In conversations about corporate social responsibility, cronyism is often left out. It shouldn’t be.
O ne of the great — and sometimes annoying — things about America is active investors who care about the companies they invest in. You don’t have to agree with everything, or even most things, that activist investors say to appreciate that they are vigorously participating in the free market and exercising their property rights with the shares that they own.
Where that passion overflows into calls for government regulation to enforce their views on others, problems arise. Andrew Stuttaford has written plenty at NR about the excesses of the ESG movement and the application of ESG principles by investors who manage other people’s money, without their consent. That’s a violation of their property rights, and it’s one whose awareness has successfully been raised by conservatives in recent years.
Of course, the primary purpose of a corporation is to make a profit by providing products that serve its customers well. To that end, investors are right to care about how the companies whose shares they own are run. The corporate social responsibility movement has demonstrated that it can affect companies’ behavior, entirely through market forces, by shareholder resolutions and public campaigns.
One thing that is often left by the wayside, however, is cronyism. The cozy relationship between corporations and government — federal, state, or local — in securing special tax breaks, subsidies, and other handouts, is rarely treated as a major concern by activist investors. A new paper by Richard Morrison of the Competitive Enterprise Institute and John Mozena of the Center for Economic Accountability argues that it should be.
“Companies that are draining resources from communities and delivering few benefits in return are violating any meaningful definition of corporate social responsibility,” they write. That’s a pretty accurate description of most federal subsidies and state and local “economic development” programs, and yet supposedly socially conscious corporations seem perfectly happy to take them.
As Morrison and Mozena point out, this isn’t a partisan issue. Democrats and Republicans alike, especially at the state level, love to shower preferred corporations with special tax breaks and exemptions from the rules other businesses have to follow so that they can go to a ribbon-cutting ceremony and put out a press release about how they “created” 100 or 500 or 1,000 jobs.
Sometimes these deals fail spectacularly, such as with Foxconn in Wisconsin. More often — at least 75 percent of the time, according to one study — they don’t make any difference at all, “incentivizing” economic activity that would have happened anyway. And even when they do boost jobs, it is often at tremendous cost. A Mackinac Center study of economic development subsidies in Michigan found that taxpayers were paying almost $600,000 per job “created” by the programs.
There is copious economic research on economic development subsidies in the U.S., and it’s virtually unanimous in finding that they don’t work. Morrison and Mozena list the negative effects that researchers have found from these programs. Governments that give subsidies have less money for actual government services, and they target big businesses at the expense of smaller ones. Subsidies cause innovation to decline, as measured by new business start-ups and patent filings. States that are already struggling with pension and health-care costs pile on pointless expenses that worsen their fiscal health further.
There’s even a trade publication, Area Development, that surveys corporations about how they select sites for new facilities. The survey found that the top reasons are labor costs and availability, energy costs, and quality of life. Tax incentives were ranked 13th.
For big companies especially, this makes sense. As Morrison and Mozena point out, North Carolina’s $846 million subsidy deal to attract Apple was huge from the state’s perspective, but it equals less than one day’s worth of annual revenue for Apple. Big corporations are happy to take the extra money, but they’re taking the governments that provide it for a ride.
And that’s the problem that investors can solve. They can and should demand that businesses not seek subsidy deals with governments. Precisely because these deals are so insignificant for big corporations, investors don’t have to worry about profits taking a hit for refusing to make them. Publicly traded companies need to hear that their owners, the shareholders, don’t want them to participate in wasting taxpayers’ money.
Voters should demand that politicians stop supplying these subsidies as well. Some state and local government officials have gone to prison over economic development deals, and more probably should. Morrison and Mozena found that many of the deals supposedly negotiated in the public interest are not available for the public to view. The lack of transparency and flourishing of corruption should make voters of any ideological persuasion uncomfortable.
A resurgence of free-market pride in not taking government money, though, should ultimately come from the free market, not the political process. “This is a rare corporate governance topic that is not embroiled in partisan politics, as research and polling regularly find that corporate welfare is an issue that bridges traditional partisan divides,” Morrison and Mozena write. Shareholders of all political stripes should be able to agree that they are investing in companies because they believe in their products, not in their ability to extract money from taxpayers.