Allow no tax exemption on
contributions
to a foundation until the money has been actually put to approved charitable use.
Lundberg - The-Rich-and-the-Super-Rich-by-Ferdinand-Lundberg
Under appropriate circumstances, one is melancholically led to believe, rightists in the United States would have more of a field day than they ever had in Germany or Italy.
Whereas in other countries the secret police are invariably unpopular, in the United States the FBI and the CIA have generally had the standing of folk heroes-mute testimony to the superior effectiveness of American propaganda methods and to the trend of popular feelings.
The foreign program under Hoffman, set to achieve an era of greater world friendliness for the United States, was attacked as communistic. It was, plainly, "internationalist," itself evil. (Whatever isn't American, inter alia, is wicked. ) And the educational programs, supporting progressive and adult education, were obviously communistic in that they deviated from traditional paths, trod by no others than our sainted pluperfect forebears.
The broad rightist attack, which according to Macdonald frightened Henry Ford II, although surveys showed that wild calls for boycotts had not hurt Ford Motor sales, was finally subdued in an ingenious way. Hoffman and his aides were ushered out and the attack was simply smothered in money. Unselectively, heavy grants in the hundreds of millions were ladled out year after year to all accredited colleges and universities, all hospitals and, later, all museums, all symphony orchestras; all of everything in the status quo. In the grants to colleges and universities, Catholic institutions were included (to their gratified consternation) in the greatest deluge of money they ever experienced. Nobody was spared.
This silenced the rightists, possibly because all the dry emotional tinder out in the grass roots had been thoroughly saturated in floods of money. It was difficult to maintain the idea before the public that the Ford Foundation was evil when it was spewing forth lifegiving money to all points of the compass like lava from a volcano. As no standards were observed it was all obviously democratic.
If the continual widespread distribution of money in large amounts is a good thing, then the Ford Foundation must be one of the best things that ever happened. Cui bono? The status quo is clearly made more bearable as its various cracks and fissures are plastered over, while thousands cheer. And the Ford Motor Company, the goose that laid this golden egg, is surely not hurt. The public-relations value of the Ford Foundation to the automobile company was not lost upon the more than 8,000 Ford dealers in the United States, who earlier in the 1950's were among those protesting that too much foundation money was being spent abroad on benighted aliens. 72 But, apparently unknown to them, Ford Motor is a big operation abroad as well.
Public Relations and Influence over Attitudes
Apart from their roles in corporate control, the big foundations, at home and abroad, have a public-relations "splash value. " What they give to approved medical, scientific and educational institutions tends to bathe in reflected radiance corporate enterprises that some critics quixotically consider ominous. It appears, on closer analysis, that this is a mistaken and possibly deranged judgment, and that all effort is really being expended for the benefit of humanity, naturally without forgetting the stockholders. If not socialism, the panorama seems to have overtones about it at least of quasi-socialism or, we may say paradoxically, capitalist socialism or social capitalism.
The foundations, it is clear, represent to some degree a line of public-relations defense of the large corporations. General Motors, too, is not without its surrounding foundations--the Alfred P. Sloan Foundation, the Mott Foundation and a number of others. The big foundation, indeed, is the hallmark of corporate super-wealth.
As to giving money away, it is evident that these endowments could have been transferred in one original move to extremely capable hands. In education they could have been turned over to the Association of American Universities and similar bodies, in science to the American Association for the Advancement of Science, in medicine to the American Medical Association, and so on. But this would be the end of it all. The donor and his heirs would have no more participation in it.
By making serial gifts each year out of income from a perpetual principal fund the donor can keep prospective worthy recipients sitting around forever like a circle of hungry dogs, awaiting the next handout. In such an arrangement prospective institutional recipients are not likely to voice unwelcome socio-economic or politico- economic ideas. They are more likely to be careful to give utterance only to impeccably sound ideas, the kind one might hear in the top clubs. The general foundations, then, with their serial gifts, function pretty much as a carrot, rewarding those who are
cooperative and constructive, passing over the unworthy, the carping, the critical, the nonadmiring, the unsound.
Institutional administrators consequently find that it pays to stay clear of public controversies and to voice at best only tried-and-true platitudes: to show themselves at all times as sound men. While this reticence to some extent dims their true brilliance, in the long run it seems most rewarding. Robert Maynard Hutchins is one of the few on this circuit who for a long time seemed able to have his cake and eat it too, to function as a big institutional wheel and still enjoy the luxury of delivering himself of tart remarks at the expense of the many sorry spectacles around him. But after he rose to great foundation heights the forces of conformity at last caught up with him, in a latter- day version of a preordained cut-rate Greek tragedy. For the Fund for the Republic was cut loose from the Ford Foundation and left to face the hostile hordes with a dwindling mere $15 million.
The critic is often challenged to say how he would do it better, as though a judge who found an apple to be sour was under obligation to grow a sweeter one. But in the case of the foundations such a challenge would be easy to meet. In the case of the Ford Foundation a much more consequential commitment of its money would have been to devote it to making an adequate secondary-school education available to all promising students. Secondary education is the weakest link in the American educational chain. What the Ford Foundation could have done, and can still do, is to see that all promising students get into a good school, all expenses paid. As such schools are only rarely found in home neighborhoods it would be necessary that the students be boarded, sometimes clothed and supplied with travel expenses. Some could be placed in existing private schools, although they, too, are crowded. For others, regional private schools with highly motivated, well-paid faculties would have to be supplied.
The task could be left to other agencies, public and private, to see the Ford-grant graduates through college. As it is, a very large percentage of those entering colleges are poorly prepared to profit by college-level work. In my proposed Ford-grant system defects of preparation would be removed.
While the immediate impact of such expenditure would not be apparent, the long-term consequences would be enormous and beneficial.
Politically there is very little that could be said against this plan from any point of view.
Effects of Grants, Good and Bad
That the various foundation emphases in their grants are not without vast social effects we can see from the judgments of informed critics wandering more or less like unheeded ghosts through Foundationland.
As an example of what he considers mischief, Macdonald cites an early cause taken up by the Carnegie Foundation for the Advancement of Teaching. Andrew Carnegie had it brought to his attention how poorly teachers were paid, and he decided to do something about it--thus privately assuming a legislative function (which all the foundations do). So in 1905 he established his foundation to improve teaching, with the objective of giving every down-at-heels college professor in the country a free pension.
When it became evident toward 1920 that all of Carnegie's money could not fill this bill, existing contracts were frozen. There was then established the Teachers Annuity and Insurance Association, supported by contributions from teachers and colleges as well as by Carnegie money. Carnegie's heart, however, had been in the right place.
It had been initially necessary, though, to have a criterion of who was a worthy teacher and what was a college. Many places that call themselves colleges, then and now, are not. The then president of the Carnegie Corporation, Henry Pritchett, composed an "Accepted List" of colleges eligible for Carnegie pensions. An admirer of the German university system, Pritchett laid it down that qualifying colleges must have Ph. D. s as department heads. Many already had such cherished department heads and the Ph. D. up to that time had merely been a degree sought by people committed to research scholarship.
"This put pressure on colleges to qualify, which put pressure on professors to get
Ph. D. s, which brought about the present Procrustean situation where no amount of
scholarly brilliance or teaching flair will make up for lack of a doctorate. There are
those who see in the Ph. D. obsession a major cause of the sterility and mediocrity of our
academic life today, and the moral of that is: Doing Good Is a Complicated Business. " 73
Without intending to do so but by incautiously exerting their great power, the Carnegie interests, it is contended, actually devalued the Ph. D. degree to its present estate when it is most conspicuously borne by routine jobholders and bureaucratic academic administrators. As hordes of prospective jobholders, looking forward to tenured academic employment and distant pensions, besieged the graduate schools (of which many new ones set up shop to supply the demand) the graduate curriculum was purposely made mechanically more arduous in order to deter all except the most hardy plodders (getting the prized degrees began to take up to ten and twelve years in the less formalized subjects such as history, literature and philosophy). Brilliant minds, superior either as teachers or as scholarly producers, increasingly declined to subject themselves to what was often a creatively sterile grind.
While the Ph. D. requirement lent itself readily to the organizing American corporate approach, in England, not similarly scourged by the Ph. D. mania, one still saw hundreds of brilliant teachers and scores of internationally recognized scholars without the degree. Visiting the United States these English scholars, flaunting only a meager M. A. , often lecture to halls filled by goggle-eyed American Ph. D. s. Bertrand Russell was one such.
The point in all this is not that there is anything wrong with the basic idea of the Ph. D. The point is only that it is no longer indicative of a true scholarly interest, which can indeed be shown only by the nature of work done. Many Ph. D. s, too, have come to be awarded in ridiculous fields. Hutchins found one granted for work in automobile driver training!
So this heavy-handed Germanizing of American scholarship traces back to an original ex parte foundation decision.
Not all foundation efforts, by any means, have had such a disputatious outcome.
Carnegie money, for example, financed Abraham Flexner's great investigation of American medical schools. The report, which appeared in 1910, found nearly all of them far below par and some to be rackets, leading to extensive reforms that drove out the worst and converted the remainder from among the worst in the world to the best.
