VIEWPOINTS : Criticisms of Corporations From Treasury Officer Darman

Corporate America found itself the target of some pointed criticism about a week ago from a high-level Reagan Administration official.

Deputy Treasury Secretary Richard G. Darman, speaking in New York before the Japan Society, scored the bureaucracy and parochialism of some major corporations. He derided the way some executives have climbed the corporate ladder, and he found fault with their working hours. Darman also touched on issues such as tax reform and cooperation with Japan.

Some executives reacted with dismay both to the tone and substance of Darman’s remarks. The following are excerpts from his speech: Corporate Bureaucracy

High on the list (of deep cultural problems in the United States) one would find a problem that is sometimes captured with the term “corpocracy”--a reference to large-scale corporate America’s tendency to be like the government bureaucracy that corporate executives love to malign: bloated, risk-averse, inefficient and unimaginative. American corpocracy is a problem that is clearly of rising popular interest and concern.

Raiders as Folk Heroes

The rising concern about the stewardship of America’s great corporate bureaucracies is reflected in the media’s increasing infatuation with characters like Carl C. Icahn and T. Boone Pickens Jr. Once dismissed as corporate “raiders,” they are gaining attention as a new kind of populist folk hero--taking on not only big corporations but the phenomenon of corpocracy itself.

Research, Development

As a general matter, we pride ourselves on our pioneering traditions; but outside of the publicly funded defense area, we under-invest in R&D.; Some high-priced private managers seem to spend less time developing R&D; budgets than they spend reviewing golf scores.

The Executive Ladder

We pride ourselves on being entrepreneurial risk-takers; but many climb to the top of the corporate ladder on the strength of their demeanor and a failure to make observeable mistakes.

Parochialism

We claim now to recognize our interdependence in a global economy--a belated, post-Arab-oil-embargo recognition; but much of corporate America remains parochial and knows far less about other cultures than foreign managers know about us. It is little wonder that the Japanese, Koreans and others can design and market state-of-the-art consumer products for our markets but that we are often inept at doing the reverse. Indeed, in many cases American managers are not even as adept as some foreigners in designing products, strategies and tactics for dealing with our own culture.

Work Hours

If, by chance, one wants to discuss any of (these issues) with some of America’s top corporate leaders, it is often best to call after 10 in the morning and before 4 in the afternoon--unless one has the number of their car phones.

Working With Japan

The United States has often acted as if we alone had the right answers, when obviously that is not the case. In stimulating new economic vitality, the Japanese may well benefit by following the U.S. lead in tax reform; but clearly we, too, have much to learn from the Japanese--about increasing savings, promoting innovation and managing global marketing strategies. The U.S. and Japan are the world’s two largest economies. We both are highly market-oriented. Together we now account for 70% of the major industrialized democracies’ GNP (gross national product), and almost 40% of global GNP. If we are able constructively to spur each other and ourselves toward greater economic vitality, we will remain the two most dynamic economic powers. And by managing our policy development cooperatively . . . we can set a constructive example that the world would seem bound to follow.

The Populist Force Behind Tax Reform

Like other strains of American populism, this latest strain has been rooted in a broad social resentment of unfulfilled promise; excessive privilege among established elites; undue weight given to a class of supposed experts; a general sense of systematic unfairness, and a desire for simple, direct, common-sensical remedies. The curious thing about this new populism, however, is that unlike other strains of populism, this latest American strain has often been opposed to government as the new elite and has not sought increased governmental intervention as its remedy; thus, indirectly, it has been rather market-oriented. In the case of tax reform, it has reflected a simple appreciation that “flatter” can mean “fairer”--because tax systems that are steeply progressive on paper seem inescapably to degenerate in fact. They create powerful incentives for cheating, loophole-creating and sheltering. And they tend gradually to destroy themselves in a revenue-chasing cycle of higher rates, more intrusive enforcement and even greater incentives for further erosion of both compliance and confidence.

Investment Tax Credit

The fact is that the investment tax credit, when combined with accelerated depreciation and leveraged financing, amounted to a negative income tax for some types of investment--a distortion that rewarded a gaming of the tax system rather than the kind of productive, market-oriented risk-taking that would improve U.S. competitiveness. As with tax shelters generally, a reduction of this unproductive gaming is bound to be helpful on balance.

Taxes, Trade Deficits

U.S. corporate taxation is relatively insignificant in the overall trade equation. Corporate taxation is now, and under tax reform, a small percentage of the U.S. corporate cost structure. The percentage is substantially smaller, for example, than that represented by the movement of the exchange value of the dollar immediately following the Plaza Agreement of September, 1985. There are many other variables--ranging from the fiscal deficit, to non-tariff barriers, to U.S. product design and marketing, to investment in R&D--which; one might cite as of greater significance to trade than U.S. corporate taxation.

Investing in Education

There is a populist interest in improved education--what economists would term investment in human capital development. And well there should be: The once-envied American universal public education system is itself becoming non-competitive on the world scene. While the children of some societies are now in disciplined learning environments for 240 days of the year, the children of America’s urban ghettos are being schooled in the ways of their street culture. And the children of America’s boom generation of yuppies . . . are being liberated to learn more karate, or gourmet cooking, or river rafting--worthy activities to some degree but not exactly a sign of an overwhelming commitment to the intellectual capital development on which the success of future generations must depend.