Profit Sharing: An American Presidential History

Profit Sharing: An American Presidential History
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Profit sharing recently became an issue in the Presidential campaign with Hillary Rodham Clinton's announcement last month that widespread profit sharing in American business will be one of her key economic ideas in order to address the plight of the middle class. This is a good time to explore how modern Presidents and Presidential candidates have thought about and acted on the idea of profit sharing throughout American history and how and why profit sharing makes its way to the national agenda. Today, politicians of all stripes have recognized that wage stagnation is the major domestic economic problem on the mind of citizens. Productivity and profits of businesses have been on the rise while inflation-adjusted wages and incomes for the middle class have been mostly flat. Cash profit sharing enters the picture as a potential approach to share those gains. Here is how some of America's leaders have grappled with these arguments.

In 1953, Democratic President-to-be John F. Kennedy took time to give a lengthy speech to an influential group of corporations that practiced profit sharing when he was a Massachusetts Senator. Kennedy spoke to the Council of Profit Sharing Industries in Boston. At this time the Council was the major national organization of businesses practicing profit sharing. A number of companies were trying out the practice of profit sharing across the nation. The Council included the well-known profit-sharing company, S.C. Johnson & Sons, the maker of Pledge, Drano, Windex, and Raid, a family-owned company that introduced profit sharing in 1917 and is still known as a leader in profit sharing today. When JFK addressed the Council, the organization of company officials had grown from a small collection of firms, originally from Ohio and then largely from the Mid-West, to scores of firms with a national organization that held annual conventions for business leaders, promoted the idea, and hosted major public figures.

Kennedy's remarks directly echoed the wage/productivity gap that has motivated the current debate on profit sharing. He said that: " It is through such practices that the productivity of our workers and our industrial community will continue to increase, and our wages and our national income shall continue to our citizens become still more prosperous." Kennedy spoke at a moment when the leaders of business were trying to take the front position in spreading the idea of profit sharing. At this time, decades of research had already concluded that profit sharing raised productivity so Kennedy was reflecting that academic finding in his remarks. Kennedy joined a long tradition of interest by leaders in American political life on the concept of profit sharing.

Earlier, Republican President Theodore Roosevelt called for widespread profit sharing in his Annual Message to Congress on December 8, 1908 when he said, "I believe in a steady bring about a condition of affairs under which the men who work with hand and brain...shall own a greater share than at present of the wealth they produce." In order to promote profit sharing, there was actually little for President Teddy Roosevelt to do at the time other than use "the bully pulpit" for which he was so famous, just to talk about the idea. This is because the Federal government had no authority to provide any tax incentives to businesses since Federal personal and corporate income taxes would not come into existence until 1913 with the Sixteenth Amendment to the U.S. Constitution. While emphasizing the endeavor would be an initiative mainly of the private sector, President Roosevelt perhaps looked to the future and suggested that "Legislation can do a good deal."

Roosevelt addressed the issue of profit sharing in an era in which the great power of business and its gigantic trusts seemed daunting to the individual laborer and the labor union. In another speech entitled, "The Democratic Movement in a Republic," coincidentally given in 1913, as income taxes just became legal, now former President Teddy Roosevelt was even more insistent about the profit sharing idea and he went a step further saying, "we must insist upon the principle of cooperation, of profit sharing and partnership as regards employer and employee, so that the prosperity coming to the big business organization shall in measurable degree and with some approximation to justice be divided with the ordinary wage workers in the business." Former President Roosevelt had just founded the Progressive Party a year earlier and he was preparing to mount a new challenge to then Republican President William Taft and New Jersey Democratic Governor Woodrow Wilson in the 1912 election that ended with Wilson becoming the next President of the United States.

Teddy Roosevelt fit his ideas about profit sharing into the larger concept of "the living wage." He laid out this concept at the national convention of The Progressive Party in 1912: "As a people, we cannot afford to let any group of citizens or any individual citizen, live or labor under conditions which are injurious to the common welfare.... We must protect the crushable elements at the base of our present industrial structure. We stand for a living wage. Wages are subnormal if they fail to provide a living for those who devote their time and energy to industrial occupations. The monetary equivalent of a living wage varies according to local conditions, but must include enough to secure the elements of a normal standard of living--a standard high enough to make morality possible, to provide for education and recreation, to care for immature members of the family, to maintain the family during periods of sickness, and to permit a reasonable savings for old age." For policy wonks today who wonder whether to emphasize either the minimum wage or profit sharing, Roosevelt provided the overarching concept of "the living wage" that could be inclusive of both.

