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Office of the Secretary
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and Public Affairs
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�Pink Slips, Profits, and Paychecks:
Corporate Citizenship in an Era of Smaller Goventment
Robert B. Reich
U.S. Secretary of Labor
George Washington University School of Business and Public Management
February 6, 1996
If the government is to do less, then the private sector will have to do more.
But the stunning announcement on the first business day of 1996 that one of the
nation's largest and most profitable companies will permanently lay off tens of
thousands of employees raises profound questions about the private sector's ability
to take on more responsibility for Americans' economic well-being. What may feel
like a nightmare for the affected workers is, in fact, hailed as a dream-come-true on
Wall Street-- suggesting that the company may have done exactly the right thing by
its shareholders. But that is precisely the issue. Do companies have obligations
beyond the bottom line? Do they owe anything to their workers, their workers'
families and their communities?
Even some of the most orthodox defenders of the free market have said that
movie studios, record companies and television networks should forswear lewdness
or violence, although pandering to audiences' baser appetites would yield rich profits.
The profit principle, it seems, is something short of absolute. What, then, about a
corporation's duty to its employees, their families and the communities in which
they live? Might not the sudden loss of a paycheck be at least as damaging to
family values as a titillating screen performance?
In fact, family values are intricately intertwined with what might be called
home economics. The necessity to work longer hours in order to make ends meet
may mean that a parent isn't home when a child is in most need of parenting. The
urgency of finding a new job may mean that one spouse must move to another city,
or must commute long distances, leaving family behind. Or it may require that an
entire family uproot itself from friends and relatives. The financial pressures
resulting from a declining paycheck.or the loss of a job can disrupt and sometimes
destroy families. Whether we like it or not -- whether we recognize it or not-corporate decision-makers have significant influence over the future strength of
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America's families and communities.
Yet corporate executives protest, with some justification, that they have no
choice. They argue that they must do what is in the interest of shareholders even at
the expense of employees and the communities in which they live. If wages and
benefits can be cut without imperiling production, they must be cut. If employees'
efforts do not generate a sufficient return, the jobs have to go. And if an entire
1
�community loses its economic base because the company can do its work more
efficiently elsewhere, then so be it. Managers who balk at executing the judgments
of the market fear, with reason, that they will quickly face their own day of
reckoning.
Yet this restricted vision of stewardship is ultimately disastrous for America-including American business. Corporate leaders must reconsider. This era of
government downsizing is also a time for corporations to size up their
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responsibilities to America. As the President noted in his State of the Union
address, employers must do their part along with employees -- sharing with workers
the benefits of the good years, not just the burdens of the bad. It is a time for
companies to focus beyond the bottom line. It is a time for a new corporate
citizenship.
I would like to speak of what such a reconsideration might entail. But first, a
little perspective on how we reached this point.
l. The End of the Social Compact
Chief executives once sang a different tune. In a 1951 address that was typical
of the era, Frank Abrams, chainnan of Standard Oil of New Jersey, proclaimed, "The
job of management is to maintain an equitable and working balance among the
claims of the various directly interested groups ... stockholders, employees, customers
and the public at large." That same year, Fortune magazine lectured executives on
their duty to be "industrial statesmen" who worked for the good of their employees
and communities as well as shareholders.
This implicit social compact between corporations, their employees and
communities with which they dealt survived into the 1960's and 1970's. So long as
the company earned healthy profits, employees could be assured of secure jobs with
rising wages and benefits, and their communities could count on a steady tax base.
When the economy turned sour, employees might be laid off for a time. But when
the economy revived, the work would return. The very term "layoff'' suggested a
temporary separation.
The compact was enforced in several ways. Unions obviously played an
important role. There was also a public expectation that when a company did well,
its employees and community would also do well. It would be unseemly-- "unAmerican", if you will -- for a business not to share the benefits of its success.
•''
What has changed? For one thing, competition. American businesses have
been transformed from comfortable and stable rivals into bloodletting gladiators.
Information technologies have radically reduced the transaction time between
suppliers, wholesalers, retailers and customers. Airlines, telephone companies,
utilities, common carriers-- and Wall Street itself-- have been deregulated. Global
competitors threaten the very survival of American manufacturers. Entry barriers
such as preferential access to capital markets have dropped, allowing small
companies to grab market share from big ones.
