Capitalism Needs Big Dose Of Big Picture

Under U.S. capitalism, corporations have one goal: to make as much money as possible for stockholders without breaking any laws. That focused, efficient system has created enormous prosperity for many Americans over two centuries.

But would capitalism work even better in the next century if some consideration were given to “stakeholders” - employees, customers and suppliers?

Pure capitalists say stakeholders should have no role in determining a company’s direction. They believe prosperity is generated only when managers stay committed to the singular goal of making money for owners.

But does that philosophy still make sense when the definition of owner has grown so fuzzy? Being an owner is no longer as simple as it was early in the century when powerful families, such as the Fords, Firestones and Rockefellers, founded companies and held stock in them for life.

Those founder-owners had enormous incentive to keep their companies healthy over the long haul, which they did by investing in workers, equipment, research and new products.

As the century comes to an end, big companies increasingly are owned by people who don’t even know they own them. Because I buy stocks through a 401(k) plan, I know I own parts of many companies. But I haven’t a clue which ones.

As more people invest through mutual funds and more stock traders use computer programs to buy and sell shares, the connection between owners and their companies gets stretched thinner. “Owners” may have a claim to that title for just days or even hours as stocks get churned.

These short-term owners are more likely to be looking for short-term profits. A company that sells off its most valuable assets or lays off its most experienced workers could see an immediate jump in its stock price, but would it be a better company in the future?

Delta Air Lines Inc. is providing a dramatic example of how managers, by focusing on stockholders and ignoring stakeholders, may be endangering a venerable corporation.

Delta executives announced a couple of years ago they would have to lower costs drastically to compete with discount carriers. That decision was a no-brainer; Delta’s labor costs were far too high.

But in its zeal to make big changes, Delta did a poor job of communicating with its most important stakeholders: customers and workers. Managers slashed jobs without heeding the employees who could have told them service would suffer.

As a result of having too few employees in critical service areas, Delta’s reputation has suffered. The airline’s ratings on customer complaints, baggage mishandling and on-time performance have plummeted. Customers who used to love Delta now joke that its name is an acronym for “Doesn’t Ever Leave the Airport.”

Even worse, Delta has deeply alienated its pilots. The unionized employees are so disaffected they are seriously considering a strike. Walking off the job would be a foolish, self-destructive move, but the pilots are angry enough to give serious consideration to such crazy thoughts.

Delta has made great progress in lowering its costs and boosting profits, but it has crushed worker morale, frustrated customers and turned its very name into a joke. In the short run, stockholders have benefited greatly, with share prices rising roughly 35 percent in the past year. But has the nation’s economy been well-served by Delta’s focus on stockholders at the expense of stakeholders?

Earlier this month, House Minority Leader Richard Gephardt, D-Mo., launched a campaign to bring attention to the stakeholder issue. He wants to give companies incentives to consider the interests of workers and customers. Companies might qualify for tax breaks, contracts and trade freedom if they would sign on to a “Best Practices Code of Conduct.” Participating companies would promise to try to treat workers, customers and communities fairly.

Gephardt points to Harley-Davidson, Anheuser-Busch, Motorola and others as examples of profitable U.S. companies that try to do right by both their stakeholders and stockholders.

So far, Gephardt’s plan is very short on details. Perhaps, on closer examination, his ideas will turn out to be unworkable or inappropriate. But I think he’s on to something. It’s time for Congress to figure out how, in this age of stock mutual funds and computerized trading, companies could be encouraged to focus on long-term profits and stability.

The primary goal of our economic system must continue to be maximizing profits, but perhaps that goal can best be reached by giving companies incentives to look beyond just the next quarter’s results.

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