The proper role of the American corporation

GUEST: Ralph Gomory, Ph.D.
AIR DATE: 11/2/2013
VTR: 07/17/13

I’m Richard Heffner, your host on The Open Mind. And my guest today is Ralph Gomory, a mathematics Ph.D. from Princeton who taught there, then worked at IBM for 30 years, retiring as its Senior Vice President for Science and Technology in 1989, when he went on for some years to be President of the Alfred P. Sloan Foundation.

Together with Richard Sylla, a colleague at New York University’s Stern School of Business, my guest has now written a quite fascinating article in which they point out how from its earliest years America led the world in making the corporate form of business organization easily available to entrepreneurs with its long life, limited liability and ever-expanding opportunities for pooling the resources of many investors – thus contributing greatly to our incredible economic growth as a nation.

But, as much as our national wealth owes historically to corporate growth, Professors Sylla and Gomory point out that there has now been a shift, a shift away from a nation-building “stakeholder” view of corporate interests and purposes – with workers, suppliers, customers, all of us as “stakeholders” – to one dominated by profit and share-holder-value maximization, with an “I’m all right, Jack, let the Devil take the hindmost” attitude that I gather sets my guest’s teeth on edge.

He and his colleague write … quote … “We strongly question whether this shift has been beneficial to the country as a whole…

“There is a need [now] to find ways of inducing corporations to act in ways that produce better societal outcomes…in which corporate interests and the public interest might become better aligned.”

And yet I would now ask my friend Ralph Gomory whether that’s not just wishful thinking…unless by … quote … “inducing corporations” he means “requiring” them to do the “right thing.” Ralph, a question for you.

GOMORY: Well, and this is not the first time … in American history when corporations have sort of veered off a societally desirable path. That, that happened in the 1920s and culminated in the Great Depression. And then from the depths … Great Depression came changes in the way we relate to corporations and they relate to us.

HEFFNER: By “inducing” them to change their ways?

GOMORY: In that case … ah … yes.

HEFFNER: Not by regulation? Not by requiring changes …

GOMORY: Oh, well it depends on what you mean by “induce”. I mean there were … you know we got the 40 hour week, we got retirement, mandatory retirement benefits. We had the … the corporations had to report what they were doing, in a way they didn’t previously. Things of that sort. Those were legislation.

But the surrounding, the surrounding world probably had more impact than anything else. Because when we came out of the Second World War, within a very few years … our whole system was under challenge from the Soviet system. Right. And it was a huge challenge.

Their economy was growing very rapidly, there were major Communist parties in France, in Italy, China went Communist. In other words we were in a struggle against a totally different system and we could not afford …and everyone felt that in their bones, to run a capitalist system here … or a free market system … that only paid off for the rich. Right. So we didn’t. We ran a system here for 30 years in which everybody gained. And “everybody” is too extreme because it wasn’t true for minor … certain minority groups.

But, as far as workers versus owners it was, the share of the national income that went to the very wealthy was stable, and the share that went to the middle class was stable … both went up together. They shared the gains of productivity. And, in the end this form defeated the Communist threat.

HEFFNER: But there’s one word that you’re leaving out.

GOMORY: What’s that?

HEFFNER: Globalization.

GOMORY: Oh, there wasn’t … at that time.

HEFFNER: Okay, but now there is.

GOMORY: Well, globalization is just one more way that a company who’s only purpose is profit can go and find cheap workers.

HEFFNER: But now they do and they do with a vengeance.

GOMORY: Yes. But it isn’t true that we couldn’t change that.

HEFFNER: Okay, but Ralph … what I’m …what I come back to …

GOMORY: Yeah.

HEFFNER: … and you’ll forgive me for doing so …

GOMORY: Please. Go to it. (Laugh)

HEFFNER: … that is that I, I think there’s a step missing here. I think you, you want to make a plea … I see you and I said this before we came into the studio. I’ve been reading the things that you’ve been writing …

GOMORY: Yeah.

HEFFNER: … up to this, this piece on manufacturing.

GOMORY: MmmHmm.

HEFFNER: … and I find you getting angrier and angrier and yet you talk about inducing … it, it’s like a piece that appeared yesterday in the Times by Andrew Ross Sorkin … expressing what I thought was surprise, surprise … greed is still lurking in the halls of Wall Street.

