Pledging Allegiance: Multinationals in an Increasingly Nationalist World

By Peter Atwater  FEB 09, 2011 9:15 AM

Current social mood suggests a rising preference for smaller and more local over big and multinational. For the latter, this begs the question: Whose passport do they carry?


Ahead of its fourth-quarter earnings release, American Express (AXP) announced that it was taking a re-engineering charge of $113 million resulting from its decision to consolidate locations within the company’s global servicing network. And specifically, the company noted that it planned “to transfer work currently handled at a Madrid service center to regional facilities in Brighton, UK, and Buenos Aires, Argentina; and service support for the Japanese card business from Sydney to Japan.”

I am sure that for most investors these actions read like yet another efficiency move by a multinational corporation to lower costs and improve profitability, and I am sure that is how the folks at Amex intended it. But the announcement made me wonder how the folks in Spanish government must have felt about the news, particularly with that country’s high youth unemployment rate.

As our own president has repeatedly emphasized of late, if the economic recovery is to continue, unemployment levels must come down -- and that means more jobs here in the US. But we are hardly alone in our desire for increased domestic hiring. As suggested above, Europe needs jobs, as do many parts of Asia and the Middle East, not to mention Africa.

We’re all competing for the next hire. And it’s not just nations. Yesterday, I attended a meeting where the governor of Delaware talked about his BFFs -- or Business Finders’ Fee Tax Credit -- and what his state is willing to pay for new jobs.

To date, multinational corporations have been the beneficiaries of the national and state competition for jobs, often playing one country or city against another in return for lower taxes and other economic incentives. But with fiscal challenges rising at all levels of government, I am sensing a significant sea change.

In his speech on Monday at the US Chamber of Commerce, President Obama evoked the self-sacrifice expressed by President John F. Kennedy saying:

I want to be clear: Even as we make America the best place on Earth to do business, businesses also have a responsibility to America.

I understand the challenges you face. I understand you are under incredible pressure to cut costs and keep your margins up. I understand the significance of your obligations to your shareholders and the pressures that are created by quarterly reports. I get it.

But as we work with you to make America a better place to do business, I’m hoping that all of you are thinking what you can do for America. Ask yourselves what you can do to hire more American workers, what you can do to support the American economy and invest in this nation. That’s what I want to talk about today -- the responsibilities we all have -- the mutual responsibilities we have -- to secure the future that we all share.

Maybe it’s just me, but I suspect that “mutual responsibility” will be embraced by most multinational corporation CEOs about as warmly as Dodd-Frank has been welcomed by their too-big-to fail financial services counterparts, particularly as it challenges global firms’ super-sovereign status and their heretofore ability to appear local irrespective of jurisdiction.

Don’t get me wrong, some US-based multinational firm CEO’s like Jeffrey Immelt of GE (GE) will publicly adopt the “this country has been good to me, and I want to pay it back” attitude suggested by President Obama, (particularly if it helps the company with its export sales) but I suspect that privately, most will bristle, suggesting that “mutual responsibility” clearly challenges the fiduciary obligation that CEOs and boards of directors have to shareholders -- many of whom are outside the United States. And it will be even more interesting to see how the leaders of such firms as Chrysler, Anheuser-Busch (BUD), Shell (RDS-A) and Nestle (all owned by non-US headquartered corporations, but with a big US presence) react.

And with President Obama having now asked multinational businesses to step up here, I suspect that it is only a matter of time before Mr. Immelt and his US counterparts are challenged to live up to their “mutual responsibilities” in many other countries around the globe -- where unemployment and fiscal challenges are growing by the day -- particularly with the debt ratings (and debt capacity) for many multinational corporations well above their sovereign nation “hosts."

Should the global economy strengthen and fiscal and corporate balance sheets improve, I suspect that my concerns will be for naught and the rhetoric of “mutual responsibility” will rapidly be replaced by “mutual benefit." But should that not happen, I expect that “mutual responsibility” will be replaced with something stronger, such as “national obligation,” as governments across the globe press for greater and greater local allegiance, and, to borrow an increasingly used term from the European debt markets, “burden sharing." (And in that event, I would not underestimate the impact to efficiency and operating margins as everything from treasury to sourcing is de-globalized.)

In a rapidly growing global economy, business is business -- whether small, middle market or multinational; and it's all good and good for all. But our asymmetric recovery has created a world of haves and have-nots, not just in the consumer space, but in the commercial world as well. (See Our Increasingly Dangerous Asymmetric Economy.) And to these eyes, the current social mood suggests a rapidly rising preference for smaller and more local over big and multinational. And for multinationals, this ultimately begs the question as to just whose passport they really do carry?

Over the past two years, the leaders of our largest financial institutions have failed to grasp the collective societal message that "to whom much is given, much will be expected." Leaders of multinational corporations would be wise to learn from the mistakes of their banking brethren.

It is now a world of “mutual responsibility,” and for multinational corporations, I suspect that there will significant challenges as they are forced to now re-prioritize their responsibility to shareholders, to employees, to suppliers, to customers, and to the countries in which they operate.

Everyone wants a bigger piece, and it is a zero sum world.

But multinational boards would be wise to prepare an answer, as the consequences are now not only economic, but political and social as well.

America now expects GE and other multinationals to recite the Pledge of Allegiance and to carry a US passport.

And unfortunately for multinational corporations, America is not alone in its feelings.

Position in SPY options, SH and JPM.

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