Economists, preoccupied with theories of the corporation and the national economy, rarely ask what happens when a corporation monopolizes not only a product but the local work force, when a town is obliged to “consume” a company’s pollution, when one business controls a city by political intimidation. While such questions are largely ignored, local families and local owners increasingly become appendages of the absentee-owners, usually of national and multinational conglomerates. “He who was a leader in the village becomes dependent on outsiders for his action and policy,” Justice William O. Douglas said of this condition. “Clerks responsible to a superior in a distant place take the place of resident proprietors beholden to no one.”1
Large local corporations utterly dominate many towns simply by using their economic and political power, as Anaconda and Montana Power control the state of Montana, as seven paper companies own more than a third of Maine, and as hundreds of smaller corporations continue to control the company towns created by the expansion of new industries at the turn of the century. In mining, lumber, and textile regions, we still find many unhealthy, hazardous, grim and grimy company towns where citizens depend on one firm for their work, their homes, and often their daily shopping. “Saint Peter don’t you call me ’cause I can’t go, I owe my soul to the company store.”
Pullman, Illinois, was built in the 1880s as a model town by George M. Pullman of the Pullman Palace Car Company. He invested $8 million in apartment buildings, parks, playgrounds, churches, theaters, arcades, casinos; the town won awards for its designs at international expositions. But Pullman in fact was tense with fear and suspicion, as company spies probed for tips on “union infiltration” or “dangerous” and “disloyal” employees. When the 1893 depression came, the company laid off workers, cut wages 25 percent, but did not reduce rents. After investigating Pullman in the 1930s, the economist Richard T. Ely concluded that “the idea of Pullman is un-American. It is a benevolent, well-wishing feudalism, which desires the happiness of the people but in such a way as shall please the authorities.”
Economists today apparently assume that towns like Pullman have largely disappeared. In fact some five million Americans now live in company towns—paper pulp towns in Maine, mining towns in the West, textile and papermill towns in the South. We frequently hear how one crop economies in poor countries can lead to political authoritarianism and economic instability, but American analysts often fail to comprehend that similar things can happen in parts of their own country.
Consider the town of Saint Marys, Georgia, nearly all of whose 1,800 wage earners are employed by the Gilman Paper Company and its business allies. Gilman interests control the city council, the town’s only real estate company, bank, and insurance firm, as well as all its lawyers. A populist insurgent, Dr. Carl Drury, recently challenged and defeated a Gilman-backed candidate in a countywide election for state representative. An assistant personnel manager at the Gilman mill reported that his boss “told me to go down to the bag plant, spend all the time and money I needed, and find out who was going to vote for Drury. All of the Drury supporters would be terminated.” The personnel manager refused, and was told, “Either you get that damned list or that’s it.” He quit. “It would have been suicide to stay after that,” he said. Another mill worker, however, wouldn’t anger his employer. “I have a wife, three children, and a mortgage. I am not going to jeopardize them just to give the mill a kick in the ass. The mill knows it and I know it.” After the election some people were fired or suffered business losses because they supported Drury.
Corporate domination, moreover, can occur in entire states as well. Everyone knows that DuPont is powerful in Delaware but few realize how powerful. The firm employs 11 percent of the state work force and manufactures 20 percent of the state’s gross product.2 The DuPont family controls the DuPont company through the DuPonts on the board of directors and through the family’s holding company, the Christiana Securities corporation, which also owns the company that publishes the state’s two biggest newspapers, the Morning News and the Evening Journal.
In Wilmington you find DuPont everywhere, not just in the DuPont Building, the company’s huge office complex. The Playhouse, Wilmington’s only legitimate theater, is owned by DuPont, and the Wilmington Trust Company, Delaware’s largest bank, is controlled by it. The recent county executive was a former DuPont lawyer, the father of Wilmington’s past mayor was a prominent DuPont executive. The state’s one congressman is Pierre S. du Pont IV; its attorney general is married to a DuPont and is the son of a DuPont executive; the recent governor, Russell Peterson, was a former DuPont research director. People connected with the firm or the family comprise a fourth of the state legislature, a third of its committee heads, the president pro tempore of the Senate, and the majority leader of the Delaware House.