Again, Carnegie money financed Gunnar Myrdal and associates in the monumental study of the American Negro before World War II, titled An American Dilemma. It was on the basis largely of the findings in this report that the Supreme Court rendered its epochal school desegregation decision of 1954.
Rockefeller money largely financed Dr. Alfred Kinsey and associates in the study of sexual behavior which, despite methodological and other controversies that ensued, appeared to represent a long step toward greater light in a puritanically degraded area.
As Macdonald notes, "The Rockefeller agencies made medical history with such exploits as their worldwide campaigns to control malaria and yellow fever, and their detection--and subsequent elimination--of hookworm as a drain on the vitality of rural Southerners. " 74 It is evident that there is much one can find to set up on the credit side of the foundations.
And, yet, the critics still find many serpents coiled in the garden. William H. Whyte, in Fortune (November, 1955), held it a bad thing that foundation grants went more and more to institutions or to research teams, less and less to individual workers. As Macdonald reminds us, the greatest work has been done by individuals, and in the "soft" disciplines. 75
Not only must the foundations, with an eye to the cultural vigilantes, stick to safe, tried and true areas, but they cannot support pioneers, who automatically have the animal mobs ranged against them. Had they existed in an earlier day the foundations could not have sponsored Copernicus, Galileo, Vesalius, Darwin, Pasteur, Marx, Freud or many others. These were all, by public acclaim, reprehensible men; some still are.
As recently as the 1920's they could not, owing to low-grade public opinion, support Mrs. Margaret Sanger in her timely but frustrated campaign to disseminate information about birth control. Margaret Sanger, like Socrates, fought as an individual and went to jail as an individual. The birth control movement was stalled, has been revived only recently under dire eleventh-hour necessity.
The original program of the Ford Foundation grew out of criticism by Edwin R. Embree, former president of the Julius Rosenwald Foundation, advanced in an article in Harper's Magazine in 1949 entitled "Timid Billions. " Embree held that, because foundations--mainly those of Carnegie and Rockefeller--had pioneered in medicine and health nearly fifty years before, these now highly developed fields had become placid foundation preserves, with about half of all grants going to them, another third to routine universities and colleges, and the rest to routine welfare agencies. He thought it time that new ground was broken, with the results seen in the successful know-nothing attacks on the Ford Foundation.
Embree criticized the foundations for "scatteration. " And in its more recent policy this is precisely what the Ford Foundation has come to.
The Guggenheim Foundation more conspicuously than others has awarded grants to the humanities and to individuals. Hundreds of writers and artists have received sustaining funds from this source.
As part of the favorable tax-financed public-relations image the foundations develop for corporations and founders that grew rich in questionable ways, they present the aspect of being highly civilized by proxy association with cultural heroes. Avoiding in their lifetimes creative persons like Margaret Sanger or Socrates who are invariably suspected by the ignorant multitudes of being up to no good, the foundations fondly embrace all established cultural heroes and those potential heroes working in popularly approved cultural channels. Not heroic themselves, they nevertheless exist in a soft, derived heroic light, invoking in the thoughtless gaping multitudes some feeling of being in the shadow of a cathedral. They are, on the contrary, basically demagogic; for the main thrust of their effort is not in any sense the deliverance of man but the protection of their sponsors' plantation. While this is surely narrowly intelligent of them, it is not, as I see it, something to induce public celebration.
And the fact that it is all done, really, with public money certainly puts anyone in the position of being gulled who applauds them more than mildly for good works. It should never be forgotten that if the Ford Foundation had never been founded every cent of the money would have been taken in inheritance taxes by the United States government, thus lightening the tax load for everybody. If the Fords, Dow, should achieve something humanly tremendous through their foundation they would not achieve it with their money but with our money. While not impugning the achievement, whatever it was, or the judgment that led to it, recognition of the nature of the transaction would certainly place it in a somewhat different light.
What the subsidy is in the case of any foundation of any considerable size one can readily ascertain by looking up what the estate tax rate was when it received its funds. This rate, ranging more recently up to 90 per cent, represents the portion of principal saved from taxes. Where income on the principal exceeds $100,000, the amount of taxes avoided, at present rates, is at least 70 per cent and has been as high as 91 per cent.
So, whatever good is accomplished by the foundations is largely accomplished with other people's money, a familiar finpolitan practice. And if one wishes to salute the original source of this beneficence it should be Congress, making free use of our money.
Money funneled into education has to some extent no doubt been of general benefit. However, much of this educational effort has been devoted to producing corporate personnel, with the primary mission of making profits. The Du Ponts have poured heavy sums into M. I. T. ; and Carnegie established the Carnegie Institute of Technology in Pittsburgh, a prime source of local plant and departmental managers and company officers. Even more general applications of educational funds can be shown destined primarily for the support of the corporate world.
It is a common experience in the United States for people to read in newspapers and magazines of great new medical advances and discoveries, but they little realize that most of these advances will never be available to them, will be available only to those who can afford them in a few centrally located medical centers. As I gave extended attention thirty years ago to these problems in which there has been little change since, the contemporary reader may be left to the references. 76
Scientific findings have been applied most assiduously in the amassing of corporate profits.
While it is generally gratifying to see so much human ingenuity displayed and developed, it is worth noticing that the fruits of all the effort are for the most part restricted in their distribution. The wide prevalence of slums would suggest to a visitor from another planet that there was little education, science or medicine available to anyone at all in the United States.
If it is nevertheless insisted that all this foundation effort represents philanthropic activity, then it is governmentally coerced philanthropic activity, under the threat of taking the principal in taxes if the income is not devoted to narrowly applied good works. The government, in brief, forces the rich to tend their own plantation.
Intellectual Sleight-of-Hand
I therefore cannot help seeing the entire American philanthropic movement, hailed as something unique in the world, as intellectual sleight-of-hand as far as its claimed disinterested benevolence and general distribution of benefits are concerned. There may have been some gain in allowing private dispositions of the money to be made, where it has been made in good faith, because one cannot suppose it would have been expended
more judiciously if left to run-of-the-mill pubpols. The prospect might have been far less entrancing if it had been left to the manipulation of the more self-oriented of these.
The Ford Motor Company does not claim to be philanthropic. But the Ford Foundation, which grew out of it and is the public halo of the company, is claimed to be philanthropic even though it is managed by the same people. When Henry Ford II presides over the Ford Motor Company he is nonphilanthropic, a business barracuda; but when he steps into his role as a trustee of the Ford Foundation he, like a Jekyll- Hyde, suddenly becomes a philanthropist. With the Ford Motor Company he endeavors to garner all the money possible; with the foundation he endeavors to give money--our money--away.
Is he--on balance--richer or poorer? As a result of establishing their many foundations and "giving away" hundreds of millions of dollars, are the Rockefellers and other foundation impresarios richer or poorer, more or less esteemed, more or less solidly ensconced, stronger or weaker?
The answer in every case of a surviving foundation family group is that the foundation has benefited its sponsors more than it benefited the world. Whatever benefit it has wrought for the world it has wrought, too, for the family group. For the world is their village, through which their personal interests ramify in a bewildering network. Why should they not wish to benefit the world as they, too, must live in it? And any benefit wrought, however minor, brings to them vast credit, enhances their status as exalted citizens of the world. They all rate at the highest level in mass-media esteem.
The main point I extract from this is that these are very subtly powerful people, far more powerful even than they are portrayed by a deferential press. Nor are they, despite the deft airbrush of the public relations man, especially benign, as is plainly evident in the heavy commitment to systematic extreme violence of the political system in which they have, by enormous margins, the largest stake.
Never registering opposition to any of the many wars, foreign police actions and military missions against the heathen in which the seemingly detached government engages, usually instead registering enthusiastic approval and giving full support, they must be considered integral to this way of conducting affairs. At the time of this writing this political system is using some of its vast firepower, much of its manpower, with which to establish new foreign bases, as in Vietnam. Although Vietnam is popularly accepted as an heroic dirt-level president's maximum effort, the operation has been formally and enthusiastically endorsed by Governor Nelson A. Rockefeller. It is, obviously, a venture carrying the highest finpolitan sanction. 77
While the Vietnam venture will indeed make all of us more secure against the devil of Communism (or will it? ), it is surely going to make some persons far more secure than others. To be entirely fair, we must concede that even the denizens of the slums, thanks to a foresighted president, will be made more secure in their slumminess. This boon happily works both ways: The rich and the poor are benefited by being fully protected in their respective statuses.
Proposed Foundation Reforms
Representative Wright Patman advanced concrete proposals for reforming the foundations, tightening the regulatory leash so they would not be quite so free to maneuver self-servingly as now. His recommendations were as follows:
1. Limit their life to twenty-five years, as in the voluntary cases of the Julius Rosenwald Fund and the foundation established by the late Arthur Curtiss James.
2. Prohibit them from engaging in tax-exempt business in unfair competition with taxpaying businesses.
3. Prohibit them from engaging in tax-free lending and borrowing.
4. Require them to engage in arm's length relationships--that is, prohibit them from extending intramural benefits, say, to the employees of a controlled company, a form of subtle unfair competition with others.
