Robert Reich: The Man Who Sacrificed Workers To Shareholders – OpEd

For most corporations, the largest single cost is payrolls. Hence the now-accepted formula for raising stock prices: Increase profits by cutting payrolls, then use the increased profits to buy back shares of stock.

No one in the last four decades exemplified this formula more than Albert Dunlap. Dunlap is no longer well known, but he was the early and loudest proponent of shareholder capitalism — the idea that a corporation’s sole purpose is to maximize shareholder value — in contrast to stakeholder capitalism, which holds that corporations had responsibilities to their employees, their communities, and the nation, as well. 

Scott Paper Company hired Dunlap as CEO in 1994. Within Dunlap’s first two years at the helm, Scott Paper’s stock price rose some 200 percent, and the value of the company (measured by the total value of outstanding shares) grew from $2.5 billion in 1993 to $9 billion in 1995. 

Dunlap accomplished this by firing over 70 percent of management jobs and trimming more than 11,200 jobs from the payroll, for a total payroll reduction of 35 percent. He transferred another 6,000 jobs to the payrolls of other companies when Dunlap sold non-core businesses. 

After this, the business community admiringly called him “Chainsaw Al.” 

Dunlap then sold Scott Paper to Kimberly-Clark, creating the second-largest consumer products company in the United States, and leaving Dunlap with a cool $100 million after just 20 months at Scott Paper.

I duked it out with Dunlap on Ted Koppel’s ABC show “Nightline” shortly after Dunlap left Scott Paper in 1996. 

Koppel: Good evening …. If the current trends continue, we can expect to see the biggest businesses laying more people off at the same time that government is less able to provide additional support …. Joining me now from our Washington studios, Secretary of Labor Robert Reich and Albert Dunlap, former chairman and CEO of the Scott Paper Company. Mr. Dunlap, do you think that benign leadership is workable at a large company?

Dunlap: The reason to be in business is to make money for your shareholders. The shareholders own the company. They take all the risk. No company ever gives the shareholders their money back when they go bust, and you have an awesome responsibility to see that they get the proper return for their risk.

Koppel: Mr. Secretary, isn’t what’s good for business in the long run good for the American people?

Me: Not necessarily, Ted. The stock market is soaring, but wages are stuck because people are scared to ask for a raise. They’re afraid they may lose their job, and they don’t have any bargaining leverage …. There are social consequences to all of this. It’s not just a matter of maximizing shareholder returns.

Koppel: Mr. Dunlap?

Dunlap: Business is not a social experiment …. And you know, socialism has failed the world over, yet we in America want to reinstitute socialism into our economic situations, and I think that’s dead wrong.

Koppel: Are you proposing some form of socialism here, Mr. Secretary?

Me: I’m talking about corporate responsibility. Millions of Americans are trapped in the old economy. If the public sector can’t help them because it has to balance the budget, then the private sector is going to have to do more. Corporate responsibility extends beyond maximizing shareholder returns. There’s also a responsibility to employees and to communities.

Dunlap: That is not the role of business …. And the last person that should arbitrate that is the government, the largest business in America with the worst balance sheet, the poorest management, services people don’t want, and a bloated cost structure.

Me: We’ve got to think of society as a whole. America isn’t simply a bunch of businesses. It’s a group of people. If businesses are highly profitable, they at least owe it to their employees to upgrade their skills. And if they’re downsizing, they have a responsibility to find their employees new jobs that pay as well….

Koppel: Mr. Dunlap, Mr. Reich, thank you both very much indeed. I’ll be back in a moment.

The cameras stopped, the klieg lights went off, and I rose out of my chair. A studio technician unfastened the microphone and earpiece. “I heard you just now,” he said. “Right on.”

“Thanks,” I responded, pulling up the cord from inside my shirt.

“This used to be a full-time job for me,” he continued. “But the network laid me off six months ago. Now they call me back when they need me. I work three jobs with no benefits. All the networks are the same.”

“That true for most employees?”

“Yup.” He began to wind the cord. “Almost no one on full-time payroll anymore. Camera crew, control room, makeup. We’re all freelance. Even a lot of the producers are freelance. Giant corporations are buying and selling networks like playing cards. A few people at the top are making hundreds of millions. But the little guys like me don’t count.”

Dunlap appeared from around the corner. I hadn’t met him in person; during the program, he and I had talked into separate cameras from adjoining studios.

Dunlap was built like a tank. He had been a boxer in college, and he still swaggered. 

