When a Company's Power Keeps Growing, What Can It Do — and What Can't It? | 2018 Business Events ⑥

Once big companies control enough resources, they can out-argue governments at every level. How do you reconcile business, which exists to make money, with politics, which is supposed to serve the public?

Some of these events are the product of changes already under way, and they will change our lives further. Some are interventions by forces business cannot control, which force market participants to keep adjusting their strategies. And some come from companies themselves: once a company reaches a certain size, how does it come to terms with the public, with consumers, with state power, and with everything else around it?

A country gets the companies it deserves. In 2018, as always, the business world changed a great deal. The year's biggest business stories only confirm it.

On November 13, 2018, after more than a year of deliberation, Amazon announced that its second headquarters would go to Long Island in New York City and to Crystal City in Arlington, Northern Virginia. To win Amazon's favor over dozens of competing cities, New York and Virginia together put up subsidies worth as much as $2.1 billion — enough to cover more than 40% of Amazon's $5 billion total investment in the new headquarters. That worried a lot of people. Amazon had grown so big that in negotiations with local governments across the United States it now held an enormous advantage, and leverage with nothing to check it.

In China, meanwhile, a Guangdong man named Tan Qindong posted an article online charging that Hongmao Medicinal Liquor was to some degree toxic, and was arrested by police in Liangcheng, Inner Mongolia, where the tonic is made. Xinhua quoted Liu Mingxiang, a legal scholar at Renmin University of China: “Even if there was something wrong with what Tan Qindong said, at most it amounts to a civil dispute. Local police should not intervene in civil disputes, and should not become a tool of local protectionism.” The local protectionism he had in mind is this: the maker of Hongmao Medicinal Liquor is one of Liangcheng's biggest taxpayers. According to Bao Hongsheng, the chairman of Hongmao Medicinal Liquor, the company expected to pay 270 million yuan in tax in 2017, while Liangcheng's entire annual fiscal revenue comes to only a little over 1 billion yuan.

The relationship between business and politics, between companies and government, has long been an argument among scholars. Both cases point to the same question: as a company grows fast and gets bigger, its influence over government grows with it, and may even eat away at the boundary that once separated the two.

“Because countries, companies, and economic structures differ, the nature of this relationship keeps changing over time. At the most basic level, the way business wields its own power affects democracy. Some see this as a threat, while others regard a successful free-market economy as a precondition for democracy.” So says The Oxford Handbook of Business and Government.

The ethicist Onora O'Neill puts the worry another way: because a company exists to make profits for its shareholders, it will use every resource it has to chase them. “How could they possibly care about social justice,” she asks, “except insofar as justice is defined in the narrowest sense as obeying the law?”

If you think of society as a field where different forces push against one another, the pushing plainly goes both ways. We have already looked at how government regulation shapes the way business operates; now, when a big company's power outweighs that of government at every level, how does it shape the way society runs?

At the macro level, big companies usually exert political influence by shaping policy. The question won fresh attention in the United States with The Business of America Is Lobbying, a 2015 book by the political scientist Lee Drutman, in which he notes that big companies spend $2.6 billion a year lobbying members of the US Congress — more than the $2 billion Congress itself receives in federal appropriations. He believes this means that when members of Congress write laws, they pay more attention to big companies than to the taxpayers they are supposed to represent.

He later wrote in The Atlantic about another shift in American lobbying. Quoting a Washington lobbyist, he wrote: “Twenty-five years ago … the purpose of lobbying was just to ‘get government out of our business — let us do what we want to do.’ Slowly, that mindset changed into ‘How can we make government our partner?’ It's a shift from ‘leave me alone’ to ‘let's work together.’”

Every big company has something it wants. CNN reported that General Electric spent $134 million on lobbying during the first five years of the Obama administration to win tax breaks. Comcast, the entertainment giant, spent $45 million persuading the government to loosen antitrust oversight, and in 2011 its $30 billion purchase of NBCUniversal went through. Two political scientists, at Grinnell College and Boston University, found that during the 2008 election drug companies gave more money to Democrats, because the Democratic presidential candidate was campaigning for universal health care — a policy that would widen the drug industry's market and its revenue.