5. Prohibit them from soliciting or accepting contributions from suppliers to and patrons of their companies.
6. Prohibit foundations from owning more than 3 per cent of any corporation, thus shrinking them as factors in corporate control.
7. Make them conform to certain rules in the case of proxy fights in corporations where they hold stock ownership.
8. Prohibit them from trading in and out of securities in quest of capital gains.
9.
Allow no tax exemption on contributions to a foundation until the money has been actually put to approved charitable use.
10. Deny tax exemption to any foundation if it has clearly been established for tax avoidance or to obtain financial benefits for the founder.
11. Compute donations of property to a foundation at cost or market value, whichever is lower, rather than on the present basis of market value which permits the evasion of taxes on appreciated assets.
12. In contributions made by corporations, let such contributions be credited to the stockholders, thus keeping untaxed contributions to present limits prescribed by law.
13. Treat all capital gains by foundations as expendable income and do not allow them to be converted into new capital.
14. Add money unreasonably accumulated by corporations controlled by a foundation under present laws to the foundation's own accumulation as if the two were one. "The use of subsidiary corporations should not be permitted to cloak actual accumulations, as is the case in the Howard Hughes Medical Institute of Miami Beach. "
15. Corporations controlled by foundations should be subject to taxes on unreasonably accumulated earnings, as prescribed by law for foundations.
16. From the base for the marital deduction there should be excluded amounts left to foundations that are henceforth untaxed. And while money given to foundations is not subject to gift and estate taxes, the rate brackets to be applied to moneys that are taxable should be the same as if the prescribed foundation portions were part of the taxable gifts or estate.
17. Regulation of the foundations by the Treasury Department should be tightened in many specifically indicated ways and the Treasury Department should be obliged by law to function actively in this area.
"These and other reforms," Mr. Patman gravely' concluded, "are vitally necessary. " 78 For what little it may be worth, I concur.
The Patman investigation has already influenced the passage of new laws regulating foundations in New York State, where most of them are chartered. The effect of these New York laws will probably be to drive many to states of easier virtue, as in the case of corporations that finally found lax regulatory states in Delaware and New Jersey. In general, regulation in any of the states, of any kind of activity, is about on a par with the
regulation of a frontier saloon, which is why entrepreneurs of all kinds prefer state to federal regulation.
Said the New York Times about the new situation in New York:
A sampling of reports filed as the result of a new law this year has shown that many purportedly charitable foundations are tax dodges, according to Attorney General Louis J. Lefkowitz. He said that the foundations were also sources of funds for the personal use of their directors.
The charitable organizations . . . operated without supervision or regulation before last January. . . .
A random sampling of 400 registrants, and examination of the 500 financial reports, has turned up numerous examples that show sufficient evidence of improper manipulation of the funds to justify the calling of an investigation, according to the Attorney General.
Often the manipulators who used the funds for their personal gain had already profited by large tax deductions based on their gifts to the foundations, he added.
. . . some charities have already received millions of dollars this year that they would not otherwise have obtained as a result of his staffs work.
Tax-free ostensible charitable funds had been used (Mr. Lefkowitz discovered tardily) for business purposes, to buy expensive paintings and sculpture for the donors' own homes, to pay salaries to relatives and for a variety of other personal accommodations- facts which anyone could have ascertained in 1937 by reading America's Sixty Families. Most of the New York foundations funded at more than $1 million--and this the authorities now thought suspicious--were set up to make distributions for charitable purposes "to be selected by the directors. "
Under the new law the attorney general of the state may at his discretion bring action to remove directors who fail to comply with the law and may compel accountings and order reimbursement for loss of funds resulting from improper activities of directors or trustees. 79
All this, however, will not lock the barn door even tardily because there are forty-nine other states.
Concluding, whatever foundations do, for good or ill, for self or humanity, they do for the most part with publicly conferred money.
Eleven
MINISTERS OF FINPOLITY: THE UPPER EXECUTIVES
Top executives of top American corporations are, after the Kremlin rulers, the most anxiously studied and written about small group of persons in the contemporary world of affairs. Each group is more sedulously and continuously scrutinized, in sober truth, than the much larger and far more crucial collection of scientists.
More numerous than Russian politicos, American upper corporation executives are nevertheless very few. If we take the elite Fortune list we have before us only 500
industrial companies, 50 commercial banks, 50 public utility companies, 50 transportation companies (rail, air, highway and water), 50 life insurance companies and 50 merchandising enterprises--750 in all. This is the cream, with assets ranging from as low as $7. 444 million (Needham Packing) to $30. 906 billion (AT&T).
Each of these enterprises glories in a chairman, a president, usually at least one executive vice president, sometimes a comptroller and always a treasurer and a secretary, the three latter rarely involved in policy formation. The array of vice presidents varies by size of enterprise but, no matter how large it is, these men are usually mere divisional or departmental managers, direct instruments of top management but not in top, management themselves.
So truly imperial is the domain of the largest finpolities such as AT&T, General Motors and Standard Oil that the executive vice-presidential function is often divided among several men, who meet as an executive committee. General Motors in 1964 had three executive vice presidents; Standard Oil of New Jersey, five; but Ford, only one.
In the ordinary case the top officers are a trio: chairman, president and executive vice president. The president's duties correspond to those of the captain of a ship, are virtually as routinely formalized; and those of the vice president correspond to the ship's executive officer.
If we allot to big management an average of five men we have 3,750 upper executives. Because some of the larger companies have more than five in top management, it may be that as many as 5,000 should be reckoned. As there are smallish fairly important companies not included in Fortune's compendium, the number of top management people may be as great as 10,000, the number set forth in Business Executives of America, published by the Institute for Research in Biography in 1950. But this total included men in Canadian as well as United States companies.
Important corporation executives certainly do not exceed 10,000. More probably there are fewer than 5,000, a restricted group. Naturally, if one looks down the entire nondemocratic para-military chain of command to junior executives and foremen, the number of executives is much greater. None of these shapes policy and few ever will. They are cogs of the order of middle-range Soviet commissars and lower bureaucrats. The system is indeed very much like the Soviet's, which was modeled after it.
Corporations generally are run by the executive vice president (or vice presidents), the president usually supervising and intervening directly only when he feels it advisable. In newer, reorganized or problematic companies the president, it is true, may be a dynamo of activity. The chairman is available for consultation on nice points of policy; only rarely if ever, one gathers, does he tell the president, unbidden, what he ought to be doing.
Within the bounds of determined policy and the nature of the business the president is a complete autocrat. Such being the case he usually acts with great restraint, like a jet pilot who knows that the slightest touch on the rudder may cause a wide deflection of course.
The chairman comes into fullest bloom at meetings of the directors, over whom he presides. These are held quarterly or semi-annually; and are mostly routine affairs. Top officers are directors, and one may ascertain who is and who is not in top management by noticing whether he is or is not a director as well as an officer, a point in elementary corporatology.
The chairman, president and executive vice presidents are invariably directors; the vice presidents sometimes are. In Ford and Standard Oil of New Jersey some vice presidents are; in General Motors at present only executive vice presidents are.
Apart from company officers, directors usually consist of officers of other friendly companies or friendly banks, of lawyers, sometimes foundation officers and college presidents, former officers and large stockholders (sometimes themselves former officers). Directors who actively question or suggest are usually owners or representatives of large blocks of stock or senior obligations. In most cases the outside members are passive, merely listening and taking note of what is reported by the executives. They evaluate what they hear in terms of their own business experience.
Except where forbidden by law, as in the case of banks, directors are usually cogs in widespread interlocks, a phenomenon abhorrent down through the years to many congressmen. Congressmen who dislike this practice of interlocking directors--that is, a few directors from a cluster of key companies spread around among a large number of satellite companies--would like it forbidden on the ground that it signals central moneybund or "Wall Street" control. They would prefer that a man be a director of only one company at a time, thereby bringing in many "unsound" outsiders.
My own objection to forbidding interlocking directors is that it would be ineffective in breaking the true interlock, which exists by prior dispensation in a small ownership coterie through blood relationships, intermarriages, private school associations and club memberships. We must not forget that the entire corporate situation directly concerns no more than 2/10ths of 1 per cent of the adult population (fewer than 200,000 people); with some 8/10ths of 1 per cent less involved; and never more than 10 per cent even infinitesimally involved except as rank-and-file employees and consumers. Abolishing corporate interlocks would not alter any basic situation, would at most provide only one more futile pseudo-reform. If it led anyone to believe some basic change had taken place, it would be grossly deceptive.
Those who oppose interlocking directorates, if they were seriously consistent in their recommendation, should call for the outlawing of intermarriage, hereditary trust funds, common schooling and common metropolitan club membership among large property holders and corporate families. One could isolate each one, incommunicado, in a private telephone booth.
Except where they represent large blocks of stock or are officers of the company, directors are seldom vital to the conduct of affairs--serve mostly as window dressing. There is a school of corporate thought that contends directors should direct; but this is a minority view. Directors generally do not direct unless they are also big stockholders or officers; as outsiders they usually don't know enough about the specific situation. Even the notion that some bring to bear an indispensable broad-gauged public point of view, valuable in preserving the corporate image as a benign entity, won't hold water because efficient public relations departments tend to this simple detail. A few directors, in fact, are invited on boards solely because they are witty or eccentrically knowledgeable fellows, thus tending to perk up otherwise dull meetings of essentially stodgy men.
