Crony Capitalism Has No Place in the Supreme Court

Despite the Hobby Lobby ruling, the word “corporation” is still nowhere to be found in the Constitution.

Hobby Lobby supporters react to the U.S. Supreme Court decision, June 30, 2014 in Washington, DC.
National Journal
Norm Ornstein
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Norm Ornstein
July 2, 2014, 4 p.m.

Cit­izens United, Hobby Lobby, Wal­greens, Medtron­ic, Steph­en Schwar­z­man. If Ed McMa­hon had used these five as a setup for Johnny Car­son’s Car­nac the Mag­ni­fi­cent, Car­son would have had a great punch line. Un­for­tu­nately, my punch line is not funny. I will get to it in a bit.

Monday’s Hobby Lobby de­cision has un­der­stand­ably got­ten a huge amount of at­ten­tion, with its im­pact on wo­men and its im­plic­a­tions for re­li­gious free­dom. I be­lieve the most dan­ger­ous part of Samuel Alito’s de­cision had to do with his defin­i­tion of a for-profit cor­por­a­tion, and not just closely held ones. “A cor­por­a­tion is simply a form of or­gan­iz­a­tion used by hu­man be­ings to achieve de­sired ends,” he wrote.

“When rights, wheth­er con­sti­tu­tion­al or stat­utory, are ex­ten­ded to cor­por­a­tions, the pur­pose is to pro­tect the rights of these people.”

He ad­ded, “Some lower court judges have sug­ges­ted that RFRA [the Re­li­gious Free­dom Res­tor­a­tion Act] does not pro­tect for-profit cor­por­a­tions be­cause the pur­pose of such cor­por­a­tions is simply to make money. This ar­gu­ment flies in the face of mod­ern cor­por­ate law…. While it is cer­tainly true that a cent­ral ob­ject­ive of for-profit cor­por­a­tions is to make money, mod­ern cor­por­ate law does not re­quire for-profit cor­por­a­tions to pur­sue profit at the ex­pense of everything else, and many do not do so. For-profit cor­por­a­tions, with own­er­ship ap­prov­al, sup­port a wide vari­ety of char­it­able causes, and it is not at all un­com­mon for such cor­por­a­tions to fur­ther hu­man­it­ari­an and oth­er al­tru­ist­ic ob­ject­ives.”

Alito’s stir­ring de­fense of cor­por­a­tions, of course, builds on that ap­plied by Justice An­thony Kennedy in Cit­izens United, which was it­self amp­li­fied by a pae­an to cor­por­a­tions de­livered in a sep­ar­ate opin­ion and par­tial dis­sent by Justice Ant­on­in Scalia — in which he as­ser­ted, re­mark­ably, how much the Found­ing Fath­ers (oth­er than Thomas Jef­fer­son) loved cor­por­a­tions. In both cases, a cor­por­ate charter — the idea that these are sep­ar­ate, ar­ti­fi­cial en­tit­ies cre­ated for nar­row and spe­cif­ic pur­poses — is ig­nored, dis­missed, or down­played in the de­sire to equate cor­por­a­tions with in­di­vidu­als in grant­ing rights. To Alito, cor­por­a­tions are col­lec­tions of in­di­vidu­als, and de­serve all the pro­tec­tions the in­di­vidu­als in the col­lect­ive have. Of course, miss­ing from his col­lect­ive are the em­ploy­ees of the cor­por­a­tion.

Here is the text­book leg­al defin­i­tion of a cor­por­a­tion: an as­so­ci­ation of in­di­vidu­als, cre­ated by law or un­der au­thor­ity of law, hav­ing a con­tinu­ous ex­ist­ence in­de­pend­ent of the ex­ist­ences of its mem­bers, and powers and li­ab­il­it­ies dis­tinct from those of its mem­bers.

Why are for-profit cor­por­a­tions set up? The char­ac­ter­iz­a­tion tells us: to make profits. And the cor­por­ate charter has mul­tiple be­ne­fits that go way bey­ond those of in­di­vidu­als. There are ma­jor tax be­ne­fits un­avail­able to in­di­vidu­als. There are strin­gent leg­al pro­tec­tions from li­ab­il­ity un­avail­able to in­di­vidu­als.

For dec­ades, the Su­preme Court re­cog­nized that real­ity, and put lim­its on the abil­ity of for-profit cor­por­a­tions to over­whelm or dis­pro­por­tion­ately in­flu­ence elec­tions. Kennedy blew that his­tory apart in Cit­izens United, and Alito amp­li­fied it in Hobby Lobby. When Alito writes about hu­man­it­ari­an and oth­er al­tru­ist­ic ob­ject­ives, the fact is that for-profit cor­por­a­tions with share­hold­ers jus­ti­fy char­it­able giv­ing and oth­er al­tru­ism to their share­hold­ers as ac­tions that are good for them in their goal of max­im­iz­ing profits.

