Let’s Talk About Evolving American Capitalism Part 3: Corporate Examples, Praise and Criticism
Following part 2 of the Evolving Capitalism essay series, which identified several frameworks for quantifying societal profit, part 3 is a deeper dive into how companies actually apply these guiding principles to their real world operations. I’ll begin by exploring several themes underscoring how companies are generating profits (either reducing cost or raising revenues) for society’s stakeholders who have historically been disadvantaged compared to shareholders. Then, I’ll draw awareness to some of the biggest criticisms that some of these same companies and others face, which illuminate some of the biggest myopically dollar-profit/shareholder focused operations companies still follow, which must be reconsidered in order to achieve a successful evolution of American Capitalism.
Clarification: the term “profit,” in the sense of “societal profit” refers to the sum outcome from activities which either A) reduce the damage caused to non-shareholder stakeholders by the operations of the company (i.e. externalized cost; a negative value), or increase the tangible benefits to non-shareholder stakeholders (i.e. benefits; a positive value).
Societal Profit Praise
ESG (Environmental, Sustainability and Governance) Reports
Many companies have begun to provide more transparency into how their operations affect their other stakeholders by producing ESG reports, and moreover setting improvement goals against ESG targets, and reporting on company progress to those goals (e.g. current greenhouse gas emissions, and a timeline goal to become carbon neutral).
ESG reports often follow the disclosure recommendations of popular reporting standards, such as the World Economic Forum’s Global Reporting Initiative-informed guidelines, and include data like material recycling rates, regenerative/organic cultivation methods, water usage/conservation rates, carbon emissions/emissions offset/reduced emissions, energy usage as a ratio of profit (called intensity), and corruption/ethics policies/issues.
ESG reports typically also reference initiatives that companies are running, which benefit (or reduce harm to) the company’s societal and environmental stakeholders, such as Uber’s goal to double Black and African American representation in senior leadership or Williams and Sonoma’s efforts to reduce their carbon footprint (Williams and Sonoma outlines a 3 phase timeline for reducing their environmental footprint, which has become a commonplace approach adopted by many other companies, including even energy giants like Shell and BP).
Diversity and inclusion reports have also become a major new ESG disclosure that companies have begun to embrace, including gender pay gap rates and gender/racial participation rates in company-wide/management/senior management segments. Tesla recently offered one example of such a D&I report.
While producing reports may seem like only one small step to generating societal profit, such reports are important because they create internal awareness to the company’s performance from decision-makers, as well as pubic awareness, which can hold the company accountable for improving their performance (especially if audited by a 3rd party). The completion of reports can even serve an impetus for direct adjustments, such as that taken by Salesforce, which reportedly found a gender pay disparity amongst 17,000 employees and spent $3 million correcting it.
While ESG reporting isn’t yet mandatory, as more companies undertake the effort to produce these reports, eventually we will reach a critical tipping point, where ESG reports become standard, and companies which do not produce them (to specification), will be considered behind the times. In this vein, it was great to see how not only individual companies, but also stock markets such as the Nasdaq and investing tools such as Fidelity have begun pulling ESG reporting into their operations.
Southwest Airline’s ESG reporting via Fidelity’s dashboard
Broader Stakeholder Donations
One of the most common, direct actions in generating societal profit that companies have undertaken for many years is to spend part of their earned dollar profits on philanthropic initiatives.
Some companies, like Coca-Cola make annual donations or Patagonia (via their % for the Planet Pledge) make donations of 1% of each year’s operating income. Other companies, such as Amazon donate some amount regularly every year, and many more companies make periodic onetime donations, such as the sweeping reactions to the murder of George Floyd, where companies put up donations of all sizes, including $100k, $500k, $1M and even larger cash commitments of donations to BLM-related non-profits.
In addition to direct corporate donations, many companies also have employee donation matching programs. Double the Donation provides stats on a few high-profile company employee donation match programs; for instance, the firm with the highest recorded match rates is the Soros Fund Management, which offers a 3:1 match rate, with a maximum yearly contribution of $300,000. These values align well with Soros Fund founder by George Soros, who also founded the Open Society Foundations, which represents non-profit interests in politics and was recorded by OpenSecrets as the second highest top lobbying spender in 2019.
