This is the story of a large American conglomerate, the United Stores of America Corporation (ticker symbol: USA.) In the year 2016, USA Corp was still struggling to recover from the severe losses it suffered starting in the fourth quarter of 2008. The crisis, brought about through risky trades made by its financial arm, USA Capital, reverberated throughout the rest of the company. Despite the profitability of its manufacturing and service subsidiaries, USA had to make across-the-board layoffs to stem the losses. At the trough of the crisis, 10% of its workforce had lost their jobs.
The then-CEO of USA, who inherited the crisis after his predecessor left in early 2009, initially borrowed against the company’s sterling credit rating to hire back some of the laid-off workers. He also took measures to rein in the excesses of USA Capital’s trading practices, much to the chagrin of its powerful executives and the members of the Board of Directors who were beholden to their interests. These actions — along with the extension of health benefits to all employees — enraged the CEO’s enemies on the board. A quirk in the board’s rules allowed a minority to subsequently block many of the CEO’s initiatives. The minority exploited this loophole to relentlessly stymie his efforts to restore the company’s competitiveness, even on noncontroversial measures, and then appealed to the shareholders at the 2010 biennial meeting to replace the CEO’s allies on the board due to the company’s sluggish return to profitability.
Despite USA Corp’s downturn, it remained the bluest of blue chip companies. Even in 2012 investors were lining up to buy its corporate bonds. Real yields on seven- and ten-year bonds were often negative, such that USA could have paid back less money than it borrowed. The CEO desperately wanted to use this free money to hire back employees and make long-term investments in the firm’s factories, employee training, and R&D. He also wanted to restore USA’s social conscience by limiting carbon emissions and offering job opportunities to recent immigrants.
The board’s minority was stridently opposed to the CEO’s vision for USA Corp. They refused to take the investors’ free money or hire new workers. Instead, they argued that the path to profitability required paying more to top executives while cutting back on employee salaries and benefits, shunning corporate responsibility, and busting the collective bargaining rights of the union. They also wanted to enforce a rigid moral code that did not honor spousal benefits for gay employees and excluded birth control from women’s healthcare coverage.
The CEO’s enemies turned to the private equity world to find the man they thought could lead this dramatic retrenchment. Nobody had more experience trimming corporate fat than their candidate, and he had shown an eagerness to mold his moral standards to conform to those of his patrons. Under his management, the board and top executives could expect huge returns on their investment income, which would be taxed at the low capital gains rate of 15%.
At the 2012 shareholder meeting, they funneled hundreds of millions of outside dollars into unseating the CEO. They blamed him for failing to resurrect the company he took over in freefall while neglecting their complicity in blocking his growth agenda. The shareholders took the bait, and, in a close vote, installed the private equity man as CEO.
He moved quickly to undo the previous CEO’s actions, revoking health benefits for low-level employees and stripping environmental standards from the company’s factories. The workforce was slashed to subsistence levels, while USA Capital regained carte blanche to leverage the rest of the company’s assets on risky bets. However, the company still couldn’t turn a profit. USA Corp’s fate followed that of its business partners in Britain, Spain, and Greece, where cuts in salaries and benefits led to even greater declines in revenues. USA’s austerity made the balance book hole bigger, not smaller.
Yet, as promised, the executives prospered. Their income increased from 300 times the median employee’s salary to 500, and they paid a lower tax rate to boot. After all, they saw themselves as job-creators and deserved to be compensated at a level commensurate to their value to the company. A meritocratic ethos was instilled in USA Corp from the top-down. None exemplified the company’s new values more than the CEO, a self-made man who had risen from elite boarding schools to follow his father’s footsteps as a corporate chief executive.
The board members who engineered the takeover felt vindicated. USA Corp was unrecognizable to many of its former employees and customers, but capitalism had prevailed. The free market will always pick winners and losers, and through their own innate value, they had become winners. The former CEO had spent too much time worrying about the losers, so he became one, too. Satisfied, the board members then turned their sights to a new question, one that might ensure that the winners like themselves would always win: Why doesn’t government operate more like a corporation?