Alito tried to make a deep dis­tinc­tion for closely held cor­por­a­tions; read­ing his de­cision, one might think that these are mom-and-pop op­er­a­tions, small fam­ily busi­nesses. Of course, as many ob­serv­ers have poin­ted out, Car­gill, Mars, Koch In­dus­tries, and oth­er closely held cor­por­a­tions have tens of thou­sands of em­ploy­ees (in Car­gill’s case, 133,000) and many bil­lions in busi­ness and profit. Hobby Lobby is a huge busi­ness. Give the Hobby Lobby own­ers’ fam­ily cred­it for their deep re­li­gious con­vic­tions. But if profit-mak­ing were truly sub­or­din­ated to those con­vic­tions, which are strongly in op­pos­i­tion to abor­tion rights, Hobby Lobby would provide paid ma­ter­nity leave for em­ploy­ees who shun con­tra­cep­tion and abor­tion to have ba­bies. It doesn’t.

But for the ma­jor­ity on the Roberts Court, through a series of rul­ings that fa­vor cor­por­a­tions over labor or oth­er in­terests, it is clear that cor­por­a­tions are king, su­per­i­or to in­di­vidu­al Amer­ic­ans — with all the spe­cial treat­ment in taxes and pro­tec­tion from leg­al li­ab­il­ity that are un­avail­able to us in­di­vidu­als, and now all the ex­tra be­ne­fits that come with in­di­vidu­al cit­izen­ship. Call it the new Crony Cap­it­al­ism.

What has that got to do with Wal­green and Medtron­ic? Both are gi­ant for-profit Amer­ic­an cor­por­a­tions man­euv­er­ing to buy European com­pan­ies to free them­selves from U.S. taxes by mov­ing their headquar­ters abroad. Wal­green is con­sid­er­ing mer­ging with Al­li­ance Boots, a drug­store chain in Europe and mov­ing its base from Illinois to Switzer­land; Medtron­ic is buy­ing com­pet­it­or Cov­idi­en and mov­ing its home from Min­neapol­is to Ire­land. As Steve Pearl­stein wrote in The Wash­ing­ton Post about Medtron­ic, ad­dress­ing the Medtron­ic CEO, “The tax-avoid­ance scheme you have chosen is known as an ‘in­ver­sion.’ It in­volves buy­ing a com­pet­it­or, Cov­idi­en, for a premi­um price of $43 bil­lion and then tak­ing its leg­al headquar­ters in Dub­lin as your own. In real­ity, Cov­idi­en is no more Ir­ish than Medtron­ic. The ma­jor­ity of the sales, em­ploy­ees, and profits (prop­erly cal­cu­lated) of both com­pan­ies are still in the United States.

The only reas­on Cov­idi­en has its leg­al ad­dress in Ire­land is that its pre­vi­ous home, Ber­muda, was so trans­par­ent a tax dodge that bet­ter cov­er was needed when the com­pany was spun off from Tyco In­ter­na­tion­al in 2007.”

In The New York Times, An­drew Ross Sor­kin writes the Wal­green story in a piece titled “At Wal­greens, Re­noun­cing Cor­por­ate Cit­izen­ship.” He notes that when Wal­green’s CEO sought tax breaks from Illinois a couple of years ago, he said, “We are proud of our Illinois her­it­age.” He got the tax breaks, and now is break­ing for Switzer­land. Sor­kin notes that Wal­green and its sub­si­di­ary Duane Reade get al­most a quarter of their $72 bil­lion in rev­en­ue from the US gov­ern­ment — $16.7 bil­lion from Medi­care and Medi­caid last year. Of course, Wal­green and Medtron­ic are not alone; many com­pan­ies are us­ing in­ver­sions and more will jump on the band­wag­on be­fore long.

In­di­vidu­al Amer­ic­ans have many motives and ob­ject­ives, some selfish or self-centered or pa­ro­chi­al, some more broad-based and al­tru­ist­ic; some fo­cused on fam­ily or her­it­age, some on a re­gion or on the coun­try as a whole; some short-term and some more long-term. But all are based on be­ing Amer­ic­an and built around Amer­ica’s na­tion­al in­terest. Com­pan­ies, Alito not­with­stand­ing, have one cent­ral motive: profits.

That is not at odds with Amer­ica’s na­tion­al in­terest. When Gen­er­al Mo­tors CEO Charles Wilson said to Con­gress in 1953, “What was good for the coun­try was good for Gen­er­al Mo­tors and vice versa,” he had a point.