In crises directors may be collectively called up to tap their general business experience. Some internal dispute over fundamental policy may be submitted to them, in which case they function as a board of judges. If they cannot resolve the dispute it will be resolved at the next meeting of stockholders, where the big shareholders will assert themselves. But such an occurrence is rare because among the directors it is known who speaks for large stockholdings. It is known where the ultimate power lies.
Despite all the devotion to voting in corporations, the process is hardly democratic because the vote, in any showdown, is by shares of stock, not by individuals. All the thousands of rag-tag stockholders in the Ford Motor Company could not outvote the Ford family. The situation is absolutely or effectively the same in every company, which means that a very large and paramountly vital part of internal American affairs is
under essentially autocratic rule, as in Russia. At variance with democratic ideology this statement surely is but nevertheless, alas, it is true, true, true.
As long as matters progress smoothly, as they ordinarily do, the point of view of the managing officers prevails at board meetings. Organizational trouble appears only if a very large stockholder, or someone speaking for large blocks of stock, seriously opposes the management.
While newspapers report from time to time on internal struggles for company control, such reports rarely involve the biggest companies. Control is seldom an issue in the big smoothly running enterprise. Whenever it is, the issue is quickly resolved, either by internal vote or by court decision.
The Executive Mystique
Corporation officers are of interest in this inquiry mainly because they are the front- line deputies of the rich and the super-rich when they are not themselves of the rich. They are the watchdogs and overseers (usually hired) of great wealth. As such, their earned take-home pay is rivaled only by that of persons in the sports and entertainment worlds who become tremendous box office attractions--home-run hitters, knock-out punchers or seducers-seductresses of the screen. Because only a handful of these fireflies maintain their box office charisma for any considerable time, as a group they are not in the income class of the executives, who even in retirement continue to be handsomely rewarded. Entertainers and athletes in general are paid little.
Just what is it that makes an upper corporation executive worth his pay, ranging on the record from $200,000 to $800,000 a year in the merely cash portions? A standard answer, part of what I shall hereafter refer to as the executive mystique, is that "the value of an upper-echelon executive lies in the decisions he makes and influences. " 1
It is made evident that the decisions for which he is rewarded so handsomely are money-making decisions. While he may at times make wrong decisions, most of his decisions (at least the big ones) must be the right ones, the winning ones. Or so it is argued.
One cannot deny that the top executives are decision makers. But this observation is not very profound because, paradoxically, not to make any decision is a decision. We are all, as it happens, decision makers. But we are not--most of us--money-making decision makers.
The kind of decision making the big executive engages in, according to theory, is as follows:
He makes one big decision (or a series of decisions) that vastly improves the relative position of his company, reflected in earnings; that slightly improves or holds steady the relative position of his company among rivals; that in any general economic decline leads his company to lose ground less rapidly than others; or that enables his company, at the bottom of a slump, to spring up again, phoenix-like, and astonish the world--or at least the editors of Fortune and the Wall Street Journal.
More exactly, he is not supposed to make those decisions by himself, out of the whole cloth, but to fit together the advice and insights of many others, like a master craftsman, and extract the winning decision.
In theory the decisions he makes must be winning decisions. Because if one is paying for decision making, as the big stockholders are supposed to be doing, one surely does not want to pay for losing decisions. And yet, highly paid executives often make momentous losing decisions, sometimes all together, sometimes in industry groups and sometimes in single companies.
In the early 1930's, the leading corporate executives all made a collectively losing decision. They decided to maintain their economic positions amid sudden price declines through cost-cutting, mainly by wholesale discharges of unprotected workers, the rank- and-file patriots. The theory was that as demand for goods was restimulated at lower price levels, business would pick up at more normalized levels than in the 1920's, workers could be rehired at lower wages as in the slump of 1920-22. Then the process of money-making could resume on a "sounder" basis.
There was no pick-up, however, because during the serial process of wholesale layoffs workers exhausted their meager savings and credit.
When prices reached low levels they continued to fall to still lower levels, except where they were "administered. " Much less business was done because many people had no money. The economy began stagnating, the Communists gloated because Marx had predicted capitalism would lose the ability to govern in one of these slumps. The Great Depression was on, produced by master minds who instead of living up to their reputation as entrepreneurs had become, turtle-like, solely interested in preserving working capital.
Ironically, surrounding conditions from a business point of view were perfect. There was no government interference with business. There had been twelve years of uninterrupted lax Republican rule under figurehead presidents. Taxes under Treasury Secretary Andrew Mellon had been brought to very low levels. Tariff walls against odious foreign goods were at record high levels. Big Business ruled the roost more fully than it did later under Lyndon B. Johnson.
If it were a fact that executives are paid as decision makers they would all have been fired. For they had all, acting according to crowd psychology as they usually do, made a general losing decision, reflected in steady corporate deficits. There never was a major winning decision in this situation in the sense of one company moving ahead of others. No corporate master mind showed himself, for the simple reason that there were no corporate master minds. The emperors were all stark naked. In national self-defense the government moved, slowly, to intervene with its own programs, amid witless cries from the corporate press of "creeping socialism. "
One often sees the same sort of collective losing decision making in an entire industry, as in the railroad industry since World War I. Suddenly faced with new competition-- from pipelines, trucks, buses and airplanes--the railroad industry down through the decades, instead of adjusting services to meet new conditions, instead of participating by one avenue or the other in new forms of transport, decided to curtail services. The industry decided, forsooth, to go out of business on the installment plan.
Where one company clearly falls behind all others in the same industry through having failed to adapt to new currents or to take advantage of some innovation, it is obvious that the chief executive (or his subalterns) has not been alert and he is, unless he is a big stockholder, usually dropped. This was the case with respect to Charles Luckman, president of Lever Brothers after World War II and widely touted as a "wonder boy. " The rest of the industry stole a march on him in the introduction of detergents in place of soap powders, and Lever Brothers underwent setbacks in the market until it tardily took up detergents. Luckman was fired.
But when Ford Motor Company lost a reported $250 million on its hapless Edsel model in the 1950's, Henry Ford II did not walk the plank. He, along with other stockholders, simply took it in the pocketbook. He could not be fired because be was a chief owner. This simple fact revealed the source of true power in an executive.
Aging Sewell Avery, a big stockholder, stubbornly held to his position at the head of Montgomery Ward and Company after World War II and decided to retrench in expectation of a resumption of the depression. Ward's arch-rival, Sears, Roebuck and Company, decided to expand in expectation of an inflationary boom, and soon passed on to astronomic heights of latter-day success. Here we have a case of a losing and a winning decision, both made by experienced managements, one rather inflexible. To argue that Avery was a poor executive because he made a less advantageous decision is like arguing that Napoleon was a bad general because he lost the battle of Waterloo.
In all the loose talk about executive decision making it is overlooked that corporate decisions are usually made collectively, more recently on the basis of a vast mass of information assembled and digested by computers. After careful sifting by low-paid technicians--statisticians, economists, mathematicians, psychologists and even at times anthropologists--a set of alternatives is laid before the executive board. If the correct data have been fed to the computers these mechanisms may themselves have the answer: Expand, branch out, retrench, stand pat, fight, submit, deny. Again, the decisions are rarely of life-and-death caliber. They are usually fairly routine and marginal.
John F. Kennedy, it is reported, faced divided counsels among his advisers on the religious issue in 1960. Some said he should avoid it, some said he should stress it, others felt he should touch on it, but lightly. The problem was put to a computer into which a mass of data was fed on the characteristics of the American population. The computer replied: Stress the issue. And this was done. While one cannot say that this is why Kennedy won, it obviously did not cause him to lose. So it was presumably the right decision-made by a computer. The masterly decision in this case was evidently to turn to the computer.
Corporation officials often face issues that arise from a set of losing decisions of long- or short-term nature. And they know they are losers. What they often do then is to make no decision, ride with the tide in the hope that something of a saving nature will turn up. They are not, then, paid primarily to make dramatic "right" decisions, although they participate in corporate serendipity and will be penalized for obviously bizarre judgments, now increasingly eliminated by expert analysts and computer technology. But corporations, their nets spread wide, are not run by ear, as the decision-making theory suggests. If they sometimes gamble, it is only in small ways. Almost never do they stake their lives on a single line of policy. They do indeed have alternative policies, sometimes all in effect in different areas at the same time. They play both ends against the middle and the middle against both ends.
There is much else, which need not detain us, to show there is little in this contention that high compensation is given for profitable decision-making. The decision-making theory is part of the executive mystique. This mystique, dubbed "Management," has been developed partly for psychological reasons: To give executives in a long chain of command down to the newest junior executive and foreman a sense of worth in essentially boring jobs. It also provides an impressive rationale for the payment of grotesque salaries. For as decision makers, most company chairmen and presidents could not fight their way out of a paper bag, as is repeatedly shown when they are dragged into full public view and subjected to searching questioning under subpoena. Then they almost invariably wilt, show themselves as very ordinary men.
