Robert Reich: Welcome, and the simulation is going to start right now.
I'm going to be playing Hacksaw Bob.
Now, when I put these glasses on that means I am playing a part.
[Laughter] This is not me.
This is me in a role.
I'm going to show you, and what I'm proposing for the Acme Widget Company.
Now, you are my board of directors, and here is the Acme Widget Company.
And here is our profits.
You can see, here is the current trend in blue -- We're not doing awfully bad, members
of board of director.
We're doing okay.
But I want profits to be even higher, as I am sure do you, right?
We all do.
That's what we are here for.
Okay, everybody agree?
Alright.
Now, so here's what I'm proposing.
I have a plan, you're my board of directors.
And let me take these off.
In real life, a board of directors is much smaller than this.
We're sitting around a big table, let's assume.
Okay, I'm back.
So I would like you to approve my plan, and I'm going to explain my plan to you, and then
I want a vote of approval.
Here's the plan: I want to cut payroll costs by 60 percent.
I want to reduce wages of all employees, except top executives by 40 percent, eliminate health
care and retirement benefits for all employees, except top executives.
And I'm going to accomplish this by firing 25 percent of the workforce, outsourcing jobs
abroad, substituting automated machines, improving overall efficiency, and moving our plant to
a non-union state.
Alright, everyone in favor, I hope.
All of those in favor A. Vote right now.
You're in favor A. If you don't like it it's B. And let's see 7,8,9,10, and let's end the
bidding there.
And I hope you see the light.
I hope it's A. I need your approval.
[Laughter] You're not giving me approval, alright.
[Laughter] So I don't understand.
I'm trying to get the profits up.
Does anyone have a problem with my plan, what's the problem?
Anybody that voted against me?
Anybody?
What's the problem?
Students: It's immoral.
Reich: Morals-Smorals!
What we are doing is moving resources to their highest and best uses.
We've got a lot of people we don't need.
They don't, have you ever been employed by somebody who doesn't really need you?
I mean, do you know how awful it feels to be somebody who is just there for no reason,
just having a make-work job?
These people are going to have better lives because they're going to be fired.
And they're going to get better jobs elsewhere, better jobs elsewhere.
Highest and best uses.
Anybody else have a problem with me?
Yes.
Student:Your workers aren't going to work well for you if you don't treat them well.
Reich: I'm going to treat them well.
Well, let's put it this way.
Student: You're cutting their retirement account benefits.
Reich:Okay, okay.
I hear what you're saying.
Look at it, you say workers aren't going to be efficient and they aren't going to do well
if I don't treat them well.
But what I've done, I've hired a consultant company, and what they've done, if they've
looked at supply and demand of the kind of hourly workers, there are hourly workers -- you
know these hourly workers they just do the same thing over an over again.
They're aren't going to be any problems.
This is the same thing every one of our competitors is doing right now, so there's not going to
be a problem.
There might be a morale problem for a while.
I'll explain it.
Anybody else have a problem?
Yes, what's the problem?
Student: In the short-term, this is going to maximize profits, but in the long-run this
going to be detrimental.
You say that in the short-term it's going to maximize profits, but in the long-run,
as John Maynard Keynes once said, we're all dead.
[Laughter] I mean, I don't care about the long-run.
I want to maximize shareholder returns in the foreseeable future.
And, by the way, I have stock analysts breathing down my neck from Wall Street.
They are looking quarter to quarter.
And their major investors are looking quarter to quarter.
And that's what we have got to do.
We've got to maximize share prices.
Anybody else have any problems with this?
Yes, what?
Students: You're cutting wages for top executives.
Reich: The reason I'm exempting top executives is because I want to get the best top executives.
There is a market for the best top executives.
If we don't pay our top executives enough, then those top executives are going to go
elsewhere.
I want to get star talent.
You know, the other thing, I just want to make sure you're all aware of, is if we don't
maximize shareholder returns, we are going to be taken over.
