Simply talking corporate America into being more responsible is not enough. It may get corporations to talk the talk, but not to walk the walk. To understand what is wrong with American capitalism and how to fix it, the president-elect and his advisors should examine how DuPont managed to dump an extremely dangerous chemical into the Ohio River and nearby land and get away with it for decades.
If you want to understand President-Elect Joe Biden’s views on the problems with corporate America, look no further than his relationship with giant chemical company DuPont.
A recent exposé by long-time Wall Street Journal editor Jacob Schlesinger, relying on quotes from Biden’s top aides, spotlighted Biden’s deep dissatisfaction with the direction DuPont has taken over the past decade, viewing it as emblematic with what is wrong with the economy. In Biden’s eyes, the DuPont story is about the rise and fall of the ‘conscientious corporation’: For decades, Biden has had deep ties with and admiration for DuPont, the largest employer and philanthropist in his home state of Delaware. But recently, Schlesinger notes, Biden has ‘watched with concern as DuPont, struggling to boost profits, was targeted by an activist shareholder… eased out its chief executive, merged with another company, split into three pieces and cut its Delaware workforce by one-fourth’.
The president-elect thus views DuPont as a cautionary tale of what happens when stock-market-driven short-termism kicks in, and the company starts maximizing shareholder wealth with little regard to employees, consumers, nearby communities, taxpayers, and the environment. If we could get DuPont and other big companies back to the good old days when they practiced ‘stakeholder capitalism’, the entire economy would be on the right track—or so the thinking goes.
‘Dupont’s is not a case of conscientious capitalism gone missing due to stock-market-driven short-termism. It is rather a case of regulatory failures and the inability of market forces to stop externalities.’
We agree with Biden that DuPont presents a good case study to draw lessons from on what is wrong with the economy and how to fix it. But we disagree with the lessons he is apparently extracting. We believe that Biden looks at the DuPont case from the wrong angle. DuPont’s is not a case of conscientious capitalism gone missing due to stock-market-driven short-termism. It is rather a case of regulatory failures and the inability of market forces to stop externalities.
To gain a full appreciation of the DuPont story, Biden and his team might start by spending less than two hours watching the 2019 movie Dark Waters. The movie depicts the true story of corporate lawyer Rob Bilott, who used to represent chemical companies until one day he took on the case of a farmer who wanted to sue one. That company was DuPont. In the process of litigating the farmer’s claim, Bilott—who wrote about the legal battle with DuPont in his 2019 book Exposure—unearthed information suggesting that, for decades, DuPont had been dumping an extremely dangerous chemical (dubbed PFOA) into the Ohio River and nearby land.
PFOA is bio-persistent and accumulative, which means that it does not break down in the environment and accumulates over time in our blood, making the decision to dump it even more disastrous. Information about the extreme risks of this pollution existed in-house at least from 1984, yet the company apparently opted to double production (without investing in effective abatement) and worry about the consequences later. Pertinently, for all these decades, DuPont has kept damning information about the risks in house, opting not to fully report them to the regulators or nearby communities. The upshot is that a not-so conscientious corporate behavior was going on in DuPont for many decades, long before the dreaded shareholder activists targeted it, and even while its CEO was hailed as the leading authority on how to build green companies.
Then, if the president-elect’s aides have a bit more time, they can read the Stigler Center working paper by Shapira and Zingales on the DuPont-PFOA debacle. That paper shows that continuing to pollute while not investing in abatement was actually the optimal decision from a shareholder-wealth-maximization perspective, albeit a socially harmful one. It pays to pollute. DuPont’s decision-makers could count on the sanction coming much further down the line, if at all, and they were right: while the company enjoyed decades of profits from using PFOA to manufacture its signature Teflon product, the meaningful sanction came only in 2017. As a rough simplification, consider that a $1 billion fine in 2017 is the equivalent of a $100 million fine in 1984 terms, when the decision to continue polluting was made. The time lag heavily dilutes the deterrent value of the sanction. In other words, the ‘good old days’ of the 1970s, 80s, or 90s were great for DuPont’s shareholders, but not so much to the environment or the people who suffered deadly diseases.
The Shapira and Zingales paper then continues to highlight how the different systems of control meant to stop such costly externalities—regulation, litigation, and reputation—all failed. They failed because giant companies such as DuPont can delay and dilute the expected legal and reputational sanctions for corporate misbehavior. For instance, they can utilize the revolving doors and hire former regulators. Indeed, just last week, environmental activist Erin Brockovich—famously played by Julia Roberts—published an op-ed titled ‘Dear Joe Biden: Are You Kidding Me?’ calling Biden out for including a top DuPont consultant in his Environmental Protection Agency (EPA) transition team. That consultant is Michael McCabe, who was the EPA deputy administrator that DuPont hired in 2003 to help it tame the regulatory backlash once bad news started surfacing about the PFOA pollution.
Perhaps the most troubling point about the DuPont case is that Biden was not wrong to think that DuPont is a leader. Relatively speaking, DuPont is, indeed, widely considered one of the most respectable American companies, and a leader on many environmental and social fronts. That such a catastrophe could happen not for a fly-by-night operator with little reputation to lose, but rather for such a reputable company, is alarming. If it happened there, it could happen everywhere.
‘Dupont polluted because it was good for both short- and long-term shareholders.’
It is appealing to attribute all these problems to stock-market-driven short-termism. When companies degrade the environment, mistreat their employees, or underinvest in R&D, it’s tempting to say the market made them do it, or that these bad hedge fund activists made them do it. Biden himself has long subscribed to the short-termism narrative: ‘I’m not blaming CEOs’, he wrote in a WSJ op-ed dating back to 2016, aptly titled ‘How Short-Termism Saps the Economy’. Perhaps he should start to. A recent paper by Roe and Shapira shows that the narrative of short-termism as sapping the economy is too successful: it distorts the real problems and leads to bad policymaking, such as further insulating managers. DuPont polluted because it was good for both short- and long-term shareholders. The problem was not a time horizon one, but rather an externality; a question of who pays, rather than when they pay.
The upshot is straightforward: those who look for large companies to voluntarily and single-handedly fix problems such as degradation of the environment, mistreatment of employees, or underinvestment in R&D on their own, are in for a rude awakening. The fix, to the extent it exists, would have to come from better enforcing environmental regulations; from incentivizing whistleblowing to combat the extreme asymmetries in information (the outside world did not even know that PFOA existed, let alone that it is in their drinking water and causing cancer); and perhaps more indirectly from stricter antitrust that will mitigate the ability of huge companies to tweak the rules of the game to their favor (see a recent ProMarket post by Luigi Zingales).
Simply talking corporate America into being more responsible will not suffice. It may get them to talk the talk, but not to walk the walk (see Bebchuk & Tallarita). So, yes – Biden’s team should take a careful look at the DuPont story for lessons. But they should look at the less salient, more troubling aspects of such stories, such as how large companies can capture regulation, influence media coverage, and even academic research in their favor. Unless they grapple with these underlying issues, chances are that the upcoming administration would not fare better when it comes to combatting environmental pollution and other core problems than the Trump or the Obama administrations did.
This post was originally published on ProMarket, the publication of the Stigler Center at the University of Chicago Booth School of Business.
Guy Rolnik is a Clinical Professor for Strategic Management at the University of Chicago Booth school of Business.
Roy Shapira is an associate professor at the Harry Radzyner Law School, IDC Herzliya.