One result is that the state legislature has failed to reform the tax system, which favors the DuPont firm and family by virtue of its extremely low property tax assessments and the lack of any tax on personal property owned either by individuals or business. In fact, a 1970 state law abolished one of the few progressive features of the Delaware tax system—the treatment of capital gains as ordinary taxable income. When Wilmington Medical Center, controlled by the DuPonts, recently wanted to move, the family made sure that a new center was built in the rich suburbs, not in Wilmington proper where poor people badly needed additional medical services. Five of the seven members of the county council, who helped make the site available, were either DuPont employees or members of the family.
As a result of the wave of conglomerate mergers in the late 1960s, many local enterprises have become branch offices of financial centers in places like New York City and Chicago. The acquiring corporation has national if not international interests, producing or selling goods in Birmingham, Alabama, or Providence, Rhode Island, but not wanting to become enmeshed in such places.3 For most of the branch managers who run the plants, the town is a temporary station on the way to success in New York or Los Angeles. “IBM is famous for never allowing anyone to take up roots…they’re constantly moving people around the country,” says New York Congressman Hamilton Fish, who has IBM facilities in his district.
The sociologist Robert Schulze, in a study of the managers of a big corporation, found that “their community roots were the most shallow if indeed it could be said that they had any community roots at all. The data led us to suspect that perhaps Cibola…was of no great importance to their lives.”4 Or as one corporate official told his local manager in Worcester, Massachusetts, “We couldn’t care less what happens in Worcester.” This indifference can have an effect on the life of the town, which often looks to the larger local firms to aid in local development. Their lack of interest can amount to a veto of new schools, housing, libraries, parks, hospitals.
When absentee-run firms do take part in civic affairs, they often mount rearguard actions to protect their own economic interests, threatening to leave the town or city, exercising a veto over proposals they dislike. Or they support local puppets who act in their behalf to keep down taxes—a kind of local imperialism which both paralyzes the civic will and engenders a hostility not unlike that which Chile must have felt toward ITT.
An early study documenting this pattern was conducted for a congressional committee in 1946 by Professor C. Wright Mills.5 Noting that by 1944 2 percent of all manufacturing concerns had employed 60 percent of our industrial workers, Mills asked, “How does this concentration of economic power affect the general welfare of our cities and their inhabitants?” To find the answer he studied three pairs of cities. In each pair was a “big-business city,” where a few big absentee-owned firms provided most of the industrial employment, and a “small-business city,” where many smaller, locally-owned firms comprised the community’s economic life. Here are some of his conclusions:
“Big-business cities” witnessed sudden and explosive jumps in population, leading to real estate booms, speculation and unplanned suburban sprawl radiating around center city slums; the operating cost of municipal services was quite high. Growth in the “small-business cities” was more evolutionary and planned. Homes were better built, the city was better laid out, and municipal costs were lower.
A quarter of those employed in the “small-business city” were proprietors or officials of corporations; only 3 percent were self-employed in the “big-business city.” Plant shut-downs in bad times were obviously more catastrophic in a big-business city, since the local economy was so much more dependent on a few major firms.
Income was more equitably distributed in “small-business cities,” as an average of more than twice as many people earned over $10,000. Thus, while the “independent middle class thrives” in the small-business cities, it does not in the big.
From this evidence, as well as his study of such factors as death rates, the number of libraries, museums, recreational facilities and parks, per capita expenditures for schools and teachers, and frequency of home ownership, Mills concluded that “big business tends to depress while small business tends to raise the level of civic welfare.” Since Mills’s research there has been no comparable study of the relation between big business and urban life, while absentee ownership and the amount of aggregate economic concentration have increased along with the decay of American cities. In view of this, as well as the vast sums spent on the study of “urban affairs” in the universities, it is dismaying that Mills’s work on the local effects of corporate power has not been continued.
