The business backlash in America may be losing some of its energy

Jul 15th 2004 | NEW YORK
From The Economist print edition

HAS Donald Trump saved American capitalism? Investors in the real-estate mogul's duff Atlantic City casino business are unlikely to agree. They are getting stiffed with a low share price and a probable debt restructuring. But Mr Trump's small-screen triumph as a reality-TV star is helping to revive interest in a figure not seen in public since the bursting of the stockmarket bubble in 2000-01: the celebrity boss. Even as erstwhile heroes of capitalism are led away in handcuffs, Americans seem to be flirting with the idea of falling in love with the boss all over again.

Naturally, the transition from one era to the next requires some finessing. The cover of Fortune magazine, for instance, recently featured a somewhat mixed message about the boss of InterActiveCorp (“Is Barry Diller's company the real thing or just another house of cards?”). But it has also drooled in less-restrained fashion over IBM's boss, Sam Palmisano, Ford's boss, Bill Ford, and the curiously telegenic Mr Trump (“He's never been hotter”).

The popularity of Lou Dobbs, a TV anchorman who administers nightly lashings to America's corporate elite, may have peaked: his audience has shrunk in the past couple of months, says Nielsen Media Research. In the recession, the average job tenure for chief executives fell to five years. Now it is rising again. Even celebrity ex-bosses may be getting gentler treatment. Some of the media coverage after the arrest on fraud charges on July 8th of Kenneth Lay, Enron's former chairman, was surprisingly friendly, say his lawyers, pointing to reports in the New York Times and Washington Post. Mr Lay has since been on prime-time TV joshing with host Larry King. “Great meeting you, Ken,” Mr King wrapped up.

Trust me, I'm a boss

After two years of tough regulatory enforcement, new laws, high-profile trials and a hostile press, public anger towards business seems to be fading somewhat. A recent poll by Gallup shows that public confidence in big business is up for the second straight year, albeit from a 30-year low. The legislative cycle may have run its course. The Sarbanes-Oxley act, which introduced many rules governing boardroom behaviour, hurtled unimpeded through Congress in 2002. This year's most important rule-making effort, an initiative by the Securities and Exchange Commission (SEC) to introduce a mildly less undemocratic system for electing board directors, has come under possibly mortal fire from a reinvigorated business lobby.

Although the most recent “proxy season” saw a record number of shareholder resolutions, there are even signs that the attitudes of “activist” shareholders are starting to soften. One revealing bellwether: the attitude of Institutional Shareholder Services (ISS), a corporate-governance advisory firm, towards offshore incorporation. In 1999, ISS advised investors to vote against a shareholder proposal asking that Tyco reincorporate from Bermuda back to America, citing the tax benefits of incorporating offshore. In 2003, after a scandal at the firm and cries from politicians about “unpatriotic” bosses, ISS reversed itself and told investors to vote for reincorporation in America, helping to deliver a big protest vote. This year, ISS changed tack again and voted with management for the Bermudan tax advantages.

Further signs of a change in the weather come from this year's presidential race. John Kerry, the Democratic contender, opened his campaign on a conspicuously anti-business note, lambasting bosses who outsource jobs abroad as “Benedict Arnold CEOs”—an allusion to a famous American traitor. The Kerry campaign has kept up some of its big-business-bashing rhetoric. Recent campaign adverts bill his running mate, John Edwards, a former trial lawyer, as “the son of a mill worker who took on powerful interests in the courtroom—and then carried his fight for the powerless all the way to the US Senate.” On the whole, however, Mr Kerry has backed away from his earlier remarks, as much of the anti-business venom has drained from the offshoring debate.

Mark Roe, a Harvard Law School professor, calls such periodic swings in sentiment against big business “backlashes”. These occur, argues Mr Roe, following periods of greater economic freedom. Freedom promotes efficiency: small firms merge with each other to form bigger ones, which produce at greater scale. It also promotes inequality and erodes social cohesion, as the power and wealth of the managerial class grows along with companies. This creates envy among workers, and the potential for political instability.

Some countries have developed practices that help to suppress backlash, says Mr Roe. Half of the supervisory board seats at German firms are reserved for labour representatives. This checks growth in executive pay and gives workers a voice in management. Income inequality is bigger in France than in Germany. But French companies cannot easily sack employees, giving workers the power of tenure. Other countries, such as Argentina, lacking such dampening mechanisms, suffer from political instability and even revolution.

America seems to chart a third course. It suffers from business backlashes, but tempers them with ad hoc legislative and regulatory efforts that absorb the worst of the (otherwise) destructive political forces. Thus, America passed its antitrust laws during a backlash against industrial robber barons, the core of its securities laws during a backlash against Wall Street after the 1929 stockmarket crash, and the recent Sarbanes-Oxley act during a backlash against boardroom excess. In this way, argues Mr Roe, America avoids political instability and achieves “soft transformation”. Instead of grousing at the new rules, in other words, American businessmen should be thanking Messrs Sarbanes and Oxley for saving them from the gallows.

If America's latest backlash is now fading, one feature persists: heightened policing. “There is still a tremendous amount of regulatory enforcement going on,” says Martin Lipton of Wachtell, Lipton, Rosen & Katz, a law firm. “The Justice Department's corporate-fraud task force is as active as it has ever been.” The public mood may have been softening, says Mr Lipton, “but I am not at all sure that the regulators agree.”

Perhaps, along with the legislative efforts of Congress, the SEC and the Justice Department draw their strength from political energies that are now fading. America threw its New York Stock Exchange boss in jail long after the 1929 crash. Rudy Giuliani launched a prosecutorial war against Wall Street after the 1980s “decade of greed”. Being slow-moving bureaucrats, the cops may simply lag the cycle.

But maybe the extra cops are here to stay. America's latest backlash followed an unprecedented boom in executive pay, with a typical top chief executive's remuneration up from 40 times that of an average worker in 1980 to 500 times by 2000. Most of those gains in pay have persisted. Tougher regulators and harsher justice for business crooks may be the glue that binds increasingly unequal Americans together. By all means, play the well-paid hero boss again. But also be prepared for jail.

Last updated: July 04
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