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The New Corporate Citizenship

Robert B. Reich U.S. Secretary of Labor

Town Hall, Los Angeles April 16, 1996

In 1993, President Clinton went to Washington determined to make life better for people who work hard and play by the rules. He had an economic strategy to deal with unemployment, which had idled more than 7 percent of our workforce. And he delivered. The jobless rate has dropped to just over 5.5 percent. He promised 8 million new jobs in his first term. And he delivered. The figure now stands at eight and a half million, and counting. He promised to cut the deficit which had ballooned under his predecessors. And he delivered. By the end of this year it will be half of what it was when he took office.

Companies are doing well. Last year, the Fortune 500 enjoyed an average profit rate of 13 percent.

Working families are doing better than they have for a long time. The long slide in median wages has been halted. The poverty rate is dropping. And America is finally growing together again. The most recent available data shows that in 1994, every family income group, from the richest to the poorest, experienced a real increase in their incomes for the first time since 1989.

And things are beginning to look up here in California, too. In the 12-month period ending in February, this state added more than a quarter-million new jobs. That's on top of another quarter-million jobs that were added in the previous 12 months. That is a half-million new jobs. We're talking about a dramatic turnaround. And although unemployment in California is still higher than the national rate, it is down two whole points from 1993 and headed in the right direction.

Clearly, the Clinton strategy has succeeded in jump-starting the economy and setting the stage for greater numbers of average working Americans to prosper in what the President has called the "Age of Possibility."

But the President has also said that this is a record to build on, not sit on. Over the long term -- since 1979 -- about 97 percent of the average increase in household income has gone to the top fifth of the nation's families. Everyone else -- four-fifths of American households -- has shared just 3 percent of the income gains.

Thus, the President has defined the great challenge before us -- the second stage of economic renewal -- as restoring wage growth and economic security for the majority of working families, and making the American dream of opportunity for all a reality for all who are willing to work for it.

In spite of the economic upturn and restored upward mobility for many families, millions of working Americans aren't sure what they're going to get out of the new, high- tech, global economy. This is an era of extraordinary dynamism and change, similar in scope to the industrial revolution that moved people from farm to factory. And like that earlier transition, this one is perilous for many people.

Left unchecked, economic insecurity can undermine the political preconditions for continued business prosperity. If too many of our people feel excluded from the upside gains of a dynamic economy and disproportionately burdened by its downside risks and costs, they eventually will support policies that sacrifice growth in favor of economic security -- policies like trade protection, capital controls and inflexible rules of employment. Or, worse yet, they become susceptible to insidious efforts to shift the blame for their ills to those who are least culpable but easy targets of rage -- immigrants, welfare mothers, affirmative action, to name a few. Left unchecked, the widening disparities in income and opportunity can undermine the coherence of our society. A society too sharply divided between winners and losers loses its moral authority.

We know that if this is the case, we will not be able to succeed as an economy, or as a society. This situation is not sustainable. But what should we do?

The solution does not lend itself to easy, "bumper sticker" strategies. As we have seen, anyone can get on the soapbox and exploit the anxieties of working people and their fears about the new economy. But that's not going to keep this nation on the right course. That won't help more of our people move safely into the new economy, where they can prosper.

We must be candid about what is happening here. This new era of economic dynamism and possibility marks the end of the old era of stable mass production. We have moved from the farm to the assembly line, and are en route from the assembly line to the computer. Information technologies, combined with global trade and worldwide investment, have shifted the economic ground we stand on. I use this metaphor advisedly in California.

Tens of millions of Americans are at risk of being trapped on one side of a great chasm that has opened between the old economy and the new. There are many new jobs, but the good ones lie tantalizingly beyond the grasp of many working people. Those jobs call for more than the energy, good sense, and determination that most Americans possess in abundance. They also require technical or problem-solving skills, and the capacity to continuously acquire new skills.

Machinists are being supplanted by the operators of computer- controlled machine tools. Garage mechanics are being replaced by automotive technicians who can diagnose and repair the electronic gadgets that control today's cars. Office clerks are giving way to office technicians skilled in using computers for storing and updating data. Cashiers can become inventory-control specialists.