There is little incentive to stop polluting when you control the local authorities who supposedly monitor you. Savannah, Georgia, and its mighty Savannah River, for example, have become garbage dumps for local industry. American Cyanamid, which produces among other materials the pigment to write the m’s on M&M’s, pours six million gallons of waste water into the Savannah every day, including over 600,000 pounds of sulphuric acid. The Union Camp Corporation, producing paper bags, dumps 37 million gallons of waste water daily. Union Camp has so fouled the air with its kraft pulp emulsions, according to two scientists at a local pollution conference, that the long-range community effects include:
- the town is a much less desirable place to live in;
- it offers less attraction to other new industries and commercial enterprises;
- property values and rentals in summertime areas have declined;
reduced visibility causes hazards and inconvenience to travelers.
Union Camp’s response to such criticism shows the arrogance of a corporation that knows that it is in political control. The firm refused to divulge the extent of air pollution it emits per day. The state’s Air Quality Control Board is responsible for obtaining just this type of information, but is discouraged from doing so by Union Camp. In fact, Georgia’s air pollution law itself was drafted by Glen Kimble, the firm’s director of air and water pollution, who proposed it on “behalf of all Georgia industry.”
When John Lientz, Union Camp manager, was asked about the likelihood that heavy industrial pumping might dry up the Savannah area’s underground water supplies, he answered, “I don’t know. I won’t be here.” A study of Savannah, directed by James Fallows and sponsored by the Center for Study of Responsive Law,6 asked a Union Camp executive vice president whether there were any limitations on their use of ground water. “I had my lawyers in Virginia research that,” he said, “and they told us that we could suck the state of Virginia out through a hole in the ground, and there was nothing anyone could do about it.”
Essentially, the city is hostage to the corporation. Union Camp came to Savannah during the depression in 1935, for which the firm has obtained quid pro quos ever since (e.g., Savannah agreed in 1935 to pay part of Union Camp’s legal expenses for pollution cases). The city is being slowly poisoned by its corporate benefactor, while new industry hesitates to enter Union Camp’s satrapy since the environment is already polluted, the water supply dwindling, and the local labor market pre-empted. Yet Savannah is still intimidated by threats that Union Camp will move to another city if local restrictions become too severe. But Savannah, of course, cannot run away from Union Camp.
Another example of the corporate “donor” poisoning its municipal donee is the Johns-Manville plant in Manville, New Jersey. The plant employs 40 percent of Manville’s employees; its payroll accounts for 60 percent of the town’s total income. It pays more than half the taxes and has made gifts to hospitals, schools, and recreational facilities. But as Philip Greer wrote in the Washington Post, “People are dying in Manville of diseases virtually unknown elsewhere” and at rates several times the national norms. They are dying, medical experts agree, because they work in the biggest asbestos processing plant in the world. Johns-Manville claims it is doing all it can to reduce the dust levels which lead to disease. Any more costly improvements, the firm warns critics, could lead to plant shutdowns instead.
There are less obvious cases of such Faustian situations, where a town depends on a firm to revive its economy only to find that unexpected side effects are ruining it. Orlando, Florida, was delighted a few years back when Walt Disney World announced it would build a vast amusement complex there But today Orlando is glutted with people and cars; it has too few rooms for too many tourists, inflated real estate, high rises mushrooming everywhere, schools that are overcrowded, and garbage and sewage services that are inadequate. The new World Trade Center in New York not only invigorates Wall Street, but also interferes with the television reception of thousands of New Yorkers, creates traffic jams, and pours tons of raw sewage into the Hudson. High rise construction in San Francisco is ruining the city’s architectural standards and costing eleven dollars in services for every ten dollars the high rises contribute in taxes. Butte, Montana, created by Anaconda Company, is now literally being consumed by it since Anaconda is shoveling away more and more of the city in order to get at rich ore deposits.
Throughout the country powerful local corporations evade their fair share of local taxes. Before they settle in a town they demand, and often get, a subsidy in the form of preferential tax rates. As a previous article showed,7 higher taxes for small businessmen and home-owners are the result. The extent of such privilege has recently been documented by Senator Muskie and his committee on intergovernmental relations. Some of the unsavory methods used to secure these privileges, including corruption and bribery, have been exposed by George Crile, a reporter who investigated the tax situation in Indiana.8
For example, corporate property taxes are often underassessed or they contrive to be classified in special low tax “zones,” thereby imposing higher tax burdens on private citizens. In 1950, Union Camp slipped a law through the state legislature creating special “industrial zones”—i.e., permanent tax shelters which could never be annexed to the city of Savannah. As a result, Union Camp underpays Chatham County $3-4 million yearly, or a third of the county’s $11 million budget. The firm’s huge plant is assessed at some $90 million for local property tax purposes, while local experts estimate it should be assessed at $300-500 million. It now pays $1.4 million in property taxes; assessed at $300 million it would pay taxes of $5.1 million.