This is not to say that corporation executives are without ability. They are able people, the ablest that can be found for the task. Their ability resides in a varying combination of qualities. The big factor that enters into their selection and compensation is that they are custodian-trustees and overseers of vastly valuable properties.
The foreign program under Hoffman, set to achieve an era of greater world friendliness for the United States, was attacked as communistic. It was, plainly, "internationalist," itself evil. (Whatever isn't American, inter alia, is wicked. ) And the educational programs, supporting progressive and adult education, were obviously communistic in that they deviated from traditional paths, trod by no others than our sainted pluperfect forebears.
The broad rightist attack, which according to Macdonald frightened Henry Ford II, although surveys showed that wild calls for boycotts had not hurt Ford Motor sales, was finally subdued in an ingenious way. Hoffman and his aides were ushered out and the attack was simply smothered in money. Unselectively, heavy grants in the hundreds of millions were ladled out year after year to all accredited colleges and universities, all hospitals and, later, all museums, all symphony orchestras; all of everything in the status quo. In the grants to colleges and universities, Catholic institutions were included (to their gratified consternation) in the greatest deluge of money they ever experienced. Nobody was spared.
This silenced the rightists, possibly because all the dry emotional tinder out in the grass roots had been thoroughly saturated in floods of money. It was difficult to maintain the idea before the public that the Ford Foundation was evil when it was spewing forth lifegiving money to all points of the compass like lava from a volcano. As no standards were observed it was all obviously democratic.
If the continual widespread distribution of money in large amounts is a good thing, then the Ford Foundation must be one of the best things that ever happened. Cui bono? The status quo is clearly made more bearable as its various cracks and fissures are plastered over, while thousands cheer. And the Ford Motor Company, the goose that laid this golden egg, is surely not hurt. The public-relations value of the Ford Foundation to the automobile company was not lost upon the more than 8,000 Ford dealers in the United States, who earlier in the 1950's were among those protesting that too much foundation money was being spent abroad on benighted aliens. 72 But, apparently unknown to them, Ford Motor is a big operation abroad as well.
Public Relations and Influence over Attitudes
Apart from their roles in corporate control, the big foundations, at home and abroad, have a public-relations "splash value. " What they give to approved medical, scientific and educational institutions tends to bathe in reflected radiance corporate enterprises that some critics quixotically consider ominous. It appears, on closer analysis, that this is a mistaken and possibly deranged judgment, and that all effort is really being expended for the benefit of humanity, naturally without forgetting the stockholders. If not socialism, the panorama seems to have overtones about it at least of quasi-socialism or, we may say paradoxically, capitalist socialism or social capitalism.
The foundations, it is clear, represent to some degree a line of public-relations defense of the large corporations. General Motors, too, is not without its surrounding foundations--the Alfred P. Sloan Foundation, the Mott Foundation and a number of others. The big foundation, indeed, is the hallmark of corporate super-wealth.
As to giving money away, it is evident that these endowments could have been transferred in one original move to extremely capable hands. In education they could have been turned over to the Association of American Universities and similar bodies, in science to the American Association for the Advancement of Science, in medicine to the American Medical Association, and so on. But this would be the end of it all. The donor and his heirs would have no more participation in it.
By making serial gifts each year out of income from a perpetual principal fund the donor can keep prospective worthy recipients sitting around forever like a circle of hungry dogs, awaiting the next handout. In such an arrangement prospective institutional recipients are not likely to voice unwelcome socio-economic or politico- economic ideas. They are more likely to be careful to give utterance only to impeccably sound ideas, the kind one might hear in the top clubs. The general foundations, then, with their serial gifts, function pretty much as a carrot, rewarding those who are
cooperative and constructive, passing over the unworthy, the carping, the critical, the nonadmiring, the unsound.
Institutional administrators consequently find that it pays to stay clear of public controversies and to voice at best only tried-and-true platitudes: to show themselves at all times as sound men. While this reticence to some extent dims their true brilliance, in the long run it seems most rewarding. Robert Maynard Hutchins is one of the few on this circuit who for a long time seemed able to have his cake and eat it too, to function as a big institutional wheel and still enjoy the luxury of delivering himself of tart remarks at the expense of the many sorry spectacles around him. But after he rose to great foundation heights the forces of conformity at last caught up with him, in a latter- day version of a preordained cut-rate Greek tragedy. For the Fund for the Republic was cut loose from the Ford Foundation and left to face the hostile hordes with a dwindling mere $15 million.
The critic is often challenged to say how he would do it better, as though a judge who found an apple to be sour was under obligation to grow a sweeter one. But in the case of the foundations such a challenge would be easy to meet. In the case of the Ford Foundation a much more consequential commitment of its money would have been to devote it to making an adequate secondary-school education available to all promising students. Secondary education is the weakest link in the American educational chain. What the Ford Foundation could have done, and can still do, is to see that all promising students get into a good school, all expenses paid. As such schools are only rarely found in home neighborhoods it would be necessary that the students be boarded, sometimes clothed and supplied with travel expenses. Some could be placed in existing private schools, although they, too, are crowded. For others, regional private schools with highly motivated, well-paid faculties would have to be supplied.
The task could be left to other agencies, public and private, to see the Ford-grant graduates through college. As it is, a very large percentage of those entering colleges are poorly prepared to profit by college-level work. In my proposed Ford-grant system defects of preparation would be removed.
While the immediate impact of such expenditure would not be apparent, the long-term consequences would be enormous and beneficial.
Politically there is very little that could be said against this plan from any point of view.
Effects of Grants, Good and Bad
That the various foundation emphases in their grants are not without vast social effects we can see from the judgments of informed critics wandering more or less like unheeded ghosts through Foundationland.
As an example of what he considers mischief, Macdonald cites an early cause taken up by the Carnegie Foundation for the Advancement of Teaching. Andrew Carnegie had it brought to his attention how poorly teachers were paid, and he decided to do something about it--thus privately assuming a legislative function (which all the foundations do). So in 1905 he established his foundation to improve teaching, with the objective of giving every down-at-heels college professor in the country a free pension.
When it became evident toward 1920 that all of Carnegie's money could not fill this bill, existing contracts were frozen. There was then established the Teachers Annuity and Insurance Association, supported by contributions from teachers and colleges as well as by Carnegie money. Carnegie's heart, however, had been in the right place.
It had been initially necessary, though, to have a criterion of who was a worthy teacher and what was a college. Many places that call themselves colleges, then and now, are not. The then president of the Carnegie Corporation, Henry Pritchett, composed an "Accepted List" of colleges eligible for Carnegie pensions. An admirer of the German university system, Pritchett laid it down that qualifying colleges must have Ph. D. s as department heads. Many already had such cherished department heads and the Ph. D. up to that time had merely been a degree sought by people committed to research scholarship.
"This put pressure on colleges to qualify, which put pressure on professors to get
Ph. D. s, which brought about the present Procrustean situation where no amount of
scholarly brilliance or teaching flair will make up for lack of a doctorate. There are
those who see in the Ph. D. obsession a major cause of the sterility and mediocrity of our
academic life today, and the moral of that is: Doing Good Is a Complicated Business. " 73
Without intending to do so but by incautiously exerting their great power, the Carnegie interests, it is contended, actually devalued the Ph. D. degree to its present estate when it is most conspicuously borne by routine jobholders and bureaucratic academic administrators. As hordes of prospective jobholders, looking forward to tenured academic employment and distant pensions, besieged the graduate schools (of which many new ones set up shop to supply the demand) the graduate curriculum was purposely made mechanically more arduous in order to deter all except the most hardy plodders (getting the prized degrees began to take up to ten and twelve years in the less formalized subjects such as history, literature and philosophy). Brilliant minds, superior either as teachers or as scholarly producers, increasingly declined to subject themselves to what was often a creatively sterile grind.
While the Ph. D. requirement lent itself readily to the organizing American corporate approach, in England, not similarly scourged by the Ph. D. mania, one still saw hundreds of brilliant teachers and scores of internationally recognized scholars without the degree. Visiting the United States these English scholars, flaunting only a meager M. A. , often lecture to halls filled by goggle-eyed American Ph. D. s. Bertrand Russell was one such.
The point in all this is not that there is anything wrong with the basic idea of the Ph. D. The point is only that it is no longer indicative of a true scholarly interest, which can indeed be shown only by the nature of work done. Many Ph. D. s, too, have come to be awarded in ridiculous fields. Hutchins found one granted for work in automobile driver training!
So this heavy-handed Germanizing of American scholarship traces back to an original ex parte foundation decision.
Not all foundation efforts, by any means, have had such a disputatious outcome.
Carnegie money, for example, financed Abraham Flexner's great investigation of American medical schools. The report, which appeared in 1910, found nearly all of them far below par and some to be rackets, leading to extensive reforms that drove out the worst and converted the remainder from among the worst in the world to the best.
Again, Carnegie money financed Gunnar Myrdal and associates in the monumental study of the American Negro before World War II, titled An American Dilemma. It was on the basis largely of the findings in this report that the Supreme Court rendered its epochal school desegregation decision of 1954.
