May 10, 2007
Herbert M. Allison, Chairman and CEO
Dear Mr. Allison:
Your organizations is violating your fiduciary responsibility to maximize the retirement benefits of the wage earners by supporting the wrong economic system. I have tried unsuccessfully for several years to engage you and your associates in a dialogue on how to support democratic capitalism and purge the imperfections of ultra-capitalism. Now that the perfect storm of economic failure is closer you still have that opportunity but if are not receptive to reform ideas you will only have yourselves to blame when attacked by angry customers. Your Wall Street myopia will be part of your playing defense.
The following are my credentials that apparently you did not regard as adequate for a meeting. I was chairman and CEO of a NYSE public company, ADT, Inc., for almost 18 years, I am the author of Democratic Capitalism, The Way to a World of Peace and Plenty, that contains three simple reforms that could move the economy from the bad to the good capitalism, and a comprehensive review of governance procedures. I have served on numerous Boards in many countries including 20 years on the Kroger Board including Chairing their Governance Committee. My web site www.democratic-capitalism is another reference for ideas on reform and governance. The testimonials to my book include an enthusiastic one from John Whitehead, perhaps the most respected name on Wall Street. I met and communicated with your predecessor many times to my benefit. Before ADT, my experience in public companies included being president of a small division of General Dynamics and a member of their inside Board at age 32. Experience was then combined with 20 years of full time study of our political-economic system and allowed me to connect the dots to examine the economic system that can eliminate material scarcity in the world, and economic common purpose that can unite people and stop the violence.
Attached is my challenge to your industry to resolve the conflict in capitalism by supporting the system that produces the greatest amount of broadly distributed wealth, and by opposing the system that concentrates wealth in record amounts and gives priority in foreign affairs to military misadventures over economic common purpose.
I am still available to meet.
Late in the 20th century, after the demise of communism, society had the first pragmatic opportunity for economic freedom to eliminate material scarcity in the world, and economic common purpose to stop the violence. Countries from Eastern Europe to South East Asia were improving the lives of their people through economic freedom. The European Union had demonstrated how economic cooperation could stop the violence. China and India used economic freedom to take over 500 million people out of extreme poverty in a decade. Economic freedom worked in both democratic and authoritarian nations and many believed that once the freedom was out of the bottle in the economic sphere is would, in time, expand into the political.
The transformative events that made America a new beginning of history, as Paine called it at that time, seemed ready to expand to the whole world. The dream of peace and plenty was not fuzzy utopia but a realistic opportunity. Tragically the opportunity was lost by a colossal failure of leadership by the very country who had most enjoyed the benefits of freedom for over two centuries. Instead of continuing the movement towards the economic and social logic of democratic capitalism America led instead to ultra-capitalism. The stark difference is between the economic system dominated by finance capitalism or the democratic economic system of participation and sharing. The former, ultra-capitalism, is a combination of mercantilism that treats the wage earner as a disposable cost commodity, successfully lobbies rules for short term profit, and tries to maximize profits by wage and benefit suppression in an environment of fear and intimidation. In contrast, democratic capitalism, maximizes profits by motivating and rewarding the wage earner for their innovation and productivity in an environment of trust and cooperation.
How did this happen? A combination of government mistakes and the lobby power of Wall Street. ERISA in 1974 was the greatest investment opportunity in the history of capitalism but with the help of the institutional investors it converted American capitalism to short term and greedy while reversing economic momentum in emerging economies. Most of the money went into the stock market and deals not into growth investment. Capitalists who had traditionally exploited the wage earners’ labor learned how to exploit their capital, an intolerable contradiction that cannot continue much longer. There has been no transparency or accountability for these trillions of dollars. The tax deferrable feature helps keep the wage earner ignorant of their investment and without any influence on the policies of the institutional investor. Despite books written on the superior performance of index funds with an annual cost of .15% most of the money is still being massaged by the money managers at ten times that cost. There is a fundamental conflict in that the financial motivations of the handlers of money, at every stage, are contradictory to the interests of the customer, the wage earner.