Today the United States has a president who came out of business, Donald Trump. Less than a year into office he rolled out a huge tax cut. He handed big companies enormous tax breaks with no public participation at all — perhaps the latest proof of how business bends politics.

“Companies now have enough resources to go on the offensive and the defensive at once, on almost every issue that matters most to them,” Drutman writes. In the early 1970s, he notes, business had not yet grasped how much lobbying mattered. Lewis Powell, later a justice of the US Supreme Court, argued that no force in American society counted for less in government than the business corporation.

Only later — as the public began to question the image of business, and as the postwar boom faded through the 1970s — did companies come to see how much policy mattered to their operations. Lobbying then pushed Congress to rewrite labor law, cutting what companies owed the people they employed, and to hand them tax cuts. From there, big companies kept raising their spending on lobbying, which built the hold they have over the US Congress today.

At the micro level, local governments are weaker, but a big company's influence does not shrink to match, which makes the imbalance of power worse. In that sense, local government is the easier thing for a big company to control.

Some companies work the gaps in local government. In November 2018, Bloomberg Businessweek reported one such case. After the 2008 financial crisis, banks tightened lending and pushed many small businesses and individuals into trouble. During those years a crop of lending companies sprang up in New York.

New York law lets a lender write a “confession of judgment” into a loan contract. That means that when a small-business borrower breaks the terms, the lender can take it to court, and the court can rule for the lender with the borrower not even present. The lender can then use the ruling to freeze the borrower's assets and get its money back.

By Bloomberg Businessweek's count, only 14 cases invoked confessions of judgment before 2014; by the third quarter of 2018 the number had passed 3,500. “Unsurprisingly, many lenders began to abuse the clause. In interviews and court filings, creditors have accused borrowers of forging documents, lying about how much they owed, or inventing debts the borrower was never actually responsible for.”

More often a big company simply uses its own strength to force its way into a place and remake it, while the local government has nothing to bargain with. In 1989 and 1990, The New York Times ran two articles on what Walmart did to a small town.

In the first, the Iowa town of Independence, population 6,100, got its Walmart in 1983. Mayor Frank Brimmer recalled: “They told us that if Walmart didn't build here, it would build in a neighboring town instead. And our residents wouldn't care whether they were shopping here or 25 miles away.”

“You can't beat Walmart, so we joined them.” Walmart was big enough to buy in bulk and push down wholesale prices, which let it promise shoppers “everyday low prices”; and once prices fell far enough, residents chose Walmart over the town's own stores. Fourteen months after it opened, the shops along the town's Main Street began to close, and the damage reached some regional retail chains as well.

Walmart ended up replacing most of the town's commerce. It said it had created 95 local jobs, but half were part-time and paid only slightly above the minimum wage — and about the same number of jobs disappeared under the blow Walmart dealt.

Plenty of residents turned on city hall over it: “What bothers me is that our city officials gave Walmart everything it asked for far too easily. They were practically courting them. When I opened my store here, they didn't do anything for me.” Mayor Brimmer eventually came round to Walmart, and covered its water bills and the cost of laying the pipes it needed — the price, he believed, of the jobs Walmart brought to town.

But a report a year later suggested Brimmer's thinking was too simple. In the Texas town of Hearne, Walmart decided to close its store after ten years. It had already driven out every retailer the town had, so its sudden exit left a commercial vacuum. Residents had to drive 26 miles to the neighboring town of Bryan for daily necessities.

Walmart's reason was that the store had not performed as expected. Residents' anger was plain: “They don't care at all what they've done to the people here. I don't drive, so I can't get to Bryan. Before they came, I had other places to shop, dollar stores and the like — now there's nothing left.” Town officials were at a loss too. They tried to attract other retailers, but Hearne was clearly not going back to what it had been.

The same thing is still happening in America. In 2016, Walmart announced it was closing 106 stores in out-of-the-way small towns. Walmart said it would work with local governments to keep residents supplied with what they needed, but people in many of those places said Walmart had already done them damage that could not be undone.

Shaping policy at the national level is one thing; moving into a single town changes people's lives more directly and more visibly. But while corporate lobbying only began in earnest in the 1970s, business attempts to remake a place go back much further, to what scholars call the “company town.”