We're going to be taken over by corporate raiders, by shareholders who want higher returns
-- private equity funds.
You've heard of private equity funds, activist investors, you've heard of them.
Well, we're going to be taken over, and then you're going to be out of a job and I'm going
to be out of a job.
And is that better than what we have right now?
They're going to do exactly what I've suggested.
They are going to make exactly the same suggestions I am making, so what is the problem here?Anybody
else?
What's your problem?
Student: So you call yourself a hacksaw, but only 25 percent layoffs?
So why don't we cut more, automate more, and rely entirely on percarium labor?
Reich: You are the kind of person I am proud to have on my board of directors?
[Laughter] So you're saying, do more of this?
Fire more, if I can.
Well, you know, this is a good start.
And the reason I got my name hacksaw Bob, you know there are CEOs out there -- there
used to be a guy chainsaw Al Dunlop, the head of GE was a called neutron Jack.
And they got their monikers because they all did something like this to boost share prices
and boost profits because the biggest cost in this company is labor.
And so the way we boost profits is we get labor costs down, and you're absolutely right,
if we could do it, maybe next time around.
Maybe my plan, I'll come back to you.
You're a really good guy.
[Laughter] Any other problems?
I want you to vote on this again, and I want you to vote for my proposition, but I just
want to make sure I'm responding to everyone's concerns you have.
Yes.
Student: You're dehumanizing the workforce.
And if you do that you won't have consumers to buy your products.
Reich: Oh yes, you're saying that the workers are consumers and if they don't have the money
or they don't have security they're not going buy the products, I know that.
But, you know, we're only one company.
I mean you've got a lot of other companies out there, right?
And it's not my responsibility to make sure that consumers around the country, and everyplace
else have enough money to buy our products, alright?
What we have to do is maximize shareholder returns.
That is our number 1 responsibility.
That is our only responsibility.
Our legal responsibility.
We have a fiduciary duty.
Have you ever heard of fiduciary duty?
Fiduciary duty.
[Laughter] Say it again, fiduciary duty to maximize shareholder returns, so I don't know
that those of you that are worried about this all -- cut payroll by 60 percent, we can do
it, we should be doing it.
And we can do it in these ways.
You've got a problem?
[Laughter] Student: I've got a question.
Reich: You've got a question.
Student: What are the severance packages for the people that will be laid off?
Reich: The severance packages?
Zero!
Student: Is that legal?
Reich: Of course it's legal.
We're not doing anything that's illegal.
There is no severance package.
There's no law that says we have to give any severance package.
Yes?
Student: If you want to increase profit, why don't you just make a better product?
Reich: If you want to increase profit, why don't we make a better product?
[Laughter] Well, first of all, we are putting money into R&D, yes we are.
We are.
In fact, some of the savings we're going to get are going to go into R&D and the market
is going to react well because I've already been talking to analysts and they have been
saying to me that you're a little bit low on the research and development side.
We would like to see a little bit more R&D, and we're going to do that.
We're going to make products better and better and better.
And nobody has come up with a good argument.
You have a good argument?
A question, yes.
Student: What do you anticipate will happen to all of the people you fire?
Reich: What happens to all the people I fire?
They get other jobs.
Student: Do you not care about their well-being?
Reich: Well, I care about their well-being to the extent that we're all human beings,
but I, you know, it's not my responsibility as CEO of this company to care about their
well-being as human beings out in the world.
I would like -- as a person, of course, I care about their well-being, I'm a nice person,
but in terms of my responsibility and your responsibility as one of my trustees, you
know, my board of directors, my board of directors.
no.
Student: But isn't that your responsibility as a human being?
Reich: My responsibility as a human being has nothing to do with it!
We're in business.
[Laughter] Thees are laws.
What we are supposed to do, and what I want to stress with you, if we don't do it a private
equity group is going to come in and they will do it.
They will do it.
