Corporate Power in a Global Economy Ch 2

4.5. The Declining Power of Labor Unions Corporate power can be assessed by looking at the strength of countervailing forces that oppose the concentration of corporate power and seek to limit their influence. Perhaps the most powerful countervailing force to corporate power has historically been labor unions that represent workers’ interests. A decline in union power may signify the ability of corporations to weaken their “opponents.” 42 Using union membership as a proxy for the power of labor unions, we conclude that labor unions are now considerably weaker than in previous decades. As shown in Figure 4, labor union membership in OECD countries was relatively constant during the 1970s at nearly 40 percent of employees. But since the 1980s average union membership has been steadily declining, to only about 15 percent in 2019. Labor union membership differs significantly across OECD countries, from about 10 percent in the United States and Mexico to more than 50 percent in the Scandinavian countries, including Norway, Sweden, and Iceland. Figure 4. Labor Union Membership, Select OECD Countries, 1970-2019 Union Membership (Percent of Employees) 100 80 60 40 20 0 1970 1980 1990 2000 2010 Germany Italy Sweden United Kingdom United States OECD Average 2020 Source: OECD, OECD.Stat, Trade Union Dataset Several hypotheses have been proposed for the decline in union membership in most OECD countries. In general, jobs in developed nations have shifted from the manufacturing sector to service-oriented jobs, which tend to be more difficult to unionize. Many companies now take a more aggressive stance against unions, particularly if they have the option of moving production to low-wage countries. Another factor is the anti-union stance taken by some governments, particularly in the United States during the 1980s. A 2020 42 This does not imply that labor unions oppose the growth of multinational corporations in all respects. For example, to the extent that the expansion of MNCs creates jobs, both management and labor benefit. analysis concludes that anti-union corporate practices and government regulatory changes have been the primary drivers of declining union membership in many countries, particularly in the United States. 43 Contrary to the trend of declining union membership in high-income countries, union membership tends to be increasing in low- and middle-income countries, although reliable data are often lacking. However, labor unions in non-OECD countries are generally not effective counterweights to corporate power. For example, labor unions in China rarely challenge companies’ policies and may face police intimidation. 44 In India, unions are often limited by a lack of financial resources and government support.45 Also, industrial workers seeking to go on strike in India must provide 60 days’ notice, reducing the effectiveness of a potential work stoppage. 46 4.6. Corporate Taxes Another approach for assessing recent changes in corporate power is to measure their ability to reduce their tax burden. Corporations can lobby for changes in tax laws or influence the level of tax code enforcement by government agencies. A sign of an increase in corporate power would be a decline in the tax rates paid by corporations. Figure 5 presents corporate statutory tax rates from 2000 to 2022, averaged across different regions of the world. We can see that corporate tax rates are declining across the world. Among the OECD nations, the average statutory corporate tax rate fell from over 32 percent in 2000 to only about 23 percent in 2022, the largest decrease among the various global regions. Of the 117 countries represented in Figure 5, corporate tax rates decreased between 2000 and 2022 in 97 countries, with rates increasing in only 6 countries, including China, Honduras, and Hong Kong. The 2017 Tax Cuts and Jobs Act (TCJA) in the United States was one of the most significant corporate tax law changes in recent years. Prior to the TCJA corporate tax rates varied by profit level, up to a maximum of 35 percent. The Act instituted a universal rate of 21 percent on corporate profits, while eliminating some deductions and expanding the types of foreign-sourced profits subject to U.S. taxation. Proponents argued that the lower tax rates would be offset by an increase in business investment leading to higher taxable profits. Thus, even though the TCJA lowered statutory tax rates, the effective tax rates paid by corporations could increase. A 2022 analysis by the U.S. Government Accountability Office (GAO), an independent government agency, found that the average effective corporate tax rate fell in 2018 (after 43 Mishel et al., 2020. Kirton, 2021. 45 Anonymous, 2022. 46 Panda, 2021. 44 the implementation of the TCJA provisions) compared to 2014 to 2017.47 A 2021 Brookings Institution paper found that: [The] TCJA clearly reduced federal revenues significantly and several pieces of evidence suggest that TCJA’s supply-side incentives had little effect on investment, wages, or profit-shifting. … the insensitivity of aggregate investment to tax incentives may be due in part to a rise in economic uncertainty or to increasing market power of big businesses in the economy. 48 Tax Rate (Percent) Figure 5. Average Statutory Corporate Tax Rates, by Global Region, 2000-2022 35 33 31 29 27 25 23 21 19 17 15 2000 2005 2010 2015 Africa OECD Latin America and Caribbean Asia and Pacific 2020 Source: OECD, 2022a. The GAO report also found that the TCJA led to an increase in the number of corporations that were able to eliminate their tax liability entirely by claiming various credits and deductions. Between 2014 and 2018 the percentage of large 49 profitable corporations owing no federal taxes increased from 22 to 34 percent. 50 Further, some profitable companies are able to obtain tax refunds despite earning large profits. For example, in 2021 AT&T reported pre-tax profits of about $30 billion but ended up receiving a tax rebate of over $1 billion from the federal government. The insurance company AIG reported 2021 profits of about $10 billion but received a tax rebate of over $200 million. 51 Besides lobbying for lower tax rates, corporations can also reduce their tax burden by moving profits to low- or no-tax jurisdictions, often referred to as tax havens. Typically, a corporation can take advantage of a tax haven by setting up a “shell” company in a country 47 GAO, 2022. Gale and Haldeman, 2021, p. 9. 49 "Large” corporations were defined in the GAO report as those with assets in excess of $10 million. 50 GAO, 2022. 51 Koronowski et al., 2022. 