Capitalism has been severely corrupted by over a quarter century of ultra-capitalism in these ways:
- Several hundred billion dollars a year is being wasted on stock buy backs and non-strategic acquisitions instead of rewarding the owners of capital the wage earners with a “capital wage” in dividends
- ERISA was poorly designed and encouraged Directors to protect themselves on investment decisions by passing the responsibility to money managers.
- The money managers were measured quarterly and annually and passed that criteria onto the performance of companies although it had little connection with the dynamics of business
This post-capitalist age will displace the post-modern age in which comprehensive solutions to improve the human condition were abandoned. These secular philosophers could not find a moral basis common with religion because they looked in the wrong places; they concentrated on political and cultural changes and ignored the economic solution.
The post-capitalist system will maximize the creation of wealth by motivating the participating wage earners, and distribute it broadly through wage earner ownership. This system is described in detail in my book Democratic Capitalism, The Way to a World of Peace and Plenty. It is a synthesis of Adam Smith, Karl Marx, and John Stuart Mill. It was Mill that integrated Marx’s visions with private property, competition, and skilled management thereby completing the definition of democratic capitalism. It has been demonstrated that economic freedom can feed, clothe, shelter, educate, provide good health and hope for all humans, and that economic common purpose can steadily reduce the violence. For example, China and India have used forms of economic freedom to take 500 million people out of extreme poverty in a decade; the European Union has substituted economic cooperation for killing millions of each generation of their young men.
The enormous lobby power of finance capitalism has successfully resisted democratic capitalism and as a consequence it has had a long gestation period since Marx and Mill. Recent developments however, make its emergence inevitable: Information Age industries depend on the democratic work culture of participation, decentralization, and empowerment to release the cognitive power of their people, and trillions of dollars of pension and 401 (k) savings make the wage earner the majority owner of corporate America.
This historical opportunity is in suspense because of a spectacular failure of American leadership. The country that has been the beacon for freedom has instead corrupted the economic system with record concentration of wealth, and corrupted its foreign policy with militaristic, imperialistic actions.
Institutional investors’ fiduciary responsibility to maximize the wage earners’ retirement savings required support of democratic capitalism, not ultra-capitalism, defined as modern mercantilism that treats the wage earner as a disposable cost commodity and finance capitalism that is dominant over, not supportive of, the productive economy.
This lack of transparency and accountability will change. With the Democrats in power they will make political capital by exposing the total costs and conflicts of interest and probably pass oversight laws, like SOX, that hurt more then they help. Even more compelling, the lawyers are discovering a new enormous opportunity and several lawsuits, including one against Fidelity, had been filed, as I am sure you are aware.
I am proposing in this letter that TIAA-CREF and CALPERS, do not get trapped in playing defense but rather take the lead to usher in the post-capitalist age with maximum creation of wealth broadly distributed.
The attached chapter 3 from my volume 2 not yet published outlines how this perversion of capitalism happened and how the institutional investors can change the domestic economy from ultra-capitalism to democratic capitalism qualifying America then to again lead the world in economic common purpose. These thee actions are proposed for your consideration::
- Pressure on companies to use surplus for investment in growth and dividends instead of stock buy backs and non-strategic acquisitions. Pressure government to make these dividends tax free for low-and-middle income wage earners, a “capital wage” for their ownership. Hundreds of billions of dollars will thus be returned to the wage earner to be spent or saved both adding economic growth. This capitalism combining income and appreciation will make profit sharing and ownership plans universal and will add spendable income for reciprocal purchases and make free trade the way eliminate material scarcity in the world.
- Change the measurement of corporate performance from quarterly earnings per share to a three-year running average of sales, profits, and cash flow against management’s predictions. This simple change will emancipate companies from the short-term pressure to fire people and shut down long-term growth programs. The measurement of cash flow against prediction would have prevented most of the damage at Enron.