Rockefeller money largely financed Dr. Alfred Kinsey and associates in the study of sexual behavior which, despite methodological and other controversies that ensued, appeared to represent a long step toward greater light in a puritanically degraded area.
As Macdonald notes, "The Rockefeller agencies made medical history with such exploits as their worldwide campaigns to control malaria and yellow fever, and their detection--and subsequent elimination--of hookworm as a drain on the vitality of rural Southerners. " 74 It is evident that there is much one can find to set up on the credit side of the foundations.
And, yet, the critics still find many serpents coiled in the garden. William H. Whyte, in Fortune (November, 1955), held it a bad thing that foundation grants went more and more to institutions or to research teams, less and less to individual workers. As Macdonald reminds us, the greatest work has been done by individuals, and in the "soft" disciplines. 75
Not only must the foundations, with an eye to the cultural vigilantes, stick to safe, tried and true areas, but they cannot support pioneers, who automatically have the animal mobs ranged against them. Had they existed in an earlier day the foundations could not have sponsored Copernicus, Galileo, Vesalius, Darwin, Pasteur, Marx, Freud or many others. These were all, by public acclaim, reprehensible men; some still are.
As recently as the 1920's they could not, owing to low-grade public opinion, support Mrs. Margaret Sanger in her timely but frustrated campaign to disseminate information about birth control. Margaret Sanger, like Socrates, fought as an individual and went to jail as an individual. The birth control movement was stalled, has been revived only recently under dire eleventh-hour necessity.
The original program of the Ford Foundation grew out of criticism by Edwin R. Embree, former president of the Julius Rosenwald Foundation, advanced in an article in Harper's Magazine in 1949 entitled "Timid Billions. " Embree held that, because foundations--mainly those of Carnegie and Rockefeller--had pioneered in medicine and health nearly fifty years before, these now highly developed fields had become placid foundation preserves, with about half of all grants going to them, another third to routine universities and colleges, and the rest to routine welfare agencies. He thought it time that new ground was broken, with the results seen in the successful know-nothing attacks on the Ford Foundation.
Embree criticized the foundations for "scatteration. " And in its more recent policy this is precisely what the Ford Foundation has come to.
The Guggenheim Foundation more conspicuously than others has awarded grants to the humanities and to individuals. Hundreds of writers and artists have received sustaining funds from this source.
As part of the favorable tax-financed public-relations image the foundations develop for corporations and founders that grew rich in questionable ways, they present the aspect of being highly civilized by proxy association with cultural heroes. Avoiding in their lifetimes creative persons like Margaret Sanger or Socrates who are invariably suspected by the ignorant multitudes of being up to no good, the foundations fondly embrace all established cultural heroes and those potential heroes working in popularly approved cultural channels. Not heroic themselves, they nevertheless exist in a soft, derived heroic light, invoking in the thoughtless gaping multitudes some feeling of being in the shadow of a cathedral. They are, on the contrary, basically demagogic; for the main thrust of their effort is not in any sense the deliverance of man but the protection of their sponsors' plantation. While this is surely narrowly intelligent of them, it is not, as I see it, something to induce public celebration.
And the fact that it is all done, really, with public money certainly puts anyone in the position of being gulled who applauds them more than mildly for good works. It should never be forgotten that if the Ford Foundation had never been founded every cent of the money would have been taken in inheritance taxes by the United States government, thus lightening the tax load for everybody. If the Fords, Dow, should achieve something humanly tremendous through their foundation they would not achieve it with their money but with our money. While not impugning the achievement, whatever it was, or the judgment that led to it, recognition of the nature of the transaction would certainly place it in a somewhat different light.
What the subsidy is in the case of any foundation of any considerable size one can readily ascertain by looking up what the estate tax rate was when it received its funds. This rate, ranging more recently up to 90 per cent, represents the portion of principal saved from taxes. Where income on the principal exceeds $100,000, the amount of taxes avoided, at present rates, is at least 70 per cent and has been as high as 91 per cent.
So, whatever good is accomplished by the foundations is largely accomplished with other people's money, a familiar finpolitan practice. And if one wishes to salute the original source of this beneficence it should be Congress, making free use of our money.
Money funneled into education has to some extent no doubt been of general benefit. However, much of this educational effort has been devoted to producing corporate personnel, with the primary mission of making profits. The Du Ponts have poured heavy sums into M. I. T. ; and Carnegie established the Carnegie Institute of Technology in Pittsburgh, a prime source of local plant and departmental managers and company officers. Even more general applications of educational funds can be shown destined primarily for the support of the corporate world.
It is a common experience in the United States for people to read in newspapers and magazines of great new medical advances and discoveries, but they little realize that most of these advances will never be available to them, will be available only to those who can afford them in a few centrally located medical centers. As I gave extended attention thirty years ago to these problems in which there has been little change since, the contemporary reader may be left to the references. 76
Scientific findings have been applied most assiduously in the amassing of corporate profits.
While it is generally gratifying to see so much human ingenuity displayed and developed, it is worth noticing that the fruits of all the effort are for the most part restricted in their distribution. The wide prevalence of slums would suggest to a visitor from another planet that there was little education, science or medicine available to anyone at all in the United States.
If it is nevertheless insisted that all this foundation effort represents philanthropic activity, then it is governmentally coerced philanthropic activity, under the threat of taking the principal in taxes if the income is not devoted to narrowly applied good works. The government, in brief, forces the rich to tend their own plantation.
Intellectual Sleight-of-Hand
I therefore cannot help seeing the entire American philanthropic movement, hailed as something unique in the world, as intellectual sleight-of-hand as far as its claimed disinterested benevolence and general distribution of benefits are concerned. There may have been some gain in allowing private dispositions of the money to be made, where it has been made in good faith, because one cannot suppose it would have been expended
more judiciously if left to run-of-the-mill pubpols. The prospect might have been far less entrancing if it had been left to the manipulation of the more self-oriented of these.
The Ford Motor Company does not claim to be philanthropic. But the Ford Foundation, which grew out of it and is the public halo of the company, is claimed to be philanthropic even though it is managed by the same people. When Henry Ford II presides over the Ford Motor Company he is nonphilanthropic, a business barracuda; but when he steps into his role as a trustee of the Ford Foundation he, like a Jekyll- Hyde, suddenly becomes a philanthropist. With the Ford Motor Company he endeavors to garner all the money possible; with the foundation he endeavors to give money--our money--away.
Is he--on balance--richer or poorer? As a result of establishing their many foundations and "giving away" hundreds of millions of dollars, are the Rockefellers and other foundation impresarios richer or poorer, more or less esteemed, more or less solidly ensconced, stronger or weaker?
The answer in every case of a surviving foundation family group is that the foundation has benefited its sponsors more than it benefited the world. Whatever benefit it has wrought for the world it has wrought, too, for the family group. For the world is their village, through which their personal interests ramify in a bewildering network. Why should they not wish to benefit the world as they, too, must live in it? And any benefit wrought, however minor, brings to them vast credit, enhances their status as exalted citizens of the world. They all rate at the highest level in mass-media esteem.
The main point I extract from this is that these are very subtly powerful people, far more powerful even than they are portrayed by a deferential press. Nor are they, despite the deft airbrush of the public relations man, especially benign, as is plainly evident in the heavy commitment to systematic extreme violence of the political system in which they have, by enormous margins, the largest stake.
Never registering opposition to any of the many wars, foreign police actions and military missions against the heathen in which the seemingly detached government engages, usually instead registering enthusiastic approval and giving full support, they must be considered integral to this way of conducting affairs. At the time of this writing this political system is using some of its vast firepower, much of its manpower, with which to establish new foreign bases, as in Vietnam. Although Vietnam is popularly accepted as an heroic dirt-level president's maximum effort, the operation has been formally and enthusiastically endorsed by Governor Nelson A. Rockefeller. It is, obviously, a venture carrying the highest finpolitan sanction. 77
While the Vietnam venture will indeed make all of us more secure against the devil of Communism (or will it? ), it is surely going to make some persons far more secure than others. To be entirely fair, we must concede that even the denizens of the slums, thanks to a foresighted president, will be made more secure in their slumminess. This boon happily works both ways: The rich and the poor are benefited by being fully protected in their respective statuses.
Proposed Foundation Reforms
Representative Wright Patman advanced concrete proposals for reforming the foundations, tightening the regulatory leash so they would not be quite so free to maneuver self-servingly as now. His recommendations were as follows:
1. Limit their life to twenty-five years, as in the voluntary cases of the Julius Rosenwald Fund and the foundation established by the late Arthur Curtiss James.
2. Prohibit them from engaging in tax-exempt business in unfair competition with taxpaying businesses.
3. Prohibit them from engaging in tax-free lending and borrowing.
4. Require them to engage in arm's length relationships--that is, prohibit them from extending intramural benefits, say, to the employees of a controlled company, a form of subtle unfair competition with others.
5. Prohibit them from soliciting or accepting contributions from suppliers to and patrons of their companies.
6. Prohibit foundations from owning more than 3 per cent of any corporation, thus shrinking them as factors in corporate control.
7. Make them conform to certain rules in the case of proxy fights in corporations where they hold stock ownership.
8. Prohibit them from trading in and out of securities in quest of capital gains.
9.