Deploying some of a company’s dollar profits into donations is certainly better for society’s non-shareholder stakeholders than keeping those dollars in cash pools or executing stock buybacks. Donations to 501(c)3 non-profits also represent a more than 100 year-old example of how capitalism has evolved, by pairing capitalist-oriented incentive (i.e. tax liability reduction) with a broader set of stakeholders (i.e. those served through non-profits).
Many companies also cite free/discounted products within their donation reports. For instance, several large tech companies like Salesforce report that they give away over $1 billion worth of free or discounted products and services each year.
In the grand scheme of evolutions, however, dollar/product donations do not rank highly, given that in practice they are often limited to 1% or less of a company’s profits, and can also be arbitrarily discontinued if the company has a need to re-invest those dollars elsewhere one year, or reduced after negative public sentiment abates. Giving away products is also a (understandable from a strategic perspective) self-serving double-benefit, given that the products do produce societal benefit by supporting philanthropic initiatives on the one hand, yet they also increase the usage of the company’s products (and encourage potential potential sales at-retail or else slight discount from the increased awareness) on the other.
Many companies also encourage their employees to volunteer their time as a form of donation, like Google’s commitment to donate 1 million employee work hours, or Microsoft’s to-date 750k donated employee hours. Yvon Chouinard & Vincent Stanley of Patagonia cite in their book “The Responsible Company” how Google serves a broader set of stakeholders by giving their employees free reign on how they spend 20% of their time. For example, some employees decided to work on non-primary company projects, such as philanthropic initiatives to map the impact of climate change on large animal migrations. Donating time is one step farther along the evolution scale, given that it is more of an altruistic or “tax” act that re-distributes a portion (through hourly employee compensation) of company resources to the broader set of stakeholders in society who have directly or indirectly supported the growth of dollar-profits for the company of the company in the first place.
Broader Stakeholder Investments
Moving beyond donations, some companies have demonstrated more involved shifts in how they support societal profit outcomes, by investing their corporate resources into initiatives which are more tightly integrated with company operations.
For instance, consider Microsoft’s recent pledge to double its spend with Black and African American suppliers. The company also committed to doubling the percentage of Black and African Americans in company leadership, which was echoed by swell of similar pledges by companies such as Uber. Another example is Intel’s track record since 2015 of investing $400 million into technology companies led by women and under-represented minorities, as well as Netflix’s recent announcement to “ move up to $100 million, or 2 percent of its cash holdings, to financial institutions that focus on Black communities.” Several companies including DoorDash and Paypal also announced their funding of Kiva microfinance loans specifically for Black and African American-owned small businesses. Companies such as Sephora have signed on to the 15% pledge, which calls on signatories to commit a minimum of 15% of their retail shelf space to products sold by Black and African-American owned businesses, whom the 15% pledge call out represent ~15% of the American population.
ESG reports and donations do not have the capability to incentivize ongoing allocation (beyond PR/brand awareness/values alignment/tax deductions); yet these investment examples do demonstrate how companies can evolve their operations to produce societal profit. Purchasing, investing, and hiring more from the Black and African American community generates more growth for this stakeholder group, which has been historically disadvantaged by society’s systematic bias of minorities in such considerations. This action also creates the potential to earn a return on the company’s resources, through product sales, investment profits, and employee productivity, which can incentivize additional investments in a capitalism-supported chain of reasoning.
Even companies whose business models inherently produce damage to the environment have shed light on how capitalism can evolve to give societal profit stakeholders more seats at the table and influence over how businesses operate. For instance, Jet Blue signed a new deal with French bank BNP Paribas for loans whose terms were tied to sustainability goals. The loans’ provide an incentive to improve societal profit because their servicing costs “depend on whether [Jet Blue] achieves a pre-determined environmental, social and governance (ESG) score,” with scoring provided by a third party.
Imagine applying the same concept to a bank in the US, where the loan’s interest rate is partially determined by the company’s annual pay gap and diversity performance vs collaboratively set goals, or the average of the industry!