48 such as the Cayman Islands (which has no corporate taxes). A shell company is a legal entity that exists only on paper, without any employees or physical office in the tax haven country. The parent company then directs taxable assets and profits to the shell company, where the tax rates are significantly lower (even zero) than the tax rates where the parent company is located. Even if a tax haven country does not tax assets and profits, it can generate significant revenues from charging fees to establish shell companies. For more on tax havens, see Box 2. BOX 2: CORPORATE TAX HAVENS The International Monetary Fund estimates that tax havens deprive countries of $500 to $600 billion in corporate tax revenues annually. As a share of GDP, developing countries lose the most in tax revenues from tax havens. The $200 billion in annual tax losses in lowincome countries exceeds their annual receipts of international aid (about $150 billion). 52 In 2015, the world’s largest economies implemented a plan to crackdown on the abuse of tax havens by multinational corporations. But a 2022 analysis found that corporate profit shifting to tax havens has instead increased since then. 53 The authors found that corporations shifted nearly $1 trillion in profits to tax haven countries in 2019, up from about $600 billion in 2015. Overall, multinational corporations shifted 37 percent of their profits to tax haven countries in 2019. Companies based in the United States were responsible for about half of the global amount of profits shifted to tax havens, followed by companies from the United Kingdom and Germany. The nonprofit Tax Justice Network ranks the world’s most complicit tax havens countries based on the leniency of their corporate tax laws and the amount of profits that are claimed in each country.54 The most significant tax havens countries are the British Virgin Islands, the Cayman Islands, and Bermuda. However, corporate tax havens aren’t necessarily small island nations, as the top 10 tax haven countries also include the Netherlands, Switzerland, and the United Arab Emirates. While individual countries can enact national laws to reduce corporate tax haven abuses, such as empowering tax agencies to investigate fraud cases, ultimately a strong international agreement is needed to adequately address the problem. In 2021, 136 countries provisionally agreed to establish a global minimum corporate tax rate of 15 percent to reduce the amount of tax revenues lost from tax havens. The agreement would also make it more difficult for companies to shield their profits in tax haven countries. While the agreement would not eliminate tax havens, the OECD estimates it would allow countries to collect an additional $150 billion in taxes from corporations annually. 55 52 Shaxson, 2019. Wier and Zucman, 2022. 54 Tax Justice Network, Corporate Tax Haven Index, https://cthi.taxjustice.net/en/. 55 Thomas, 2021. 53 4.7. Corporate Subsidies In addition to avoiding taxation, corporations can also use their political power to obtain subsidies. Subsidies come in various forms, including direct cash payments, low-interest loans, price supports, public bailouts, and other favorable policies. Note that tax breaks can also be classified as a type of government subsidy. Of course, not all subsidies are necessarily socially harmful, as subsidies can be used to motivate investment in lowincome communities, or in renewable energy. Tracking corporate subsidy payments is difficult due to a lack of transparency. In the United States, only about 60 percent of subsidy programs report the name of the company receiving payment. 56 According to the conservative Cato Institute, the U.S. federal government spends more than $100 billion annually in inefficient subsidies, equivalent to about $800 per household. 57 Corporations looking to locate new factories or office buildings can use their market power to pit states or municipalities against each other to obtain the most favorable subsidies. In order to attract corporate investment and jobs, local politicians may offer deals such as tax breaks and low-cost land. As another example, a large firm may convince a municipality to build new roads as a condition for constructing a production facility in the area. According to the nonprofit Center for Economic Accountability, 2022 was a record year for corporate subsidy payments by U.S. states, including $2.1 billion paid by the state of Ohio to attract an Intel computer chip manufacturing plant and $1.8 billion paid by Georgia to Hyundai to attract an electric vehicle manufacturing plant. 58 4.8. Externalizing Social Costs Another type of corporate subsidy occurs when companies impose the negative effects of their production activities on society without compensation. For example, a corporation that manufactures automobiles generates pollution and the cost of this pollution is borne by nearby residents who do not receive any compensation from the company. External costs (or benefits) arising from economic activities are referred to as externalities. While firms of any size can create externalities, multinational corporations can use their political influence to avoid bearing responsibility for significant external costs. Given the close relation between minimizing costs and maximizing profits, it is natural to assume that an organization that seeks profits and has significant political power will feel some motivation to use that power to externalize costs, where possible. This motivation may be held in check by ethical considerations, by regulation, or by a fear of backlash from groups that might harm the organization; for example, consumer groups, or others who could mobilize effective public opinion.59 56 Tarczynska, 2022. Edwards, 2022b. 58 CEA, 2022. 59 Goodwin, 2003 57 The fossil fuel industry is generally recognized as the largest recipient of global subsidies. Global financial subsidies to fossil fuel companies have been estimated to be about $600 billion annually by the International Monetary Fund, equivalent to about 0.5 percent of global GDP.60 These subsidies have remained relatively stable since 2015. However, by far the largest subsidy the fossil fuel industry receives is the implicit subsidy of underpricing for its environmental damage, including air pollution and global climate change. In other words, the fossil fuel industry imposes vast environmental externalities on society, generally without providing adequate compensation. Including these environmental subsidies, the IMF estimates that global fossil fuel subsidies were about $6 trillion in 2020, equivalent to 6.8 percent of world GDP. In the absence of new policies, global fossil fuel subsidies are expected to rise to 7.4 percent of world GDP in 2025. The IMF notes that pricing fossil fuels at their efficient levels would raise nearly $3 trillion in new government revenues worldwide while reducing air pollution deaths by nearly one million per year and putting the world on target to limit global warming to 1.5 degrees Celsius—the target agreed upon under the 2015 Paris Climate Agreement. The only available comprehensive estimate of the environmental externalities imposed by global economic activity is from a 2013 analysis. 