American Inclusive Capitalism: An Agenda for a New Business Activism

"I think it’s particularly important for business today to take an active role in trying to fix the problems that this country does have."

Jamie Dimon, Chairman and CEO JP Morgan Chase- April 5, 2017 

Since the global financial crisis of 2008, concerned business leaders, government officials, thinkers, and a wide group of stakeholders have spawned a new discourse on the future of modern capitalism.   The Coalition for Inclusive Capitalism was inaugurated in 2014 in order to encourage businesses to make changes and expand their investment and management practices to regain public trust.   Primarily comprised of business leaders, the Coalition advocates for corporations to be managed for the long-term and for the benefit of stakeholders as well as shareholders.  Thomas Piketty’s “Capital in the 21st Century,” became an international best seller by highlighting the challenges facing capitalist economies and how rising inequality is leading to discontent and undermining democratic values.  In January 2017 the G20 Finance Ministers called on members to pursue inclusive growth. 

Innovation and global commerce have traditionally been tremendous forces for progress. Capitalism has demonstrated a consistent ability to adapt to changing circumstances and drive technological change.   According to the latest available data, the global economy is more than five times larger than it was half a century ago, and global per capita GDP has more than doubled over the same period. These numbers represent more than higher profits for corporations: they also amount to millions of jobs created and billions of lives improved. In 2015, the World Bank estimated that the share of the global population living in extreme poverty had fallen below 10 percent for the first time – down from over 40 percent barely three decades ago.[1]

Growing income inequality and a rapidly evolving job market have left many people behind.

Networks and connections are playing an increasingly dominant role in all aspects of our lives.   As Joshua Cooper Ramo has described in his book “The Seventh Sense:  Power, Fortune, and Survival in the Age of Networks” - financial webs, DNA databases, currency platforms, medicine and research labs are all increasingly operating through both concentrated and diffuse networks.  Networks have compressed time and space, accelerated the speed of commerce and trade, and enabled the creation of vast wealth.[2]

But it is also evident that the market economy that has worked so well is not serving everyone equally.  Growing income inequality and a rapidly evolving job market have left many people behind.  In July 2016, the McKinsey Global Institute released an extensive report on incomes in twenty-five advanced economies worldwide, finding that between 65 percent and 70 percent of households were in income segments whose average incomes stagnated or declined between 2005 and 2014.[3] The growth of artificial intelligence, big data, and machine learning are having a profound impact on skilled labor, eliminating many positions and also undermining steady, secure employment opportunities and with it sources of income.[4]  

Growing inequality, technological changes, and the rise of digital networks are creating new economic paradigms. 

This precipitous rise in income equality is having a direct impact on the way many see the capitalist system as a whole.  According to a recent study by the Harvard Kennedy School, only 19 percent of Americans aged 18-29 identify themselves as “capitalist” and only 42 percent of Americans 18-29 say they even support capitalism at all.   Some have gone so far as to state whether these trends are insurmountable and if the world is entering a “post-capitalist” phase of economics.[5]

The World Economic Forum’s (WEF) 2017 Global Risk Report shows in detail how rising income inequality and the polarization of societies pose a risk to the global economy in 2017 and will shape the world for at least a decade unless urgent action is taken. The WEF’s 2017 Inclusive Growth and Development Report shows that the United States ranked 23rd among the most advanced economies in that regard, one spot above Japan. According to the report, the United States ranked 29th out of 30 in net income inequality, 29th in wealth inequality and 28th in poverty rate. [6]

Growing inequality, technological changes, and the rise of digital networks are creating new economic paradigms. These disruptions are clear and potentially dangerous. These challenges also present the United States with an opportunity to show the world how a new American and inclusive capitalism can work, thrive and ultimately serve as a model for American leadership around the world.