As Presidential candidate Woodrow Wilson faced off against Progressive Teddy Roosevelt and President William Howard Taft in the 1912 Presidential election, Wilson went on to make a number of policy statements about profit sharing himself. Wilson agreed with some basic economic principles but also laid down one challenge to Teddy Roosevelt in a September 12, 1912 speech in Buffalo. On the issue of the centrality of individual access to a share of wealth, Wilson was absolutely clear when he said that: "America was created in order that every man should have the same chance as every other man to exercise mastery over his own fortunes." However, in his Buffalo speech, Wilson did not like a version of Roosevelt's implementation plan for nationwide profit sharing as he understood it. He criticized what he understood as one of Roosevelt's plans to sharply cut the tariff protection of manufacturers "who did not share their profits liberally enough with their workmen." Without corporate taxes as a carrot to facilitate corporations turning to the profit sharing practice, Wilson's opinion was that Roosevelt might be threatening to use too blunt an instrument by using the stick of cutting the tariff protection on manufacturers who did not cooperate. It is actually unclear that Roosevelt ever seriously pushed that proposal. As a proponent of wider forms of industrial democracy, Wilson wanted to be sure that profit sharing would sincerely serve the interests of workers and he worried about insincere profit sharing plans that exploited labor. Wilson's concerns actually may have slowed him down from making any meaningful initiatives in the direction of profit sharing. Clearly, Wilson's inner circle disagreed with him on this point. Joseph Patrick Tumulty, who was Wilson's top assistant as Governor of New Jersey and later tantamount to his "chief of staff" at the White House, proposed that the President throw himself energetically behind the profit sharing idea in a memorandum written on June 4. 1919. Tumulty correctly read the political scene that the Gilded Age was upon the Wilson Administration and the President had nothing specific and little practical to offer real workers.

The subject of nation-wide profit sharing came up in a dramatic way in the Presidential election of 1920, which determined President Woodrow Wilson's successor at the national helm. The Army Chief of Staff Major General Leonard S. Wood was urged by friends of Theodore Roosevelt to run. Wood was both beloved as a leader of the army and also controversial for some events in his military career. Wood believed that he had the mantle of Teddy Roosevelt to carry forward. Wood selected as his campaign manager William Cooper Proctor who had established and developed the generous profit sharing plan at Procter & Gamble in Cincinnati in the mid-1880's. Procter was a great admirer of Teddy Roosevelt. Wood articulated a broad vision of the importance of profit sharing to resolving the conflict between labor and capital in his speeches and articles. Proctor, using his own personal profits from the huge company that grew large on the basis of the profit sharing idea, also became a major contributor to the Wood campaign. There is no question that Procter was trying hard to bring his vision of industrial relations, for which he was already nationally famous in the press and policy circles, into the realm national Presidential policy. The drama was that some elements of the Republican establishment did everything they could to undermine the idealism of General Wood and William Cooper Procter.

As the voting started at the Republican Convention, historians report that the some elements of the Republican establishment offered the Wood campaign the votes to quickly secure the Republican Presidential nomination at the party's convention if the candidate ceded to them control of several cabinet departments (should he become the new President) in a political deal. Historians have reported that both Wood and Procter honorably and definitively rejected this unseemly deal and they both saw their plans for the Republican nomination and for profit sharing to play an outsize role in the Presidential campaign, go immediately and totally down the drain. The Republican establishment then brought Warren Harding into the convention and he quickly secured the nomination and later the Presidency. Ironically, in his personal life, President Harding had implemented a profit sharing arrangement in his and his wife's newspaper business where they split shares in the company two thirds to the couple and one third to the workers. The 1921 campaign was the closest a modern Presidential candidate ever came to making profit sharing a national policy issue and it was undermined by the most cynical politics.

It took a Democratic Administration, that of President Franklin D. Roosevelt, to give profit sharing its major concrete push from 1933-1945, but with definite bipartisan assistance. While historians focus on FDR's social programs, a series of events were set in motion during his administration that led to a far-reaching expansion of profit sharing in the American economy. Republicans played a key role in his success. The story began with Michigan Republican Senator Arthur S. Vandenberg who vehemently opposed Roosevelt's New Deal programs and voted against the establishment of Social Security. In 1939, Senator Vandenberg had a big hand in hearings on profit sharing in Senate Finance Committee chaired by Iowa Democratic Senator Clyde L. Herring who was angling to be Roosevelt's Vice Presidential pick in the 1940 Democratic Convention. In a November 27, 1938 front page article, The Milwaukee Journal wrote about the hearings noting that "how to make democracy work, how to give enough Americans enough personal interest in preserving the capitalist profit system, how to divide the fruits of production among people equitably, these are the announced objectives of President Roosevelt." The newspaper went on to say that both parties realized that profit sharing could advance this objective as a bipartisan idea.

