Capitalism can be a marvelous machine for advancing individual prosperity and social progress. But like any machine, it needs to be soundly governed and faithfully attended. When it runs amok or ceases to have the steady hand of conscientious stewardship and good judgment at the controls, when it falls into the clutches of the greedy and self-obsessed and works to the primary benefit of a select few, it sets itself on a perilous course of almost certain mishap and painful misadventure.
There was much that caught the eye of our high-priced panel of outrage experts this week, especially the ones with four legs and floppy ears. There was the kidnapping of British sailors by Iran; the tainted food poisoning of dogs and cats whom owners have entrusted to pricey brands like Iams and Eukanuba; and the repeated spin and rinse performance by Attorney General Alberto Gonzales over the firings of U.S. attorneys, which has to make you wonder if Alberto Culver might do better in the job. Then there was yet another hurtin’ song by Barry Diller who just wants to be able to pay himself $295 million for a year’s work and not have to see any comment about it in the press. Anything less, to Barry, is “almost criminal.” The Ontario Lottery and Gaming Corporation came in for big criticism by that province’s ombudsman over the payment of millions of dollars in lottery winnings to fraudulent retailers and for turning a “blind eye” to allegations of criminal activity for many years. Allegations of corruption in the handling of the RCMP’s pension fund and of stonewalling at the highest level of the force during an internal investigation, made before a committee of Canada’s House of Commons, were especially disturbing and have all the earmarks of a major scandal.
In the end, three significant betrayals of the great institution of capitalism stood out for this weekly slot at Finlay On Governance.
ITT
The first was the action of giant defense contractor ITT, which this week pleaded guilty to criminal charges of unlawfully selling classified information to foreign countries, including China. (ITT has a history of being accident prone when it comes to dealing with governments, as its involvement in ousting the Allende government in Chile reminds.)
You have to wonder what kind of breakdown of ethics and compliance oversight, especially at the level of the board, would have permitted this scandal. The company dragged its feet and fought the allegations for several years before its guilty plea this week. Its directors now preside over an admitted corporate felon. This is another illustration of a board that undervalued the importance of upholding a culture of ethics and integrity and failed to take steps necessary to ensure that the organization was properly alert to potential wrongdoing. ITT betrayed its investors, its employees and American military personnel in the process. It is an example of the dark side of capitalism —the willingness to profit at any cost —even treachery. The $100 million penalty ITT agreed to pay the government doesn’t begin to make restitution for the scale of the crime. There is no indication that the directors and senior officers who were responsible for overseeing ITT during the time of this offense plan to contribute to the penalty from the compensation they received.
Circuit City
The second is the announcement by Circuit City of its plan to fire 3,400 of its better paid full-time employees and offer to rehire them —after several months off the job and without income— as part-time, lower paid workers with no benefits. The company’s CEO received a salary and bonus payment of approximately $1.5 million last year and has been given a generous long-term compensation plan, including a $3 million award of stock. Circuit City is apparently taking its cue from Wal-Mart, that other model of enlightened corporate responsibility in America.
One of the more noble features of modern capitalism over the years, and especially in the period after World War II, has been that it allowed people to advance their lives by working hard at their jobs and moving up. It was under that social contract that the middle class was created, the suburbs were built and the vast infrastructure of schools, hospitals and social legislation to protect children, workers and consumers was developed. It was, in many ways, the idea of the great society forged by members of the greatest generation. Are we beginning to see the unraveling —even reversal— of that proposition to a situation where workers have to give up and give back in order just to survive? And how productive can an organization be that is filled with people who feel betrayed and have lost so much of what they worked hard to achieve? Did the company’s board even consider that question before embarking on what will surely be a public relations, if not larger business, disaster?
Companies are made productive and innovative by the quality and morale of their employees —not just a very well paid CEO at the top. When we begin to lose that ethic in our major corporations, capitalism —and society— will have lost one of their most important attributes of success. Which brings us to our third betrayal this week.
The Widening Wealth (and Responsibility) Gap
It was announced on Thursday that the top 1 percent of Americans received their largest share of national income since 1928, according to 2005 tax data.
As the Times noted:
The top 1 percent received 21.8 percent of all reported income in 2005, up significantly from 19.8 percent the year before and more than double their share of income in 1980. The peak was in 1928, when the top 1 percent reported 23.9 percent of all income.
So now, despite all the efforts to improve education and the advancements that have taken place in business, government, and the tax system over the past three-quarters of a century, in one important respect America is back to where it was before the Great Depression. We will leave it to others to explain how this happened. But if you look at the tax reduction policies of the Bush administration for upper incomes and the tremendous wealth explosion in CEO pay alone over the past decade, you will quickly see that the ground has been carefully laid for this reversal in social progress. There can be no doubt that many at the top will care not at all about this development. They would be content to ride the current wealth wave as far as they can and give absolutely no thought to the human —or broader social— consequences.
Capitalism has experienced these kinds of episodes in the past —the Gilded Age from 1865 to 1901 and the “malefactors of great wealth” that sparked the fury of Theodore Roosevelt and his promise of a “square deal” in a fledgling 20th century come to mind. The results produced considerable upheaval. One of the more turbulent periods was the aftermath of the Great Depression, when the hope of a “new deal” began to resonate with displaced workers who rode the rails in search of work. It is not encouraging that we are seeing a return to the milestone of 1929 in 2007.
Yet it seems that even with the benefit of history, there are few at the top who understand that capitalism needs its stewards as much as its zealots. It is a system that depends on its champions of integrity and public consent as much as it does on its contrivers of non-compete payments and backdated stock options. How long will this gap be tolerated? How much wider can it grow before serious divisions erupt in society? I have a feeling that neither the LBO kings at Blackstone and elsewhere nor the hedge fund titans and Wall Street wizards that dominate today’s financial landscape have given the slightest thought to that question or to the tide of resentment that is brewing against them. Neither had J. P. Morgan or any of the other giants of early 20th century capitalism back into whose spiritual embrace 21st American capitalism seems to be returning —vanishing middle class and all. So many of these grand figures of the past —and present— seem only in it for the moment and all that they can get at the time. They are the masters of the big transaction and the generators of an ever escalating succession of zeros on the end of the fee paying check. Their egos, their paydays, their mansions, their limousines and private jets —everything about these Caesars of financial triumph is big except the respectability of the legacy that many are leaving or their enduring contribution to the evolution and legitimacy of modern capitalism.
Capitalism can be a great machine for advancing individual prosperity and social progress. But like any machine, it needs to be soundly governed and faithfully attended. When it runs amok or ceases to have the steady hand of conscientious stewardship and good judgment at the controls, when it falls into the clutches of the greedy and self-obsessed and works to the primary benefit of a select few, it sets itself on a perilous course of almost certain mishap and painful misadventure.
Revelations this week demonstrate that there is not enough attention by the leaders of capitalism to its responsibilities, and to the ultimate destination of social progress for all that it must serve if it is to survive, which is why we have chosen these examples as the Outrage of the Week.