61 This study estimated the externalities associated with primary production (agriculture, forestry, fisheries, mining, and oil and gas) and primary processing (cement, steel, petrochemicals, and pulp and paper) across different regions of the world. It found that total unpriced damages were $7.3 trillion, equivalent to 13 percent of world GDP at the time. The largest category of externalities was climate change emissions (13 percent of the global damages), followed by water use (25 percent), land use (24 percent), and air pollution (7 percent). The international mobility of MNCs raises the question of whether firms chose to locate operations in countries with less stringent environmental regulations. Such “exporting” of pollution can result in increased environmental impacts in lower-income countries. A 2020 paper finds that companies headquartered in countries with strict environmental regulations do tend to export their carbon emissions by locating production in countries with weaker environmental regulations.62 Specifically, in countries with strict carbon regulations firms tend to lower their domestic emissions by 29 percent on average, while increasing their emissions abroad by 43 percent. Another study estimated how international trade affects deaths from air pollution in different countries.63 The results indicated that air pollution deaths increase in China, India, and other parts of Asia from the production of goods consumed in other countries. Meanwhile, air pollution deaths in the United States and Europe are lowered as production is shifted abroad, effectively exporting these deaths to countries with less stringent regulations. 60 Parry et al., 2021. Trucost, 2013. 62 Itzhak et al., 2020. 63 Anonymous, 2017. 61 4.9. The Rise of Exceptional Profits Almost all businesses exist primarily to make profits. To motivate an entrepreneur or investor to invest in a particular business, the rate of return on that investment should ideally exceed the rate of return on their next best alternative. In other words, the entrepreneur or investor should always consider their opportunity cost. For example, the average rate of return in the stock market is about 10 percent per year. So, an entrepreneur or corporate investor should seek a rate of return greater than 10 percent, especially considering the risk of investing in a particular company as opposed to the overall stock market. A 2016 article in The Economist notes that from the 1960s up to 2000 the global rates of return for U.S. companies fluctuated between 8 and 12 percent. 64 This suggests that corporate rates of return were similar to, or marginally higher than, the rate of return in the stock market. However, since 2000 U.S. corporate rates of return have fluctuated between 12 and 16 percent, leading to an era of “exceptional” profits well above those necessary to attract investment. While less than 15 percent of U.S. companies managed rates of return greater than 25 percent in the 1990s, by the 2010s more than one-third of companies were able to achieve rates of return greater than 25 percent. The article notes: Profits are an essential part of capitalism. They give investors a return, encourage innovation and signal where resources should be invested. … But high profits across a whole economy can be a sign of sickness. They can signal the existence of firms more adept at siphoning wealth off than creating it afresh, such as those that exploit monopolies. The article concludes that the rise of exceptional profits has contributed to an increase in economic inequality in the U.S. and that “a giant dose of competition” is necessary through antitrust and lobbying regulations. For a discussion of how firms have been able to make exceptional profits during the inflationary period resulting from the COVID-19 pandemic, see Box 3. BOX 3. CORPORATE PROFITS IN THE PANDEMIC INFLATIONARY ERA The inflation rate in the U.S. rose to over 9 percent during mid-2022, its highest level since the early 1980s. According to the U.S. Bureau of Labor statistics, the leading causes of inflation during this time were: energy price volatility, supply chain backlogs related to the COVID-19 pandemic, and a tight labor market forcing firms to raise wages (and thus prices).65 Implicit in these standard explanations for inflation is the idea that large companies and consumers were “sharing the pain.” But a 2022 analysis by The Guardian 64 65 Anonymous, 2016. Hernandez, 2023. finds that while consumers have clearly suffered from inflation during the pandemic inflationary era, large U.S. companies have been capturing record profits.66 From the start of the pandemic in early 2020 to mid-2023, real (i.e., adjusted for inflation) median wages in the U.S. failed to keep pace with inflation. 67 However, during the pandemic median profits for large U.S. companies increased by 49 percent. According to The Guardian analysis, the main reason corporate profits have soared even as inflation hurt consumers is a consolidation of market power in a small number of very large companies. Krista Brown, a policy analyst with the American Economic Liberties Project, notes that: Those who have market power can raise prices above what’s considered fair market value. We’re at a point in our market concentrations that we haven’t seen ever before. Once an industry becomes dominated by fewer than 10 companies, and particularly fewer than 5 companies, those companies have enough market power to limit supply to raise prices, and consequently profits. Brown further states: it’s obvious that corporations are trying to pass on any form of short-term pain they might be feeling … and that’s serving the top, wealthiest class instead of those in need of fair wages or products that are affordable. 4.10. Summary Assessment of Corporate Power This section has presented several perspectives for analyzing corporate power. There are conflicting data about whether an increasing share of global economic activity is generated by the world’s largest corporations. However, across the world multinational corporations appear to be exerting power to decrease membership in labor unions, lower their taxes, and externalize environmental costs. In the United States, the data present a more convincing story of increasing corporate power. Most U.S. industries are becoming more concentrated, with the largest companies increasing their share of revenues, profits, and assets. Does an increase in corporate power necessarily reduce overall social welfare? As we’ll see below, there are some advantages to corporate power, but excess market concentration appears to result in at least three major negative consequences: 1. Excessive market power leads to an increase in economic inequality. As a greater share of national income is captured as corporate profits, the share of income going to workers falls, reducing their purchasing power and increasing inequality.68 66 Perkins, 2022. Wage data from Federal Reserve Economic Data (FRED), St. Louis Fed. 68 Manyika et al., 2019. 