SINGAPORE (Sept 9): Jamie Dimon, chairman and CEO of JPMorgan Chase, found himself in a difficult position during a hearing with the US House Financial Services Committee in April. Freshman Representative Katie Porter told him that a single mother who lives in her California congressional district and works as a teller at JPMorgan simply could not make ends meet. Porter explained that the woman earned US$16.50 ($22.90) per hour at the bank, and takes home about US$2,425 every month. And, despite living on the most frugal of budgets, she is left with a deficit of about US$567 every month.
“My question for you, Mr Dimon, is how should she manage this budget shortfall while she’s working full-time at your bank?” Porter asked. Dimon attempted to deflect the question by saying that the woman had a “starter” job, and that she might work her way up to his job one day. But that only gave Porter the opportunity to remind everyone how much Dimon is paid. “She may, but Mr Dimon, she doesn’t have the ability right now to spend your US$31 million,” Porter said. “She’s short US$567. What do you suggest she do?”
Looking defeated, Dimon said, “I don’t know. I’d have to think about that.” Porter then baited him by asking if he thought the woman should perhaps apply for a JPMorgan credit card, or an overdraft facility that came with high fees. His face darkening, Dimon responded to the taunts by repeatedly saying, “I don’t know. I’d have to think about it.”
Last month, Dimon made headlines again. The Business Roundtable, an organisation chaired by him that represents the leaders of the largest companies in the US, declared that the primary role of a corporation is no longer to serve only its shareholders. Instead, corporations also have a duty to serve their customers, employees, suppliers and communities. “The American dream is alive, but fraying,” said Dimon, in an Aug 19 press release. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.”
This was a marked shift from the guiding philosophy of Milton Friedman that “the social responsibility of business is to increase its profits”. That was the headline of a landmark article he wrote for The New York Times in 1970 that helped enshrine the primacy of shareholder interests in the decades that followed. In the article, Friedman rubbished the idea of a business having a social
conscience and “[taking] seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers”.
Yet, times are changing and wealthy corporate bosses of Dimon’s ilk evidently feel they must change too. In 2016, Donald Trump rode to the White House with the support of disgruntled white working class voters sidelined by companies that have turned to automation and global supply chains to boost their profitability over the last few decades. In office, Trump delivered tax cuts that benefited the corporate sector, but he has also turned his back on globalisation and pursued a haphazard trade war with China that is causing widespread nervousness in the market.
Now, some of Trump’s opponents are tapping the same vein of discontent that powered his rise. Instead of blaming immigrants and trade, they see the profit-maximising nature of corporations as a key part of the problem. And, after the US mid-term elections last year, which saw US voters put more Democrats in the House of Representatives as well as state offices across the country, it is perhaps little surprise that corporate titans such as Dimon are trying to recast their purpose.
Making capitalism accountable?
Among the Democrats who won seats in the House of Representatives last year was Porter, a law professor-turned-politician who defeated a two-time Republican incumbent and became the first Democrat to represent her district in Orange County, California since 1953. Interestingly, while attending Harvard Law School, Porter studied under Senator Elizabeth Warren, who has made strong progress recently in her bid for the Democratic Party 2020 presidential nomination.
According to FiveThirtyEight, Warren now has the highest “net favourability rating” among the Democrat presidential candidates. Even Trump has been commenting about her recent rise. “They do stories so big on Elizabeth ‘Pocahontas’ Warren’s crowd sizes, adding many more people than are actually there, and yet my crowds, which are far bigger, get no coverage at all. Fake News!” Trump grumbled in a tweet on Aug 27.
Warren could have similarly complained about the wide media coverage accorded to Dimon and the Business Roundtable over the last few weeks. Almost exactly a year before, in August 2018, Warren unveiled her Accountable Capitalism Act, which seeks to coerce companies to own the impact of their activities on society, asserting that the corporate sector’s single-minded focus on shareholder value was the root cause of many problems in the US. “In the early 1980s, America’s biggest companies dedicated less than half of their profits to shareholders and reinvested the rest in the company. But over the last decade, big American companies have dedicated 93% of their earnings to shareholders,” she said last year. Even though worker productivity has risen steadily, real wages for the median worker have been basically flat and the share of national income that goes to workers has dropped markedly, she added.
