Look Who Demands Profits Above All

Los Angeles Times

Despite the populist rhetoric of this campaign season, many traditional
Democrats are pushing companies to generate higher returns regardless
of social responsibility.

These Democrats may not mean to do it, but this is the practical
consequence of how they're saving for retirement. American teachers, civil
servants, unionized workers, college professors and similar Democratic
stalwarts are putting their savings into giant funds like TIAA-CREF, the $
290-billion teachers' retirement system, and the $ 175-billion California
Public Employees Retirement System, or CalPERS. The teachers and others
want the highest returns they can get. So the large institutional investors
are demanding that companies make big profits and boost their share

In recent years, institutional investors have been active in ousting chief
executives at IBM, AT&T, Sears, General Motors, Xerox, Coca-Cola, Aetna,
Compaq Computer and other blue-chip American corporations that didn't
boost share prices enough. TIAA-CREF has even ousted an entire board
that failed to fire an under-performing CEO. While the huge severance
packages for these departing executives makes it hard to feel sorry for
them, they are even better compensated when they generate high

Not surprisingly, these incentives have been pushing CEOs to do whatever
is necessary within the law to boost their share prices, even if that means
pandering to the carnal appetites of teenage movie-goers, messing up the
environment, raising oil prices, marketing guns and cigarettes, using
sweatshops in East Asia, laying off platoons of employees and treating
patients like fast-food drive-in customers.

It's called cognitive dissonance when a part of your brain wants one thing
and another part wants something different. While the frontal lobes of
traditional Democrats are delighted by the populist campaign rhetoric that
scolds corporations for being socially irresponsible, their hypothalami want
hefty returns on the savings in their pension plans. The two aren't
necessarily--or even probably--compatible.

The board of directors of CalPERS recently rejected a proposal from one
board member to dump shares of tobacco companies and to refrain from
investing in nations that didn't meet some minimally humane political and
social criteria. The board's chairman feared a slippery slope. "Do we one
day ban investments in alcohol, handguns and rap music?" he asked
rhetorically. (CalPERS' investment staff noted that just the sale of the
fund's tobacco stocks would cost it upward of $ 56 million in transaction
costs alone.)

Mild-mannered folk like California's public retirees--tens of thousands of
people who spent their careers working for the state and are improbably
cast as rabid promoters of free-market capitalism--are also quietly
undermining what remains of European social democracy. They are not
alone in doing so, of course, but given the extensive holdings of their
retirement funds in European-based companies, their influence should not
be underestimated.

When Alcatel, a mostly French-owned telecommunications company,
announced that its annual profit would be less than had been forecast, its
management was driven to the distinctly un-French solution of restoring
profits by laying off about 12,000 employees. CalPERS was not the sole
instigator, although French President Jacques Chirac testily noted in his
Bastille Day address last year that the layoff was triggered when
"California retirees suddenly decided to sell Alcatel."

Europe's traditional "stakeholder" capitalism has made European
companies responsive to employees and communities as well as
shareholders, which is why it doesn't sit well with American institutional
investors intent on making companies attentive only to them. Not long
ago, CalPERS complained that a German utility gave the cities it served too
much control over its board, thereby diminishing the value of the utility's
shares owned by CalPERS. The utility executives explained that its system
of city representation maintained a bond with the utility's customers, but
when CalPERS threatened to dump its shares, the utility promptly
scrapped the system. The problem here isn't with CalPERS, TIAA-CREF or
other big institutional investors. They're only doing their job, which is to
maximize the value of their investors' portfolios.

The real issue is that power is shifting away from governments to
investors. This means that political speeches calling on companies to be
more socially responsible are meaningless. If we want companies to be
more socially responsible, we'll have to pass laws requiring them to be so,
and those laws will have to be enforced. And not just national laws.
National governments are weakening as highly mobile capital finds better
deals elsewhere around the world, where profits are higher because laws
are meeker. So, ultimately, many such laws will have to be international.

That's why a central question for the coming decade is what sorts of global
agreements can be reached on the environment, energy and labor and on
the production and marketing of dubious products like guns, cigarettes and

Unless Democrats face head-on the cognitive dissonance in their brains,
they'll continue to practice a politics that has little or nothing to do with the
personal economic choices they're making. And they'll fail to insist that
their candidates talk realistically about how to redress the balance
between the desires of voters and the demands of investors.

You may also like