Peter Georgescu is the former CEO of the ad agency Young & Rubicam and the author of the new, slim book Capitalists Arise! Georgescu’s argument is as straight as they come. As is widely known, America’s middle class is insolvent and wealth inequality is worsening. There are many actors to blame for our predicament, but Georgescu zeroes in on the role American business has played. Business used to be the engine of growth but that is no longer the case, he argues, because business leaders are making decisions with only short-term goals in mind. This is not only bad for business, but also bad for the country. I spoke with Georgescu last week over the phone to talk about his book and what he believes business leaders should do to restore American growth. Our conversation has been edited for clarity and length.
Washington Monthly: What prompted you to write this book and what are you hoping to accomplish?
Peter Georgescu: I’m an off-the-boat immigrant who arrived at 15-years-old and didn’t know a word of English. I was afforded the opportunity to get a good education. I had the opportunity to be the best Peter Georgescu I could be. I got to live the American Dream. I don’t believe that if I arrived today that I would have the same opportunities that I had. I’m writing from a business perspective because it became clear to me that business has been complicit in helping create the economic inequality that is devastating America. But business has the opportunity to contribute to the solution.
WM: How did business contribute to American growth and opportunity?
PG: The free market capitalism that built America as the number one nation in the world both economically and militarily no longer exists today. In that version, from about 1945 to 1980, it built the biggest middle class in the world. It helped raise hundreds of millions of people around the world out of poverty. It did so because business focused on the following stakeholders. First, the customers. Second, the employees because they help create and improve the product or service and they are the ones who deliver the product or service to customers. Third, the corporation itself. The corporation needed to be reinvented periodically and even more so now in the 21st century. If you don’t change or improve, you die. Last came the shareholder. If you took care of all the other things, then the shareholder would do very well. All this was best expressed in Johnson and Johnson’s company credo.
WM: You talk about “shareholder primacy” in business in your book. What is “shareholder primacy”?
PG: Today the shareholder is the almost absolute, sole critical stakeholder that business needs to pay attention to and feed. This has translated into maximizing short-term shareholder value. This way of doing business arose in the 1980s. In 1970, the libertarian economist Milton Friedman penned a highly influential op-ed that appeared in The New York Times that gave the rationale and moral cover for business people to do what they do today. His credo entered the mainstream in the 80s.This emphasis on maximization and short-term leads to one stakeholder taking all. Today, on average, ninety cents out of every operating dollar goes to the shareholder and 36 percent of operating dollars goes to dividends, the highest since 1933. We’re also hoarding cash overseas to minimize tax payments. This is the major difference in the capitalism that exists today and the capitalism that was.
WM: How is this version of capitalism hurting opportunity in America?
PG: It cheats the employees, the corporation itself, and the communities in which it does business. First, it creates a stock market bubble because to constantly increase total shareholder return values is extremely difficult to do with organic growth. So to get the ratio up you decrease the number of shares. You borrow money, cheap money, to buy back your stock and reduce the number of shares so the ratio looks great. The financial community is very comfortable with that but it’s obviously not sustainable.
Second, for 40 years wages have been basically flat. From 1945-1980, the rate increase of productivity and employee compensation was exactly the same. But from 1980 on, productivity goes up, innovation goes up, profits go up, and wages are flat for 40 years.
Third, investment in research and development is dramatically down. Investment in basic research is dramatically down. Our share of investment in R&D ranks well below China, Germany, South Korea. Over time we are becoming increasingly less competitive.
The critical issue is not so much the shareholder but what the shareholder primacy model, in conjunction with globalization and technology, has contributed to society. Framing it that way helps us understand the depth of the problem, which is not just income inequality. Income inequality breaks down the covenant between the nation and its citizens. And that covenant provides the ability for people to be the very best they can be. It is the American Dream. But with lack of opportunity comes lack of hope. Inequality is not an abstraction. It is a very clear reality when almost 60 percent of all households have to borrow money to put food on the table. We have no economically viable middle class. They’re insolvent. The American middle class is insolvent. The upper-middle class home at the end of the year has $8500 left after paying all expenses and taxes. For 20 percent of us life is as good as it gets. But this is the gap that exists and if it isn’t addressed and solved, it’s going to absolutely ruin this country. I’m choosing to focus on business because business has better odds today of taking action than government.