Similarly, in Chicago, US Steel has illegally escaped payment of millions of dollars of property taxes every year. A study by a respected citizens group there, Citizens Against Pollution (CAP), estimated that US Steel avoided $16.4 million in taxes in 1970; the combined undertaxation of three other steel companies amounted to $11 million more. Chicago’s share of lost taxes alone could triple the city’s budget for environmental control. Largely because of CAP’s campaigns, US Steel’s assessment of $45.7 million in 1970 rose to $84.5 million in 1971, still well below the estimated value of $195.2 million.
When criticized, corporations insist that they are charitable, and of course they are. In 1968-1969 they gave $255 million to higher education, or 15 percent of all voluntary support to schools. Total corporate gifts in 1968 totaled $912 million, or some 6 percent of all philanthropy in the country. These gifts, however, amount to only about 1 percent of pretax profits, well below both the Internal Revenue Code’s permissible charitable deduction of 5 percent and the average individual taxpayer’s contribution of 2.5 percent of adjusted gross income. Still, as the basic text on corporation law points out, “The concentration of a large proportion of the wealth of [the] community in the hands of business corporations has made corporate gifts essential if charities are to be privately financed.”9
For example, in Delaware the DuPont family’s thirty-six foundations have assets of more than $400 million and give away over $12 million a year. This is almost as much as the city of Wilmington and the county of New Castle each spent for local government functions. Clearly, there are benefits to the donors as well as to the towns from such contributions: gifts can reduce federal, state, and local estate taxes, thereby limiting public revenue; the donor may retain control over the spending of their funds; the firm reaps invaluable publicity and can use its gifts to promote corporate policies.10
In fact corporate giving usually is done at a price, and the more dominant the firm, the more dependent the community. “Dependency on DuPont foundations takes two major forms,” assert James Phelan and Robert Pozen, authors of The Company State.
Some private groups change their programs to suit the needs of a DuPont family member and some governmental bodies come to rely on foundations to perform public functions.
Private groups become supplicants, trying to get someone from the DuPonts on their board of directors, currying favor with foundation executives, fearing that programs will be axed if they become “controversial.” Donations are made by small privileged groups subject to no standards or checks and without the community having a voice. Such a philanthropic monopoly can discourage citizens from taking initiatives and limit the diversion of projects that might have otherwise existed.
At the same time communities can suffer when corporate donations they have come to rely on suddenly dry up, as is often the case when a local operation is acquired by an outsider. “Every time a company changes hands, we worry,” says Robert F. Cahill, campaign director of the Golden Rule Fund of Worcester, Massachusetts. “Experience has taught us that it wouldn’t be surprising if we were to suffer a sharp cut in the company’s corporate gift, even if employee giving is not affected.” A study of Rochester, New York, showed a drop in corporate contributions after mergers took place: “It was clear that these absentee-owned firms lagged behind the locally-owned firms in response to rising community needs.”11 Civic fund raisers throughout the country have by and large learned to expect less from chain supermarkets than from local supermarkets.
Control of local banks by powerful corporate cliques can also frustrate community development. The small inventor, the maverick entrepreneur, the politically unpopular investor would all benefit from a greater diversity of sources for financing. But with centralized power comes fiscal conservatism, for dominant banks would rather take care of their big corporate clients than back risky ventures. Wilmington Trust, a DuPont-dominated bank, invests heavily in corporate and government bonds rather than in local loans. The value of these securities amounted to 60 percent of the loans outstanding for Wilmington Trust in 1969. By contrast the corresponding figure was 42 percent for the US Trust Company of New York, 23 percent for the Philadelphia National Bank, and 26 percent for the Girard Trust Company of Philadelphia.