67 2. An increase in corporate power reduces market competition, leading to a decrease in investment and productivity. Economist Thomas Philippon of New York University estimates that the decline in market competition in the United States since 2000 has reduced GDP by about one percent. 69 3. As already mentioned, corporations use their market power to reduce their tax burden and lobby for subsidies, including the implicit subsidy of externalizing environmental damages. This results in reduced public revenues for social spending on education, infrastructure, health care, and other needs, as well as contributing to climate change and other environmental problems. As discussed in Section 3, corporations were once required to serve the public good. While large corporations are clearly here to stay, the relevant issue is how can corporations better align with broader social goals? We consider that issue below in the next section. 5. ALIGNING CORPORATE BEHAVIOR WITH SOCIAL GOALS In 1970, the Nobel Prize-winning economist Milton Friedman wrote that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” 70 According to this perspective, corporations are under no obligation to align their behavior with broader social goals, such as reducing inequality, paying a living wage, or reducing environmental impacts. By virtue of their sheer magnitude, the activities of MNCs have large spillover effects on society. The conception of corporations as merely economic entities is being replaced by a view that places corporations in a broader economic, social, and environmental context—often called the “triple bottom line.” While this modern viewpoint still recognizes the importance of earning profits, it emphasizes that corporations should act in ways that are socially and environmentally responsible, even going beyond minimum legal requirements. In this section, we consider the two main ways that corporate behavior can better align with broader social goals: through voluntary measures and through government regulation. But before we discuss ways to improve the social behaviors of large corporations, we discuss the benefits MNCs currently provide to society. 5.1. Benefits of Large Corporations Benefits of MNCs in High-Income Countries The growth of large multinational corporations in recent decades has produced some undeniable benefits. The ability of large corporations to seek out low-cost production opportunities provides a benefit to consumers in the form of lower prices. The prices of many manufactured goods, such as televisions and home appliances, have declined in real 69 70 Philippon, 2021. Friedman, 1990. terms through improvements in technology and cheaper labor. In addition to low prices, large corporations are also capable of providing a familiar product of consistent quality in different regions of the world. For example, the fast-food restaurant chain McDonald’s serves food with similar standards in more than 40,000 locations in over 110 countries. Large corporations offer some advantages to their employees, who are more likely than workers in small firms to receive fringe benefits such as health care and pensions. As shown in Table 4, large firms with more than 500 workers employ more than half (54 percent) of all workers in the United States. Further, average annual wages tend to increase as a firm employs more workers. Also, many large corporations that have been in existence for decades are unlikely candidates for bankruptcy (although there are some recent exceptions to this such as Enron, Radio Shack, and Borders). The stability of large corporations is attractive to investors seeking security and relatively stable returns. Large corporations implicitly recognize their interconnection with society in their donations to non-profit organizations. For example, Wal-Mart donated a total of $1.5 billion in 2022 to thousands of organizations, including those helping to fight hunger and respond to natural disasters. 71 General Motors reports on their efforts to promote youth education in Mexico and Egypt. 72 Total corporate donations in the U.S. in 2022 were estimated to be over $21 billion.73 Table 4. Average Annual Salary by Firm Size, United States, 2020 Number of Employees Less than 5 5 to 19 20 to 99 100 to 499 500 to 999 1,000 to 4,999 5,000 or more Total Number of Average Annual Employees Worker Salary 6,000,000 $49,000 15,200,000 $40,600 21,700,000 $45,100 18,700,000 $54,500 7,200,000 $58,200 17,100,000 $64,500 48,300,000 $65,000 Source: U.S. Census Bureau, 2023. Benefits of MNCs in Lower-Income Countries While the majority of MNCs are headquartered in high-income countries, an increasing number are located in low- and middle-income countries, particularly China. MNCs generate employment in lower-income countries through subcontracts to production facilities. These jobs can play a critical role in reducing global poverty: 72 GM, 2022. MNCs play a vital role in alleviating poverty in the countries where they operate. Although directly and cumulatively employing hundreds of millions of people in the developing world is a key contributor, the impact goes beyond simply employment. The reasons are twofold. First, poverty reduction depends on the growth of businesses: MNCs help connect local businesses with world markets and facilitate access to credit and technologies. Second, MNCs can drive the institutional change necessary for poverty reduction: they may have leverage with local governments, invest in infrastructure projects and provide competitive jobs. 74 A 2022 journal article analyzed the impacts of U.S.-based MNCs on 18 developing countries over the period 2009-2018.75 The results indicate that the companies had a positive effect on poverty reduction in those countries. The authors also found that countries which implemented reforms to attract MNCs, such as promoting industrialization and democracy, were also more effective at reducing poverty. The United Nations notes that multinational corporations in developing countries are ideally suited to tackle many social and environmental challenges including poverty alleviation, climate change, and gender inequality. 