WM: What is the civic responsibility of American business leaders? Are business leaders doing a good job of fulfilling that duty?
PG: There’s a total disconnect between business and society. This current system has only one objective, which is to serve shareholders. No CEO is asking, “How are my actions going to impact society?” Their job is to deliver the next quarter’s results, period. And if they don’t do that, they’re gone. This is part of the culture of shareholder primacy. Companies should pay people fair wages, which are wages that share in the incremental value that productivity and innovation produce. Why should we have a right to be in business if we can’t pay people fairly? I also think that the idea that a minimum wage would kill businesses is absurd.
The driver of success in the 21st century is not money. It is innovation. The real value creators are not the capitalists, they are the employees. Only they have the possibility to reimagine and reinvent corporations and to create additional value, which means you have to pay them fairly, you have to treat them with respect and dignity. They need to feel like they have a stake in the company. If they don’t, why are they going to spend their waking moments thinking about how they’re going to improve the company’s product or service? If you take care of your people, you do better and your shareholder will do better. That’s the tragedy of what’s going on today. If business were to pay people fairly, reinvest in their companies with a long-term vision, shareholders would actually do better over the long-run. Instead, we have helped eliminate the middle class, made them insolvent, and the upper-middle-class is barely hanging on. 4 out of 5 Americans will experience some form of poverty in their lifetimes. That’s where we are today.
WM: Is there a role for government to incentivize businesses to do the right thing?
PG: Yes, but good luck. It’s very unlikely government today could do anything about it. But why do businesses need to be incentivized for the shareholder to do even better and to help the middle class become more affluent? The only sure way to drive up our anemic growth is to increase demand. Cutting taxes doesn’t do any good. Henry Ford doubled the wages of his people so that they could afford to buy his products. Today, 20 percent of Americans are responsible for 100 percent of our GDP growth. This is not a social responsibility for business. It’s imperative that businesses change, or free market capitalism will be gone.
I think that business should enter partnerships with government. For example, health care. Only government could take the risk to invest $40 billion to try to decode the human genome. No pharmaceutical company could do that. As soon as they did it, private companies created hundreds of thousands of high-paying jobs. That’s the kind of contribution government can make. Who invented the internet, after all?
WM: So you see the best role for government as being the country’s biggest research and development funder.
PG: Yes! Exactly. The National Institute of Health is a great example. It’s done fantastic things for human health and for business. The byproduct of putting a man on the moon was dozens of industries, not just companies. But just creating more jobs doesn’t solve anything if we don’t pay people well.
WM: You were the CEO of one of the largest ad agencies in America. Your business was selling things to the public. What has Donald Trump sold the American people, and what’s your take on how he’s affecting both the worlds of business and government?
PG: He was elected because he promised to fix this problem. I would just invite the readers to figure out how indeed, never mind what is being said or debated, the administration’s actions and proposals address America’s inequality. I don’t see it. All I see is a health care plan that goes totally against what we should be doing. It would exacerbate the problem. I would get a tax cut. I don’t understand how that helps.
WM: It seems that the responsibility of moving away from shareholder primacy and short-termism in business lies entirely on business leaders themselves. Is it just a matter of leaders making that decision or this an issue of policy?
PG: It is entirely up to business leaders. By the way, there are plenty of green shoots, companies that do the right thing and it is working for them. Whole Foods, Costco, and Home Depot are great examples. In such a brutal industry, Home Depot pays more than minimum wage. But equity holders also need to support what the courageous CEOs want to do. The media needs to be part of the action and point to them and say, “Hey, these are the heroes of tomorrow.” For a sustained prosperity, business and society must work together. You cannot have the two operating on separate universes. You cannot have successful businesses amidst a socioeconomic disaster.
