Cox: Public company capitalism meets its match

HONG KONG (Reuters Breakingviews) - Capitalism takes many guises around the world. In Italy, it has a family twist. In France, the state plays a starring role. Japan tries to achieve consensus with government, conglomerates, salarymen and society at large. China’s Communist Party dubs it socialism with Chinese characteristics. In Germany, labor gets a voice. America’s model puts the stockholders of public companies front and center. Until now.

U.S. President-elect Donald Trump speaks at a USA Thank You Tour event at Crown Coliseum in Fayetteville, North Carolina, U.S., December 5, 2016. REUTERS/Shannon Stapleton

Donald Trump is challenging the ideals that have guided American markets and corporate behavior for a generation. In the past two weeks he has prodded, tweeted and shamed giants of the industrial firmament to align their business decisions with his “America First” ideology.

Even though he is still more than a month away from being inaugurated as president of the United States, Trump’s approach has alarmed an establishment raised on the economic theories of Milton Friedman. The influential University of Chicago monetarist railed against suggestions that businesses in a free-enterprise system should assume social responsibilities. Most of Corporate America has long taken this as gospel.

In his 1962 classic “Capitalism and Freedom,” Friedman argued: “There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

Combine Trump’s refusal, at least selectively, to accept that principle with his stated wish to make cross-border trade more expensive for U.S. companies, and he’s adopting an activist approach to corporate activity that’s unique for a Republican president and almost without precedent even among Democrats.

Take the president-elect’s coercion of United Technologies to keep factory jobs at a Carrier plant in Indiana that were slated to move to Mexico. The deal provides a possible blueprint for his administration’s industrial policy. Trump and Vice President-elect Mike Pence, who is also the Hoosier State’s governor, used a combination of the bully pulpit and tax giveaways to convince United Technologies to change its plans.

That allowed Trump last week to take a victory lap through a factory made infamous during the election campaign after an employee filmed management’s announcement that it planned to fire everyone and replace them with cheaper workers south of the border. Trump seized on the video, which went viral, and used it to cudgel the corporate elite.

As a result of the Trump-Pence intervention, hundreds of workers will keep their jobs - though exactly how many is contested. Setting aside the question of whether Carrier can sustainably sell products made in America by expensive workers in a competitive global marketplace, it’s a victory for the wider social compact over stockholders who will see a few pennies less profit.

Thinking like this is routine elsewhere in the world. Developed-country governments often put their fingers on the scale to, say, discourage companies from moving offshore or to prevent foreign investors from acquiring companies and firing workers. The latter is part of what the Investment Canada Act polices, for instance.

Part of this is about thinking bigger-picture and longer-term than some companies do. That idea has provoked some serious pondering by McKinsey, the management consultant, and BlackRock, the largest fund manager in the world. In a survey of senior executives conducted this year for its “Focusing Capital on the Long Term” project, McKinsey found 87 percent of them reported “feeling the most pressure to demonstrate strong financial performance within two years,” up from 79 percent in 2013.

McKinsey presented the 1,000 executives in the survey with scenarios to assess how they would respond differently given a longer-term horizon to meet their objectives. Unsurprisingly, those who reported long-termism as a major part of their companies’ cultures were far less likely than their counterparts to slash discretionary spending or delay a project when faced with a quarterly earnings shortfall.

The survey also showed respondents at publicly traded companies were more likely than their privately held peers to suffer rising quick-fix financial pressure. Trump is primarily a private-industry guy. So are the vulture investors he has chosen for Cabinet positions: Wilbur Ross and Steven Mnuchin, at Commerce and Treasury, respectively. They made their fortunes picking over the carrion of public companies driven into the ground by managers who probably focused too much on the short term.

It’s possible, therefore, that Trump’s instincts and his Twitter feed may counter the short-termism that’s prevalent in U.S. corner offices and boardrooms. But it is also plausible that his bullying style leads to a darker form of capitalism, one characterized by cronyism and quid pro quos, where corporations singled out for shaming become vassals serving a capricious master. In this scenario, boards are incentivized to make decisions not for the long-term good of a broad group of stakeholders but to curry favor with the Twitterer-in-chief.

That may already be happening. Greg Hayes, chief executive of United Technologies, Carrier’s parent, said Trump didn’t make threats or talk about the company’s military contracts. Really, though he didn’t have to. United Technologies gets about a tenth of its revenue from Uncle Sam. Keeping a plant open a few more years in Indiana may be a small price to pay by way of insurance.

Trump also recently criticized Boeing, another big defense contractor, over the cost - which he characteristically exaggerated - of new Air Force One jets. Boeing was moved to issue a mollifying statement. It’s hard to have much sympathy with the company when military contracts have been so widely exposed as wasteful. But a president-elect might be better off setting out policies that would make all government projects more efficient, rather than trying to embarrass firms individually.

Doing that makes it seem like sucking up to the incoming White House resident could be a way to get ahead. Masayoshi Son, the founder of Japan’s SoftBank, has not achieved a $19 billion net worth by missing tricks like that. This week, he popped by Trump Tower pledging to invest $50 billion, mostly other people’s money which perhaps would have been spent anyway, in the United States.

The gesture won praise from the president-elect, but the vote of confidence from Son may not come without strings. The Obama administration dashed SoftBank’s hope of merging Sprint, its U.S. mobile-phone business, with T-Mobile US. Since Election Day, Sprint shares have surged 44 percent. Son may have astutely read America’s new form of capitalism.

It’s too early to say whether Trump’s interventions herald a period of corporate favoritism or a policy effort that sets American companies on a different course. With his business history of defaulting on debt, sidestepping taxes and strong-arming suppliers, Trump is an unlikely champion for what Europeans might call “stakeholder capitalism.”

But by inserting himself into the affairs of private enterprises, he is already changing the rules of the game in ways that would make Friedman, who passed away a decade ago, turn in his grave. Public company capitalism - as practiced by Friedman’s acolytes - has met a formidable match.


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