76 In order to meet these challenges, corporations must adopt inclusive management techniques, promoting jobs and economic development among the world’s poorest: “Innovative corporations from the global south will be the ones leading social change, creating jobs and servicing the yet-untapped markets at the base of the economic pyramid.” The U.N. finds that those companies with the most inclusive policies have stronger potential for continuity and growth. Another potential benefit of MNC investment in developing countries is the promotion of entrepreneurship.77 Large corporations can serve as incubators for new technologies, funding startups either directly or through local subsidiaries. The large scale of MNCs means they may be willing to risk a high failure rate and invest across a wide range of activities. Evidence indicates that MNC investment to support local businesses has been increasing in recent years. Of course, the benefits of MNCs in developing countries must be weighed against the negative impacts. The majority of the profits generated by corporate subsidiaries in developing countries flow back to the high-income countries where those companies are headquartered. While MNCs support millions of jobs in developing countries, those jobs generally provide low pay and often involve poor working conditions. The International Labour Organization notes that the majority of the world’s workers experience: a lack of material well-being, economic security, equal opportunities or scope for human development. … Many workers find themselves having to take up 74 World Benchmarking Alliance, 2020. Castillo and Chiatchoua, 2022. 76 Neto, 2019. 77 Bahar, 2015. 75 unattractive jobs that tend to be informal and are characterized by low pay and little or no access to social protection and rights at work.78 While large corporations are increasingly investing in countries such as China and India, MNC investment in the poorest regions of the world remains low. And as mentioned earlier, MNC-funded production facilities in Asia are contributing to the deaths of millions of people per year due to air pollution. 5.2. Non-regulatory Approaches to Corporate Reform As issues such as economic inequality, racial injustice, and climate change have received more attention in recent years, large corporations are increasingly adopting a triple-bottom line business model. The annual financial reports of nearly all large MNCs also publish reports detailing their impacts on societies and the environment. For example, Shell’s 2022 Sustainability Report details how they aim to become a carbon-neutral energy company by 2050.79 Unilever describes their efforts to promote equity, diversity, and inclusion, noting that 54 percent of their managers are women. 80 A problem with some corporate social and environmental reporting is a lack of standardization and independent verification. A notable effort to increase the transparency and consistency of corporations’ environmental and social performance is the Global Reporting Initiative (GRI). The GRI was founded in 1997: to create the first accountability mechanism to ensure companies adhere to responsible environmental conduct principles, which was then broadened to include social, economic and governance issues.81 The GRI has published reporting guidelines for firms wishing to participate in the project.82 The GRI guidelines “have become the world’s most widely used and internationally accepted tool for corporate transparency,” with over 10,000 corporations subscribing to their standards, including 78 percent of the world’s 250 largest corporations. 83,84 Another voluntary attempt to increase the transparency of corporate activities is ecolabeling. Eco-labels either indicate the overall environmental impacts of a product or identify those products that pass certification criteria. Eco-labeling is now common in such industries as major home appliances, forestry products, and organic foods. For example, Home Depot and Lowe’s seek to purchase wood that has been certified by the Forest 78 ILO, 2019. Shell, 2022. 84 KPMG, 2022. 79 Stewardship Council as meeting a list of ten environmental and social criteria, including maintenance of ecological functions and recognition of indigenous people’s rights. 85 Corporate decision makers typically focus on the demands of shareholders and fail to consider the impacts of their decisions on other affected groups. These stakeholders include all parties who are impacted by corporate decisions, including consumers, workers, suppliers, creditors, those living near production facilities, and people of the future who will be affected by environmental and other impacts. Consumers, non-governmental organizations, and other stakeholders can make their preferences known through boycotts and protests. Consumer boycotts and public information campaigns have been instrumental in leading to corporate change in some instances, such as the packaging used by McDonald’s and the fishing techniques used to harvest tuna. The unfavorable media attention arising from consumer boycotts can lead to reduced sales and profits: Citizen attacks on corporations have been surprisingly effective, and many executives have seen how stonewalling and defensiveness have boomeranged. In some cases, the criticism intensifies, with the potential to damage brand images and sales, undermine companies’ standing with regulators and politicians, and, ultimately, whack a company’s stock price. 86 Another way that stakeholders can influence corporations is through their investment decisions. Increased transparency on environmental and social issues allows investors to seek out corporations that behave in a socially responsible manner or screen out corporations based on certain criteria. Global investments in ESG (environmental, social, and governance) funds surpassed $2.5 trillion in 2023, concentrated in Europe (with over 80 percent of ESG investments). About 90 percent of investors consider ESG funds as part of their investment strategy.87 Another potentially important investment trend is the growing concentration of corporate stock held by institutional owners, including mutual funds and pension plans. In the early 1970s, individuals owned 75 percent of corporate stock in the United States. By 2020, institutions owned about 80 percent of the stock value of the 500 largest U.S. corporations.88 The increase in institutional ownership provides an opportunity for organized and effective influence in matters of corporate governance. About one-third of institutional investors consider ESG issues in their investment decisions. 89 Corporate shareholders, including institutions and individuals, can encourage corporate responsibility by forcing votes on shareholder resolutions. While most shareholder 86 Business Week, 2000. Baker, 2023. 88 Greenspoon, 2019. 