Allow no tax exemption on contributions to a foundation until the money has been actually put to approved charitable use.
10. Deny tax exemption to any foundation if it has clearly been established for tax avoidance or to obtain financial benefits for the founder.
11. Compute donations of property to a foundation at cost or market value, whichever is lower, rather than on the present basis of market value which permits the evasion of taxes on appreciated assets.
12. In contributions made by corporations, let such contributions be credited to the stockholders, thus keeping untaxed contributions to present limits prescribed by law.
13. Treat all capital gains by foundations as expendable income and do not allow them to be converted into new capital.
14. Add money unreasonably accumulated by corporations controlled by a foundation under present laws to the foundation's own accumulation as if the two were one. "The use of subsidiary corporations should not be permitted to cloak actual accumulations, as is the case in the Howard Hughes Medical Institute of Miami Beach. "
15. Corporations controlled by foundations should be subject to taxes on unreasonably accumulated earnings, as prescribed by law for foundations.
16. From the base for the marital deduction there should be excluded amounts left to foundations that are henceforth untaxed. And while money given to foundations is not subject to gift and estate taxes, the rate brackets to be applied to moneys that are taxable should be the same as if the prescribed foundation portions were part of the taxable gifts or estate.
17. Regulation of the foundations by the Treasury Department should be tightened in many specifically indicated ways and the Treasury Department should be obliged by law to function actively in this area.
"These and other reforms," Mr. Patman gravely' concluded, "are vitally necessary. " 78 For what little it may be worth, I concur.
The Patman investigation has already influenced the passage of new laws regulating foundations in New York State, where most of them are chartered. The effect of these New York laws will probably be to drive many to states of easier virtue, as in the case of corporations that finally found lax regulatory states in Delaware and New Jersey. In general, regulation in any of the states, of any kind of activity, is about on a par with the
regulation of a frontier saloon, which is why entrepreneurs of all kinds prefer state to federal regulation.
Said the New York Times about the new situation in New York:
A sampling of reports filed as the result of a new law this year has shown that many purportedly charitable foundations are tax dodges, according to Attorney General Louis J. Lefkowitz. He said that the foundations were also sources of funds for the personal use of their directors.
The charitable organizations . . . operated without supervision or regulation before last January. . . .
A random sampling of 400 registrants, and examination of the 500 financial reports, has turned up numerous examples that show sufficient evidence of improper manipulation of the funds to justify the calling of an investigation, according to the Attorney General.
Often the manipulators who used the funds for their personal gain had already profited by large tax deductions based on their gifts to the foundations, he added.
. . . some charities have already received millions of dollars this year that they would not otherwise have obtained as a result of his staffs work.
Tax-free ostensible charitable funds had been used (Mr. Lefkowitz discovered tardily) for business purposes, to buy expensive paintings and sculpture for the donors' own homes, to pay salaries to relatives and for a variety of other personal accommodations- facts which anyone could have ascertained in 1937 by reading America's Sixty Families. Most of the New York foundations funded at more than $1 million--and this the authorities now thought suspicious--were set up to make distributions for charitable purposes "to be selected by the directors. "
Under the new law the attorney general of the state may at his discretion bring action to remove directors who fail to comply with the law and may compel accountings and order reimbursement for loss of funds resulting from improper activities of directors or trustees. 79
All this, however, will not lock the barn door even tardily because there are forty-nine other states.
Concluding, whatever foundations do, for good or ill, for self or humanity, they do for the most part with publicly conferred money.
Eleven
MINISTERS OF FINPOLITY: THE UPPER EXECUTIVES
Top executives of top American corporations are, after the Kremlin rulers, the most anxiously studied and written about small group of persons in the contemporary world of affairs. Each group is more sedulously and continuously scrutinized, in sober truth, than the much larger and far more crucial collection of scientists.
More numerous than Russian politicos, American upper corporation executives are nevertheless very few. If we take the elite Fortune list we have before us only 500
industrial companies, 50 commercial banks, 50 public utility companies, 50 transportation companies (rail, air, highway and water), 50 life insurance companies and 50 merchandising enterprises--750 in all. This is the cream, with assets ranging from as low as $7. 444 million (Needham Packing) to $30. 906 billion (AT&T).
Each of these enterprises glories in a chairman, a president, usually at least one executive vice president, sometimes a comptroller and always a treasurer and a secretary, the three latter rarely involved in policy formation. The array of vice presidents varies by size of enterprise but, no matter how large it is, these men are usually mere divisional or departmental managers, direct instruments of top management but not in top, management themselves.
So truly imperial is the domain of the largest finpolities such as AT&T, General Motors and Standard Oil that the executive vice-presidential function is often divided among several men, who meet as an executive committee. General Motors in 1964 had three executive vice presidents; Standard Oil of New Jersey, five; but Ford, only one.
In the ordinary case the top officers are a trio: chairman, president and executive vice president. The president's duties correspond to those of the captain of a ship, are virtually as routinely formalized; and those of the vice president correspond to the ship's executive officer.
If we allot to big management an average of five men we have 3,750 upper executives. Because some of the larger companies have more than five in top management, it may be that as many as 5,000 should be reckoned. As there are smallish fairly important companies not included in Fortune's compendium, the number of top management people may be as great as 10,000, the number set forth in Business Executives of America, published by the Institute for Research in Biography in 1950. But this total included men in Canadian as well as United States companies.
Important corporation executives certainly do not exceed 10,000. More probably there are fewer than 5,000, a restricted group. Naturally, if one looks down the entire nondemocratic para-military chain of command to junior executives and foremen, the number of executives is much greater. None of these shapes policy and few ever will. They are cogs of the order of middle-range Soviet commissars and lower bureaucrats. The system is indeed very much like the Soviet's, which was modeled after it.
Corporations generally are run by the executive vice president (or vice presidents), the president usually supervising and intervening directly only when he feels it advisable. In newer, reorganized or problematic companies the president, it is true, may be a dynamo of activity. The chairman is available for consultation on nice points of policy; only rarely if ever, one gathers, does he tell the president, unbidden, what he ought to be doing.
Within the bounds of determined policy and the nature of the business the president is a complete autocrat. Such being the case he usually acts with great restraint, like a jet pilot who knows that the slightest touch on the rudder may cause a wide deflection of course.
The chairman comes into fullest bloom at meetings of the directors, over whom he presides. These are held quarterly or semi-annually; and are mostly routine affairs. Top officers are directors, and one may ascertain who is and who is not in top management by noticing whether he is or is not a director as well as an officer, a point in elementary corporatology.
The chairman, president and executive vice presidents are invariably directors; the vice presidents sometimes are. In Ford and Standard Oil of New Jersey some vice presidents are; in General Motors at present only executive vice presidents are.
Apart from company officers, directors usually consist of officers of other friendly companies or friendly banks, of lawyers, sometimes foundation officers and college presidents, former officers and large stockholders (sometimes themselves former officers). Directors who actively question or suggest are usually owners or representatives of large blocks of stock or senior obligations. In most cases the outside members are passive, merely listening and taking note of what is reported by the executives. They evaluate what they hear in terms of their own business experience.
Except where forbidden by law, as in the case of banks, directors are usually cogs in widespread interlocks, a phenomenon abhorrent down through the years to many congressmen. Congressmen who dislike this practice of interlocking directors--that is, a few directors from a cluster of key companies spread around among a large number of satellite companies--would like it forbidden on the ground that it signals central moneybund or "Wall Street" control. They would prefer that a man be a director of only one company at a time, thereby bringing in many "unsound" outsiders.
My own objection to forbidding interlocking directors is that it would be ineffective in breaking the true interlock, which exists by prior dispensation in a small ownership coterie through blood relationships, intermarriages, private school associations and club memberships. We must not forget that the entire corporate situation directly concerns no more than 2/10ths of 1 per cent of the adult population (fewer than 200,000 people); with some 8/10ths of 1 per cent less involved; and never more than 10 per cent even infinitesimally involved except as rank-and-file employees and consumers. Abolishing corporate interlocks would not alter any basic situation, would at most provide only one more futile pseudo-reform. If it led anyone to believe some basic change had taken place, it would be grossly deceptive.
Those who oppose interlocking directorates, if they were seriously consistent in their recommendation, should call for the outlawing of intermarriage, hereditary trust funds, common schooling and common metropolitan club membership among large property holders and corporate families. One could isolate each one, incommunicado, in a private telephone booth.
Except where they represent large blocks of stock or are officers of the company, directors are seldom vital to the conduct of affairs--serve mostly as window dressing. There is a school of corporate thought that contends directors should direct; but this is a minority view. Directors generally do not direct unless they are also big stockholders or officers; as outsiders they usually don't know enough about the specific situation. Even the notion that some bring to bear an indispensable broad-gauged public point of view, valuable in preserving the corporate image as a benign entity, won't hold water because efficient public relations departments tend to this simple detail. A few directors, in fact, are invited on boards solely because they are witty or eccentrically knowledgeable fellows, thus tending to perk up otherwise dull meetings of essentially stodgy men.
