Regulation: Reich and Responsibility

Business bashing gets serious.

I knew it would happen. I even knew who would do it. But when Labor Secretary Robert Reich began to cite Bill Bennett and Charlton Heston in his campaign for "corporate responsibility" earlier this year, my prescience was no comfort.

Bennett and Heston, you may recall, led a successful campaign last year to encourage Time Warner to distance itself from some controversial rap artists on the basis that no "responsible" corporation would associate its name with such filth. Heston even read the lyrics of one rap "song" to embarrassed Time Warner directors with an extravagant flourish, creating some of the most entertaining sound bites of recent memory.

In fairness, Bennett and Heston never called for government action. Their chosen means of affecting corporate decision making were boycott threats and public shaming, both perfectly acceptable modes of discourse in a free society. But by citing the concept that corporations have social responsibilities beyond those of satisfying shareholder demands, conservative critics of sex and violence in the media unwittingly cracked a door through which Secretary Reich, with characteristic marketing savvy, subsequently drove his bulldozer.

"Do companies have obligations beyond the bottom line?" he asked at a February speech at George Washington University. "Even some of the most orthodox defenders of the free market have said that movie studios, record companies, and television networks should foreswear lewdness and violence, although pandering to audiences' baser appetites would yield rich profits. The profit principle, it seems, is something short of absolute. What, then, about a corporation's duty to its employees, their families, and the communities in which they live? Might not the sudden loss of a paycheck be at least as damaging to family values as a titillating screen performance?"

Of course, if Reich really wanted to emulate conservative media critics, he would argue for voluntary boycotts of irresponsible corporations. But the agenda he shares with like-minded members of Congress and union activists is far more ambitious. By manipulating federal regulations and the tax code, Reich and his allies want nothing less than to instigate an elaborate system of government control over corporate decisions.

The centerpiece of this agenda would be the creation of a new category of business enterprises called "A-Corporations" that would receive special tax and regulatory treatment by meeting certain standards of responsible corporate behavior, such as:

• The corporation must contribute at least 3 percent of payroll to retirement plans for workers.
• It must spend at least 2 percent of payroll for training or education of Americans in its employ.
• It must offer a standard health insurance plan (designed by the National Association of Insurance Commissioners) to all its U.S. workers.
• It must operate an employee profit-sharing or stock-option plan in which at least half of all employees participate.
• It must provide compensation to its CEO that is no more than 50 times the compensation provided to its lowest-paid full-time worker.
• It must spend at least half its R&D budget in the United States.
• At least 90 percent of its investment in plant, equipment, and employment used for the production and delivery of goods and services consumed in the United States must occur in the United States.
• Lastly, and most bizarrely, an A-Corp must "belong to and pay significant dues to" a trade association certified by the U.S. Department of Commerce.

The A-Corp plan, devised by Sen. Jeff Bingaman (D-N.M.) and supported by Democratic House and Senate leaders, is a free marketeer's worst nightmare come true--government planning of virtually every significant corporate decision. Of course, Reich and other advocates deny that this is their intent. No firm would be required to become an A-Corp, they explain. Instead, A-Corporations would qualify for lower corporate tax rates, faster treatment from federal regulatory agencies, and exemption from some regulatory requirements altogether. In other words, firms would be "encouraged" to comply with the new rules by being forced to pay higher taxes and receiving punitive treatment by government regulators until they do so.

Reich compares the favorable treatment of officially responsible corporations to current tax exemptions or benefits for charitable organizations, partnerships, and proprietorships. "The corporation is, remember, a creation of law," he told his GWU audience. "It does not exist in nature." In return for the special privileges that government grants corporations, such as limited liability and unlimited longevity, it is only reasonable to ask corporations to be "more accountable for the social costs and benefits of economic change," said Reich.

Those of us who, in the secretary's words, "worship at the altar of the free market" would be wise to consider carefully this argument about the special nature of the corporation before addressing the potential consequences of government-imposed corporate responsibility. It is true, for example, that the corporation was originally created by governments to accomplish governmental, not private, ends. The first joint-stock corporations were chartered by England, France, and Holland to explore the New World and found colonies in the name of the sovereign. After the American Revolution, states began to charter corporations, but they were granted exclusively to enterprises that fulfilled "public purposes." For example, the first state corporate charter, enacted by North Carolina, authorized incorporation only for the purpose of constructing bridges and turnpikes.

It was interstate competition that, throughout the 19th century, encouraged legislatures to gradually liberalize their incorporation statutes to the point that private individuals could organize corporations purely for private purposes. Each state wanted to host the large business enterprises in such fields as transportation and manufacturing that new technology and economic freedom had allowed entrepreneurs to create. Thus states had an incentive to develop corporate codes that encouraged the greatest amount of investment and economic activity.

The result, as University of Illinois legal scholar Stephen Bainbridge and others convincingly argue, was not a special government "favor" for which the shareholders of corporations owed government special duties. Instead, the private, profit-seeking corporation became a default form of legally codified business organization, much like a standard-form sales contract, from which willing parties could deviate by mutual consent. Limited liability, after all, serves the interests of creditors or potential plaintiffs as well as those of shareholders. Under a legal regime that required all business to be conducted under strict personal liability, few people would be willing to become shareholders. In such a world, large-scale businesses would likely be highly leveraged and involve little equity capital, making recovery of claims exceedingly difficult. "Limited liability is less a social subsidy than a social contract supported by consideration," Bainbridge concludes.

Of course, even if one were to conclude otherwise, that doing business in corporate form is a government favor that confers social responsibilities, the rules that Reich and like-minded congressional advocates of the A-Corp would impose are inane. Mandating that a certain percentage of corporate payrolls be devoted to training or retirement plans simply denies employees the choice of where and how to obtain these goods. Only formal company-provided training could be so measured, ignoring the value of on-the-job training that does not exist as a separate expenditure. And, some workers might rather take their training subsidy in the form of higher wages with which to obtain needed skills from other institutions (particularly if they are planning to change employers or occupations) or might prefer to make their own investments for retirement rather than have to accept those approved by company plans.

The protectionist aspect of the A-Corp plan is also problematic. It is by no means clear that "average Americans" would benefit if the government were to browbeat firms to spend more research dollars or build more plants in the United States. If the best judgment of corporate managers is that such expenditures would be more efficiently made abroad, then American consumers benefit from better, lower-priced products and American families with pensions, 401(k)s, IRAs, and college savings benefit from higher investment returns.

The idea of "encouraging" corporate social responsibility through federal tax and regulatory prods may sound bizarre, but Reich is clever and his timing is astute. In this election year when the phony but often-voiced concern about economic insecurity has many politicians scrambling to endorse something to help "working families," legislation imposing responsibilities on corporations may become a popular cause, especially since it doesn't involve direct federal expenditures.

Furthermore, the media's incessant bashing of current economic performance and its unwillingness to seriously discuss the benefits that free enterprise confers on society at large has led to increasing public suspicion of corporate America. Even during the midst of the Great Depression, for example, public opinion surveys showed that most Americans thought their interests and the interests of corporations were similar. But since the 1970s, respondents have more often said that their interests are opposed to those of corporations. It is this reservoir of suspicion that Reich and other corporate bashers seek to tap. Friends of the free market and the profit-seeking corporation must find a way to drain it.

Contributing Editor John Hood ([e-mail]) is president of the John Locke Foundation, a North Carolina-based public policy think tank, and the author of The Heroic Enterprise: Business and the Common Good, published in June by The Free Press.