The scholars Marcelo Borges and Susana Torres define a company town as a residential and service center built by a company, usually next to or near the factories or mines it runs. The company town is a classic product of the Industrial Revolution: production needed workers in large numbers, so companies tried to attract labor by supplying everything a worker's life required, and in time this produced a city where the company took care of everything.

In a company town the company is not only the employer. It is the landlord, the effective manager of public safety and social peace, and usually the supplier of the goods and services workers buy. It owns the houses employees live in and runs the local schools and churches. “The employer's political control extends to the courts, the mayor, the city council, and the whole governing system,” Sharon Zukin writes in Landscapes of Power. “The company town also shuts out traveling merchants, unions, and other employers.” It is a dictatorship in all but name.

Behind a company town there is usually a powerful manufacturer — steel, cars, and the like — the industries that held up the world economy through most of the 20th century. Weirton, West Virginia, and Scotia, California, were built by a steel company and a timber company respectively. In China, when state-owned enterprises were at their strongest, they too carried a great deal of the public service that should have belonged to government — schools, hospitals and more: the old practice of SOEs “running society.”

In 2011 Newsweek ran a piece called “The Last Company Town” on Scotia's decline. China's state-enterprise reforms have likewise called for shedding the old idea of enterprises running society. Yet the company town has not disappeared. As Newsweek pointed out, the city-building plans of internet companies, above all Facebook and Google, are only an updated version of the company town. The all-encompassing, take-charge-of-everything approach has not changed at all.

As long as a company is big enough to need a large workforce gathered in one place, the company town is unavoidable. Through most of the 20th century, America's company towns were built by steel, cars, and mining; later, industrial upgrading produced new ones.

Rochester prospered as Kodak grew. At the peak, Kodak, Xerox, and Bausch & Lomb together provided more than 60% of the jobs in town. Walmart has all but owned American retail for decades; Bentonville, where it is headquartered, had about 50,000 residents in 2017, and after several rounds of layoffs Walmart still employs about 15,000 people there. They give the town vigorous spending power, which has pushed it to grow further. The Walton family behind Walmart has also built hotels, art museums and other facilities there.

When an industry moves away, though, the company town runs into trouble. As steel and car production shifted to emerging economies, laid-off blue-collar workers went to other cities to make a living, and company towns like Weirton and Scotia fell into complete decline, some of them abandoned. That is what “last” means in Newsweek's headline.

Kodak was overturned by digital imaging, and its weight in Rochester is nothing like what it was. The biggest local employer now is the University of Rochester, which with its two hospitals employs 20,000 people. Bentonville may not be as lucky as Rochester. With Walmart itself under pressure from Amazon, the town's future is precarious too.

The rise and fall of America's company towns is worth China's attention. Liangcheng in Inner Mongolia depends on Hongmao Medicinal Liquor; Benxi and Anshan in Liaoning live mainly off their steel companies; and the timber industry in Yichun, Heilongjiang, has been sliding for years. A place leaning too heavily on one important company is something to watch.

The remedy does not look hard to find, either: as long as a replacement industry turns up, there is still a chance to prosper. In America now, Silicon Valley at its most powerful is displacing the old service industries and building new towns on tract after tract of land. Of course, the substance of it has never changed — total paternalistic control over employees, and the use and erosion of public power.

Newsweek called Google's campus in Mountain View perhaps the most paternalistic attempt of recent years. “Employees enjoy dry cleaning, haircuts, massages, and cafeterias serving three meals a day. They commute on company buses, sleep in company dorms, and unwind in company recreation facilities.” Google also provides employee housing — 60 medium-sized suites or 400 single dorm rooms — a figure it raised again in 2017, to 5,000 units.

In China, companies like Foxconn have replaced state enterprises as the main builders of company towns. Foxconn's campus in Shenzhen covers 23,000 square kilometers and contains libraries, sports fields, an IE Academy and a hospital. After a string of suicides at the company, Foxconn also fitted out counseling rooms.