- Reduce the amount of borrowed money for speculation that has caused asset inflation throughout our history and damaged the people. Our government takes aggressive action to stop price inflation that erodes the wealth of the few but denies responsibility to stop asset inflation that has always allowed the rich to get richer before the poor get poorer. There are ample tools available to prevent asset inflation such as taxes, interest rates, bank reserves and brokers’ margins.
During the last quarter-century America has entered into a financialization phase that has been a terminal condition for other strong nations since Spain in the 16th century. It saps the growth out of the economy with the myriad ways of cashing in growth investment for present consumption. The simple changes recommended above can reverse this momentum and restore the American dream. The institutional investors such as you can be the agents of such change.
Let me know if you wish to meet to discuss these propositions about how to move to the post capitalist age.
In 1974 the government passed a law, ERISA, that required companies to take money, most of it then used for growth or paid out in dividends, and give it to money managers to invest for the retirement income of the wage earner. Trillions of dollars were available in this greatest savings-investment opportunity in the history of capitalism. Instead, the short-term measurement of your industry’s performance was applied to corporate performance and the money was perverted into a weapon to force the liquidation of long-term growth for short-term profits. Congress could have designed the system to assure that the money went into growth investment, environmental and infrastructure needs but it didn’t. Your industry could have caught this monstrous error and corrected it consistent with your fiduciary responsibility, but you didn’t.
Three factors created this opportunity: first, mandated pension funding provided $100 billion a year for investment in the job growth economy, infrastructure, and environmental needs while making the wage earner new capitalists; secondly, Information Age industries needed the democratic capitalistic work culture of participation, trust and cooperation to compete; and finally more countries, authoritarian and democratic, were using economic freedom to improve the lives of their people. The world was beginning to unite in economic common purpose in a beautiful inversion in which the standard of living goes up the violence goes down. The new worker-capitalists would be motivated to create more wealth and share in the rewards of capitalism.
Tragically, it did not work that way. Instead the pension money was used by Wall Street, with the help of your industry, to force companies to abandon long term building for quarterly e.g. The rewards from this peoples’ capitalism did not go to the new owners, rather it went into an extraordinary increase of compensation for the handlers of the money, into stock buy backs, into deals, and into higher stock prices. Ultra-capitalism was launched, a combination of modern mercantilism in which the wage earner is treated as a cost commodity and profits are maximized by suppressing wages and benefits combined with a finance capitalism that is dominant, not supportive, of the job growth economy. The results were a record concentration of wealth at home and the reversal of economic momentum in emerging economies such as Indonesia, the world’s largest Muslim nation.
Three agents caused this perversion of capitalism: the government passed a poorly designed law. A precondition of capitalism is the investment of present surplus for economic growth and future profit. The design of ERISA did not address where the money would be invested, and how much is would cost to get there. Secondly, Wall Street lobbied a steady stream of non-democratic privileges that diverted most of this capital to present consumption by the various handlers; and finally, your industry became the willing partners of Wall Street and joined in the short-term pressure and voted the shares of the wage earners in support of stock buy backs and non-strategic deals. The money went mainly into the stock market and annually into the pockets of the money managers with little of it making it through into new equity for growth.
In contrast to the pragmatic opportunity for society to eliminate material scarcity and unite the world in economic common purpose, there is also a threat of folly and violence that will dwarf earlier failures of society. Your organizations can be pivotal in which direction the world takes. You have the democratic power and fiduciary responsibility to influence both companies and government to move from the present short term and greedy ultra-capitalism to democratic capitalism that creates more wealth and distributes it broadly. Reform is urgently needed because Adam Smith’s conditions for the success of free markets, neutral money and control of the speculators, are being violated as never before in the history of capitalism. Excessive liquidity and volatility have allowed finance capitalism to dominate the domestic economy and reverse economic momentum in emerging nations abroad.