We're going to be taken over, an unfriendly takeover, where an activist investor is going
to come in and buy enough shares of stock that activist investor is actually going to
control this company.
And if you don't understand that basic logic then you have no business being on this board.
One more, and then I really want your backing on this.
Yes.
Student: How much revenue and much wages, or some of employees can be saved by firing
some of the top executives?
And maybe moving some of the upper-management up?
Reich: You know, the question is how much can we save by firing top executives.
Look, we're not top heavy.
I mean I've gone through the top executives, and I have fired some of them, you know that
because we've talked about that before.
You know, there are under performing top executives, but I want to make sure you understand that
the market for executive talent is getting tighter and tighter.
And so if they are very good, I want to pay them.
If they're not good, they're getting out of here, alright.
This is why people expect us to do a better and better job on profits in this company.
So once again, I'm going to ask you once again, final time, and I want you to take seriously
my arguments, alright.
I want you you to vote.
You, my board of directors, A, yes, you like my plan.
B, no.
Go.
And let's take a look at what you have decided?
And I hope.
[Laughter] And you're still not with me, but here's what I like, we're going in the right
direction.
[Laughter] Okay, I am going to end this simulation before I barf.
[Laughter] No, I'm not going to barf.
But see what I tried to do and this was a slight caricature, but what I tried to do
in this simulation is give you a sense of what is driving a lot of what we see in the
economy.
If labor costs are 70 percent of a business's costs and there is pressure on a business
to raise profits, and there are unfriendly takeovers or as they are now known activist
investors or private equity firms that are ready to take over the business to do all
of this.
Then there is huge pressure on companies and board of directors.
This is something that's quite new.
In the 50s, 60s, and 70s, this was the view that prevailed: "Americans regard business
management as a stewardship, and expect it to operate the economy as a public trust for
the benefit of all the people."
This just happens to be J.D.
Zellerbach in 1956.
He was a paper executive.
But if you actually looked at the economy in the 1940s and 50s, you actually saw that
the dominant model was what we might today call stakeholder capitalism.
It was not designed only to maximize shareholder returns.
It was also designed -- at least according to how a lot of corporations behaved and,
not just want they said, the CEO said, but also how they behaved -- it was also to improve
the wellbeing of workers and to improve the well-being of communities.
And then you had, starting tin the 1980s: "We have bloated bureaucracies in corporate
America...I have to look out for the shareholders interests, and I'm the largest shareholder."
And that's Carl Ichan, a corporate raider of the 1980s.
There are also a lot of other corporate raiders of the 1980s.
They used something then called junk bonds, which actually were very high risk, high risk
debt that they took on in order to buy what they said were under-performing companies.
Under-performing companies meaning that the companies did not have a high return.
Companies could have done better if they actually did worse to their workers and communities.
Companies could do better if they cut the fat, cut to the bone.
The butcher metaphors that came out in the 1980s.
So there is a fundamental question.
This is still the dominate view of the purpose of the corporation.
And many people argue that this make the economy more efficient.
Otherwise, you have bloated corporate bureaucracies and you've got a lot of people who are sitting
around doing things, including average workers who would be much better off if they just
had different jobs.
And you've got communities that have grown used to particular companies in their communities.
They don't even appreciate the jobs they have.
But this view generated a very different economy, so the question is who has the superior view.
And this is the question I want to leave you with.
Is is Zellerbach or is it Icahn?
Go.
5, 6, 7, 8, 9, 10.
And let's end the bidding there.
Well, I'm not particularly surprised.
But let me just say this: If you want to stakeholder capitalism, then the laws and regulations
that shape the capital market have got to be changed.
If you want an economy that puts a greater value on, for example, the job security of
American workers, if that's what your value is, and that's what other people's values
are, then you've got to change the rules.
As the rules are now constructed and the regulations and laws, it is shareholder capitalism.
So whether we change and how we change is up to you.
And up to you.