GOMORY: MmmHmm.

HEFFNER: How do you induce these people now with globalization to go back to the …

GOMORY: I really don’t think globalization is the heart of the matter, it’s just a manifestation … a way in which corporations which are dedicated to profit only make a profit.

It happens to be an unusually destructive way. But as long as that’s there dedication … then … that’s a problem.

HEFFNER: How would you change that dedication?

GOMORY: Well, I think there … first of all, through, through government action … right … let’s take globalization. Could the government do anything about globalization? Certainly it could. Right. But it would have to use methods whose very names have become things you don’t want to utter … like “tariff” … okay.

There is a very simple scheme that was proposed by a well-known capitalist … Warren Buffet. Which he called “import certificates”, which would balance trade … we … it’s, it’s not just globalization … we have globalization and we’re importing far more than we export … okay. So the first … and that means that, that we’re letting in all sorts of low price goods that are destroying our own industries. Right. Now that is very stoppable.

HEFFNER: When you say, “destroying our own industries” …

GOMORY: Yes.

HEFFNER: … you don’t mean destroying corporate America … because …

GOMORY: Well, not the whole thing.

HEFFNER: But, but, isn’t … when you say “destroying our industries” … you’re sort of saying … it seems to me … industries that are not hand in glove involved in the globalization process.

GOMORY: No.

HEFFNER: No?

GOMORY: Well, it depends what you mean by destroying an industry … all right. Let’s, let’s say we used to make something here … like cars … okay … well, we make half the cars now and half, and half of the parts are imported. So much of that industry … we still have the name here … but the work is done somewhere else and the result is imported here. Now that’s a very profitable way of doing things.

HEFFNER: Profitable for whom?

GOMORY: It’s profitable for … it shows up as the profits of the company and therefore it’s profitable for the shareholders and for those who are paid … basically a percentage of the profits, rather than wages.

HEFFNER: And the people who we used to consider stakeholders don’t count.

GOMORY: Nope. In fact it’s to the interest of the shareholders to hold down wages because there’s more, more left.

You see corporations create value … that’s why they’re so important. I think … take a stack of parts, which they buy from somebody and assemble it and simplify it obviously into a car, which is very valuable. Okay, they add value by these activities. Now that added value, which they’ve created … they can do a lot of things with.

One is they could pay wages. Okay. Another is they could have profits and give it to their shareholders. Third is they could pay taxes and support the government. There are a few other things, but those are the big things. Now in that pie we have only in recent years taken the point of view … the shareholder should get it all.

If we can avoid taxes by doing fancy tricks in Ireland, we’ll certainly do that. And if we can hold down people’s wages, which isn’t hard to when you’re in a depression … which is really good stuff … okay … we’ll do that.

But we could have a corporation a) prevented from making these profits by balancing trade. Or have incentives that, that corporate tax rate goes down when they hire people in the US, when they … in the US, not in China … for example.

HEFFNER: As I read the press …

GOMORY: Yeah.

HEFFNER: … the effective tax rates …

GOMORY: MmmHmm.

HEFFNER: … of many corporations are so low now …

GOMORY: MmmHmm.

HEFFNER: … it would be pretty hard to give them a further advantage. In other words, they’re doing pretty well at what they’re doing now.

GOMORY: Yeah. That’s probably true. Yeah.

HEFFNER: Which is why when you sort of talk about “now fellas, be nice …”

GOMORY: I’m not …

HEFFNER: … that’s what I read …

GOMORY: Yeah, yeah. It certainly isn’t the way I feel about it. “Hey, fellas, be nice.” It’s a question of a … it’s not a … thinking about nice fellas at all … it’s a system which produces this result. It isn’t bad guys. I’m one of the bad guys, don’t forget that.

HEFFNER: Tell me what you mean by that.

GOMORY: I serve on corporate boards. I vote to move our stuff overseas. Right.

HEFFNER: So it’s not about bad guys.

GOMORY: Not at all. It’s a system which says if you’ve going to do things other … with any consideration other than profits, we’re going to remove you.

HEFFNER: Where in the world …

GOMORY: MmmHmm.

HEFFNER: … does this come from, except from guys who make the corporate decisions … you and others.

GOMORY: You know … if you have … if you …

HEFFNER: Be patient with me.