89 USSIF, https://www.ussif.org/sribasics 87 resolutions on ESG issues have not been successful,90 a few recent successes show the significant potential for future resolutions. For example, in 2021 61 percent of Chevron shareholders voted in favor of a resolution to force the company to reduce its carbon emissions.91 Also in 2021, an ESG hedge fund successfully replaced two of Exxon Mobil’s board members with its own nominees favoring more action on climate change. 92 Another way a corporation can align with a triple-bottom line ethos is to obtain certification as a B corporation, which requires meeting a set of independent standards established by the nonprofit company B Lab. These standards define “the social, environmental, and governance best practices for businesses.”93 As of 2023, there are approximately 5,700 companies in more than 80 countries that have been certified as B corporations, including Ben & Jerry’s, Patagonia, and The Body Shop. While B corporation certification provides no legal or tax benefits, it can bring increased brand recognition and confirm a company’s commitment to a triple-bottom line. While research on the economic performance of B corporations is limited, the evidence so far is mixed. For example, a 2021 journal article finds that B corporations experience an increase in sales after certification in the short term, but more sales volatility over the long run. 94 5.3. Regulatory Reform of Large Corporations It is unlikely that MNCs will fully align their behavior with the broader social and environmental goals of society solely through voluntary measures and stakeholder demands. While direct action by consumers and investors has initiated some corporate reforms, it is ultimately the task of governments to set the legal boundaries for corporate behavior. Several reforms could be instituted at the national level to better align corporate behavior with social well-being. Corporate taxation can be viewed as a way to collect fees from corporations to finance public services and as compensation for external costs imposed on society. As mentioned previously, corporate tax rates have been declining globally and existing loopholes in national tax policies allow some corporations to achieve very low, even negative, rates of taxation on profits. Some proposed reforms that could be enacted in the U.S. include: focusing on the long list of corporate tax breaks, or as they are officially called, ‘corporate tax expenditures’ … They could rethink the way the corporate income tax currently treats stock options. They could adopt restrictions on abusive corporate tax sheltering … They could reform the way multinational corporations allocate their profits between the United States and foreign countries, so that U.S. 90 Shareholders receive one vote per stock owned. A resolution needs more than 50 percent of the votes to pass. 91 Anonymous, 2021. 92 Hiller and Herbst-Bayless, 2021. 94 Patel and Dahlin, 2021. taxable profits are not artificially shifted offshore. In short, the corporate income tax code is overdue for a deep examination of how we tax, or fail to tax, our major corporations.95 Enforcement of antitrust laws is an obvious means to limit the power of large corporations that obtain excessive or monopoly power. Enforcement of antitrust laws in the United States has declined since the 1960s, which can be considered both a signal and a cause of increasing corporate power. According to a 2022 paper, the declining enforcement of antitrust laws in the U.S. has not reflected public preferences but is primarily a consequence of lobbying and other political efforts by large corporations. 96 A return to more rigorous enforcement of antitrust laws could be used to increase competition in industries with high concentration ratios. Greater scrutiny of proposed mergers is another measure for preventing the concentration of market power. Campaign finance reform could limit the power of corporations in the political arena. In the U.S., in 2023 Congressional Democrats introduced a constitutional amendment that would reverse the Citizens United ruling, but with virtually no chance of approval (see Box 1). Campaign finance reforms to limit corporate influence have been instituted by some U.S. states, particularly in Arizona and Maine. In both states, candidates for statewide offices who agree not to take contributions from large and corporate donors, and who also raise a minimum number of small ($5) donations prior to the general election, are eligible for public campaign funds (the amount of funding depends on the office). 97,98 Candidates who forego public funding are, however, still eligible to receive corporate donations. In Maine, about 55 percent of the candidates for statewide offices in 2020 receive public funding, but in the 2000s larger majorities (around 80 percent) were publicly funded. 99 Several countries ban corporate donations to political parties and/or candidates. In Europe, Belgium, France, Greece, Poland, and several other countries ban corporate donations to both political parties and candidates. 100 Germany and Spain ban corporate donations to political parties but not candidates. Examples of countries where corporate donations to candidates are banned, but not to political parties, include Guatemala, Japan, Romania, and South Africa. As a result of various corporate corruption scandals in Brazil, the country’s Supreme Federal Court ruled in 2015 that corporate donations to political parties and candidates were unconstitutional. However, the prohibition hasn’t necessarily reduced the influence of corporate interests: If the objective of the 2015 electoral reform was to reduce the influence of economic power, then banning corporate donations didn’t work. As the law allows 95 McIntyre and Nguyen, 2004, p. 15 Lancieri et al., 2022. 