2
�Today, vast amounts of capital can be moved from place to place at the push
of a key on a personal computer. Investors face an ever-wider array of choices of
where to put their money. This "electronic capitalism" has replaced the gentlemanly
investment system that had given "industrial statesmen" the discretion to balance the
interests of shareholders against those of employees and communities. Now, any
chief executive who hesitates to subordinate all else to maximize shareholder returns
risks trouble. By the same token, a chief executive who ruthlessly subordinates all
else can reap handsome rewards. We are faced with the spectacle of CEO's
pocketing multi-million dollar bonuses and stock options after abandoning their
employees and communities -- indeed, precisely because they have abandoned their
employees and communities.
The social compact has come undone. Unions are less able to enforce it.
Public norms and expectations cannot sustain it. Profitable companies are shedding
workers and they are leaving town. Even the term "layofP' no longer means what it
used to. Most layoffs are now permanent. We need a new word to describe what
the phenomenon. Perhaps we should call them not "layoffs" but "cast-offs."
2. The Trap of the Old Economy
This transformation of the corporation into the agent of the shareholder
alone, and the consequent stranding of so many working people and their
communities, is occurring at a particularly unfortunate time. Much of the American
workforce is facing a stark challenge of adapting to new economic realities, just as
sources of support in meeting that challenge are quicldy eroding.
The same explosion of technological change and global integration that has
intensified competition among companies and expanded investors' options is also
changing the nature of work. The mass-production jobs which were once the
gateways to the middle class are being replaced by jobs requiring technical or
problem-solving skills and the capacity to continuously acquire new skills. The
earnings of people who are poorly educatec!. to begin with, or who have outmoded
skills, are declining. The earnings of those ·with good educations and the right skills·
are rising. The gap is widening rapidly.
Tens of millions of Americans remain trapped in the old economy. I have seen
them and talked with them across the nation. They are laid off-- cast-off-- and
jobless, or in new jobs with worse wages and benefits: In fact, most people who
have lost their jobs in recent years and found new ones never catch up with the
earnings and benefits they once ha~; 1 Or they have started out in a low-wage job
and cannot seem to get ahead no n1atter how hard they work. They cannot easily
acquire on their own the education and training needed to succeed in the new
economy.
Stevens, Ann Huff, "Long-term Effects of Job Displacement: Evidence .from
the Panel Study of Income Dynamics", NBER Working Paper #5343, November
1995.
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�This is a problem for all of us, not just the bottom half of the workforce.
Almost three quarters of our national output comes from people; only one quarter
from machinery. The quality of our labor force is the engine of economic grO'wth;
physical capit~l is the caboose. If a significant portion of the American workforce
lacks the skills to succeed in the new economy, the standard of living of all
Americans is imperiled.
3. The Consequence
The corporation's relentless focus on one goal ·· the exclusive goal of
maximizing shareholder returns ·· makes it less willing or able to ease the transition
of the American workforce to the new economy. Were the old social compact still in
effect, companies would bring their workers along, and pay the extra freight. With
the compact voided, even highly-profitable companies now leave their workers
behind.
The narrow economic calculus discourages such investments: The nation as a
whole may be better off when employers provide adequate pensions and decent
health coverage and when they teach their workers basic or industry-wide skills
beyond what is required to function effectively in their current job. The economy as
a whole may be more productive and flexible when employers see to it that workers
who are no longer needed get trained for and placed in new jobs. Yet because the
company's shareholders do not reap the full benefits of these sorts of investments,
even the most enlightened Chief Executive Officer will be loathe to make them to
the extent that society needs.
To be sure, some companies do take the "high road" to higher profits··
bringing employees along while improving and enlarging their businesses and thus
expanding their payrolls ·· rather than the low road of suppressing wages and paring
payrolls. And the shareholders of these companies do perfectly well. In fact, the
long-term payoff from boosting worker loyalty and security and from retaining
experienced workers can exceed the more immediate financial benefits of taking the
"low road".
Let me give you several examples of high-road companies. Just before last
Christmas, a tragic fire destroyed the factory of Malden Mills in Methuen,
Massachusetts, and with it the security and the hopes of the 2,400 people who
work there. Three days later, the owner of the finn, Mr. Aaron Feuerstein, appeared
before his employees and told them that he would not only rebuild and rehire every
one of them, but he would also con9nue paying them their salaries and their
benefits during the shutdown. Today, Malden Mills is well on its way back to full
operation.
Or consider another company ·· this one publicly-held. Coming, Incorporated,
is ensuring its worldwide leadership in its diverse product line·· from housewares to
telecommuncations ·· through a commitment to employee participation and training.