Senator Vandenberg was reported by the newspaper to be "the spark plug" at the profit sharing hearings just as he was widely rumored to be a prospective GOP candidate for President in 1940. The committee was no simple PR front show. In the most substantive bipartisan work ever done in Congress on the profit sharing idea, the committee, with a majority of Democrats and an active Republican minority, did an extensive research survey on profit sharing, invited many profit sharing companies and experts from around the nation and questioned them intently, and engaged in a vigorous blunt back-and-forth discussion and careful analysis of the issue. The committee report concluded that "profit sharing creates employer-employee relations that makes for peace, equity, efficiency, and contentment... and contributes substantially to financial security in retirement." The newspaper summarized the findings in this way, "it (profit sharing) has not always worked" but where it has been a "sincere effort" it could, as one witness said "get the best work by giving the workers what they have coming to them." Many of America's largest and most famous companies at the time, Sears, then high-tech star Eastman Kodak, and, of course, Procter & Gamble, sent CEOs or top managers to the hearings to talk in detail about their experiences with the concept. These companies had very generous profit sharing on top of wages. Shortly thereafter, Congress passed the committee's bipartisan policy proposal that gave tax advantages to deferred profit sharing plans.

The Roosevelt Administration's tax incentives changed the national profit sharing territory and set the stage for America's first bipartisan profit sharing push using tax incentives across the entire economy. The incentives encouraged a particular type of profit sharing plan, the deferred profit sharing trust where workers received a combination of cash profit sharing in the present and deferred profit sharing payments to be held in a savings plan for the future. According to the Encyclopedia of Retirement and Finance "from 1940-1946, the Internal Revenue Service approved 2,471 deferred profit sharing plans, a vast increase over the 37 plans already in existence." In 1942, as an outgrowth of World War II economic policy, the Encyclopedia reports that the Salary Stabilization Act restricted wage increases. As companies searched for another way to compensate workers, they saw the tax advantages of deferred profit sharing plans as even more attractive, allowing them to deduct up to 15% on top of wages. Workers also liked the long-term capital gains treatment on the profit sharing checks. According to the Encyclopedia, "between 1946 and 1955, an additional 6,000 plans were approved." As a result, the FDR Administration became responsible for initiating the first major expansion of profit sharing in American history that continued through the Truman and Eisenhower and Kennedy Administrations.

The profit sharing idea had now begun to be widely acceptable among the political class. For example, Conrad Black in his biography of former President Richard M. Nixon writes about a April 1949 Nixon speech to the Los Angeles County Republican Central Committee in which Nixon supported "generalized profit sharing for unionized labor to give it a stake in employer companies." George W. Romney, who initially challenged Nixon for the Republican Presidential nomination in the 1968 election, developed a widely publicized profit sharing plan when he was head of the American Motors Corporation. Romney disagreed with the then President of General Motors, Harlow H. Curtice, who flatly rejected UAW leader Walter Reuther's calls for profit sharing. The GM leader called profit sharing "a radical scheme...foreign to the concepts of the American enterprise system." This view of profit sharing receives little support in a close analysis of Presidential history on profit sharing. The Washington Post, which covered all these political developments got involved on its own. Eugene Meyer, who bought the newspaper in 1933, was Chairman of the Federal Reserve from 1930-1922, and was the father of Post publisher Katherine Graham, implemented a far-reaching profit sharing plan at the paper and also included hundreds of the papers employees in a program where they also received grants of the Post's stock. One of President Eisenhower's top aides, Thomas Pike, was in fact a trustee of the Council of Profit Sharing Industries. And probably the most conservative politician of his generation, Senator Barry N. Goldwater, the Republican Presidential nominee in 1964, implemented profit sharing in the network of retail stores he managed along with full healthcare, life insurance, and a forty hour work week.

The man who won the 1964 election competition with Senator Goldwater, President Lyndon B. Johnson, strongly supported the profit sharing idea. It is not widely known that he and his wife, Lady Bird Johnson, instituted an employee profit sharing plan for their Texas TV and radio stations, KTBC in Austin. In his first speech after the JFK assassination to State Governors on November 25, 1963, LBJ surprisingly found space for this particular idea as he weaved capitalism and profit sharing and worker economic rights together when he said: "We think that where a capitalist can put up a dollar, he can get a return on it. A manager can get up early to work and with money and men he can build a better mousetrap. A laborer who is worthy of his hire stands a chance of getting attention and maybe a little profit-sharing system, and the highest minimum wages of any nation in the world." In fact, LBJ spoke of profit sharing as emblematic of the U.S. economic system when he said in another speech later in his Presidency, "We can all, each of us, take great pride in our own tax paying, profit-sharing, private enterprise system of government where incentive has its reward, and all the nations of the world look to us with envy."

