Aligning American firms with American values

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During the Reagan administration, American companies believed that in addition to returning profits to their shareholders, they also held a moral obligation to consider the interests of their employees, community and nation.

[Dana Rohrabacher and Greg Autry| May 26, 2016 |Washington Times]

America’s current business model suffers from a tragic misalignment of interests that is decimating the middle class, undermining our core values, tearing apart our electorate, and threatening our national security. As a member of Congress who worked in the Reagan White House and a business school professor who researches entrepreneurship policy, we’d like to call attention to this existential American crisis and explain one simple idea that could help put us back on the path to mutual prosperity.

Two decades of obsessively focusing on shareholder returns has enshrined a short-term mindset that destroys American jobs and undermines America’s strength. With no consideration for either their employees or their country, nominally American firms simply relabeled themselves as “multinationals” and made it their goal to distribute America’s middle-class jobs, capital and technology across the globe in exchange for higher short-run profits.

Sadly, our business schools also embraced this perverse model. Today, we teach bright young minds from around the world how to take American taxpayer-funded research from their schools and launch start-ups that transfer this technology, along with billions of dollars in American investment, to places like China, Brunei or Vietnam.

Once there, it is inevitably stolen, creating millions of non-American jobs and empowering regimes that are often unsympathetic to America’s interests and openly hostile to American values.

In the crassest example of this self-destructive mindset, General Motors received massive government loans, used the money to shut down factories across America, and then opened new ones in China. While tens of thousands of Americans have lost their careers, the firm is now quietly importing Chinese-made Buicks into the United States. Would GM’s employees have allowed this outrage to America to occur if their voices had been heard? No, they would not.

How can we fix this? The first step is to insure that corporate shareholders are individuals who can see beyond next quarter’s profits. The best way to do that is to find a way for employers to get more stock into the hands of employees and ensure they hold their shares. President Reagan understood this when he spoke of “an increasing trend toward the next logical step, employee ownership,” and he called it “a path that befits a free people.”

To that end, we advocate H.R. 4577, a bill co-sponsored by this piece’s co-author and Rep. Collin Peterson, a Minnesota Democrat.

The bill would allow American corporations to grant stock to employees without tax consequences for those employees, provided they hold their shares for five years. Additionally, those who hold their stock for a full decade are exempted from capital gains when they do eventually sell.

This is a simpler approach than, and an improvement over, Employee Stock Ownership Plans, which have faced many criticisms.

While many American firms do reward employees with shares, the usual stock option approach is undesirably complex from a legal, regulatory and tax perspective. Options cost firms a lot to manage and they remain a mystery science to most employees. The tax treatment of options often compels employees either to decline the offer in the first place or to sell their stock immediately upon exercising their options.

None of this contributes to employee savings, long-term ownership or aligning corporate interests with those of their other stakeholders. Granting shares outright to employees currently counts as taxable income. In a time when real wages are chronically depressed, this process also compels employees to sell those shares simply to pay the taxes on what they’ve received.

H.R. 4577 will fix that and, by making employee stock contributions deductible, it will encourage firms not granting shares to employees to consider doing so. By requiring that tax-free stock grants must be of voting class, this bill will establish a base of voting shareholders who care about the long-term prospects of their firm and who will push to reinvest corporate capital and U.S. technology into creating American jobs.

This is a simple idea that will work for companies big and small. It will help American workers stay in the middle class and increase the value of their retirement savings. It will quietly aid in realigning the interests of American firms with America and it will contribute to correcting our dangerously negative trade balance. H.R. 4577 is good for America.

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