Tying Executive Pay to Societal Profit Targets
Not far from the last example, some companies in recent years have begun to make headlines for tying executive pay to societal profit outcomes, including diversity and inclusion targets. Similar to the BNP Paribas and Jet Blue deal which integrated financial incentive with ESG performance, financially incentivizing company senior leadership to directly improve the company’s societal profit performance is an excellent evolution which ties benefiting a broader stakeholder group with the primary motivation of compensation, and as such has great potential to spur continued investment. Companies such as Uber, Intel, Microsoft, and Starbucks have all set examples for moving forward on this dimension.
Offsetting/Removing Carbon Emissions
Carbon offsets have also begun to gain a massive popularity as of late, with many companies citing their offsetting practices as a commitment they are making to reduce the environmental harm their business models produce.
Jet Blue also announced in July 2020 that it would offset the carbon costs of all of its domestic flights. Delta followed with a commitment of $1 billion to become the first airline by 2030 to operate on net-zero carbon emissions globally, through a mix of improved flight efficiency and offset programs. Oil giants BP and Shell even committed to running net-zero carbon emissions operations by 2050.
Etsy became the first major e-commerce brand to offset the costs of shipping its products. Mobile gaming firm Wooga not only undertook material efforts internally to report on and significantly reduce its direct annual carbon footprint, but also purchases offsets for the carbon emissions directly produced by data-consumption from the interactions of its players.
While carbon offsets sound like a clear win-win for companies and the environment, given the dearth of established players in this new field, there can be risks associated with the practice of carbon offsetting. Famously, the Vatican was exposed to a fraudulent scheme when trying to offset their emissions, paying for credits that were supposed to plant trees, which were never planted. Another issue that the practice of offsetting has drawn is the risk that companies become reliant on simply purchasing offset credits, while neglecting to take significant action to innovate on actually reducing their carbon emissions in the first place, akin to being satisfied to pay a carbon excise tax.
In addition to having purchased enough credits to offset its historic emissions, Google touts its status as the largest purchaser of renewable energy worldwide, running on 100% renewable energy today.
In the spirit of capitalism market forces, the more companies actually directly purchase renewable energy, the more this demand will encourage utilities to supply more renewable energy, as well as motivate innovators and startups to target the renewable energy sector. This can also have the opposite impact on the fossil fuel industry, reducing investment by reducing demand and thereby dollar profits.
Or, consider Microsoft’s example, which was to pledge to push its operations to become carbon negative by 2030, by investing in projects that remove more carbon dioxide from the atmosphere each year than the company produces. Furthermore, Microsoft’s ambitions are to actually remove their historic weight in historical carbon emissions by 2050. Actions like Microsoft not only create the demand for renewable energy, but also set the bar for excellence, to not only be satisfied with purchasing offsets or even directly buying renewable energy, but to actually take the step forward of becoming carbon negative.
Societal Profit Criticism
Excessive Stock Buyback/Dividend Programs
While the companies listed in this essay have shown a willingness to circumvent normal operations in order to invest dollar profits into means that raise a broader set of stakeholders’ profits, many of the same companies have drawn fire for deploying far larger amounts of cash into stock dividends and stock buybacks.
Stock buybacks were not popular until a 1982 rule by the SEC called Rule 10b-18 heavily deregulated the practice. Since then, the floodgates opened and buybacks became much easier for companies to do without risking a penalty for potentially manipulating their stock prices. While some politicians, including both Democrats and Republicans have announced their displeasure with the practice, as well as intentions to limit how much corporations can spend on such initiatives, no effective change in the norm or regulation has surfaced.
For example, consider the fact that total corporate stock buybacks in 2019 were $709 billion, compared to the $20 billion that corporations spent on charitable donations in 2018.
Astonishingly, the New York Times reported that, within the S&P 500 group, 466 companies group reportedly spent 93% of their profits on stock buybacks (53%) and dividends (40%) in 2008–2017.
Even for companies that are among the most touted for their massive investments into societal and environmental programs, it’s clear that the goal of deploying dollar profits to shareholders is still the primary goal.
