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David Brodwin's blog

Will Trump Take the High Road?

David Brodwin, ASBC High Road Workplace

“When they go low, we go high” said First Lady Michelle Obama at the DNC last summer. She was referring to political rivals and campaign tactics, but the same can be said of competing businesses these days.

The High Road Workplace is emerging as a powerful strategy for corporations seeking to build lasting competitive advantage. It is a set of principles, developed by the American Sustainable Business Council, for reinventing the social contract that connects workers and employers in a web of mutually beneficial practices. The core idea is that when companies treat employees well, pay them fairly, provide benefits and engage them in decision-making, the company will enjoy a more motivated, capable and productive workforce. The gains that follow often far exceed the direct cost of the extra pay and benefits.

The business case for the High Road Workplace is particularly compelling in knowledge-intensive and creativity-intensive businesses. Eileen Fisher, a leading American clothing retailer and designer is a strong proponent. The company “believes that the well-being of its employees has a direct impact on the success and profitability of the company,” said Amy Hall, director of Social Consciousness. Investors appreciate that taking the high road can boost a company’s stock price. The Great Place to Work consultancy reports that large public companies that made their Top 100 List delivered nearly three times the total stock market returns as compared to the market average.

The High Road works on many levels. It boosts performance at companies that adopt it. It improves the lives of workers and strengthens the communities in which they live. And it reduces the demand for public social services like food stamps and health care, which ultimately affect our taxes. From a public policy standpoint, we should do all we can to encourage, incent and support companies to adopt High Road practices.

It’s not at all clear what a Trump administration will do with respect to High Road practices, but initial signs are not encouraging. For example, the Department of Labor recently finalized a rule, stemming from a presidential executive order, requiring federal government contractors to provide covered employees with up to seven days of sick leave annually. This rule will die if Trump follows through with his pledge to reverse all Obama-era executive orders.

However, things look brighter for child care and family leave. In her speech at the RNC, Ivanka Trump (speaking as a campaign surrogate) voiced strong support for improvements in these areas. Initial family leave proposals from the president-elect call for six weeks of paid leave, limited to new mothers, to be paid for by eliminating unemployment insurance fraud. It’s not much, but it’s a start.

A better start would be to pass the Family and Medical Insurance Leave Act. The FAMILY Act would establish a uniform national standard for medical leave to address employee illness and the health needs of employees’ children, parents, spouse and partners. The bill, introduced in the Senate by Kirsten Gillibrand, includes a mechanism to pay for the program through small contributions by employers and a modest payroll deduction (two cents for each 10 dollars in wages). The FAMILY Act is patterned on programs now in place in California and New Jersey; these programs have already proven to be economical, and they have not hurt small business nor reduced jobs.

Despite increasing support from the business community, versions of the FAMILY Act have been stuck in the U.S. House and Senate since the spring of 2015. If the new administration is committed to expanding family-friendly benefits and empowering business, the smart move would be to throw its weight behind the FAMILY Act.

The promise of a living wage is another important aspect of the High Road Workplace. Minimum-wage laws place a floor under what companies can pay their workers. State level initiatives to raise the minimum passed last week in Arizona, Colorado, Maine and Washington, boosting the incomes of more than two million workers. These results, particularly in Arizona (a state that Trump won) show that a higher minimum wage draws support across the political spectrum. More work lies ahead to raise the minimum at the federal level but the resounding victories in four states show that the public wants progress.

President-elect Trump has committed himself to policies that are pro-business and pro-job. He’s pledged to help the middle-income, less-educated and older workers who have been ill-served by globalization. These Americans have suffered as factories have closed and wages have stagnated. If the new president wants to keep his promises to support business and workers, then supporting the High Road Workplace would be a great first step.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report November 17, 2016.

 

The Big Wells Fargo Picture

ASBC David Brodwin

The Wells Fargo Bank scandal has been driven from the headlines by the presidential election next week, but like the Terminator, it will be back. Wells Fargo's conduct in fraudulently opening two million retail bank accounts was so foul that both political parties felt compelled to join in castigating the company and its CEO John Stumpf. Stumpf soon resigned; even his offer to disgorge $41 million in pay was not enough to save his job.