American Inclusive Capitalism – An agenda

An American inclusive capitalism agenda should be both transformational and empower businesses, governments and non-profits to effectively respond to both the short and long term challenges. Government at the state, local and federal level will need to provide an appropriate legal and regulatory framework, but executing the agenda should be led by business, and be built upon a broader rethinking of the role of businesses and capital markets and their ability to generate public goods.  Some of this rethinking is on the notion that financial value can be created by business in addressing social challenges. This view – most famously championed by Harvard Business School (HBS) Professor Michael Porter – is that businesses through a “shared value” model present the best opportunity to scale and solve these problems. And Porter’s HBS colleagues Gary Pisano and Willy Shih have argued for a manufacturing renaissance through the expansion of a new “industrial commons” where research and development (R&D) and production among companies can be co-located and serve as an innovative platform for growth.[7]

Enactment of an American inclusive capitalism agenda could also provide the United States with an opportunity to address urgent domestic economic challenges, unlock business creativity, and create a blueprint for other countries to address similar issues within their own economies. The implementation of the agenda within the United States could begin with the following initiatives:    

·         Reduce incentives for short term financial engineering. Over the past few decades, businesses have increasingly become unable to plan and execute for the long term.  The private equity industry has accelerated these trends by buying companies, restructuring the businesses (often accompanied by layoffs), and then selling the businesses.  Financial engineering has been central to private equity led leveraged buyouts (LBOs) fueled by debt laid upon the companies themselves. While appropriate financial engineering can provide opportunities for failing companies to thrive, in many cases the results are less than optimal for the companies, their workers and the communities where these businesses operate.  In addition, private equity owners are both the investors and the managers of their portfolio companies, which creates incentives for owners to manage operational decisions – such as union contracts, plant closings, and use of capital – for short-term gains to owners. Partly as a result of these realities, private equity-owned companies are twice as likely to file for bankruptcy as compared to public companies, which lead to significant job losses at individual companies.[8] Policymakers should reduce the incentives for indiscriminate and harmful financial engineering. An initial step could be to address what some refer to as the “carried interest loophole.” Carried interest refers to income flowing to the general partner of a private investment fund that is currently treated for tax purposes as capital gains as opposed to wage or salary income. Instead of fund managers typically paying a federal personal income tax on these gains at about 23.8%, by eliminating the carried interest loophole these same managers would be taxed at a top rate of 43.4% (not including any relevant state and local taxes). [9]   Taxing carried interest at ordinary rates would generate $180 billion over 10 years[10] and provide a disincentive to harmful financial engineering.

·         Enact a Universal Basic Income (UBI).  Universal Basic income is a transfer payment in an amount sufficient to secure basic needs as a permanent earnings floor no one could fall beneath, and would replace many of today’s temporary benefits, which are given only in case of emergency, and/or only to those who meet highly specific criteria.   Rising inequality, decades of stagnant wages, the end of career employment, and technology and networks disrupting the labor force have resulted in unprecedented income instability. Price Waterhouse Coopers (PWC) has concluded in March 2017 that up to 1/3rd of the U.S. workforce is at risk of being lost to automation.[11]   An Oxford University study goes even further concluding that up for 47 percent of jobs in the United States are at risk of being wiped out due to automation within the next twenty years.[12]  Some countries are already experimenting with a UBI system. Finland launched a UBI pilot program in 2017 where 2000 people are collecting approximately $587 per month for two years without having to report whether they are seeking employment or how they are spending the money. This supplement will be deducted from any benefits they are currently receiving.  The program was created by KELA, the Finish agency responsible for the country’s social benefits. Finish official believe the UBI will help to streamline a bloated welfare system, and since participants will continue to receive benefits even when they find work there are no disincentives to seeking employment while on the program.  A partial UBI already exists in Alaska, and pilot programs are being discussed in Canada, Brazil, Iceland and Uganda.[13]  A UBI system would serve as an effective mechanism to fight poverty while providing a floor where citizens could take risks in the job market without fear of losing all of their income.   A growing chorus from all sides of the political spectrum – from Charles Murray to Robert Reich to Labor leader Andrew Stern – to business titans such as Pierre Omidyar and Elon Musk – all now support a UBI for Americans.  There are various estimates regarding the costs of implementing a UBI program, but the UBI should be considered in tandem with full or partial consolidation of other programs and tax credits which would immediately be made redundant by the new transfer.              