He walked right up to me without so much as a hello. He was flushed. “Who the hell are you to talk about working people?” he barked, pointing his finger in my face. I half expected him to land me one on the jaw. “I was brought up in a working-class family. You had a silver spoon in your mouth!”

I wasn’t ready for his assault. The unwritten rule of TV debates was that it’s over when the lights and cameras are off. 

“You don’t … know a thing … about me,” I stammered. “Both my parents worked six days a week.”

“That’s not what my researchers say,” he hissed.

“Then your researchers are incompetent. Fire them. You’ve fired everybody else.”

He burst past me and out of the studio.

***

A few months later, in July 1996, Sunbeam hired Dunlap to raise share prices of the home appliance maker. After less than four months, Dunlap announced plans to eliminate half of Sunbeam’s 12,000 employees worldwide.

But Dunlap didn’t just cut Sunbeam’s payrolls. Another way he boosted earnings was by using a bill-and-hold strategy — selling Sunbeam products at large discounts to retailers and holding them in third-party warehouses to be delivered later. By booking sales months ahead of the actual shipment, Sunbeam was able to report higher revenues in the form of accounts receivable, which inflated its quarterly earnings. 

Dunlap was confronted with this con in a 1998 investors’ meeting, at which 200 Wall Street honchos were in attendance. After the meeting, Dunlap accosted one of his skeptics, placing his hand over his mouth and, according to a report by the magazine then known as Businessweek, yelling into his ear, “You son of a bitch. If you want to come after me, I’ll come after you twice as hard.”

In June 1998 — 23 months after his arrival — Sunbeam’s board fired Dunlap for withholding information about the company’s deteriorating financial condition. Dunlap learned firsthand what it felt like to be laid off. 

On February 6, 2001, Sunbeam filed for bankruptcy.

In August 2002, Dunlap paid $15 million to settle a class-action lawsuit brought by shareholders against him. In September, the Securities and Exchange Commission charged him with devising illegal accounting maneuvers to mask Sunbeam’s financial troubles. Dunlap agreed to be banned permanently from any public company and pay a $500,000 penalty to settle the SEC charges.

The New York Times discovered that Dunlap had engaged in similar accounting fraud 20 years earlier in a position that he never included in his resume.

In 2009, Conde Nast Portfolio named Al Dunlap the sixth-worst CEO of all time.

Dunlap died January 25, 2019, at the age of 81.

***

Some say shareholder capitalism has proven to be more “efficient” than stakeholder capitalism. It has moved economic resources to where they’re most productive, enabling the economy to grow faster. According to this view, stakeholder capitalism locked up resources in unproductive ways, CEOs were too complacent, corporations employed workers they didn’t need and paid them too much and were too tied to their communities.

But shareholders are not the only ones who invest in corporations and bear some of the risk that the value of their investments might drop. Workers who have been with a company for years often develop skills and knowledge unique to it. Others may have moved their families to take a job with the company, buying homes in the community. The community itself may have invested in roads and other infrastructure to accommodate the corporation.

When a firm abandons those workers and those communities, these stakeholders lose the value of their investments. Why should no account be taken of their stakes?

In standard microeconomics, the costs to workers and communities abandoned by profit-maximizing corporations are termed “externalities” — social costs lying outside the deals struck between corporate managers and investors. But why should these costs not be included in assessing whether the deals are good?

Over the last four decades, these “externalities” have grown so large as to swamp internal efficiencies. Entire regions of America have been abandoned by corporations and denuded of good jobs. Legions of (mostly) men without college degrees have become stranded. The bottom half of the American workforce has been left with stagnant pay and decreasing job security.

The results: rising rates of drug addiction, family violence, child abuse, and deaths of despair, and an increasingly angry working class susceptible to demagogues like Trump.

Executives claim they have a “fiduciary obligation” to maximize investors’ returns. The argument is tautological. It assumes that investors are the only people worthy of consideration. When the only purpose of business is to make as much money as possible in the shortest time frame, regardless of how it’s done, the common good is easily sacrificed. 

Meanwhile, almost all the gains from growth have gone to the top. The typical worker today is only slightly better off than his or her equivalent 45 years ago, adjusted for inflation. Most are less economically secure.

Not incidentally, few own any shares of stock. By 2024, the richest 1 percent of Americans owned 52 percent of all the shares of stock owned by Americans. The richest 10 percent, 93 percent. 

The nation’s economic gains — once distributed broadly to the working and middle class — have been siphoned to the top, thanks to people like Albert Dunlap.

This article was published at Robert Reich’s Substack