Microsoft announced a stock buyback of $40 billion (of ~$137 billion in cash on hand) in 2019.
Walmart (which this year announced a $100 million commitment to helping advance racial equality) authorized a $20 billion stock buyback in 2017, and in 2019 spent about $12 billion in dividend payments.
Apple (which also announced a $100 million racial equality philanthropic initiative) initiated its stock buyback program in 2013, and from 2013 through 2019 deployed an eye-popping $327 billion in cash to buybacks, with plans to deploy an additional $75 to $100 billion in 2020 and an increase to its dividend as well.
Notably, the practice is shunned by Amazon.
Excessive Executive Pay
While executives are now beginning to see their compensation tied to ESG goals, their general rate of pay has drawn significant criticism, especially alongside the rising concern over gender pay gap issues, senior leadership company-to-society gaps for minorities, concerns over benefits and pay for contractors, and other instances of the intransigently myopic dollar profit, shareholder focus.
According to the Economic Policy Institute, CEO pay grew an incredible 940% from 1978 to 2018 while the normal worker’s pay grew only 12%. In 2019, CEOs earned about 320x the normal worker.
It is also worth noting that a large share of executive pay is provided via stock shares and options, which creates a feedback loop incentive for executives to deploy cash to stock buybacks to increase share prices and further increase the value of their compensation packages.
Abusive Tax Sheltering
American corporations have also come under criticism for their abusive tax sheltering habits, preferring to leave profits untaxed oversees than repatriating them and paying large tax bills, which could help enable the government to do its job as the largest supporter of societal profit through funding for current programs such as social security, medicare/medicaid, and education funding, and also prospective future initiatives, such as an eventually possible universal basic income program.
Again, some of the companies who have undertaken some of the most publicized efforts to support societal profit have come under fire for excessive tax sheltering. According to reporting by the New York Times, Apple, Microsoft, and Google are among the top 5 largest for sheltering taxes offshore in locations such as Ireland, Switzerland and the Caribbean.
In fact, in order to finance dividends and stock buybacks for its shareholders, Apple prefers to borrow money, rather than repatriate its offshore cash deposits and pay US corporate taxes.
Renowned Benefit Corporation, Patagonia (which uses recycled materials for 68% of their product line), by contrast set a high bar of tax acceptance, by donating the $10 million it saved from the Trump tax cuts to climate change charities.
Lobbying and “Super” Political Action Campaigns
Lastly, the high rate at which corporate profits have been deployed to influence politics has also been cause for concern, and another indicator of the intransigence of shareholder interests over the voices of other stakeholders.
According to OpenSecrets.org, lobbying expenditures rose to $3.1 billion in 2019.
Lobbying cover a diverse array of interests, not only those that encourage such outcomes as the stock buyback deregulation or fossil fuel subsidies. After all, the top 2 lobbying spenders in 2019 were the US Chamber of Commerce (which can support the interests of small businesses) and George Soros’s philanthropic-aligned non-profit foundation.
Yet, lobbying is a powerful tool that large corporations and their shareholders have and continue to use in attempts to block or water down regulations affecting corporate interests which conflict with broader stakeholders in areas such as climate change or pay and benefits for gig workers (gig economy companies spent a record $200 million on lobbying against California’s proposition 22).
On political action campaigns, OpenSecrets published an in-depth look at the impact of the 2010 decision in Citizens United v. Federal Election Commission by the US Supreme Court to:
Allow unlimited donations to political campaigns (so long as they were spent “independently” and not directly contributed to/collaborative with parties).
Allow donations from corporations, which had previously been barred from contributing money to political campaigns.
What followed was a tsunami of incremental spending on political ads that has had a massive hand in shaping election outcomes at all levels of government.
Most of the money spent on “independent” contributions to political ads did not come from corporations. Yet the highly wealthy individuals who did contribute the most money earned their money from corporate endeavors, highlighting a circular pattern wherein corporate profits both directly and indirectly fund the vast majority of political spending.
Stay tuned for the final essay in the Evolving American Capitalism series, which will investigate the question that I believe is essential in properly guiding the process.