·         Encourage Environmental Social and Governance (ESG) and Impact Investment as core parts of Asset Management.     Impact Investments are investments made into companies, organizations and funds with the intention to create measureable social and environmental impact along with financial returns.  Research has shown that currently the majority of institutional investors actively consider ESG criteria when making alternative investment allocations.   ESG analysis has moved beyond ethical concerns and has found a firm footing as a risk and investment management topic.   Surveys now show most institutional investors are confident that ESG improves risk-adjusted returns and is an important aspect of risk and reputation management.[14] It is estimated that investors committed at least $15 billion globally to impact related projects in 2015[15] and that number is anticipated to grow exponentially as impact funds develop a track record and millennials demand more accountability as to how their savings are invested.  Large impact investment funds with over $250 million assets under management (AUM) include Bridge Ventures, the Calvert Foundation, and Turner Impact Capital.  These funds and many others invest in sustainable agriculture, global health, water and sanitation, clean technology, and affordable housing among many others.  In 2016 the largest asset management company in the world (BlackRock) launched its impact mutual fund to invest in companies seeking triple bottom line returns (profit, social and environmental returns) and the Department of Labor revised its Employee Retirement Income Security Act (ERISA) guidelines to allow pension fund managers to incorporate ESG criteria into investment allocation decisions.  Impact investment can serve as a critical future channel to solve problems while generating returns for businesses and investors.   The federal government could help to jump start this growing market by creating a new ESG related fund for the federal government’s defined contribution savings plan (Thrift Savings Plan or TSP) for civil service employees, retirees, and members of the military.    There are nearly 5 million current participants in TSP with total assets of at least $468 billion. 

·         Grant special purpose national bank charters for financial technology (fintech) companies.   Fintech companies include businesses focused on payments, blockchain, wealth management, crowdfunding, digital currencies, peer-to-peer lending, clearance and settlement.  Technology has made financial products and services more accessible, easier to use, and much more tailored to individual consumer needs.[16]  The power of fintech to accelerate financial inclusion and provide greater financial security to the marginal and the unbanked is one of the greatest potential impacts of this segment of finance. Fintech can help address this growing program of “capital deserts” by providing citizens tools to access capital particularly in underserved rural and urban areas. Many U.S. fintech companies consistently cite the lack of a clear and coherent regulatory structure within the United States as a major impediment to further growth and expansion. Policymakers currently find it difficult to support fintech innovation while upholding consumer and financial system protections.[17]

  Special purpose national bank charters for fintech companies would represent a crucial step in both modernizing the banking system

In December 2016 the Office of the Comptroller of the Currency (OCC) published and solicited comments for a paper exploring special purpose bank charters for U.S. fintech companies engaged in “receiving deposits, paying checks, or lending money.”  There would be numerous benefits to the OCC granting special purpose national bank charters to fintech companies.  Special purpose charters would help ensure that these companies operate in a safe and sounds manner while effectively serving the needs of customers, businesses, and communities.  They would promote consistency in the application of the law and regulation across the country and ensure that consumers are treated fairly.[18]  The growth of new fintech companies with national charters would also expand access to finance for SMEs, and make the federal banking system much stronger.   Special purpose national bank charters for fintech companies would represent a crucial step in both modernizing the banking system, fostering innovation, and demonstrating U.S. leadership throughout the world in the rapidly evolving intersection of technology and finance.    

·         Continue to enact legislation at state level to support alternative corporate forms such as Benefit Corporations.  Benefit corporations are legally designated for profit corporate entities whose mission includes generating a positive impact on society, employees, the community and the environment in addition to profit.  Benefit corporations give entrepreneurs the freedom to consider stakeholders in addition to shareholders and net profit.  Shareholders of such corporations, in turn, enjoy all the same protections and powers found in traditional corporate law, but also have more freedom to hold the company accountable for remaining true to its stated mission.   Benefit corporations create a no-cost economic development opportunity for states by establishing new pathways for social entrepreneurs to scale.    Thirty-two states including the District of Columbia have passed benefit corporation legislation.  “B” Corporations are businesses privately certified by B Lab, a non-profit organization founded in the United States but with offices throughout the world.  Companies are granted “B” Corporation status by B Lab upon completion of an assessment and satisfying requirements that the company integrate B Lab commitments into its core business.   There are now 4000 legally constituted benefit corporations and 2000 certified “B” Corporations in the United States.  Some examples of well-known benefit or “B” corporations include Patagonia, Kickstarter, Solberg Manufacturing, and Etsy. [19]

 More U.S. states can pass benefit corporation legislation to help facilitate a new market so that current shareholders, consumers and potential investors can make informed decisions based on companies’ missions and performance. 