In every advanced economy, the job market is rapidly shifting in favor of people with such skills -- and against people without them. The earnings of people with the right skills are rising, while the earnings of those without them are dropping -- or they simply become unemployed. As we all know, in a dynamic economy no one has job security. Those with skills can still command employability security -- the security of being reasonably sure that if they lose their job they can get a new one that's as good. The challenge is to extend this new kind of security to those who remain trapped in the old economy -- because they don't know what skills are in demand, or can't afford the costs of building skills, or feel too old to learn, or cannot find ways to sustain their families as they navigate economic transitions -- rightly fear that if they lose their jobs, they will never regain the lost ground. We have to make the new economic dynamism work for more of our people.

That's the first major change now occurring in our economy. The second has to do with the disappearance of the implicit social compact that used to bind companies with their workers and their communities.

This compact, which survived well into the 1960's and 1970's, held that so long as a company earned healthy profits, employees could count on secure jobs with rising wages and benefits, and communities could count on a steady tax base. When the economy turned sour, employees might be laid off for a time. But when the economy revived, the work would return. The very term "layoff" suggested a temporary separation.

The compact was enforced in several ways. Unions played an important role. But it was primarily the public expectation -- the unspoken but widely-accepted norm -- that when a company did well, its employees and community would also do well. For a business not to share the benefits of its success would be unseemly.

That expectation has lost its force; that compact has come undone. To put it very simply, as Hollywood movies evolved over forty years from George Bailey's Bedford Falls in It's a Wonderful Life to Gordon Gekko's Wall Street, the structure of the American economy was doing much the same thing.

What changed? For one thing, competition for investment dollars. Vast amounts of capital can now be moved from place to place at the push of a key on a personal computer. Investors face an ever-wider array of choices of where to put their money. The result is "electronic capitalism" -- a worldwide system for immediately redeploying financial assets to where they can earn their highest return.

Today, any chief executive who hesitates to sacrifice all else to maximize short-term profits can risk trouble. By the same token, a chief executive who subordinates all else can reap handsome rewards. Even the term "layoff" no longer means what it used to. Most layoffs are now permanent. We need a new word to describe what the phenomenon is. Perhaps we should call them not "layoffs" but "cast-offs."

The sum of these two momentous changes presents this nation with a great paradox. Just at the time when the workforce is most in need of help adapting to a new economic system, the drastic narrowing of the sense of corporate mission has sharply limited the private sector's capacity to respond to that need.

A narrow economic calculus discourages the necessary investments: The nation as a whole is better off when employers teach their workers basic or industry-wide skills beyond what is required to function effectively in their current jobs; the national economy as a whole is more flexible and productive when employers see to it that workers who are no longer needed get trained for and placed in new jobs. Yet because the company doesn't reap the full benefits of these sorts of investments in the short term, CEOs may be reluctant to make them to the extent that society needs.

As corporations have focused more and more exclusively on increasing shareholders' immediate returns, the consequences have become obvious. The stock market has soared while pink slips have proliferated, health care and pensions have been cut, and the paychecks of most employees have gone nowhere. Top executives, talented entrepreneurs, and Wall Street intermediaries have never done as well. Workers without adequate education and skills, or with outmoded skills, are in free fall. This situation is not sustainable. But what can be done about it?

Too many individuals and families are trapped. Government -- society -- must respond, but cannot do it all. So, to what extent can we rely on the private sector? Do companies have obligations beyond the bottom line? Do they have a duty to their employees and their communities? Over the long term, do the interests of all stakeholders -- shareholders, employees, and communities -- begin to converge? And if they do, can we build a new social compact -- a new corporate citizenship -- on the basis of that convergence?

The President has started a national discussion on these vital questions. And Americans from all walks of life -- politicians, community leaders and average working people and CEOs -- are now struggling to answer them.

Americans haven't abandoned their expectations of corporate citizenship. Last month, a poll sponsored by Business Week found that 95 percent of Americans believe companies have responsibilities to their employees and their communities that go beyond making profits. Noting the failure of wages to rise at a time of robust productivity and profit gains, the magazine's editors wrote: "The time has come to share the wealth."

Recently, President Clinton outlined five specific ways that business can exercise good corporate citizenship, enhancing long-term profits while at the same time helping more of our citizens prosper in the new economy. In each of these areas, society as a whole must do what it can to help our fellow citizens help themselves across the great divide. Government can also set minimum standards of business behavior. But businesses must make every effort to exceed the minimum.

First, businesses can institute policies that help their workers fulfill their family responsibilities -- policies such as flexible work schedules, help with child care and generous leave for family and medical reasons.