At the same time, company towns keep outside forces out. Facebook's current campus is open in its layout — a ring-shaped building with a street running through the middle, lined with restaurants, pop-up shops, a book exchange and other conveniences — but only company employees may go in. Foxconn's campus is entirely closed likewise; an outsider must fill in a registration form before being let through.

A company town's influence also seeps past its walls. As Facebook came to see that it needed to mend relations with the community around it, it began putting money into local government: first a police station outside the campus, with the rent covered, and more than $170,000 a year for one officer's salary. It also plans to give $11 million more, enough to pay six government officials. At that point it is hard to tell whether this is community support or plain bribery.

Turn it around, and if a company town matters greatly to the local economy, the local government may spare no effort in supporting it — with money, among other things, as when cities across America offered hundreds of millions and even billions of dollars in subsidies to land Amazon's second headquarters.

Big companies using public power for private gain is nothing new. In his novel Jailbird, the American writer Kurt Vonnegut described the great railway strike that broke out in Chicago in 1894. The workers lived in the company town built by the railroad magnate George Pullman, and they were protesting that the company had cut jobs and wages without cutting the rent they owed. After more than two months the strike ended when the US Army put it down, leaving 30 strikers dead and 57 injured. The American labor movement went quiet for a time afterward. The strike's leader, Eugene Debs, was arrested and sentenced to prison by the US Supreme Court, and the ruling was later used as the legal basis for government intervention in strikes.

After his release, though, Debs went on working on labor rights, and even ran for president. As labor rights drew more attention, the right to strike won protection in the Clayton Antitrust Act of 1914, passed by Congress. The act let labor organizations pursue lawful ends, and so protected the right to protest, to strike peacefully, and to bargain collectively. Only when a labor organization turned violent could the state's instruments of force step in.

President Grover Cleveland also set up a commission to investigate the strike, and it concluded that the way Pullman ran its company town was “un-American.” Four years later the Illinois Supreme Court ordered Pullman to give up running the town, on the grounds that doing so lay outside the company's charter.

Both the advance of labor rights and the breakup of the company town rested in the end on America's relatively balanced political system, in which the legislature, the executive and the courts could each look for the causes of the tragedy from its own angle and correct the wrongs behind it. In much of the world, though, where those checks are missing, a big company's abuse of public power simply comes to nothing.

In South America, Transparency International ranks Chile, Puerto Rico and Costa Rica as the most corrupt countries. Ben Ross Schneider, a political scientist at MIT, counts corruption as one important way business shapes politics. He stresses that Transparency International's rankings measure how the public feels, but adds: “It's worth noting that these rankings at least suggest the possibility that business is more likely to exploit corruption in these lower-ranked countries.”

China's Hongmao Medicinal Liquor affair ended in a different kind of indecency. Legal scholars and public opinion, including central state media, all charged the Liangcheng police in Inner Mongolia with treating a civil matter as a criminal one; yet in the end Tan Qindong, once released, publicly apologized to Hongmao Medicinal Liquor, and the company magnanimously announced that it forgave him. The legal questions behind the cross-provincial arrest, and whether power had been abused between government and business, came to nothing.

As two of the important forces in the world today, companies and politics sit in a delicate, shifting balance. Politics is sometimes the stronger party, but that does not mean business is always the weaker one, especially when what it faces is a local government. That is also why a company needs to use its own power carefully and choose prudently.

A choice Disney made in the summer of 2018 may show what that looks like. Disney, the most powerful entertainment company in the world today, took in close to $60 billion in revenue in its most recent fiscal year, with operating profit above $15 billion. For years it has enjoyed tax rebates and other favorable policies from Anaheim, home of Disneyland; The Los Angeles Times cited estimates that over 20 years the money Disney saved may have reached $1 billion.

Residents and the city government gradually came to resent Disney. Disney, they believed, no longer needed the various breaks the city was giving it. And as the friction between the two sides sharpened, it was Disney that gave way: the company itself asked the city to cancel the policies. Disney said this was meant to repair its relationship with the local community.

Critics argue that this was only a Disney deal, meant to put its favored candidate in the mayor's office in the election a few months later and to gain the upper hand in minimum-wage negotiations. But for a company that has always played hard, it was a rare act of compromise.

Cover image / Wikimedia