Benefit Corporations and “B” corporations create tremendous branding opportunities for businesses seeking to highlight their positive impact on their communities.  States and the federal government can expedite a process to incentivize businesses to declare as benefit corporations.  More U.S. states can pass benefit corporation legislation to help facilitate a new market so that current shareholders, consumers and potential investors can make informed decisions based on companies’ missions and performance.   And as the federal government downsides and more work is granted to federal contractors and subcontractors, government procurement guidelines could be reviewed and revised as a pilot project to include preferences for benefit corporations. 

·         Eliminate Anonymous Corporate Ownership.  Nearly one year after the Panama papers exposed the offshore banking activities of clients of the Panamanian firm Mossack Fonseca, it is still legal for corporations in the United States to be anonymously owned.  Anonymous ownership directly facilitates the ability of shell companies to hide assets and obscure illegal activity.   But in addition to tax evasion and money laundering, anonymous ownership is also contributing to accelerating housing prices in major U.S. cities.   According to the New York Times, streams of foreign wealth shielded by shell corporations are already used to purchase more than half of all individual properties in New York City that cost more than $5 million or more.   In a single three block stretch in Midtown Manhattan, fifty-seven percent of apartments are vacant for at least ten months every year [20]and absentee homeownership has grown by seventy percent in Manhattan since 2000.[21]  In South Florida, money linked to wrongdoing abroad is helping to power the new condos rising on its waterfront and pushing home prices far beyond what locals can afford.[22]  These investments often result in skyrocketing home prices not only in luxury units but also more affordable housing – ultimately pricing out the ability of American citizens to live in their own cities.  Cities also routinely encounter difficulties in identifying who actually owns slum properties and ensuring accountability for those owners and corporate entities that allow residential properties to become dangerous and deadly. 

 The Trump Administration should sign the bill into law in order to prevent the United States from becoming a preferred haven for tax cheats and illicit activity

The UK, France, Germany, Spain and Italy have all committed to creating a registry for anonymous corporate ownership.   In late 2016 the U.S. Justice Department concluded its three year Swiss Banking program that provided a path for Swiss banks to resolve potential criminal liabilities related to disclosure of cross-border activities, providing detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest, providing information as to other banks that have transferred funds from secret accounts, and closing accounts of those who have failed to meet U.S. reporting obligations.[23]   Despite these efforts, no U.S. state requires the name of anonymous corporate owners.  Bipartisan legislation cosponsored by Senators Charles Grassley and Sheldon Whitehouse, and Congressman Peter King and Congresswoman Carolyn Maloney has been introduced in order to identify money laundering and terrorist financing through the disclosure of anonymous owners.    Congress should pass that legislation and the Trump Administration should sign the bill into law in order to prevent the United States from becoming a preferred haven for tax cheats and illicit activity.   

Conclusion

Jamie Dimon, Chairman and CEO of JPMorgan Chase, the largest U.S. financial institution with some $2.5 trillion under management, recently released his annual letter to shareholders. His letter included extensive comments on public policy where he opined that “something is wrong” in America and “we need coherent, consistent, comprehensive, and coordinated policies that help fix these problems.”[24] His letter is another example of the urgent need for inaugurating an American inclusive capitalism agenda.   While government can provide the framework and a social safety net, the primary responsibility for such an agenda should be with the private sector through a renewed and reinvigorated business activism. Markets have a unique ability to adapt and allocate resources in the most efficient way, but when needless financial engineering results in the abandonment of communities, when middle class citizens can no longer access capital, and when more and more Americans drop out of the labor force with no source of income, the remarkable consensus that has resulted in American economic strength since the end of World War Two will become seriously endangered.     