GOMORY: Well, I, I think your questions are very good … all right. But let me just say it’s a question of what is accepted by society.

Between 1945 and 1975 these same corporations, manned by pretty much the same bunch of people behaved totally differently. Okay. And they weren’t being … there was no magic wand … that was the accepted thing.

HEFFNER: And now?

GOMORY: Now … what they, what the stockholders have done and they started to do this in a big way around 1980 and this changed the system completely … is they gave huge stock options to the ownership … I mean to the … excuse me … to the corporate leadership …

HEFFNER: The corporate leaders.

GOMORY: Yeah. Corporate … the, the payments to the corporate leadership went up (makes a squeaky noise) fantastically. Which was in my opinion and this is going to sound perverse … it was a tribute to their basic human nature. Okay. They didn’t accept the goal of profit-only-hold-down-the-wages-doesn’t-matter-what-happens-to-the-country for a 10% raise.

HEFFNER: You said “to their basic human nature …”

GOMORY: Yes.

HEFFNER: … and I interpret that as meaning “bad guys”, not “good guys”.

GOMORY: I’m sorry … you, you didn’t understand what I said.

HEFFNER: Okay.

GOMORY: I said that these guys were normal human beings …

HEFFNER: Right.

GOMORY: … okay … and therefore to turn their backs on everything but profit … you had to offer them a hell of a lot of money … not something small. You had to overcome what are their basic instincts.

Like … when I was there in this earlier period … okay … we were not … who, who did you see every day. You saw the people who worked for you … okay.

What were you proud of? You were proud when you had a good product and it started to sell or you were ahead of your competition. That’s daily stuff. That’s what you cared about, that’s what the people around you cared about.

The shareholders … well, the representatives met every three or four months … okay … and you fed them dividends and hoped they would go away.

HEFFNER: And they did then.

GOMORY: They had to come up with something new to assert themselves and they did it very, very well. But they really … the instinctive direction was not that … you had to pay them like mad to change it.

HEFFNER: What do we do now?

GOMORY: Well, I think there, there are a whole bunch of things. I think one is I would advocate … and all of the above … okay … I would advocate something like Warran Buffet’s scheme, just balancing trade.

So, it, it … one of the great fictions of the moment is that we’re, we’re negotiating free trade pacts. We’re not. We’re dealing with countries of which China’s the best current example, which subsidize the hell out of its industries. Okay. That’s why the stuff is so cheap. It’s so cheap that it pours in here … it’s cheaper than we can make it … it’s cheaper than they can make it, too, without subsidies and an artificial exchange rate. Right.

But they are gradually taking over these industries. Not so gradually … and its very profitable right now for the corporations and profits matter now in a way they didn’t matter before to the corporate leadership because they’ve become immensely rich. So … yeah …

HEFFNER: What do we do with this corporate … group that has become immensely rich and wants to hold on to its riches and has, through its riches …

GOMORY: MmmHmm.

HEFFNER: … the power to control the, the process that you want to go through of getting …

GOMORY: Yes. Now, that’s a … you’re making a very good point. If we, if we can assume that the corporations have so much money and also certain individuals have so much money that they can control Congress and state governments … then you have to think of something else.

HEFFNER: Have you thought of something else?

GOMORY: Sure.

HEFFNER: What?

GOMORY: There’s no reason why other people cannot start corporations on a different line. Why, why do banks have to be owned by these … this kind of a bank? We will get better people to work for us because that’s human nature to want to do something reasonable. And it had to be overcome by these huge amounts. There’s still plenty of people who would … why not run corporations that would attract the best people to work for it. And have reasonable goals.

HEFFNER: By the best people you mean … best in terms of the business of manufacturing … perhaps …

GOMORY: Whatever … whatever business they’re in … yes. Certainly. Yeah. And they would be motivated … I mean right now you’ve got a very motivated top crust in these corporations. The rest of the people are wondering “how the hell” can I … you know … how can I make this goal they’re setting for me? I’m tired, I want to go home. I think you can beat that.

HEFFNER: Anybody agree with you, Ralph?

GOMORY: Yes.

HEFFNER: From the real world? Forgive me for saying that?

GOMORY: I always cringe when people talk to me …

HEFFNER: … about the “real” world.

GOMORY: … about the “real” world.

HEFFNER: I know.