Early in this term President Clinton proudly signed the Family and Medical Leave Act, which requires employers to give their workers up to 12 weeks unpaid leave for the birth of a child or to care for an ailing relative. But some companies are proving that they can go beyond the minimum the new law requires -- and can boost the bottom line at the same time.

Procter & Gamble, for instance, allows up to a year of maternity leave for new mothers as well as subsidized childcare and up to five years of reduced work hours so mothers can care for their young children at home.

The evidence shows that these kinds of commitments pay for themselves in improved employee morale and productivity. Johnson & Johnson employees missed 50 percent less work after flexible work arrangements were instituted. A division of another major corporation found that flexible work schedules reduced absenteeism by 30 percent.

The second way companies can be good citizens is by providing their workers healthcare and pension benefits.

Here, too, government has a role to play in setting minimum standards. This administration is encouraging Congress to pass legislation barring health insurers from cutting off workers when they change jobs or when someone in their family gets sick. Last Thursday, the President announced a package of pension reforms enabling small businesses to more easily provide pensions, and helping workers carry their pensions from job to job.

But with millions of American workers lacking both health care and pension coverage, it is clear that businesses must do more than meet the bare minimum -- and it's clear that top-flight companies can, and do. Starbuck's, the Seattle-based coffee retailer, has been widely recognized for its practice of offering full health insurance benefits and its 401(k) plan to its part-time workers.

Thirdly, businesses should invest in their "human capital" -- in upgrading the skills of their workers -- which are so critical to raising incomes, increasing productivity, and growing the economy.

Once more, there's an important but limited role for government. We are working to change the nation's unemployment insurance system -- originally designed to provide income support during temporary layoffs -- into a re-employment system designed to get jobless workers the training they need and move them rapidly into new jobs. Our "GI Bill for America's Workers" calls for the consolidation of federal job-training programs into vouchers that unemployed or low-wage workers can use at community colleges or technical schools to get the training they need. The President is also proposing to give families a $10,000 per year tax deduction to offset expenses for university education or job training.

But the business role is at least as critical, and there is strong evidence that doing right by employees is also good for the bottom line. One study has found companies that introduced formal employee training programs experienced a 19 percent larger rise in productivity than firms which did not train their workers. Another shows that raising the average education of your workforce by one year helps them become as much as 12 percent more productive.

Some companies have received that message loud and clear. Granite Rock, the construction materials supplier in Watsonville, California, invests nearly $2,000 per employee annually in training -- nearly 13 times the industry average. Workers at Cin-Made, an Ohio firm that makes specialized packaging, receive extensive on-the-job training and receive additional pay for acquiring advanced skills. And Harley-Davidson, maker of the legendary motorcycles, has established an on-site learning center for its employees.

These investments in skills have paid off for each of these companies. Granite Rock has improved customer service and raised its productivity to 30 percent above the industry average. Cin-Made has seen its on-time deliveries increase by nearly a third. And, after some tough years, Harley is back on top of the motorcycle market.

The fourth thing businesses can do is to work in partnership with their employees -- giving them a greater voice in the enterprise and sharing the benefits of the good years, not just the burdens of the bad.

Government can and should set a decent baseline. We are determined to raise the minimum wage to a decent level so that full-time workers can pull their families out of poverty. And we should maintain the expanded Earned Income Tax Credit that helps millions of low-income working families.

But business can do a great deal more to reward their employees for their abiding loyalty, dedication and hard work -- as many companies have demonstrated. Intel, for example, is known far and wide for its strong fringe benefits, deferred profit-sharing plan and commitment to redeploying workers instead of laying them off. Instead of cutting jobs during slack demand for its speaker cabinets, Harman Electronics -- located nearby in Northridge -- has an "Off-Line Employment" program to keep its employees on the job making alternative products from scrap wood.

And perhaps the story of the year came out of Methuen, Massachusetts last Christmas, after a tragic fire destroyed the Malden Mills textile factory and with it the security and the hopes of the 2,400 people who work there. Three days later, the owner of the firm, Mr. Aaron Feuerstein, appeared before his employees and told them he would not only rebuild the factory and rehire every one of them, but he would also continue paying them their salaries and their benefits during the shutdown. Today, Malden Mills is well on its way back to full operation.