But there is a path forward. Business activism focused on new corporate forms, impact investing, and a regulatory structure that facilitates a shift away from short-termism, and towards entrepreneurship and greater access to finance can lead the way in this quest for reform.  Such reform can be the harbinger of a new social compact between government, established business, entrepreneurs and the people.  And it can give the United States an opportunity to assert leadership and address the most important economic challenges of our time.      

REFERENCES

World Bank Group.  October 2015.  Global and Regional Poverty Forecast.  http://www.worldbank.org/en/news/press-release/2015/10/04/world-bank-forecasts-global-poverty-to-fall-below-10-for-first-time-major-hurdles-remain-in-goal-to-end-poverty-by-2030

Ramo, Joshua Cooper.  May 2016.  The Seventh Sense:  Power Fortune and Survival in the Age of Networks.  Little Brown and Company.  Little, Brown and Company.  New York.  

Dobbs, Richard; Madgavkar, Anu; Manyika, James.  McKinsey.  July 2016.  Poorer than their Parents?  Flat or Falling Incomes in Advanced Economies.  http://www.mckinsey.com/global-themes/employment-and-growth/poorer-than-their-parents-a-new-perspective-on-income-inequality

Ford, Martin.  2015.  Rise of the Robots:  Technology and the Threat of a Jobless Future.  Basic Books.  New York. 

Mason, Paul.  2015.  Post Capitalism:  A Guide to Our Future.  Farrar, Straus, and Giroux.  New York.    

World Economic Forum.  2017.  Inclusive Growth and Development Report. http://www3.weforum.org/docs/WEF_Forum_IncGrwth_2017.pdf

Pisano, Gary and Shih, Willy.  2012.  Producing Prosperity:  Why America Needs a Manufacturing Renaissance

Applebaum, Eileen; and Blatt, Rosemary.  2014.  Private Equity at Work:  When Wall Street Manages Main Street.  Russell Sage Foundation.  New York. 

Tax Policy Center.  2017.  What is carried interest and how should it be taxed.  Urban Institute and Brookings.    http://www.taxpolicycenter.org/briefing-book/what-carried-interest-and-how-should-it-be-taxed

Fleisher, Victor.  June 5, 2015.  How a carried interest tax could raise $180 billion.  New York Times/Dealbook.  https://www.nytimes.com/2015/06/06/business/dealbook/how-a-carried-interest-tax-could-raise-180-billion.html?_r=0

Frey, Carl Benedikt and Osborne Michael.  September 17, 2013.  The Future of Employment.  Oxford University.  http://www.oxfordmartin.ox.ac.uk/downloads/academic/future-of-employment.pdf

Santens, Scott.  January 2017.  Why we should all have a basic income.  World Economic Forum.  https://www.weforum.org/agenda/2017/01/why-we-should-all-have-a-basic-income

Ivana Kottosova.  January 3, 2017.  Finland is giving 2000 citizens guaranteed money.  CNN Money.  http://money.cnn.com/2017/01/02/news/economy/finland-universal-basic-income/

LGT Capital Partners and Mercer.  2015.  Institutional Investors believe ESG Factors improve risk adjusted returns. https://www.lgtcp.com/shared/.content/publikationen/$news_attachment/Media-release_LGT-Capital-Partners_Mercer-survey_Institutional-investors-believe-ESG-factors-improve-risk-adjusted-returns.pdf

Office of Comptroller of the Currency (OCC).  December 2016.  Exploring Special Purpose National Bank Charters for Fintech companies.  Department of Treasury.  https://www.occ.treas.gov/topics/responsible-innovation/comments/special-purpose-national-bank-charters-for-fintech.pdf

McQuinn, Alan; Guo, Weining; Castro, Daniel.  October 2016.  Policy Principles for Fintech.  Information Technology and Innovation Foundation.  http://www2.itif.org/2016-policy-principles-fintech.pdf

Global Impact Investors Network.  2016.  How Big is the impact investing market?  https://thegiin.org/impact-investing/need-to-know/#s1