The company has won the Malcolm Baldrige National Quality Award and has been
recognized by Working Mother magazine for providing a family-friendly work
environment.
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�There are many other examples of high-road companies-- Xerox, Chrysler,
Republic Engineered Steels-- to name only a few. But I wish there were more.
Unfortunately, the high road is the exception rather than the rule. In too many
instances, top executives are not creating value; they are merely redistributing
income frpm employees and their communities to shareholders.
As corporations have focused more and more exclusively on increasing
shareholders' returns, the consequences have become obvious. The stock market has
soared while pink slips have proliferated, health care and pensions have been cut,
and the paychecks of most employees have gone nowhere. Top executives, talented
entrepreneurs, and Wall Street intermediaries have never done as well. Workers
without adequate education and skills, or with outmoded skills, are in free fall. This
situation is not sustainable. But what can be done about it?
4. The Limits on the Public Sector
Historians looking back on this era will record the double irony. As noted, the
transformation of the corporation into the agent of the shareholder alone is
occurring at a time just when the American workforce is in most need of help
adapting to a new economic system. But itis also occurring just when the public
sector is particularly constrained from filling the void. This administration came to
office hobbled by more than ·a decade of exploding public indebtedness. We had no
choice but to make deficit-reduction a first priority. Moreover, the public is
increasingly skeptical of the federal government's capacity to run large programs. As
the President noted in the State of the Union Address, "the era of big government is
over."
Regardless of how the current budget negotiations are settled, in the future
the federal government will have a more modest role in safeguarding the economic
security of Americans. States and localities may have more leeway, in principle, but
far fewer resources. And because they will compete ·with other states and locales to
attract companies, they will be reluctant to impose higher taxes or any other extra
burdens.
To be sure, government can make more effective use of the resources it does
have. We have already taken steps to change the unemployment insurance system-designed to provide income support during temporary layoffs -- into a genuine reemployment system designed to move people rapidly into new jobs and get them the
training they need. Hopefully, Congress will heed the President's call to consolidate
federal job-training programs into vt>uchers which unemployed or low-wage workers
can use at community colleges or technical schools to get the skills they need. And
we want to make pensions and health insurance more portable, so that they will
move with people from job to job, and be available between jobs. The
Administration strongly supports legislation now pending before Congress which
would bar health insurers from cancelling policies when a job is lost.
The President remains committed to education and job training. But even if
we succeed in maintaining current levels of funding in the face of severe budget
constraints, it will not be nearly enough. State and local governments across America
5
�are paring back. Classrooms in too many of our cities remain overcrowded. Tuition
at too many state universities and community colleges is rising faster than inflation.
Vocational and technical education is too often obsolete or woefully inadequate to
what the times demand. By one estimate, merely to return to the level of inequality
at the end of the 19"70s would require an additional yearly public investment in the
skills of the bottom half of our workforce of approximately $60 billion.:! It is a safe
bet that funding of that magnitude will not be forthcoming any time soon.
5. Corporate Responsibility Revisited
One ostensible purpose of eliminating the federal budget deficit is to give the
private sector more capital to invest, thus widening opportunities and raising
earnings for all Americans. Balancing the federal budget is not a goal in itself, but is
a means to higher living standards for all.
I
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Yet as we all see, there is no guarantee that corporations will use the extra
resources in this way. Maximizing shareholders' returns may require investing the
extra dollars in production abroad, or in labor-saving equipment intended to reduce
wages and cut jobs, or in mergers, acquisitions and divestitures that result in mass
layoffs.
How, then, to get the private sector to take more responsibility for their
employees and the communities in which they live, as the federal government
retreats?
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I do not advocate a return to the era of industrial statesmanship. That era,
too, is over. Even if we could turn the clock backward and enlarge upon the
C.E.O.'s former discretion in balancing the interests of shareholders against those of
employees and communities, it is far from clear that society should vest such power
iri private citizens.