100 Institute for Democracy and Electoral Assistance, Political Finance Database 96 individuals to donate a limit of 10% of their income, people who have more money are allowed to donate (much) more and exert inflated influence on the election process.101 National regulations can stipulate that stakeholders need to be formally integrated into the decision-making process of corporations. One movement that has met with some success is increasing the role of labor in corporate decisions. In Germany, as well as other European countries, works councils are elected to: institutionalize worker rights to information and consultation on the organization of production and, in some cases, codetermination of decision making. In addition to institutionalizing worker input, works councils also enforce state regulation of the workplace in such areas as occupational health and safety. They are seen as being able to extend their reach beyond the unionized sector while supplementing the work that unions already do. 102 Other proposals for corporate restructuring are more radical. As corporate behavior has broad impacts on a community, some theorists argue that the broader community needs to be explicitly brought into the management process of corporations. Modest proposals would require a community representative or other external voice on the board of corporations. More ambitious proposals would transfer varying degrees of ownership to the community or seek to reestablish large corporations as entities that are specifically chartered to provide for the overall welfare of society. As corporations increasingly operate in a global market that transcends national boundaries, the possibility of using their mobility to avoid national regulation increases. Thus, the regulation of MNCs may need to be approached at the international level through treaties, international institutions, and the coordination of national policies: … there is no world government with enforceable laws for markets. Hence international agreements are needed to develop civil governance.103 For all practical purposes international institutions to enact and enforce corporate regulations are currently non-existent. Fortunately, an effective global corporate regulatory system does not necessarily require international rules and oversight. Distinct national approaches can be effective if structured within a flexible and enforceable international framework. Consider the current variability of national tax policies. International competitiveness for corporate investment can lead to inefficient corporate behavior as firms spend resources to shift income across national boundaries to lower their taxes (see Box 2). There could be significant public benefit if nations could agree to set tax policies that are similar enough to discourage corporate mobility that has no productive purpose. One current effort is to set a global minimum corporate tax rate of 15 percent. For more on this proposal, see Box 4. 101 Benjamin and Caruso, 2016. Gallagher, 1998, p. 220 103 Bruyn, 2000, p. 200 102 BOX 4. A GLOBAL MINIMUM CORPORATE TAX In October 2021, 136 countries agreed to a plan drafted by the Organisation for Economic Co-operation and Development (OECD) to institute a global minimum corporate tax rate of 15 percent. The proposal “seeks to respond to continued concerns regarding profit shifting, harmful tax competition, and a damaging ‘race-to-the-bottom’ on corporate tax rates.”104 Companies with foreign profits taxed at less than 15 percent in those jurisdictions would be required to “top up” their taxes in their home country. The OECD’s guidelines provide a template that individual countries can use to enact domestic legislation approving the minimum tax. As of 2023, more than 40 countries are moving ahead with plans to implement the tax. 105 All 27 members of the European Union have agreed to start applying provisions of the plan in 2024. In the EU, the minimum tax rate will apply to large MNCs with annual revenues in excess of €750 million (about $820 million). The United Kingdom and South Korea are also implementing the plan starting in 2024. The United Arab Emirates has stated their intention to participate, but with an exemption for extractive industries. In Switzerland, the proposal was put to a national referendum in June 2023, with nearly 80 percent of voters approving it. 106 In the United States, the 2022 Inflation Reduction Act imposes a 15 percent minimum corporate tax rate on companies with at least $1 billion in annual revenues. The tax is expected to raise about $250 billion in additional government revenues over 10 years, with about 30 percent of Fortune 500 companies paying the minimum tax. 107 However, full implementation of the plan requires tax law changes that have yet to be approved by the U.S. Congress. Congressional Republicans are opposed to those changes, claiming that they will “undermine U.S. sovereignty to enact its own tax policy and vault foreign countries ahead.”108 But analysis by the nonpartisan Joint Committee on Taxation (JCT) estimates that if the rest of the world implements a global minimum tax in 2025 while the United States does not, then the government will lose $122 billion in revenues over 10 years.109 The JCT analysis notes that the U.S. could still see a net loss of tax revenues with full implementation of the plan, about $57 billion, as U.S. companies claim tax credits for taxes they pay elsewhere. Both sides of the debate question the assumptions underlying the JCT analysis, but the OECD’s intention was not necessarily to boost the tax revenues of any particular country but to raise more taxes overall by reducing tax avoidance. International trade agreements are another way to regulate MNCs at a supranational level. The key to international trade agreements that reduce corporate externalities is that all stakeholders be represented. Progress is slowly being made to include non-corporate 104 OECD, 2022b, p. 6. Mehboob, 2023. 106 Illien, 2023. 107 Congressional Research Service, 2022. 108 Weil, 2023. 109 Joint Committee on Taxation, 2023. 105 interests in international trade negotiations and advisory committees. However, a look at the composition of trade advisory committees in the United States reveals a striking imbalance. Of the 428 trade advisors to the United States in 2023, 84 percent represent business interests (either corporations, including Amazon, FedEx, and Johnson & Johnson, or trade associations). Only 29 advisors represent labor interests and 11 represent nonprofits.110 The prospect for international trade agreements that direct corporations to incorporate social and environmental objectives rests on the issues of accountability and transparency. Unfortunately, international trade policy is currently conducted under circumstances that are deficient on both counts. Trade representatives are appointed, not elected, and the meetings of the World Trade Organization (WTO), the primary international trade agency, are conducted behind closed doors. 