GOMORY: I’d like to challenge you, Richard.

HEFFNER: Go right ahead.

GOMORY: Which of us has spent more time in the “real” world? Right.

HEFFNER: Well, I’m older than you, so I have …

GOMORY: You know, here on earth … yes …

HEFFNER: (Laughter)

GOMORY: … you didn’t spend 30 years with IBM …

HEFFNER: No, you’re right. You were in the business …

GOMORY: I was a director of many companies, I was elected one of America’s best directors and now you start to tell me that I don’t understand anything about the “real” world? That’s not what the “real” world has been telling me.

HEFFNER: But the real world now …

GOMORY: Is what it is now. And it was a different world 30 years ago.

HEFFNER: And what would you say made it different? What changed it?

GOMORY: I think that stock options and the disappearance of the Soviet threat. Those two things …

HEFFNER: Right.

GOMORY: … changed it. And there is nothing inevitable about that sort of change.

HEFFNER: Stock options to the leaders of industry.

GOMORY: That’s right. Just the leadership, yeah … right. I mean we all, all the time when we have start-ups and stuff … they don’t take that point of view. Everybody gets a part of it. Okay?

They don’t have … “Oh, yeah, won’t you come and work for me … 60 hours a week … and I’ll give you as little as I can to get you.” No, you don’t do that with a start up because you want the heart and enthusiasm of those people. That’s not limited to small companies.

HEFFNER: You see, I can’t … I can’t second guess you …

GOMORY: Yeah.

HEFFNER: … or disagree with you … and when you, you and Richard Sylla write this piece and you start off with a quotation …

GOMORY: Yeah.

HEFFNER: … from Theodore Roosevelt … not, not someone … not a flaming radical …

GOMORY: Yeah.

HEFFNER: His first Annual Message to Congress … 1901 … “great corporation exist only because they are created and safeguarded by our institutions. And it is therefore our right and our duty to see that they work in harmony with those institutions …”

GOMORY: That’s right. And, and Theodore Roosevelt was very much a member of the 1% … right … to use a very modern …

HEFFNER: Indeed.

GOMORY: … terminology …

HEFFNER: Indeed.

GOMORY: Yeah.

HEFFNER: But you know, when I wrote my Documentary History of the United States, the first version of it back in 1950 …

GOMORY: Yeah.

HEFFNER: … a long time ago.

GOMORY: MmmHmm.

HEFFNER: .. I had a chapter in which I talked about the “permanent Roosevelt revolution”, I was talking about FDR …

GOMORY: Yes.

HEFFNER: … fifty years later …

GOMORY: Yeah.

HEFFNER: … I wrote in it …

GOMORY: Yeah.

HEFFNER: … in its 8th edition …

GOMORY: HmmMmm.

HEFFNER: … I was wrong.

GOMORY: HmmMmm.

HEFFNER: … There wasn’t a permanent revolution …

GOMORY: Yeah.

HEFFNER: … and … do you feel that that’s wrong? That, that … not wrong morally?

GOMORY: No, I, I think what you’re saying is absolutely right. There’s a counter revolution against the revolution.

HEFFNER: Yes.

GOMORY: But no … the counter … the counter revolution is no more inevitable or inherently permanent than the revolution was. All of these things are … can be worked on … you know.

HEFFNER: And far be it from me to say “No, they can’t be worked on.” But I must admit, it boggles my mind to even try to think of where you take your first steps … when I look … when I read the newspapers … when I read the daily newspapers …

GOMORY: MmmHmm.

HEFFNER: And I wonder where is that first step? Who is going to take … who is going to throw the first rock?

GOMORY: MmmHmm.

HEFFNER: Maybe Ralph Gomory.

GOMORY: I mean there’s a … there certainly … I mean the Occupy Wall Street … showed … you know … had a tendency to rock throwing. But aside … I mean there are two whole avenues of approach. One is through the government …

HEFFNER: Yeah.

GOMORY: The other is by … starting companies on a different principle.

HEFFNER: I wanted to stop you before and say …

GOMORY: Yeah.

HEFFNER: … where, where does the … where does the capital come from to start these companies?

GOMORY: First of all … I mean … there’s no reason why … I mean … Richard, you have lived on earth longer than I … but remember the insurance industry?

HEFFNER: Yeah, I remember it and I observe it now.