For many dec­ades, cor­por­a­tions and cor­por­ate lead­ers took the long view and saw a strong Amer­ic­an so­ci­ety as key to their own prosper­ity. But Gen­er­al Mo­tors, in the glob­al eco­nomy, is now a glob­al com­pany, even though it is still based in the U.S. and not yet temp­ted by in­ver­sion. Is what is good for a com­pany with huge in­terests in dozens of coun­tries ne­ces­sar­ily good for Amer­ica? Will it think first — or at all — about the prosper­ity and needs of the United States? Maybe — but can we say the same thing about “Amer­ic­an” com­pan­ies re­noun­cing their cor­por­ate cit­izen­ship? When these com­pan­ies get in­volved with polit­ics — and you can be sure be­fore long that the Su­preme Court will ex­tend the “speech rights” of cor­por­a­tions to in­clude dir­ect con­tri­bu­tions to can­did­ates — will they be think­ing of Amer­ica, or of what Amer­ica can do to pro­tect their in­terests in oth­er coun­tries? If the money comes from the “Amer­ic­an” sub­si­di­ary of the for­eign-owned com­pany, will it only be re­flect­ing the de­sires and in­terests of that Amer­ic­an en­tity or will it re­flect the in­terests of its par­ent? If a com­pany with gambling in­terests in Las Ve­gas earns most of its money in Ma­cao and gets in­volved deeply in Amer­ic­an cam­paign fin­ance, will it be most in­ter­ested in pro­mot­ing its in­terest in Ma­cao — which might be counter to Amer­ica’s in­terest in its for­eign re­la­tions with China?

When Pres­id­ent Obama, in the af­ter­math of Cit­izens United, warned at his State of the Uni­on mes­sage that the rul­ing could mean lots of for­eign cor­por­a­tions put­ting money in­to U.S. cam­paigns, Samuel Alito vis­ibly mouthed, “Not true.” Of course, Alito was wrong. For­eign in­terests, es­pe­cially giv­en the in­creased role and pre­val­ence of “dark money,” with the donors con­cealed, of­ten by laun­der­ing the money through mul­tiple non­profit en­tit­ies, can find lots of ways to put re­sources in­to Amer­ic­an cam­paigns in the new Wild West cre­ated by this Court. And now, de­fin­ing for­eign in­terests is go­ing to be­come much harder.

All of this also has to be con­sidered in the con­text of the grow­ing in­equal­ity in the coun­try, and the in­creased im­per­i­al at­ti­tude and de­tach­ment from real­ity of Amer­ica’s ol­ig­archs. Prime among them is mult­i­bil­lion­aire Steph­en Schwar­z­man, chair­man of The Black­stone Group, fam­ous for liken­ing Pres­id­ent Obama’s sug­ges­tion that it might make sense to raise the highly pref­er­en­tial tax rate on car­ried in­terest to “Hitler in­vad­ing Po­land.” The New York­er‘s James Surowiecki noted that Schwar­z­man, who has called for in­creas­ing taxes on the poor, re­cently opined that Amer­ic­ans “al­ways like to blame some­body oth­er than them­selves for a fail­ure.”

Tech en­tre­pren­eur Nick Hanauer warned his fel­low plu­to­crats in Politico Magazine that this im­per­i­ous­ness, among those who “live in our gated bubble worlds,” is help­ing cre­ate a dan­ger­ous and destabil­iz­ing dy­nam­ic — that the kind of in­equal­ity we are see­ing can nev­er be sus­tained. A world in which cor­por­a­tions are kings, their em­ploy­ees are not con­sidered as a part of their col­lect­ives, and in­di­vidu­als are not their equals, where the ra­tio of CEO com­pens­a­tion to av­er­age em­ploy­ee pay con­tin­ues to skyrock­et way bey­ond any level in Amer­ic­an his­tory, where money is the only sig­ni­fic­ant qual­ity the Su­preme Court sees as speech, and where bil­lion­aires who are mak­ing out like ban­dits and do­ing bet­ter than ever feel that they are the vic­tims, is not one where broad faith in Amer­ic­an demo­cracy can be sus­tained.

A few weeks ago, in testi­mony be­fore the Sen­ate Rules Com­mit­tee on cam­paign fin­ance, I said that I keep read­ing and re­read­ing the First Amend­ment, and I am still look­ing for the word “money.” Well, I keep read­ing and re­read­ing the Con­sti­tu­tion and I still can’t find the word “cor­por­a­tion.” This Su­preme Court, with its new form of crony cap­it­al­ism, seems to see the words every­where.

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