Exhortation can have some effect. After all, most companies are
understandably concerned about their public image. Good corporate citizenship is
often a wise business strategy. One recent example involves the gro·wing problem of
sweatshops in the garment industry. As anyone who has had anything to do with
this industry knows, the big retailers call the shots. They have the buying power to
determine how the industry runs. After slave-labor conditions were discovered in
California sweatshops last summer, we published the names of several of the nation's
largest retailers to which the garments in question had been shipped. Subsequently,
during the Christmas gift-buying season, we published the names of big retailers that
had pledged to regularly inspect their contractors or to require that the
2
James J. Heckman, Rebecca Roselius, and Jeffrey Smith, "U.S. Education
and Training Policy: A Re-evaluation of the Underlying Assumptions Behind the
'New Consensus,"' in Labor Markets, Emplovment Policv, and Job Creation, edited
by Lewis Solmon and Alec Levenson, Westview Press, 1994. Heckman's estimate
· works out to $170 billion per year for 10 years, but that sum includes the cost to
individuals of foregoing income during the course of job training. Therefore, cost to
the government is probably closer to $60 billion per year.
6
�•
standard corporation, as are partnerships and proprietorships. These differences
reflect judgments about the societal benefits and responsibilities stemming from
these various forms of organization. Similarly, there are societal advantages in
improving the. quality and flexibility of the workforce, and societal costs in failing to
do so. Certain enterprises may be well-positioned to maximize these advantages and
minimize-these costs. Let us, as a society, encourage them do so, and reward them
accordingly.
Those who worship at the altar of the free market need not fear blasphemy. I
am not suggesting that corporations be required (or induced) to keep on their
payroll workers who don't contribute to the bottom line. ·I am not asking that they
remain in communities when there are more efficient places to produce their wares,
or to take any other action which may reduce returns to shareholders. I am
suggesting, however, a means of making· corporations more accountable for the social
costs and benefits of economic change.
7. A National Discussion
Others will have different ideas for how corporations can best respond to the
growing inequalities and insecurities in our workforce. Let us have a national
discussion about this -- about the role of the corporation at this unique moment in
history. Surely this discussion is no less important than the one we are having about
the role of government. Chief executives should contribute to this discussion -- not
in order to defend the status quo but in recognition that the trends we are observing
cannot be allowed to continue. In this era of smaller government, at a time when so
many Americans are foundering in the face of record profits and a soaring stock
market, the failure of the private sector to respond imperils this nation's continued
prosperity and stability.
Will the end of the era of big government witness a new era of corporate
responsibility? Nobody can yet say for sure. But I am certain that, unless checked,
the resentment of stranded workers will eventually undermine the political
preconditions for continued business prosperity. If too many of our people feel
excluded from the upside gains of a growing economy and disproportionately .
burdened by its downside risks and costs, they will support policies that sacrifice
growth in favor of economic security -- policies like trade protection, capital controls,
and inflexible rules of employment.
I sincerely hope we do not ever get to that point. You in this room have an
enormous interest in sustaining the ,s:ulture of openness and economic dynamism
that has served business so well. Fortunately, as you move on to positions of
corporate leadership, you will also be able to exercise your influence in ways that
make such an outcome more likely. I urge you, for the sake of our country, to help
create and sustain a new era of corporate citizenship.
###
8
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�SECRETARY OF LABOR
WASHINGTON
October 13, 1995
To:
Don Baer
From:
Robert B.
Reich~
Thought you'd find the attached of particular interest.
�The .Wall Street Journal, October 12, 1995.
INT Rl N SIC VALUE/BY ROGER LOWENSTEIN
Will Flat
Wag~
Beget Future Trouble?
litical and social tension is going to boil over." Perhaps, in
n five years, half the people on welfare will. be busy as
know-nothing but hard-to-resist pressures for trade barriers.
bees, some flipping hamburgers, some grilling tunas, and
some, no doubt, toiling as economists. Even better, little
Maybe, in demands for reflation. Possibly, in unions returning from their decade-long coffee break, as they have at
money will be required to train or coax these freeloaders into
adapting to the blissful routine of the work week. Hence, very
strike-crippled Boeing Co. Failing those, anti-incumbent fervor could become permanent politics.
little funding will be available. Better still, with wages rising
so fast, tax credits for the working poor-what Ronald Reagan
Economists who disagree with Mr. Roach-and there are
called the best antipoverty program ever-will be unneeded.
plenty of them-still share his basic concern. Peter Bernstein,
All this may be inferred from recent actions of Washing- . ·an economist of eclectic tastes, thinks workers will remain
ton budget-cutters. It happens that none of it is credible to
cowed, but is hardly pleased about lt. A consequence of perpetually low wages would be perpetually slow growth (no
economists, particularly on Wall Street.