6. CONCLUSION The economic significance of multinational corporations has been illustrated in several ways. Corporate power generally seems to be increasing when measured according to firms’ ability to weaken labor unions, increase their price markups, lower their taxes, and impose external costs upon society. While economies of scale and scope have contributed to the growth of MNCs, the dominant characteristic of modern MNCs is their transnational mobility in seeking low-cost production opportunities. MNCs wield significant political power but precise measurement of this power remains elusive. Corporate power appears particularly evident in the United States, where most industries are becoming more concentrated. Corporate lobbying in the U.S. was particularly enhanced by the Supreme Court’s 2010 Citizens United ruling, which allowed corporations to channel unlimited funds for political purposes. Pressure from a number of directions is pushing MNCs to become more transparent and accountable regarding their social and environmental impacts, but much more needs to be done. Assuring that the objectives of MNCs converge with the broader goals of society is unlikely to be accomplished by voluntary reforms or consumer pressure. While national regulations such as antitrust enforcement can be effective, the transnational mobility of MNCs implies that international action is required. One promising development is the recent effort to impose a global minimum corporate tax rate of 15 percent. If this plan is widely adopted and successful, it could signal a shift in the balance of power away from large corporations in favor of broader social goals. 110 Dayen, 2023. 7. KEY TERMS AND CONCEPTS antitrust laws: legislation to control the market power of corporations B corporation: a company that has been certified by the nonprofit B Lab as meeting social, environmental, and governance best practices for businesses. conglomerate: a firm involved in the production of many unrelated goods and services deregulation: the removal of government controls from an industry; intended to increase competition division of labor: the separation of a production process into many individual tasks with each worker performing the same task repeatedly economies of scale: the per-unit costs of production decrease as the overall scale of production increases economies of scope: the per-unit costs of production decrease as a firm produces a broader range of goods and services effective tax rates: total taxes paid as a percentage of total income or profits. Due to deductions and exemptions, effective tax rates tend to be lower than statutory tax rates. externalities: costs of an economic activity that are borne by persons, or entities such as the environment, that are not among the economic actors directly responsible for the activity Global Reporting Initiative: an attempt to develop and promote a standardized approach for corporations to report on their economic, environmental, and social activities and impacts gross world product (GWP): global economic production, measured as the sum of each country’s gross domestic product (GDP). industry concentration ratios: the amount of domestic receipts of the largest firms in an industry as a percentage of national industry receipts Keynesian economics: an approach to economic policy, developed by John Maynard Keynes, that often concludes that government policies can affect the macroeconomic variables in a national economy labor union: an organization formed by workers in order to advance common interests, such as higher wages and stronger workers’ rights lobbying: attempts to legally influence political decisions through communication with politicians and other government employees. market capitalization: the stock value of a company; equal to its stock price per share multiplied by the number of shares minimum efficient scale: the smallest level of production at which the per-unit long-run production costs of a firm reach their lowest level multinational corporations: firms that own and operates subsidiaries in more than one country oligopoly: an industry dominated by a few, interdependent firms outsourcing: when a corporation contracts to other, often foreign, businesses for production, marketing, distribution, or other goods or services perfect competition: an industry composed of many price-taking firms that each set quantity but cannot influence the industry price price markup: the difference between a product’s selling price and its production cost, expressed as a ratio stakeholders: individuals or groups affected by the actions of an economic entity, such as a corporation, who are not direct owners of the entity statutory tax rates: the tax rates set by government agencies, as a percent of taxable income or profits triple bottom line: the perspective that a firm should measure performance along three axes: financial, environmental, and social. value added: a measure of the true economic contribution of a firm; calculated as a firm’s revenues minus the cost of inputs. Washington consensus: the broad general agreement between international economic institutions such as the World Bank and the International Monetary Fund, to seek economic development through liberalization policies such as reduced trade barriers, lower taxes, increased capital flows, and fiscal restraint by governments. works councils: an institutional arrangement, primarily found in Europe, whereby workers are formally integrated into the decision-making process of a firm 8. DISCUSSION QUESTIONS 1. Discuss the impact of large corporations on your life. What benefits do you obtain from large corporations? What negative impacts do large corporations have on your life? Overall, would you say that large corporations have a net positive or negative impact on your life? Why? 2. How would your answer to Question #1 change if you were a 16-year old woman making Nike shoes at a factory in Indonesia? What if you were the owner of a small neighborhood hardware store? 3. Do you feel that large multinational corporations are subject to competition? Would you say that a multinational corporation is subject to more or less competition than a local retail store? Why? 4. After reading the section on the history of large corporations, do you believe that corporate charters should be subject to revocation if they fail to operate in the public interest? Why or why not? Consider who would be affected if a corporation’s charter was revoked. 5. As discussed in this module, the scale of large multinational corporations are sometimes compared to national economies. How are corporations similar to national economies? How are they different? Contrast the decision-making process in a national and business economy. 6. Suppose the industry concentration ratio is increasing for a particular industry, say credit cards. How would you expect the credit card industry to change if the concentration ratio increased? What would you expect to happen to the interest rate on credit cards? Do you think it would be easier or harder to get a credit card if you have bad credit? 7. Do you believe that changes in the operations of large corporations are more likely to occur because of government regulation or changes in consumer behavior? Why? 8. Do you believe that the general public is entitled to a role in the management of large corporations? Why or why not? Further, do you believe the general public is entitled to ownership rights in large corporations? Why or why not?