It is difficult to predict exactly what Donald Trump will do for business because his policy platform has been vaguely defined from the beginning and continues to shift as he decides on his leadership transition team.
The president-elect won on a divisive message that promises to put America first and turn back the tide of globalization to ensure America’s greatness. What is clear is that he will have difficulty delivering on his promise of decent jobs for working and middle-class Americans, particularly those affected by the transformation of the American economy as manufacturing and other factory-based jobs are shifted overseas due to the globalization of trade and production. Those jobs have been definitively lost.
Although Trump’s political platform is vague, he has repeatedly threatened to end free trade in North America by withdrawing from NAFTA, and stop all negotiations with the EU for a new free trade agreement (TTIP) in order to “bring back jobs.” Reopening coal plants or imposing stiff tariffs on cars that have been produced in Mexican plants to replace automotive plants in the U.S. might forestall but will not reverse the trend.
In the days following the election, much was written about the connection between globalization and marginalization. Trump is perceived to have won a significant part of the working-class vote in Rust Belt states on the basis of his promise to win back jobs and tear up NAFTA.
In the context of economic globalization where transnational organizations are seen as the guarantors of the world order, a large part of the U.S. lower and middle classes have felt excluded from their benefits. It has been said that Trump’s victory was a vote against the establishment, which opponent Hillary Clinton represented after 40 years in politics.
Similarly, many said this backlash against “politics as usual” was also seen in the vote for Bernie Sanders or the victory of Brexit in the U.K.
At the same time, Trump also pledged a number of pro-Wall Street reforms, including repealing Dodd-Frank, which was enacted after the 2008 financial crisis. However, banks have spent significant resources to comply with its provisions, so they are unlikely to wish it to be overturned but rather have some of the more constraining provisions deleted, such as the Volcker Rule.
How will this new era of politics affect economics and corporate governance?
But he cannot undo globalization without becoming isolationist and destroying the economy. If Trump really wants to “make America great,” he should start by making it fair.
Tom Wilson, chairman and chief executive officer of Allstate Corp. and vice chairman of the U.S. Chamber of Commerce, recently wrote: “The emphasis on profits has widened the trust gap between corporations and society, resulting in an adversarial relationship between the private and public sectors. Let me be clear: Shareholders must get a good return, but at the same time corporations must work to be a force for good in society.”
One of the reasons why many Americans felt excluded is that, since the 1970s, financial markets have taken a central role and were used as the only mechanism for growth. We have reached a point where only 15 percent of the money flowing from financial institutions actually makes its way into business investment. Financial markets have doubled in size and scope, but little of that was transferred to the real economy.
At the same time, workers’ salaries have stagnated. Productivity has grown by 72 percent over the last 40 years, but average pay has only risen 9.2 percent (see graph here).
This, in turn, is contributing to the pay gap between employees and top executives. Executive pay policies are also at the base of unintended social impacts due to directors’ incentive schemes based on share price, a phenomenon that has driven business to myopically focus on short-term financial returns at the expense of acute societal and environmental impacts.
One of the few promises that could provide middle-class jobs is Trump’s plan of investing $1 trillion in infrastructure in the next 10 years via public-private partnerships and private investments through tax incentives.
Nevertheless, it is still unclear if his intentions to partly privately fund this investment through tax incentives would work. The project’s criteria also poses concern as private investors are only going to be interested in infrastructure projects that come with revenue streams that can make them profits after the projects are completed.
A second proposal that could point to the right direction is to ensure that companies pay taxes, as Nobel laureate in economics Joseph Stiglitz suggested “by lowering the corporate rate for companies that invest and create jobs in America and raising it for those that do not.”
But Trump’s record of business management is not exactly encouraging as he incorrectly used fiduciary duties as an excuse to justify his efforts “to pay no more tax than legally required.”
Rather than scapegoating international trade for the failure to create good quality jobs, Trump could focus on addressing the inequality that has increasingly characterized the U.S. since the 1970s, and deal with the concentration of corporate power that has left many industries with effective monopolies.
Unfortunately, Trump has promised instead to repeal or amend the Dodd-Frank Act, which aims to prevent another financial crisis. Americans voted to send a message against traditional politics, but their decision might only have supported “business as usual” — which would only serve to further entrench economic disparity.
Business and civil-society communities have a fundamental role in ensuring progress on sustainable development. A good example is the pressure put by 300 big U.S. companies demanding to keep climate change commitments agreed in Paris last year.
Similar political platforms have gained strength in Europe, with France and the Netherlands facing elections in the upcoming months. Progressive leaders ought to connect with the social discontent and start acting on it. We need a message that unites and brings benefits to the lower and middle classes by creating a model for inclusive prosperity.
For all of the above-mentioned reasons, reviewing the current corporate governance framework is key to enable change and an unmissable opportunity to foster a positive systemic change.