In fact, said economists are increasingly worried about
raise, no new minivan). This would be bad for society, bad for
the Dow Jones industrials. "The wage thing is serious," he
an opposite set of trends. Throughout the recovery, job
growth has been anemic and downsizing has continued. Adadds. Ditto, David Shulman at Salomon Brothers.
David Wyss, a ·mainstream
justing for inflation, wages have
economist at DRI/McGraw-Hill,
been flat for a decade. And the
Wages
Fall
Behind
says the issue of how to create jobs
relative rewards for unskilled, unProductivity vs. real compensation per hour;
that pay a living wage worries
trained burger-flippers (and econ1982=100
omists) have fallen.
him, because nobody knows how to
do it. Mr. Wyss, like most people
The trends are so strong that
since the fall of communism, libersome Wall Streeters have begun
to sound like radicals. Stephen
alism and Aid to Families with Dependent Children, abhors thinking
Roach, chief economist at Morgan Stanley & Co .• an institution
in class terms. Nonetheless, he
says: "It's hard to avoid. The basic
not known for harboring subversives, warns of a "backlash" unfact is that the bottom 60% are losing ground. The working poor are
less workers "begin to receive a
really caught."
.
just reward for their productivity
contributions.'·
On the right, Michael Tanner
Mr. Roach was among the first
and Stephen Moore, of the Cato In'70
'75
'80
'85
'90
'95
to predict that service industries
stitute, argue that entry-level
Source: Morgan Stanley
would discover the joys of laying
wages are too low to Jure workers
off workers, just as smokestack
off welfare, contributing to de·
factories had. In 1991, he predicted this would lead to ecomand for same. Government cannot raise wages, but it can
nomic growth, corporate profit growth, lower inflation, incut welfare, and it is. What will replace it is unclear.
creased U.S. competitiveness and (in case you care) rising
The best hope for higher wages, Mr. Moore says, is to
stimulate capital investment, which usually leads to higher
-. stocks. Predicted and delivered.
His colleagues now ask, "Who could ask for more?"
pay. The more money invested in business, the more producMr. Roach replies (we paraphrase), "th~ proletariat."
tive it is, and the more that workers are "worth." He thinks
For many decades, he notes, wages rose and fell with proa capital-gains tax cut would help.
ductivity. In other words. as companies earned more for
Mr. Roach knows that such a cut would be met with
each employee, the value (and wages) of workers rose. In the
smiles in the Morgan Stanley dining room, but questions
1980s, productivity began to leave wages behind. In the 1990s,
whether it's needed. He's more concerned about the falling
the two have become totally unhinged.
share of national income going to workers, and thinks WashThis is partly because employers are paying more for
ington's recent moves could make it worse.
fringe items, including higher contributions to Social SecuriHowever, the two agree that only Americans with skills
ty and worker's compensation. And of course, in part. it's bewill be able to command a higher wage than foreigners. To
cause workers overseas demand Jess than employees here.
Mr. Roach. this argues for more investment in "human capRegardless, workers have reason to feel they are missing
ital. .. l'vlr. Moore. who sees federal jobs programs and such
the fun. According to Mr. Roach, while profits have boomed,
as failt!res. is happy to see them go. But in their absence, he
the recovery has generated 6.5 million fewer jobs than a
allows-and he faults both political parties-there is nothing.
"normal" expansion. He sees "an unmistakable sign that po"no policy out there ... to promote higher wages.
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�
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Don Baer
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Office of Communications
Don Baer
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1994-1997
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<a href="http://clinton.presidentiallibraries.us/items/show/36008" target="_blank">Collection Finding Aid</a>
<a href="https://catalog.archives.gov/id/7431981" target="_blank">National Archives Catalog Description</a>
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2006-0458-F
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Donald Baer was Assistant to the President and Director of Communications in the White House Communications Office. The records in this collection contain copies of speeches, speech drafts, talking points, letters, notes, memoranda, background material, correspondence, reports, excerpts from manuscripts and books, news articles, presidential schedules, telephone message forms, and telephone call lists.
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Clinton Presidential Records: White House Staff and Office Files
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Reich
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Office of Communications
Don Baer
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2006-0458-F
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Box 15
<a href="http://www.clintonlibrary.gov/assets/Documents/Finding-Aids/2006/2006-0458-F.pdf" target="_blank">Collection Finding Aid</a>
<a href="https://catalog.archives.gov/id/7431981" target="_blank">National Archives Catalog Description</a>
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42-t-7431981-20060458F-015-025-2014
7431981