While all eyes are on the election, Democrats and Republicans skirmish over the lessons that the public will draw from Wells Fargo. They're fighting over whether the event will lead people to think that regulations are too strong, or not strong enough. And they will fight over what kind of punishments are needed to deter further corporate crime on this scale.

Is the CFPB a hero or villain? The Consumer Financial Protection Bureau, or CFPB, is at the center of the fight. Established in response to the 2007-08 financial crisis, the CFPB protects consumers from fraudulent financial firms and abusive products and services. Democrats pushed for its creation, while Republicans tried to kill it and, failing that, to limit its powers.

The CFPB was one of the first government entities to dig into the mess at Wells, and it ultimately fined the bank $100 million. Yet Rep. Jeb Hensarling (R-TX) – who has long sought to cripple the CFPB – faulted it for not moving more quickly and aggressively and argued for restricting it even further. "Hensarling reminds me of the kid who kills his parents and then wants to collect orphan benefits," said Sen. Sherrod Brown (D-Ohio) recently.

To jail or not to jail? The Wells Fargo case is going to bring new attention to what punishments and sanctions are needed to deter corporate crime. Notwithstanding the catastrophe of 2007-08, the SEC and other federal entities have not brought criminal charges against senior executives in the largest financial institutions involved. The reasons for "too big to jail" have been extensively documented, yet the root causes for this massive failure to prosecute remain unaddressed.

But the Wells Fargo case stands as a testament that the kid gloves treatment is not enough. And in response, some commentators have stepped forward to persuade us that jail is never the answer. For example, Adrian Wooldridge writes the usually-sensible "Schumpeter" column for the economics. He tells us that "we should resist the temptation to single people out for harsh punishment simply because they are rich and successful." Apparently he sees no difference between a brilliant entrepreneur like Bill Gates using too much computer time while he was an undergraduate at Harvard, and John Stumpf creating a business incentive system that led to two million fraudulent accounts.

Prosecute the corporation or its leaders? A crucial question in all this is whether sanctions should target the corporation as a whole or the people who lead it. It's tempting to say the corporation should be the target (and this has been the SEC's tendency in recent years) because in most major failures of this kind the problem is systemic rather than individual.

But an approach that targets the corporation and spares the leaders is hard to get right. The penalties must be big enough to sting, yet not so big as to destroy the business. If penalties are too low, the corporation considers them a wrist slap, just part of the cost of doing business. If the penalties are too high, a corporation gets crushed, employees lose jobs and shareholders lose their savings. The best example is Arthur Andersen – a mostly honest and well-run firm that was destroyed by a small handful of partners doing faulty auditing at Enron and WorldCom.

To solve this problem, perhaps penalties could be tied to a percent of the amount of income earned while a fraud was in progress, or to the amount of stock appreciation that occurred during the period.

Are boards and CEOs sufficiently accountable to investor's pain? Even if financial penalties were improved so they inflict enough (but not too much) pain on investors, other problems remain. Sadly, investors don't actually have that much control over the directors and senior executives who nominally represent them. Elections for boards of directors heavily favor incumbents and their hand-picked replacements. A competitive board election is extremely rare; it almost never happens unless an activist investor wields a big block of stock.

Similarly, investors have no way to punish CEOs in the wallet for destroying value through corporate mischief. The "Say on Pay" resolutions established under Dodd-Frank are largely nonbinding. Even if a corporation is successfully prosecuted for fraud or other wrong-doing, and even if the penalties are properly calibrated, it's by no means clear that the shareholders can toss the execs who led the wrong-doing or the board members who let it go unchallenged.

It won't be easy to upgrade the regulator and criminal justice system to stop what just happened at Wells Fargo. But realistically, sanctions against corporations rather than individuals will not do the job without major improvements in CEOs and director accountability. Until then, we still need deterrence at the individual level.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report November 2, 2016.

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