With the election of Donald Trump as our next president, American companies are destined to face a major shakeup in their corporate governance. Mr. Trump’s campaign promise of reducing the U.S. taxes that corporations are required to pay to 15 percent from 35 percent and granting a tax break to repatriate the trillions of dollars of profit earned from overseas sales and housed in kinder jurisdictions to avoid U.S. taxes, seem to be preordained. This is an opportunity for U.S. corporations to modify their corporate governance to meet changing demands for their success and for the good of the country in which they are incorporated and do business.
Foremost in corporate governance is a re-examination of whether they are being good corporate citizens. If not, they should quickly adapt toward achieving this all-important goal.
Corporations are governed by the basic principle of a fiduciary duty as established by the stockholders. The fiduciary duty includes legal, ethical and economic responsibilities. Overlapping these is the unwritten duty of corporate citizenship, which involves social and community responsibilities. In other words, citizenship is a commitment to be socially accountable for the impact they make on the community of the country where they are incorporated.
The first step to good corporate citizenship is generating profit while practicing the established legal and ethical principles. Labor costs figure prominently for companies that produce goods. Over the last several decades they were lured to shift production to countries where the labor costs were low. This practice met their economic goal.
A hidden fact of engaging a foreign entity in producing products is that the American company is compelled to disclose its manufacturing technology. This entails teaching the foreign entity the recipe (known as the “know-how” and “show-how,” in legal parlance) needed to manufacture. Such recipe is generally not protected by patents but held within the company as a highly prized trade secret. This technology transfer is intended solely to make the product for the benefit of the American company. However, in reality, despite the existence of contracts under which the recipe is disclosed, the foreign entities, particularly those based in China, are known to breach those contracts. Worse, after learning from the American company how to make the product, the foreign entities develop a competing product and go into business for themselves, thereby undercutting the profit for the American company.
Given this reality, American companies before outsourcing their production should carefully weigh the benefit of cheap labor versus the cost of losing the technology shared with the foreign entity. The latter is far more economically valuable and provides a lasting competitive advantage than the cost savings realized from cheap labor.
Compounding this, the American companies pay a mounting social price when they outsource jobs that were once held by their U.S. employees. Actually, such job elimination enraged the U.S. workers and played a large role in the election of Trump, who promised to bring such jobs back to our shores.
Will Trump be able to bring back millions of jobs? It depends on the cooperation of U.S. corporations and their moral compass to step on the path to be good corporate citizens.
Due to the great number of potential workers in China, India, Vietnam and other up-and-coming lands, there remains a worldwide excess of labor that will continue to keep a downward pressure on labor costs. What should a company that produces goods to do under these circumstances?
A trade-off should be achieved to balance the competing interest between profit and creating jobs for Americans. The U.S. companies should continue to take advantage of low-labor costs available overseas, but they should weigh this economic gain against their citizenship responsibility.
They should off-shore only repetitive, low-end, labor-intensive and essentially “robotized” manufacturing and assembly jobs. High-paying jobs, which require technical skills such as those associated with design and development of innovative products, should be reserved for U.S. workers. The design and development are the most important phase of a product life cycle. In this phase, creative juices flow and new intellectual property is created.
Such intellectual property is probably the single most valuable corporate asset. It should be harnessed for economic gain by seeking worldwide legal protection and safeguarded, as needed, by keeping it in-house under lock and key.
Next, it is the duty of the American companies to provide the necessary training to the U.S. workforce in the new skills that are needed to design and develop innovative products and equip them for today’s digital factories. With the cost savings they realized by the reduction of corporate taxes, this is an opportune time for companies to invest in such training.
The United States has essentially become a knowledge-based economy. For decades, our companies took pride in creating cutting-edge products by making huge investments in research labs and development centers in the country. The fruits of this creativity, in addition to producing and selling new products and generating profit, were protected as intellectual property (patents, trademarks, copyrights and trade secrets). By licensing such intellectual property the companies derived additional and longer-lasting economic benefit.
When our corporations shifted their R&D centers overseas, they inadvertently created a sieve in the protection of their new intellectual property. Most countries including China, India and Vietnam do not offer the same infrastructure to be creative as what is available in the U.S., and the protection of intellectual property in those countries is not as advanced as here. Second, these foreign workers are not as loyal as U.S. employees to safeguard the intellectual property. As a result, the value of this intellectual asset is significantly diminished and the return on the investment made in establishing R&D centers abroad has been lessened.
As labor cost in foreign countries rise, outsourcing of U.S. jobs will shrink. Already companies are beginning to see that it is now no more expensive to hire U.S. workers in states such as Alabama, Nevada, Mississippi and Tennessee to produce goods. This factor combined with the cost of transportation of the finished goods from the foreign country to the U.S. and the long time and resources needed to oversee the production pace and quality of the finished product should further motivate American companies to reverse their course to outsource jobs. Many state governments are eager to have jobs created in their state by offering special tax incentives and other concessions in return. Companies should avail of these incentives as they fulfill not only their economic duty but also their social responsibility.
An overt display of good corporate citizenship can burnish the public image and enhance sales of companies. Socially responsible investment funds enjoy a higher return to shareholders because certain kind of social responsibility associated with nationalism and patriotism is bound to pay off.
Shareholders and corporate officers have an important role to play now. Just like we expect individual American citizens to show patriotism and loyalty to our country, the shareholders and officers should take the corporate bull by the horns and put the company they own on the path to meet its corporate citizenship responsibilities as an indispensable part of the fiduciary duty.
T. Rao Coca is an intellectual property attorney and a former senior executive of IBM and IGT. He has a doctorate in physics, as well as a law degree and is admitted to practice law in many U.S. jurisdictions.