In crises directors may be collectively called up to tap their general business experience. Some internal dispute over fundamental policy may be submitted to them, in which case they function as a board of judges. If they cannot resolve the dispute it will be resolved at the next meeting of stockholders, where the big shareholders will assert themselves. But such an occurrence is rare because among the directors it is known who speaks for large stockholdings. It is known where the ultimate power lies.
Despite all the devotion to voting in corporations, the process is hardly democratic because the vote, in any showdown, is by shares of stock, not by individuals. All the thousands of rag-tag stockholders in the Ford Motor Company could not outvote the Ford family. The situation is absolutely or effectively the same in every company, which means that a very large and paramountly vital part of internal American affairs is
under essentially autocratic rule, as in Russia. At variance with democratic ideology this statement surely is but nevertheless, alas, it is true, true, true.
As long as matters progress smoothly, as they ordinarily do, the point of view of the managing officers prevails at board meetings. Organizational trouble appears only if a very large stockholder, or someone speaking for large blocks of stock, seriously opposes the management.
While newspapers report from time to time on internal struggles for company control, such reports rarely involve the biggest companies. Control is seldom an issue in the big smoothly running enterprise. Whenever it is, the issue is quickly resolved, either by internal vote or by court decision.
The Executive Mystique
Corporation officers are of interest in this inquiry mainly because they are the front- line deputies of the rich and the super-rich when they are not themselves of the rich. They are the watchdogs and overseers (usually hired) of great wealth. As such, their earned take-home pay is rivaled only by that of persons in the sports and entertainment worlds who become tremendous box office attractions--home-run hitters, knock-out punchers or seducers-seductresses of the screen. Because only a handful of these fireflies maintain their box office charisma for any considerable time, as a group they are not in the income class of the executives, who even in retirement continue to be handsomely rewarded. Entertainers and athletes in general are paid little.
Just what is it that makes an upper corporation executive worth his pay, ranging on the record from $200,000 to $800,000 a year in the merely cash portions? A standard answer, part of what I shall hereafter refer to as the executive mystique, is that "the value of an upper-echelon executive lies in the decisions he makes and influences. " 1
It is made evident that the decisions for which he is rewarded so handsomely are money-making decisions. While he may at times make wrong decisions, most of his decisions (at least the big ones) must be the right ones, the winning ones. Or so it is argued.
One cannot deny that the top executives are decision makers. But this observation is not very profound because, paradoxically, not to make any decision is a decision. We are all, as it happens, decision makers. But we are not--most of us--money-making decision makers.
The kind of decision making the big executive engages in, according to theory, is as follows:
He makes one big decision (or a series of decisions) that vastly improves the relative position of his company, reflected in earnings; that slightly improves or holds steady the relative position of his company among rivals; that in any general economic decline leads his company to lose ground less rapidly than others; or that enables his company, at the bottom of a slump, to spring up again, phoenix-like, and astonish the world--or at least the editors of Fortune and the Wall Street Journal.
More exactly, he is not supposed to make those decisions by himself, out of the whole cloth, but to fit together the advice and insights of many others, like a master craftsman, and extract the winning decision.
In theory the decisions he makes must be winning decisions. Because if one is paying for decision making, as the big stockholders are supposed to be doing, one surely does not want to pay for losing decisions. And yet, highly paid executives often make momentous losing decisions, sometimes all together, sometimes in industry groups and sometimes in single companies.
In the early 1930's, the leading corporate executives all made a collectively losing decision. They decided to maintain their economic positions amid sudden price declines through cost-cutting, mainly by wholesale discharges of unprotected workers, the rank- and-file patriots. The theory was that as demand for goods was restimulated at lower price levels, business would pick up at more normalized levels than in the 1920's, workers could be rehired at lower wages as in the slump of 1920-22. Then the process of money-making could resume on a "sounder" basis.
There was no pick-up, however, because during the serial process of wholesale layoffs workers exhausted their meager savings and credit.
When prices reached low levels they continued to fall to still lower levels, except where they were "administered. " Much less business was done because many people had no money. The economy began stagnating, the Communists gloated because Marx had predicted capitalism would lose the ability to govern in one of these slumps. The Great Depression was on, produced by master minds who instead of living up to their reputation as entrepreneurs had become, turtle-like, solely interested in preserving working capital.
Ironically, surrounding conditions from a business point of view were perfect. There was no government interference with business. There had been twelve years of uninterrupted lax Republican rule under figurehead presidents. Taxes under Treasury Secretary Andrew Mellon had been brought to very low levels. Tariff walls against odious foreign goods were at record high levels. Big Business ruled the roost more fully than it did later under Lyndon B. Johnson.
If it were a fact that executives are paid as decision makers they would all have been fired. For they had all, acting according to crowd psychology as they usually do, made a general losing decision, reflected in steady corporate deficits. There never was a major winning decision in this situation in the sense of one company moving ahead of others. No corporate master mind showed himself, for the simple reason that there were no corporate master minds. The emperors were all stark naked. In national self-defense the government moved, slowly, to intervene with its own programs, amid witless cries from the corporate press of "creeping socialism. "
One often sees the same sort of collective losing decision making in an entire industry, as in the railroad industry since World War I. Suddenly faced with new competition-- from pipelines, trucks, buses and airplanes--the railroad industry down through the decades, instead of adjusting services to meet new conditions, instead of participating by one avenue or the other in new forms of transport, decided to curtail services. The industry decided, forsooth, to go out of business on the installment plan.
Where one company clearly falls behind all others in the same industry through having failed to adapt to new currents or to take advantage of some innovation, it is obvious that the chief executive (or his subalterns) has not been alert and he is, unless he is a big stockholder, usually dropped. This was the case with respect to Charles Luckman, president of Lever Brothers after World War II and widely touted as a "wonder boy. " The rest of the industry stole a march on him in the introduction of detergents in place of soap powders, and Lever Brothers underwent setbacks in the market until it tardily took up detergents. Luckman was fired.
But when Ford Motor Company lost a reported $250 million on its hapless Edsel model in the 1950's, Henry Ford II did not walk the plank. He, along with other stockholders, simply took it in the pocketbook. He could not be fired because be was a chief owner. This simple fact revealed the source of true power in an executive.
Aging Sewell Avery, a big stockholder, stubbornly held to his position at the head of Montgomery Ward and Company after World War II and decided to retrench in expectation of a resumption of the depression. Ward's arch-rival, Sears, Roebuck and Company, decided to expand in expectation of an inflationary boom, and soon passed on to astronomic heights of latter-day success. Here we have a case of a losing and a winning decision, both made by experienced managements, one rather inflexible. To argue that Avery was a poor executive because he made a less advantageous decision is like arguing that Napoleon was a bad general because he lost the battle of Waterloo.
In all the loose talk about executive decision making it is overlooked that corporate decisions are usually made collectively, more recently on the basis of a vast mass of information assembled and digested by computers. After careful sifting by low-paid technicians--statisticians, economists, mathematicians, psychologists and even at times anthropologists--a set of alternatives is laid before the executive board. If the correct data have been fed to the computers these mechanisms may themselves have the answer: Expand, branch out, retrench, stand pat, fight, submit, deny. Again, the decisions are rarely of life-and-death caliber. They are usually fairly routine and marginal.
John F. Kennedy, it is reported, faced divided counsels among his advisers on the religious issue in 1960. Some said he should avoid it, some said he should stress it, others felt he should touch on it, but lightly. The problem was put to a computer into which a mass of data was fed on the characteristics of the American population. The computer replied: Stress the issue. And this was done. While one cannot say that this is why Kennedy won, it obviously did not cause him to lose. So it was presumably the right decision-made by a computer. The masterly decision in this case was evidently to turn to the computer.
Corporation officials often face issues that arise from a set of losing decisions of long- or short-term nature. And they know they are losers. What they often do then is to make no decision, ride with the tide in the hope that something of a saving nature will turn up. They are not, then, paid primarily to make dramatic "right" decisions, although they participate in corporate serendipity and will be penalized for obviously bizarre judgments, now increasingly eliminated by expert analysts and computer technology. But corporations, their nets spread wide, are not run by ear, as the decision-making theory suggests. If they sometimes gamble, it is only in small ways. Almost never do they stake their lives on a single line of policy. They do indeed have alternative policies, sometimes all in effect in different areas at the same time. They play both ends against the middle and the middle against both ends.
There is much else, which need not detain us, to show there is little in this contention that high compensation is given for profitable decision-making. The decision-making theory is part of the executive mystique. This mystique, dubbed "Management," has been developed partly for psychological reasons: To give executives in a long chain of command down to the newest junior executive and foreman a sense of worth in essentially boring jobs. It also provides an impressive rationale for the payment of grotesque salaries. For as decision makers, most company chairmen and presidents could not fight their way out of a paper bag, as is repeatedly shown when they are dragged into full public view and subjected to searching questioning under subpoena. Then they almost invariably wilt, show themselves as very ordinary men.
This is not to say that corporation executives are without ability. They are able people, the ablest that can be found for the task. Their ability resides in a varying combination of qualities. The big factor that enters into their selection and compensation is that they are custodian-trustees and overseers of vastly valuable properties.