She also pointed out that most people in the US are not invested in stocks. “Because 84% of American-held shares are owned by the top 10% of our richest households, while more than 50% of American households own no stock at all, corporate America’s commitment to maximising shareholder return is a commitment to making the richest Americans even richer at all costs. There is an urgent need to return to the era when American corporations produced broad-based growth that helped workers and shareholders alike.”
Among the provisions of the act is that US companies with annual revenues of more than US$1 billion must obtain a federal charter that obliges its directors to consider the interests of all corporate stakeholders. In addition, no fewer than 40% of its directors must be selected by employees. Directors and officers of these companies are also barred from selling shares within five years of receiving them, or within three years of a company stock buyback. These companies must also receive the approval of at least 75% of their shareholders and 75% of their directors before engaging in political expenditures. Finally, companies that engage in “repeated and egregious” illegal conduct may have their charters revoked.
“For decades, American workers have helped create record corporate profits but have seen their wages hardly budge,” said Warren last year. “My bill will help the American economy return to the era when American companies and American workers did well together.”
Pity workers, small investors
As a small investor, I have some insight into the plight of the middle-class workers who are reshaping US politics. The sad fact is that promising new companies do not really need us. A generation ago, small investors were the proud and strong blue-collar workers of the stock market. They didn’t individually own much stock, but their sheer numbers and inclination to trade helped promising companies garner lofty valuations, raise capital and grow fast. It was an era when companies and small investors did well together.
With a growing abundance of capital in the private market, companies such as Alibaba Group Holding, Spotify Technology and Uber Technologies have been able to gain massive scale and disrupt entire industries well before even contemplating going public. Small public investors like me are no longer a source of growth capital but an exit strategy for big players in the private market.
Similarly, struggling workers in the US have seen their bargaining power wane as US companies turned to automation and moved their labour-intensive processes to other countries. These workers are no longer a source of competitiveness but a cost that needs to be managed. Even if companies genuinely want to now focus on more than just shareholder value — as Warren is demanding and Dimon says he is actually doing — it won’t change their basic need to remain competitive.
In my view, Warren’s pledge to make big companies work for all their stakeholders isn’t any more realistic than Trump’s promises to bring obsolete jobs back to the Rust Belt. I am not saying that workers cannot have a larger piece of the pie, but that it shouldn’t be left to the companies to decide how large that piece ought to be. A company’s board and managers have a legal duty to act in the best interests of the company and its shareholders — nobody else. Instead of haranguing Dimon about the inability of single mothers to live on what JPMorgan pays them, Porter should perhaps demand that her former Harvard professor Warren and other Democrat colleagues work to raise the minimum wage.
Cautious on markets
As for the Business Roundtable, its move to redefine the purpose of a corporation appears to me to simply be a response to shifting political sentiment in the US and an attempt to stave off troublesome regulation. Agreeing with the first provision of Warren’s proposed Accountable Capitalism Act might put the Business Roundtable in a stronger position to lobby against the other provisions. Indeed, many big companies have corporate social responsibility programmes that will enable them to claim that they already do take the interests of their employees and surrounding communities seriously, even as they continue embracing labour-saving automation initiatives.
Still, it could become less acceptable now for US companies to outsource their processes to other countries, which will cause as much uncertainty for the mercantilist economies of Asia as the ongoing US-China trade war. Whether to cope with Republican trade tariffs or Democrat accountable capitalism, it is perhaps time for Asia’s governments and corporates to redefine their growth strategies and seek alternative markets.
In the meantime, investors here should tread carefully. At this point, I would only buy stocks with very compelling valuations versus their fundamentals. The time to become more aggressive is when efforts by governments in the region to forge new bilateral trade deals gain momentum, and when more companies begin talking about their success with new products and getting into new markets.