GOMORY: All right.

HEFFNER: Tell me about it.

GOMORY: All right, all right. Most of those companies were … quote … “mutual” companies. They managed to get started. Right. Now it’s true that many “mutual” companies … and very recently have been taken over for the benefit of their leadership.

HEFFNER: So by mutual companies … you’re, you’re saying …

GOMORY: They were owned by the insured … that’s what it meant. Mutual of Omaha … right …

HEFFNER: Do you think … we’re going to do that? Do you think that … do you see, in our society the potential for successfully mutualizing our problems?

GOMORY: I would say that’s one of the possibilities. I mean I’m not giving up on the government, either, but it looks very bad right at the moment.

But look, people don’t have to go along with this stuff. And, you know, part of what I struggle to do is get them to wake up to … too many of them sound like you, Richard, which is “Gee, there’s nothing we can do. This is impossible. This is unreal”. It’s real … it was real, it’s real in other countries. Why hell can’t it be real here?

HEFFNER: No, you’re, you’re missing a step … what I say …

GOMORY: Yeah.

HEFFNER: That’s the first question I asked you.

GOMORY: Yes.

HEFFNER: Weren’t you sounding …

GOMORY: MmmHmm

HEFFNER: … as though this can be easily done …

GOMORY: No.

HEFFNER: … when I’m saying, really … you’re talking about a revolution of kind.

GOMORY: Well, I just don’t want to use the word “revolution” …

HEFFNER: I know you don’t …

GOMORY: … because it just made people go out in the street and throw rocks. I mean you can have a revolution … we had a revolution in the 1980s spurred by stock options. We had a revolution … against the orientation of the companies. Right. We could have another revolution, by starting companies with a different orientation.

HEFFNER: It’s because people like me, commenting on what happened in the Roosevelt years …

GOMORY: Yes.

HEFFNER: … said is a permanent revolution … it’s change … when it never did change and those who were ready to turn around what FDR did were training themselves to do what they’re doing now.

GOMORY: Richard, how can you ignore the fact that that itself was a revolution. In the 1920’s we had the same kind of corporate behavior as we have now. And yet, when it got bad enough … a President … and in this case, it was through the government …

HEFFNER: MmmHmm.

GOMORY: … changed all that stuff … right.

HEFFNER: To me that means it hasn’t got bad enough yet.

GOMORY: It might be, I don’t know what it takes. MmmHmm.

HEFFNER: When you think of all the people who are unemployed today and all the people who are “losers” today …

GOMORY: Yes.

HEFFNER: … or losing …

GOMORY: MmmHmm.

HEFFNER: … what would it take?

GOMORY: I don’t know. I mean I just don’t know how to predict the unpredictable.

HEFFNER: To me, of course, one of the things it would take would be reading some of the articles you’ve been writing, because you are, I think, getting angrier and angrier and you’re not going to take it any longer.

GOMORY: Well, you may be right. But I’m not the only person writing like that and thinking like that.

HEFFNER: What does … what is the response to what you’ve been saying and righting?

GOMORY: I get some very good responses and I get some very … I’m not going to name the names, but some very prominent people who you would think of as the core of the establishment … write to me and say, “Gee, that ought to be better known”.

HEFFNER: And do you think something will happen … you do think something will happen.

GOMORY: I don’t know if it will happen in my lifetime, which doesn’t look as if it will extend very far from where it is now. But I, I have no, no reason to believe that the path we’re on is revolution proof or change proof … we’ve been on the bad … and we had this going on … the FDR revolution … now we have the counter revolution …

HEFFNER: Which we’re very much into.

GOMORY: Which we’re into, right. And there’s always the tendency to say “Well, whatever we’re in now, that’s going to go on forever”. I don’t share that tendency.

HEFFNER: I don’t either, but I’m glad it’s in your hands to …

GOMORY: (Laugh)

HEFFNER: … to write the kinds of things you’ve been writing … to take us in another direction.

GOMORY: Yeah.

HEFFNER: Ralph Gomory, thank you so much for joining me …

GOMORY: And thank you for having me here and it’s always a pleasure to talk with you.

HEFFNER: Thanks, Ralph. And thanks, too, to you in the audience. I hope you join us again next time. Meanwhile, as another old friend used to say, “Good night and good luck.”

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