Absentee-controlled firms have equally dismal effects on local investment. The Rochester study of mergers concluded that merged companies no longer banked as much locally; big city banks prospered at their expense. The Gulf & Western conglomerate insists that all the local firms it acquires transfer their banking business from local banks to the Chase Manhattan Bank in New York City. When Teledyne acquired the Monarch Rubber Company of Hartville, Ohio, it insisted that the company’s local deposits be shifted to the National City Bank of New York. “Banking practices,” as David Leinsdorf wrote in Citibank, “operate like a regressive tax funneling the money of communities with declining economies to those with brighter economic prospects.”
So communities can be harmed either when absentee-owned corporations ignore community interests or when local corporations dominate community affairs. Corporate domination of a community is bad whether it is exercised or not. If you sleep with an elephant, every thrash, grunt, or snore can be a disaster.
To say that giant corporations should not have such economic and social power is more a plea than a proposal. So long as corporations have this power, they must be forced to realize they also have special obligations and must not abuse it in order to exploit and to discourage self-rule. Even within the market system, it should not be impossible to have accountable corporate citizens; the issue is ultimately one of recognizing moral obligation.12
But towns need not continue to act as corporate supplicants. First, if victimized, they can sue. This is just what El Paso, Texas, did in 1972 when it joined with the Texas Air Quality Board to sue the American Smelting and Refining Company for its failure to meet air quality standards and its consequent lead poisoning of some El Paso residents. In May, 1972, ASARCO agreed to pay fines of $80,500 for eighty-eight specific pollution violations, to post $30,000 with the court for any future violations, to install $750,000 worth of additional emission control equipment, and—a remedy tailored to fit the offense—it also agreed to pay all the medical expenses for at least thirty months for 134 children being treated for lead poisoning.
Second, if antitrust enforcement were more vigorous against conglomerate mergers the extent of absentee-control over communities would decline. The Nixon Administration settled its anticonglomerate cases before the Supreme Court could set precedents on these mergers. Rather than wait for some future administration to take the plunge, new legislation should forbid any firm with over $250 million in assets from acquiring any other firm unless it spins off an equal amount of assets. This would arrest the trend toward increasing absentee-ownership, while permitting mergers for reasons of efficiency rather than for stock market manipulation or managerial empire-building.
Finally, if corporations are to act more responsibly, the community should be made more a part of the corporation, either by law or (less likely) by voluntary measures. But how? Citizen committees could be organized that would have a part in making policy in the local plants of the dominant firm. This, after all, is where many decisions are made affecting the local labor market, zoning laws, pollution levels, political structure, etc. Going further, a mechanism could be created to elect public directors for the firm’s board of directors from among the local citizens’ groups that have gained some power in the various plants of a nationwide conglomerate. But national public directors so elected will be impotent unless they have their own staff.
Or a two-tier system of shareholders could be created. Economic stock would be held for voting and investment purposes, looking toward the traditional rewards of stock appreciation or dividends; political stock would confer only voting rights and would be based on status, not wealth—the status of employees, community residents, and consumers who are clearly and immediately affected by a corporation but who lack any say over its actions. How might this stock be apportioned among citizens and among communities? One formula would be a law requiring that whenever a firm accounts for x percent of a community’s tax base, it must allow y percent of all its stock to be political stock, up to some ceiling of stock, say 10 percent.
These suggestions are merely starting points. To carry them out would require a degree of concern and local organization—a desire to claim power and an ability to get new laws enacted—that is far from evident today. But as such possibilities become real, they could suggest answers to one of the great questions facing the US today: how can corporate power be checked without a parallel growth in bureaucratic government?
Solutions for community problems should best be sought in the community. For years corporate leaders have been saying that their firms serve many diverse constituencies—shareholders, consumers, workers, dealers, and citizens generally. In 1969, for example, Henry Ford II told a Harvard Business School audience that
the terms of the contract between industry and society are changing…. Now we are being asked to serve a wider range of human values and to accept an obligation to members of the public with whom we have no commercial transactions.
For this sentiment to be more than mere rhetoric, the political process must convert this “contract” into workable laws, so that companies will be obliged to attend to their victims before they reward their investors.
