The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (4 page)

People who work for corporations seek these budget cuts and rule changes, but corporations are not people. And, in the eyes of the law, that has traditionally been an important distinction. Unlike individuals, who must take responsibility for their conduct, corporations’ legal responsibility for their conduct (and misconduct) has benefited from limits to that responsibility established by law. The rationale for this is that people who want to build a business would not take the same risks if failure meant they would lose not just the time and money they put into their business, but their houses, cars, stamp collections, and everything else they have; limits on liability mean that they do not face such risks and they can go about their corporate business, creating enterprises and generating wealth.

While limiting liability has eased the path to profitability, it has also obscured a corporation’s responsibility to function for the benefit of society. The greater good is an idea that’s thousands of years old, but in the recent past corporations have been permitted to lose sight of that important notion.

I can date the moment it began to fade.

In a 1970 article in the
New York Times Magazine
, Milton Friedman argued that the sole duty of a company is to its shareholders, not to the interests of workers and surrounding communities. Friedman closed his piece with these words:

This is a bottom line with lots of implications. Workers may toil their entire lives, communities may tax themselves to create infrastructure a corporation needs, and vendors may invest their entire fortune to supply the corporation—but none of these parties, Friedman said, has significant legal rights or moral claims.

The idea was radical. It was not supported by the development of the law, the regulation of business and the advancement of civilization over thousands of years. But in a surprisingly short time, Friedman’s ahistorical thinking has come to dominate our society. The corporate elite, the majority of billionaire investors and the officeholders in the legislative,
executive and judicial branches of government now subscribe to the deceptively simple philosophy that owners matter most, that all other interests are subordinate to the interests of the corporation.

This perspective has now skewed many economic rules, which, in turn, are slowly making everyone worse off (aside, that is, from world-class financiers who can put their capital to work in places like China, where workers and consumers have no rights). But don’t misunderstand: mine is not an argument against corporations. My point is that we should recognize the corporation for what it is and what it is not. We need to get the economic and other benefits that a profit-making corporation can deliver, but not allow it to distort our economy or diminish our society and values.

ANCIENT ANTECEDENTS

For context, let’s look briefly at the history of business regulation.

Nearly four thousand years ago in Sumeria, the land along the Tigris and Euphrates rivers that today we call Iraq, King Hammurabi decreed 282 laws. Hammurabi’s laws regulated loans and their repayment; set accounting rules to ensure that transactions were honest; required the creation and maintenance of business records for important transactions that had been attested to by witnesses; set safety standards for home builders; regulated the conduct of women (though not men) who owned taverns; and created the first known social insurance by requiring communities to share the losses suffered by victims of burglary and robbery and the costs of ransoming soldiers and others captured by foreign armies or rogues.

If you borrowed money and did not pay it back, the Code of Hammurabi allowed you to be seized and made a slave, but only for three years. Under some circumstances a man’s wife, concubine and children could also be impressed into service for three years. If you could not repay a debt because of circumstances beyond your control, such as a hailstorm flattening a field of grain, you could be excused from your debt—this amounted to an early form of bankruptcy protection. The clay tablet that recorded your debt could be washed, giving you a “clean slate,” a term we use to this day to describe unpaid debts that are forgiven. (Contrast this with the 2005 Bankruptcy Abuse and Consumer Protection Act, which makes it much harder for people who fall on hard times to escape their credit card debts or hold on to their homes, a boon to credit card
companies that lend money at four times their borrowing rate, earning huge profits even before all the fees they charge.)

Hammurabi’s code imposed penalties on those who rented farmland but failed to work the soil, and on those whose negligence damaged crops by failing to shut off irrigation water or letting cattle trample a garden. It barred landowners from changing the rules on payment by, say, leasing a field in return for a share of the crop only to demand payment in money in a year when a bountiful harvest drove crop prices down. The code also included sophisticated rules governing common offenses like embezzlement and advice on how to discern which party was most likely telling the truth in contract disputes.

Like the Sumerians, the ancient Athenians developed commonsense business rules. One concerned trusts created to take care of property belonging to orphaned boys. The great orator Demosthenes, orphaned at seven, was victimized when much of his father’s estate, administered by guardians, was lost to embezzlement and waste. To learn to speak clearly, Demosthenes put pebbles in his mouth. Then the young man’s plainspoken mastery of the case secured a judgment against the guardians, advancing rules that exist to this day regarding the duty of those entrusted with our money to put our interests ahead of their own, known as a duty of loyalty or fiduciary duty.

We give the Athenians credit for inventing democracy, but less often recognized is a second innovation, namely, democracy’s civil twin, progressive taxation. A key insight of the Greeks was that man’s natural state, the lawless jungle, amounted to little more than an unending war of one against all, which allowed for no legitimate wealth. The wise men of Athens came to regard progressive taxation as a political and moral issue essential to the establishment of a civilized society. Wealth could not be created and maintained without laws that defined property and other rights, the presence of courts to adjudicate disputes, the power to enforce court decisions and a military to protect riches from marauders. All this in turn depended on having a means to pay for it—taxes.

Another ancient insight, one too often ignored today, is that the rich do not deserve any extra voice in government. There’s a simple rule for it: one man, one vote. Citizens in a democracy “rule and are ruled by turns,” Aristotle taught, yet as Plato noted, oligarchs were forever conspiring against democracy, attempting to undermine economic rules that serve all equally so they could tilt the flow of money to themselves. (That hasn’t changed.)

