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Manhattan Institute

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Privatization of Politics


Privatization of Politics

February 28, 2007

Private equity is finding its way to a new type of acquisition - global environmental policy. This breakthrough was an element of the recent purchase of the Texas-based energy company, TXU Corp., by six finance firms including KKR Financial and Goldman Sachs.

The means through which the deal was brokered, though, may have far more important long-term implications. The buy-ers of TXU made an agreement with the Natural Resource's Defense Council not to build eight new coal-fired power plants, at least for now, in order to avoid a potential negative environmental campaign by the NRDC.

This decision to pre-empt the potential opposition of environmental groups may have been a bold strategy for Goldman et al, but, nonetheless, it affirms a troubling new trend - the privatization of the political process.

The issue is that the buyers of TXU are deferring to one view of the public interest - one that puts the need to limit coal emissions ahead of the need for new sources of electricity to fuel the growth of the Texas economy. This is not to say that the decision is unwise or even that environmentalists are wrong in their priorities.

What is troubling is that unelected advocacy groups can intimidate and persuade corporations to comply with their interests. This, in turn, allows businesses and advocacy groups to be in charge of public policy decisions. These public policy decisions, though, should not be made in the private arena, but in the public realm by elected officials.

Numerous brand-name retailers are under constant pressure to align their business practices with the views of advocacy groups. Home Depot has been pushed by the Rainforest Network to promote eco-friendly logging practices when purchasing wood. Walmart has been pressured by Walmart Watch to provide health insurance for all its employees, and Nike has received heat from the Vietnam Labor Watch for the labor practices of its suppliers.

Chief executive officers are said to be farsighted strategic thinkers by-anticipating such pressures and by taking steps to prevent blows from advocacy campaigns. Chairman and CEO of General Electric, Jeffrey Immelt, is a poster boy for such CEOs. He has been lauded for creating the "eco-imagination" program to reduce greenhouse gases.

Proctor and Gamble's CEO, A.G. Lafley, embraces the new-age definition of a company's responsibility to its "stakeholders"—a term broad enough to include just about everyone—and not just to its shareholders. He described the new world of activist pressure campaigns in a Wall Street Journal interview: "Like it or not, we arc in a global political world. I've concluded I'm in it anyway, and I might as well deal with it.'

As UC Berkeley professor of business and politics, David Vogel, has argued in his book "The Market for Virtue: The Potential and Limits of Corporate Social Responsibility,' major firms dealing directly with consumers are ripe targets.

This phenomenon has become so prevalent that much writing has been devoted to it The 2006 fall issue of Stanford University's Social Innovation Review included an article about an effective pressure campaign waged by the Rainforest Action Network against Mitsubishi. The authors of the article, Peter Asmus Hank Cauley, and Katharine Maroney, got right to the heart of the matter in observing how activist nongovernmental organizations lobby for their mission: instead of trying to get governments to enact laws, these NGOs target companies they believe have negative social and environmental impacts with public campaigns that place the company's brand at risk". Some call this sort of thing asocial entrepreneurship," but that's a term better reserved for those organizations that actually provide services to those in need. These activist groups are just advocates intent on using whatever tactics necessary to enforce their awn view of what public policy should be.

America has elaborate political and regulatory arenas in which to referee disputes about costs, benefits, and values. Threats of boycotts and public vilification of firms—which the press helps make possible— short-circuit that political process. Activists who decide to work around it argue that politicians won't comply with their agenda or that voters don't understand their interests. Neither view is consistent with a democratic society.

Recently, the CEO of Home Depot, Robert Nardelli, was forced out of his position despite having doubled the company's sales and earnings over six years. What he had done poorly was handling "stakeholder" protests of various sorts, prompting him to say the following: "I am very concerned with the future of business and the capitalistic system in this country.... If you stand back, you've got to say that we as a country should share a growing concern as it relates to the capitalist system. The things that got us to where we are, are under attack".

It's not what "socially responsible" CEOs say these days, but it's a good point Corporations have long complained about overregulation but what amounts to private regulation is even worse.