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David Brodwin's blog

America's CEO

President-elect Donald Trump tells us that he'll bring his vast business leadership experience to the White House. He promises to use the same techniques that make a business great to make America great. As he takes the oath of office, let's look more closely at what great business leaders do, and consider how these same techniques would let the U.S. thrive in global competition.

Attract and retain top talent. Great business leaders know the importance of talent, and they position their companies to attract the most skilled and motivated people. For the U.S. as a nation, that means that we must keep our doors open to immigrants and keep the American culture friendly and inviting. We want people who can contribute to be excited to come here.

Invest in the future. Great business leaders continually invest in research and innovation. They know a company can't be great if it doesn't have the best products and services. They resist the temptation to cut research and development spending and other innovation spending, just to raise dividends and report higher earnings in the near term. At a national level, our university system is our main investment in the future, along with funding research like the National Institutes of Health. To run the U.S. like a business means we must protect this vital investment in our growth and competitiveness.

Operate efficiently. Great companies build a competitive advantage in efficient operations. Companies like Amazon and Walmart triumph because nobody can beat them at moving stuff around quickly, reliably and cheaply. Applying this principle to the nation means building infrastructure to move people, money, goods and services around. It's disgraceful that America has let its infrastructure to fall into disrepair. Amazon would never do that, and its board would never let them.

Invest in people. Great companies spend money to train and develop their people and support them (within reason) through challenging times. They know that people don't do their best without training, coaching and honest and timely feedback. They know that turnover is more expensive than retention. No corporation would charge employees to get the training they need to do their jobs better. If we ran the country as a business, we would ensure that every young person gets the education he needs to obtain a job and perform it well. And we wouldn't ask them to take on a lifetime of debt to pay for it.

Apply smart policies and rules internally. Great businesses don't operate without rules. Employees can't just do whatever they want. For example, great businesses require staff to solve problems quickly, act with integrity and not take company resources for personal gain. Corporations that don't set and enforce rules internally get into big trouble – like Takata (for exploding airbags), Volkswagen (for cheating on emissions tests) and Wells Fargo (for opening up millions of unauthorized accounts). This internally enforcement failure costs their investors billions – to say nothing of the broader damage they inflict on the public. Rules are needed at the national level, just as they are needed within a business: To make a nation great requires smart regulations, sensibly and consistently enforced.

Manage power dynamics to support good decision-making. A great business needs to maintain a culture throughout the organization that allows good, honest, fact-based decision making. The culture must allow people to disagree strenuously, yet respectfully. It must keep tension within limits so that people can work together effectively, even as they disagree.

A business can't be great if there's open warfare between the departments. A business can't be great if performance data is suppressed, or if everyone is allowed to make up their own "facts" in a business discussion. Sadly, the decision-making culture in the U.S. today couldn't be more different with what it takes to build a great business. As Donald Trump becomes America's CEO, he has an opportunity to fix that.

Of course in many ways the nation isn't a business, and a president has many things to worry about that most CEOs can safely ignore. But if we did nothing but apply these business best-practices to America's governance, it would be a big step forward.

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 January 20, 2017.

Don't Celebrate Trump's Tax Holiday

President-elect Donald Trump has proposed a "tax holiday" – a sharp cut in taxes on corporate profits that are currently held overseas. He argues that a one-time cut in the corporate tax rate to 10 percent will encourage $2.6 trillion in profits to flow back to the U.S., creating millions of new jobs in the process.

It sounds like a no-brainer, but it's not. In truth, this kind of tax cut will create few if any new jobs, and will probably destroy existing jobs.

To understand this strange and sad truth, we need to look how profits get "trapped" overseas in the first place, and what it really means to move them back. To oversimplify just a bit, here's how it works: Big global corporations are made up of many local subsidiaries, and these subsidiaries buy and sell from one another in a global supply chain. For example, a big tech company like Apple can design a product at its U.S. headquarters, license the design to its Malaysian subsidiary to build it, the Malaysian subsidiary sells it to the Grand Cayman Islands subsidiary, which sells it to the German subsidiary, which finally sells it to a consumer.

Since the parent company controls the price that each subsidiary pays to others, it can make profits appear or disappear anywhere in the supply chain. All it needs to do is raise one transfer price and lower another. Smart corporations track which countries have the lowest tax rates, and they fudge transfer prices to make the profits biggest where the taxes are lowest. It's just an accounting trick, and a very profitable one.

But even though the profits may pile up in a tax haven like the Grand Cayman Islands, the actual cash doesn't sit there. The Grand Cayman Island subsidiary takes its cash to the bank, and the bank invests the money around the world, wherever it can earn the highest returns. Even as Apple's profits pile up in some tax haven somewhere, much of its cash is already back in the U.S., invested or loaned out by the international banking system.

Now we can begin to see why cutting the taxes on overseas profits doesn't create jobs:

  1. Much of the money that is said to be "trapped overseas" is already invested in businesses in the United States, simply because it was deposited in a financial institution. Cutting the tax rate may let a corporation spend the money differently, but that only means killing one U.S. job to create another.
  2. Most of the corporations with the biggest accumulated profits overseas don't generate enough new ideas to invest all the cash that they earn. Big tech companies, for example, generate cash faster than they can come up with cool innovations to spend it on. When a company has an idea that needs funding – if the idea is truly compelling – it will either pay the tax involved and bring the money back or simply borrow money where it needs to, at today's very low interest rates.
  3. Companies have developed a wide range of tricks to move money around from country to country without formerly repatriating it. The system is full of loopholes, says the FACT Coalition.

Among economists, this is not a partisan issue. Serious conservatives acknowledge the weakness of profit repatriation as a tool to create jobs. The conservative Heritage Foundation said that a repatriation tax holiday would "have a minuscule effect on domestic investment and thus have a minuscule effect on the U.S. economy and job creation." The RedState blog said that tax holidays for repatriation "may be good for Washington's coffers and executive boardrooms, but the claims of job creation are without merit."

Indeed, back in 2004-05 a similar tax cut was tried, and it failed. It "created almost no jobs," said RedState. That proposal had provisions to force companies to invest cash domestically in order to qualify of the tax cut, but companies figured how to work around the restrictions.

Most disturbingly, repatriation tax cuts will kill the jobs of ordinary Americans even as they raise incomes for senior corporate officers and investment bankers. Since companies don't have enough internal growth opportunities to absorb billions of dollars, the dollars will be used for two main purposes: repurchasing shares and buying up other companies. At least that's what many corporations are telling investors. Merger and acquisition activity typically destroys jobs as companies consolidate operations and lay off redundant staff. The share repurchase activity drives up the stock price, helping investors and senior executive whose pay is closely tied to the stock. Neither of these transactions do much for job creation, other than perhaps increasing the need for pilots who fly private jets and gardeners who care for landscaping at luxury vacation homes.

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 January 6, 2017.

 

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