Rewarding Corporations That Really Invest In America

Two leading Senate Democrats will soon release an election-year proposal that could reopen the debate about the corporation's social purpose. Minority Leader Thomas A. Daschle (D-S.D.) and Jeff Bingaman (D-N.M.), who heads Daschle's task force on living standards, propose a new kind of federally chartered corporation. It comes at a time when productivity gains go mainly to shareholders rather than employees and no one appears to know how to raise wages and salaries.

Bingaman and Daschle have therefore turned to the one avenue that might produce some traction: inducing corporations to embrace a "stakeholder" model. The draft legislation, to be released in late February, proposes a new class of corporations, the R Corp.--"R" for Responsible. The idea is to reward corporations that invest in employees and communities instead of pursuing relentless downsizing that boosts short-term profits.

An R Corp. would receive lower taxes and streamlined regulatory treatment. Specifically, the plan replaces the corporate income tax with a "business activity tax" of the sort proposed in 1994 by Senators John C. Danforth (R-Mo.) and David L. Boren (D-Okla.). This tax applies a fixed rate to all receipts, subtracting payments for most inputs. Employee training and R&D expenses would be tax-deductible, while wages, dividends, and interest would not. Under this plan, an R Corp. would be taxed at 11%, compared with 18% for conventional corporations. It would also pay reduced payroll taxes and be able to self-certify in several areas of regulation.

COMPENSATION RATIO. To qualify, a corporation would have to meet several tests. It would be required to contribute 3% of payroll to a portable, multi-employer pension plan, devote 2% to employee training, pay half the costs of a qualifying health plan, and have a profit-sharing plan or employee stock ownership plan with employee trustees.

Another requirement would be to hold the compensation ratio of the highest- to lowest-paid employee to no more than 50 to 1, compared with the 130-to-1 ratio in some corporations. An R Corp. would have a "community responsibility agreement" tempering relocations and layoffs. It would be unionized or have an employee-involvement plan. An R Corp. could not use child or prison labor anywhere in the world and half of its new investment and employment would have to be in the U.S.

The Bingaman plan includes a tax of the sort long proposed by Yale University economist James Tobin on the profits of short-term securities trades. The proceeds would finance a social capital fund for worker training, school-to-work transition programs, industrial extension, export promotion, and technology research and development.

HOWLS OF INDIGNATION. This unabashedly interventionist plan will likely bring howls of indignation from champions of unfettered markets. But it frames an overdue debate on corporate accountability and the cure for short-termism. Throughout the 1980s, the choice was between avenging corporate raiders or stagnant, entrenched managers. Some choice. The corporation was seen as accountable solely to its shareholders, not to a broader community of stakeholders. The shareholder-rights movement, spearheaded by large pension funds, supposedly offered an alternative of more patient capital. But often these supposed long-term owners pursued short-term returns.

The Bingaman plan suggests that we needn't choose between the imperfect discipline of trading markets and the imperfect inertia of the manager-dominated corporation. The stakeholder approach invokes an older, more social conception of the joint-stock company--where not only the shareholders but also employees and communities have a legitimate stake in the enterprise.

Liberals, left out of the raider-vs.-manager debate about corporate governance, seem to be converging on this idea. Senator Edward M. Kennedy (D-Mass.) has proposed a very similar strategy. And the idea of "stakeholder capitalism" is becoming the signature proposal of the new British Labor Party leader, Tony Blair. U.S. Labor Secretary Robert B. Reich recently wrote in a New York Times Op-Ed piece that "the corporation is, after all, a creation of law. If we want corporations to take more responsibility, we will have to alter [their] mix of advantages and disadvantages to provide the proper incentives."

The Bingaman blueprint does just that. It remains to be seen whether Reich's boss will embrace it, but after years of being on the defensive, Democrats are coming to life by focusing on the issue of how to raise living standards and the purpose of the corporation.

Before it's here, it's on the Bloomberg Terminal.