The experiences of many companies show that allowing workers to share the gain as well as the pain -- and giving them a genuine voice in the enterprise -- is a successful strategy that pays big dividends over the long term. Layoffs may be necessary, of course, but companies that treat their workers as assets will use layoffs only as a last resort, and only after giving their employees every opportunity to find new, productive work.

Finally, every company has a duty to provide a safe workplace. No one should have to put themselves at risk just to put food on the table. Government must be the cop on the safety beat. But the Labor Department's Occupational Safety and Health Administration can inspect only a tiny fraction of the nation's 6 million workplaces. It is essential, then, that businesses do their part to reduce workplace injury and death.

Companies like DuPont have discovered the benefits to be gained from a strong commitment to improving worker safety and health. Through its participation in a Voluntary Protection Program run by OSHA, DuPont has brought its injury rates down to 87 percent below the industry norm, thereby reducing its workers' compensation payments, related medical costs, and employee turnover costs.

So these are the five elements of good corporate citizenship -- family-friendly policies, health care and pensions, training and education, working in partnership with employees and providing a safe and healthy workplace. Five things companies can do to help bring about a better future for all Americans. Five steps that build upon the measures this Administration already has taken or is seeking to take to enable working people to better balance work and family, to have health care and pension security when they lose a job, to gain new skills, to be paid a decent livable wage, and to work safely.

Good corporate citizenship also means respecting the need for minimum standards, and not using financial and lobbying muscle to eradicate them. CEOs cannot have it both ways: Lobbying furiously against a higher minimum wage, full enforcement of health and safety laws, health care, and family-friendly workplace policies, while at the very same time insisting that their job is simply to respond to the dictates of the free market.

After I leave you here, I will be paying a visit to one local company that has made great strides in all five of these areas. Rhino Records may be best known for its popular re-issues of the music we grew up on. But Rhino employees will tell you that the company has great flex-time and family leave policies, good health and pension plans, a program to cover the cost of job-related tuition, profit sharing and bonuses, and an employee emergency team to address safety concerns.

On Thursday, I'll be in Portland, Oregon to drop in on Connor Formed Metal Products, another firm that is doing a lot of good things for its workers. Connor has gone the extra mile in providing an Employee Stock Ownership Plan, performance bonuses, profit sharing, health insurance and on-site job training classes.

Rhino and Connor are two more of the companies that are doing right by their workers, their communities and -- in the process -- their own bottom line. We ought to be encouraging more businesses to follow their example.

Some cynics will sneer at these principles. They'll say that business leaders can't be expected to care about the economic fate of their fellow Americans.

I just don't believe that. The American spirit of innovation is look for a better way -- and to relentlessly pursue a better world. That is the ideal that led Ron Brown and those 12 executives to their deaths in Croatia a couple of weeks ago. The idea that bad citizenship makes good business sense would be seen as bizarre by most Americans, including most business leaders, throughout most of our country's history. Everybody remembers GM's "Engine Charlie" Wilson's creed that "what's good for General Motors is good for America". But we often forget the second part of that declaration -- "And vice versa." The common interest of corporation and culture was a matter of simple common sense to most business people, until recently. And I'm confident that we'll soon dismiss the extreme notion that business can prosper while the middle class withers and the civic culture decays. We'll return to the mainstream view that corporations are, in a sense, citizens of our American community, that citizenship carries duties as well as rights, and that there is and must be an ethical basis to doing business in America.

It is already apparent that the vast majority of Americans -- including many of our nation's business leaders -- still believe that there should be a social compact. There are a great number of companies doing the right thing today. Over the long term, doing right is consistent with doing well. As a society, we must encourage others to follow their lead.

That is the new corporate citizenship -- a new idea that is really a return to a very old, very basic, American norm. It is a necessary complement to the measures we as a nation must take to ensure that all Americans have a fair shot at sharing in our prosperity.

Let us continue to have a national conversation about corporate citizenship. Surely, further discussion about the proper role of the corporation at this unique moment in history is no less important than the discussion we have been having about the proper role of government. In this era of smaller government, at a time when so many are foundering in the face of record profits and a soaring stock market, the failure of the private sector to respond imperils our nations' continued prosperity and stability.

All Americans have an enormous interest in sustaining the openness and dynamism that has served our economy, as well as the faith of those who labor in it. For the sake of our nation's future, let us work to rebuild and sustain that faith.

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