Schiller, Ben.  March 2017.  Should your company be a benefit corporation, a B Corp or what?  https://www.fastcompany.com/3069192/should-my-company-be-a-benefit-corporation-a-b-corp-or-what

Benefit Corp.  2017. http://benefitcorp.net/

B Lab.  2016.  Examples of Benefit corporations.  https://b-lab.uservoice.com/knowledgebase/articles/771990-examples-of-benefit-corporations

Satow, Julie.  October 24, 2014.  Pied-a-Neighborhood:  Pieds-a-Terre Owners Dominate some New York buildings.  New York Times.

https://www.nytimes.com/2014/10/26/realestate/pieds-terre-owners-dominate-some-new-york-buildings.html

Roberts, Sam.  July 6, 2011.  Homes Dark and Lifeless, Kept by out-of-towners.  New York Times.  http://www.nytimes.com/2011/07/07/nyregion/more-apartments-are-empty-yet-rented-or-owned-census-finds.html

Nehamas, Nicholas.  April 3, 2016.  How secret off shore money helped fuel Miami’s luxury real estate boom.  MiamiHerald.  http://www.miamiherald.com/news/business/real-estate-news/article69248462.html

US Department of Justice.  December 2016.  Swiss Bank Program Factsheet.  https://www.justice.gov/tax/swiss-bank-program

Jamie Dimon Interview with Andrew Server (Yahoo Finance).  April 5, 2017.  U.S. Chamber of Commerce.   

[1] World Bank Group.  October 2015.  Global and Regional Poverty Forecasts. 

[2] Joshua Cooper Ramo.  May 2016.  The Seventh Sense:  Power Fortune and Survival in the Age of Networks. 

[3] McKinsey July 2016.  Poorer than their Parents?  Flat or Falling Incomes in Advanced Economies. 

[4] Martin Ford.  July 2016.  Technology and the Threat of a Jobless Future

[5] Paul Mason.  2015.  Post Capitalism A Guide to our Future. 

[6] World Economic Forum 2017.  Inclusive Growth and Development Report. pdf

[7] Gary Pisano and Willy Shih.  2012.  Producing Prosperity:  Why America Needs a Manufacturing Renaissance. 

[8] Eileen Applebaum and Rosemary Blatt.  2014.  Private Equity at Work:  When Wall Street Manages Main Street. 

[9] Tax and Policy Center.  2016.  Key Elements of U.S. tax system.  What is carried interest and show should it be taxed?

[10]Victor Fleisher.  2015.  New York Times.  How a carried interest tax could raise $180 billion

[11] Scott Santens.  January 2017.  Why we should all have a basic income.  World Economic Forum. 

[12] Carl Benedikt Frey and Michael Osborne.  September 17, 2013.  The Future of Employment.  Oxford University. 

[13] Ivana Kottosova.  January 3, 2017.  Finland is giving 2000 citizens guaranteed money.  CNN Money. 

[14] LGT Capital Partners and Mercer.  2015.  Institutional Investors believe ESG Factors improve risk adjusted returns. 

[15] Global Impact Investors Network.  2016.  How big is the impact investing market?

[16] Office of Comptroller of the Currency (OCC).  December 2016.  Exploring Special Purpose National Bank Charters for Fintech companies.  Department of Treasury.

[17] Alan McQuinn, Weining Guo, and Daniel Castro.  October 2016.  Policy Principles for Fintech.  Information Technology and Innovation Foundation.    

[18] Ibid.  OCC

[19] BLab.  2017.   Examples of Benefit Corporations

[20] Julie Satow.  October 24, 2014.  Pied-a-Neighborhood:  Pieds-a-Terre Owners Dominate some New York buildings.  New York Times. 

[21] Sam Roberts.  July 6, 2011.  Homes Dark and Lifeless, Kept by out-of-towners.  New York Times. 

[22] Nicholas Nehamas.  April 3, 2016.  How secret off shore money helped fuel Miami’s luxury real estate boom.  MiamiHerald. 

[23] US Department of Justice.  December 2016.  Swiss Bank Program Factsheet.  

[24] Jamie Dimon.  April 2017.  Letter to shareholders of JPMorgan Chase.