The post World War II profit sharing tax incentives continued to endure during this period of wider acceptance of the profit sharing idea at the Presidential level and in the Congress. The special tax treatment of deferred profit sharing plans was yet again coded in the major new tax incentive legislation of the time dealing with employee savings, the Employee Retiree Income Security Act of 1974, which was initiated during the Nixon Administration, signed into law by President Gerald R. Ford, and passed the Congress with strong bipartisan support. Alan Greenspan, who served as Chairman of the Council of Economic Advisors under President Ford, had a profit sharing trust at his own private economic consulting firm, Townsend-Greenspan & Company.

Ironically, just as the forces in the American economy that contributed to flat inflation-adjusted wages for the past few decades began to seriously take shape, both cash and deferred profit sharing began to lose their currency after the 1980 election year. How did that happen? New Federal policies on 401k plans undermined cash and deferred profit sharing as a result of some unintended consequences of that legislation. The government slowed down on updating its policies on profit sharing over several decades. There were few Congressional champions. More importantly, there was a strong belief that the benefits of economic prosperity would likely "trickle down" as part of the wage system. The socially-involved generation of business leaders who implemented profit sharing in their companies and spoke about it with public fervor were replaced by a new generation of more bureaucratic inward-looking corporate officers. Pastors and ministers who used to give sermons on profit sharing started toning down the economic justice message from their pulpits. Moreover, policy-makers did not predict the aggressive "cut mentality" among corporations that never subsequently figured out new ways to share the new gains after the fat was trimmed. Profit sharing began a slow withering process.

Just after the Democratic Party lost the 1980 election to President Ronald Reagan, Ted Van Dyk, head of the Center for Democratic Policy and Charles Manatt, Chairman of the Democratic National Committee, appeared to correctly grasp the situation. Their institutions offered up the idea of changing tax laws in order to significantly expand profit sharing as one of three new Democratic ideas that would recharge the "intellectual capital of Franklin Roosevelt." UCLA economist Daniel J. B. Mitchell joined them to make the economic arguments for what the group called a "new American agenda." But the Congressional foot soldiers of the party did little and nothing ever came of the new ideas as profit sharing continued to fade and the Reagan Revolution became the new political idea. All the Presidential Administrations since then did little to either push or even raise the idea of profit sharing.

Presidential candidate Hillary Rodham Clinton's profit sharing policy proposal can be viewed within this broader bipartisan context. Clinton has proposed a two-year tax credit for each company to initiate profit sharing equal to 15% of the profits that the firm shares as a way to jumpstart the profit sharing concept again. The tax credit would be available throughout the economy for a decade. To avoid abuse, the tax credit: would be higher for small businesses, would be capped at 10% on top of employees' current wages, would be available to firms that share profits widely among workers, would be available for higher income employees only within limits, and would be subject to protections against employers substituting current fixed wages with profit sharing in order to "game" the tax incentive. Profit sharing is back on the Presidential agenda.

The idea of Federal incentives for profit sharing go back much longer than recent Presidents and Presidential candidates. On February 16, 1792, during the first Presidential Administration of George Washington, the first U.S. Congress passed profit sharing legislation. The Washington Administration offered tariff allowances, essentially tax credits, to owners of cod ships that managed the country's fourth largest export industry if the ships agreed to implement profit sharing. During the American Revolution the British had gone out of their way to destroy the cod fishery as a viable part of the young nation's nascent economy. The policy that Congress passed and Washington signed into law allowed shipowners to receive tariff allowances (essentially tax cuts) based on the size of the ships going out to fish with the idea that over some years lower taxes would help the industry rebound. There were two conditions of these "tax credits." The first condition was that all of the workers from the cabin boy to the captain had to be included. Five-eighths of the allowance was actually payable to the workers and three-eights to the shipowners. The second condition was that the captain of the ship had to sign a written agreement before each voyage promising to observe broad-based profit sharing with the entire crew on the profit on the catch of fish. In fact, broad profit sharing had been common in the industry before its collapse. Secretary of the Treasury Alexander Hamilton implemented the profit sharing "tax credits." America's first Congress and first President and first Secretary of the Treasury invented and implemented the idea of tax incentives for broad-based profit sharing.

Profit sharing has a long history in Presidential politics and policy. It is time that both profit sharing and the whole idea of shares of profits and other proposals for broad-based employee ownership for middle workers be forthrightly discussed in Presidential debates.

Joseph Blasi tells the American history of shares in his recent book, The Citizen's Share (Yale University Press, 2015), written with Richard P. Freeman of Harvard and Douglas L. Kruse of Rutgers. Blasi is the J. Robert Beyster Distinguished Professor at Rutgers University's School of Management and Labor Relations.

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