Plato’s student Aristotle explained the tension between the rich and
democratic rule when he wrote that “an oligarchy is said to be that in which the few and the wealthy [rule], and a democracy that in which the many and the poor are the rulers.” Calling a land ruled by the rich a democracy, he observed, does not make it a democracy. In ancient Rome, a general dispatched to make war in Gaul or suppress insurrection in Palestine might be away for several decades. Indeed, there were Roman emperors who traveled for years with an entourage of many thousands, yet never saw Rome. But what was to be done with their farms and other property while the generals and proconsuls served in distant outposts? The Romans created entities that were recognizable precursors to modern corporations and put in place tough laws to govern what managers put in charge of other people’s property could and could not do.

The classical “corporations” differed from today’s in significant ways. For one, they existed not for profit but in service to the state. Today corporate officers and directors are also entrusted with managing assets owned by shareholders, but they are granted enormous leeway to act as they see fit, with few controls on their conduct short of outright theft of assets, under what is known as the “business judgment” rule.

A key tenet that has changed since ancient times has to do with those limits on corporations. If a business fails, the chief executive does not have to become a slave to the bank that lent the company money. In effect, because they do not bear the same responsibility as individuals, entities like corporations, partnerships and trusts now can use their privileged status to advantage. Corporations have grown so powerful that they have inverted the Roman equation: rather than corporations existing to serve the state, the state serves them.

Multinational corporations such as General Electric, ExxonMobil, Rupert Murdoch’s News Corp, Citigroup, IBM, Apple and Microsoft all have revenue and workforces vastly larger than the treasuries and armies of many of the world’s nations. The voices of giant enterprises motivate governments; corporations influence who gets a serious shot at running for public office. We have seen this most clearly in the scandals in London enveloping Murdoch, whose newspapers hacked the telephones of the deputy prime minister and of a murdered thirteen-year-old girl, spied on private citizens for political gain and bribed Scotland Yard detectives, who in turn hid a roomful of evidence and then lied, telling the public they found no evidence of criminality or even significant wrongdoing. The underlying reality is that Murdoch was in a position to tell the government what to do and that often it did what he asked. Rules were relaxed on concentrated ownership of media in both London and
Washington, magnifying Murdoch’s power to shape public knowledge, and therefore opinion. That, too, helped produce government policies that favored his business interests.

Modern corporations show no loyalty to country, only to profit. Halliburton, the oil industry services company that Dick Cheney ran before he became vice president in 2001, even moved its physical corporate headquarters from Houston to Dubai. This is different from what some other companies, including the oil services company Nabors Industries, the Tyco conglomerate, the Accenture consulting firm and the industrial-equipment maker Ingersoll Rand, among others, did when they moved their headquarters to Bermuda on paper. Keeping their physical headquarters in the United States allowed these firms to enjoy the benefits of selling to the rich American market while paying little to nothing in taxes. Halliburton’s is a more extreme example, one in which a powerful and wealthy company transcends national borders so thoroughly that it is not an American company but a truly global enterprise with no allegiance to anything or anyone except the bottom line and the investors and executives who gain from its profits.

The results of this broad rise of corporate power have been riches for the corporate elite that were beyond imagining before President Ronald Reagan signed into law the Economic Recovery Tax Act of 1981. The philosophy of “trickle-down economics” has led to worsening conditions at the bottom of society—a shredding of the social safety net. As an example, among modern nations America now has by far the highest level of childhood poverty. The Central Intelligence Agency tells us that we rank below Cuba in infant mortality. Between birth and age eighteen, half of all American children will at some point depend on food stamps.

The poor have become poorer. The worst-off 60 million of us have less now than in 1980. At the same time the best-heeled among us, the top 1 percent of the top 1 percent, are swept along by torrents of cash and untaxed wealth far beyond what they can spend on their ever more lavish lifestyles. The little corporate Learjet is being upgraded to a private jumbo jet. The founders of Google fly their own Boeing 767 and two top-of-the-line Gulfstream V jets, which, for a fee of $1.3 million a year, they park at Moffett Field in Silicon Valley, a National Aeronautics and Space Administration base supposedly not available to airlines or other private planes. Casino mogul Sheldon Adelson, who with his wife kept Newt Gingrich’s 2012 presidential bid on life support for months, owns a pair of 747s, one of which can accommodate in-flight skateboarding by his youngest heirs.

Back on earth, the jobs and pay situation for the vast majority of Americans can be summed up in a single word: dismal. Wages, adjusted for inflation, have stagnated for more than a decade. The median wage—half make more, half less—hovered at just over $500 a week for twelve years. In 2010 the median wage fell back to the level of 1999, according to the Social Security Administration’s income data. In 2010, like the dozen years before it, one in three workers made less than $15,000 a year, while just one in four earned $50,000 or more; and less than 1 percent made $200,000 or more.

It gets worse when you look beyond wages to all income measured in inflation-adjusted dollars. The 2010 data on Americans’ adjusted gross income (the last line on the front page of your tax return) showed that the top 1 percent of the top 1 percent had a great year. Compared to 2009, the top of the top saw their incomes soar 21.5 percent. These 15,600 households captured 37 percent of all the increase in income in a country of more than 300 million people.

At the same time, the bottom 90 percent saw their average incomes decline, down a fraction of a percent. The highest income household among the bottom 90 percent made $108,024. The average for the bottom 90 percent was much lower, just $29,840. That was down $4,842 from 2000.

More shocking still, the average income of the vast majority of taxpayers in 2010 was just a smidgen more than the $29,448 average way back in 1966. The difference after forty-four years was just $392, not enough for anyone to notice. In comparison, the average incomes of the top 1 percent of the top 1 percent increased in that same period by $18.7 million. That means while the vast majority went nowhere, the top of the top enjoyed nearly quadruple their 1966 income. Since tax rates on the top fell steeply, with the top rate cut in half and capital gains taxed at just 15 percent, much of this group enjoyed eight times more after taxes.