November 29, 1973
Standard Oil Company of California et. al. v. United States, 337 US 293, 319 (1948). ↩
For an elaboration of DuPont’s control in Delaware, see J. Phelan and R. Pozen, The Company State (Grossman, 1973). ↩
Absentee-ownership flourishes in areas with weak unions, low-paying jobs, and lax environmental standards. For some states, this condition is becoming chronic. In Vermont nineteen of the twenty-two largest plants (by employees) are owned by outsiders; in New Hampshire, outsiders own sixteen of twenty. Fifty-five of the top ninety-nine firms in Maine are absentee-owned; and in seven southern West Virginia counties, twenty-eight big landowners own about one half of the land, with nineteen of the twenty-eight being out-of-state corporations. Nor is absentee ownership limited to domestic firms. American Association, Ltd. is a British multinational firm which owns 65,000 acres of land in eastern Tennessee. Insulated by distance and indifferent to adverse national publicity, it is even less accountable to the region it exploits. ↩
Schulze, “The Bifurcation of Power in a Satellite City,” in M. Janowitz, ed., Community Political Systems (Free Press, 1961). One study asked community leaders in three cities whether they thought branch managers were more or less interested in the community than were local businessmen; 95 percent, 79 percent, and 57 percent, respectively, said “less.” Cited in K. David and R. L. Blomstrom, Business, Society and Environment: Social Power and Social Response (McGraw-Hill, 1971). ↩
Small Business and Civic Welfare, Report of the Smaller War Plants Corporation to the Special Committee to Study Problems of American Small Business, US Senate, 79th Congress, 2nd Session, Doc. No. 135 (1946). See also a study that same year finding similar correlations between large scale corporate farming and farming communities, Small Business and the Community—a Study in Central Valley of California on Effects of Scale of Farm Operations, Report of the Special Committee to Study Problems of American Small Business, US Senate, 79th Congress, 2nd Session, Comm. Print No. 13 (1946). ↩
For a moving account of Union Camp in Savannah, see J. Fallows, The Water Lords (Bantam, 1971). ↩
Ralph Nader, “A Citizen’s Guide to the Economy,” New York Review, September 2, 1971. ↩
On the Impact and Administration of the Property Tax, hearings before the Senate Subcommittee on Intergovernmental Relations of the Committee on Government Operations, 92nd Congress, 2nd Session (May 4, 9, June 26, August 22, 1972). George Crile, “A Tax Assessor Has Many Friends,” Harper’s, November, 1972. ↩
R. Baker and W. Cary, Cases and Materials on Corporations (3rd. ed., 1959). ↩
In 1967 the Michigan Bell Telephone Company announced that it would “adopt” a local high school, “enriching” it by its investment of equipment and instructors. Why this contribution? William M. Day, the firm’s president, said it would “help prepare the [potential] shareholders for the business world. We think we can make a real difference in pupil attitudes.” Caveat receptor. ↩
“Report of a Committee of the Rochester Chamber of Commerce on the Out of Town Acquisition of Rochester Companies,” 1959, cited in E. Kefauver and I. Till, In a Few Hands: Monopoly in America (1965). Corporate contributions are not all that is lost due to a merger. A study of 1963-1967 acquisitions of local Wisconsin firms by outside interests found that the premerger growth rate of the acquired firms was 6.02 percent while the postmerger growth rate was 0.48 percent; employee payrolls premerger had increased 15.6 percent but only 2.1 percent in a comparable period postmerger. And many of the acquired firms shifted away from local lawyers and accountants and toward the services of the parent firm. J. G. Udell, Social and Economic Consequences of the Merger Movement in Wisconsin (University of Wisconsin, 1969). ↩
Even some judicial decisions are coming to recognize that certain corporations have obligations beyond maximizing profits. In Herald Co. v. The Denver Post, handed down by the Tenth Circuit Court of Appeals on December 29, 1972, the court permitted what was in effect a subsidy to the Denver Post’s employees stock ownership plan because the firm had an obligation to its employees as well as to its shareholders. Rowen, “Court Case Says Corporate Duties Go Beyond Profit,” Washington Post, April 8, 1973. ↩