06.21.2023 The Republican Party and big business have been on a collision course lately, with presidential candidates accusing some of our nation’s largest firms of engaging in “woke” business practices. Over the last 12 months, high-profile skirmishes have broken out between the Florida Governor Ron DeSantis and the Walt Disney Company – the state’s biggest private employer – over the presidential hopeful’s “Parental Rights in Education” bill (which places limits on classroom instruction on sexuality and gender identity). Meanwhile, Texas Governor Greg Abbott and his Republican legislature moved to restrict the state doing business with Blackrock, JP Morgan and several other institutions, accusing them of favoring alternative energy over fossil fuel. These state-level showdowns parallel the mood in Congress as the Republican majority scrutinizes big-company business practices. The policy shift marks an abrupt reversal from Congress’s pro-business attitude.
In 1925, Republican President Calvin Coolidge famously said, “the chief business of the American people is business”, characterizing his party as the party of business. In the 1970s, President Reagan put policies into action that ushered in decades of prosperity fueled by deregulation and globalization. In 1982, corporate profit relative to employee compensation was at an all-time low, but by 2012 it had surged to an all-time high. Now, it’s reversing.
Globalization was responsible for not just increased profitability, but also higher productivity, lower inflation and modest interest rates. These benefits, however, came at the expense of high-paying manufacturing jobs. Between 1988 and 2009, more than eight million jobs were eliminated from America’s manufacturing sector, leaving a trail of unemployment and despair. These families represented the seeds of the populist movement that has germinated in recent years.
Not only did Congress pave the way for unprecedented profitability, but it also allowed the nation’s largest companies to gain market share and grow even more profitable than their smaller competitors. According to a market concentration study by Jason Furman, President of the Council of Economic Advisors under President Obama, revenue earned by the top 50 companies gained market share in 11 of the 13 industries studied between 1997 and 2012. The largest companies in four industries accounted for more than one-third of total industry revenue, including transportation and warehousing, retail, finance and insurance, and utilities. Technology, a group not included in Furman’s research, is a poster child of industry dominance facilitated by Congress. While the Justice Department charged Microsoft with anti-competitive practices, forcing them to disentangle their internet browser from their desktop software, Congress enabled companies like Facebook, Google and Amazon to snap up industry upstarts like Instagram before they became a competitive threat. Between the prime globalization years of 1985 and 2012, the NASDAQ 100 outpaced the Russell 2000 index of small companies by more than 1,100%. At the same time, large companies were able to widen their profit margin advantage over their smaller competitors, thanks to favorable legislative treatment. Those times are changing.
Corporate strategy has evolved as well. Large corporations have taken on broader policy mandates as their sense of what a “constituency” is broadened away from shareholder interests. Now, the umbrella has widened to include employees, the community and customers. CEOs have been emboldened to speak out and react to public policy in recent years, particularly in alignment with the view of their younger, educated and liberal employees. In 2021, Atlanta-based Delta Airlines and Coca Cola openly criticized Georgia’s new voting law, a move that prompted Major League Baseball to relocate their All-Star Game from Atlanta that summer. The moved raised the ire of Senate Leader Mitch McConnell, who warned corporate America to stay out of politics.
Republicans have moved away from big business as their base has embraced populism – a consequence of deregulation, globalization and monopolistic practices, not to mention the financial crisis. But anti-corporate sentiment is rising in both parties, according to a recent study by Pew Research. Seventy-one per cent of conservatives believe large corporations have a negative impact on the country, higher than the 67 per cent of conservatives who believe labor unions have a negative impact on the country. Meanwhile, 80 per cent of liberals have a negative view of large corporations, ranking them lower than banks and financial institutions.
The non-partisan Center for Responsive Politics (CRP), which tracks campaign contributions, shows that congressional candidates from both parties are less reliant on corporate funding for their campaigns. Comparing the mid-term elections of 2018 and 2020, PACs as a share of total contributions were down by almost half. Long-time Republican Congressman and Speaker of the House Kevin McCarthy has turned his back on corporate contributions. In 2012, more than 53 per cent of his campaign contributions came from PACs, a vehicle for corporate largess. By 2022, that source had dwindled to six per cent, according to CRP data. Small money donations made up the bulk of the Congressional war chest.
Bottom Line: The tailwinds long enjoyed by mega-cap America are shifting, as corporate and congressional views diverge and globalization trends reverse. Investors should brace for tighter regulations, pro-labor legislation and tighter profit margins, particularly among companies and industry groups like big tech that congressional leaders accuse of policy overreach. We don’t expect the headwinds to be strong enough to negate the investment thesis for these companies, but in an environment such as this we expect the average stock to outpace the industry leaders.