speaking up for the
shareholder primacy model popularised by Chicago economist Milton
Friedman in the 1970s.
Cognex chairman Robert Shillman, for example, used his shareholder
letter this year to express his alarm at the trend of “bashing”
businesses like his Massachusetts sensor and software manufacturer which
is valued at $10bn, pointing to initiatives like Ms Warren’s accountable
capitalism bill, which would oblige directors of large companies to
consider the interests of all stakeholders, not just shareholders. “The
free market has worked great for Cognex and for all its shareholders for
the past 40 years,” he said. “Why change it?”
Other chief executives have rejected calls from Ms Warren, Ms
Ocasio-Cortez and others for higher taxes on the rich, with computer
magnate Michael Dell telling a Davos panel he trusted his charitable
foundation more than he did the US government to allocate his wealth.
Such concerns have held back previous attempts to push capitalism in a
more long-termist, stakeholder-friendly direction. Dominic Barton,
global managing partner emeritus of McKinsey, wrote a Harvard Business
Review essay in 2011 while he was still running the consultancy, urging
business leaders to address the failings the financial crisis had
exposed if they hoped to avoid rupturing the social contract between the
capitalist system and the citizenry “with unpredictable but severely
damaging results”.
Looking back, he says, “it hasn’t changed as fast as I would
want . . . but I think there’s a recognition it has to go much faster.”
Populist votes for Brexit and Donald Trump have made more people within
the system realise “we’d better fix it”, he says, and serious money is
now backing reform initiatives. “BlackRock saying this stuff when they
have $6.5tn [in assets under management] is not an academic exercise.
That wasn’t happening eight years ago.”
For the Ford Foundation’s Mr Walker, the test will be how much more
action is seen now than in the aftermath of the financial crisis. “It is
good news that some CEOs are talking about inequality. Now we need CEOs
to act,” he says. He is cautiously optimistic, seeing growing numbers of
business leaders who are now “willing to do things that are not in their
best short-term interests but are in the best interests of their company
and country long-term”.
In 2011, Mr Barton had warned his fellow business leaders that they
could reform capitalism themselves or have it reformed for them “through
political measures and the pressures of an angry public”. The question
now, he says, is whether companies will take more meaningful action —
even at a short-term cost — to save what Mr Dimon still calls the most
successful economic system the world has ever seen.
“I believe it can be [reformed from within], but I think it’s going to
be a lot bumpier than we thought,” Mr Barton says, predicting that the
process could take another 10-15 years. There may be more populist
“rise-ups” he adds: “There are going to be disruptions because people
are pissed off.”
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