DD DuPont de Nemours Inc

By Jacob M. Schlesinger 

To see what President-elect Joe Biden thinks is wrong with the economy today and how he would try to fix it, look to his relationship with DuPont Co. For much of his life the company was the largest employer and philanthropist in his home state of Delaware, funding schools, libraries and theaters.

At age 29, Mr. Biden staffed his first Senate bid with DuPont employees, who opened a campaign office on the highway built by and named for the chemical giant. While bashing other big companies for tax avoidance, Mr. Biden singled out DuPont as a "conscientious corporation" for paying a higher rate. He celebrated his long-shot 1972 victory in the Gold Ballroom of the Hotel du Pont.

More than four decades later Mr. Biden, by then Barack Obama's vice president, watched with concern as DuPont, struggling to boost profits, was targeted by an activist shareholder, sold the hotel, eased out its chief executive, merged with another company, split into three pieces and cut its Delaware workforce by one-fourth.

Mr. Biden seldom publicly discusses DuPont by name, but in private, according to aides, he regularly cites its restructuring and downsizing as Exhibit A of modern capitalism gone awry. He often bemoans what he believes to be corporate America's prioritization of investors over workers and their communities.

His platform during this year's campaign was thick with policies aimed at altering corporate behavior: a minimum corporate tax to curb tax avoidance, penalties for shipping jobs overseas, measures that make it easier for unions to form. "It's way past time we put an end to this era of shareholder capitalism," he declared in a July speech.

Mr. Biden can expect a backlash from many economists and business leaders, who argue that his gauzy view of history overlooks the inefficiencies of the old corporate titans -- which ultimately harmed their workers and communities -- and ignores the pressures of globalization and the dynamism of a modern economy that allows healthier upstarts to replacing slumping behemoths.

"I don't think corporate America has very much to apologize for," says John Engler, who was head of the Business Roundtable, a trade group of the nation's largest companies, in 2016, when he attended one of a series of meetings Mr. Biden hosted with CEOs and economists during his vice presidency to try to hone a new corporate-governance agenda.

"If companies get top-rated on other measures, if they're very woke, it won't save them if they don't make money for investors," Mr. Engler, a former Republican governor of Michigan. "I don't think there's a role for government in that."

Despite his criticism of corporate behavior, Mr. Biden is in some ways closer to Mr. Engler than to the Democratic Party's left wing, which wants to require big companies to obtain a federal charter imposing a new list of requirements on executives such as putting workers on boards. Mr. Biden often indicates he'd rather change corporate America not through regulatory fiat but moral suasion by persuading executives to take a broader view.

A career politician, Mr. Biden has no direct business experience. But he often says his perspective is shaped by his roots in Delaware, its business-friendly laws and its long history as the preferred incorporation locale for large U.S. companies.

DuPont's looming presence there has been a major influence. "He views DuPont as a proxy for a responsible corporate citizen, for a lot of American corporations in the '50s, '60s, and into the '70s," says Don Graves, who was Mr. Biden's policy adviser during the Obama administration and now works on his transition team. "He felt that over time DuPont and others began shifting away from that framing, because of the focus on quick shareholder returns."

There are parallels between Mr. Biden's outlook on commerce and politics, both worlds he often portrays as more benign in his youth -- sometimes glossing over the turmoil, or the dominance of white men -- as an era when CEOs had a stake in their communities, and lawmakers compromised across party lines. He often suggests that a calming, compromising leader such as himself could revive a more genteel age, a view some critics consider naive.

"It used to be that corporate America had a sense of responsibility beyond just CEO salaries and shareholders -- corporate America has to change its ways," Mr. Biden told a group of donors at a July fundraiser. He then added: "It's not going to require legislation. I'm not proposing any."

Mr. Biden is swimming against a tide of American business orthodoxy that is often traced to an influential 1970 essay by the late Nobel laureate economist Milton Friedman, "The Social Responsibility of Business Is to Increase its Profits." Like many on the left, Mr. Biden blames it for ushering in an era when executives purportedly sacrificed workers and communities for the sake of next quarter's bottom line -- breaking what he calls the "basic bargain" of shared prosperity. "We act like Milton Friedman is still alive and well on dealing with corporate policy," he told a group of Indiana donors in June.

"DuPont is a classic example of what Milton Friedman did," said Ted Kaufman, a former DuPont engineer who helped develop Corian countertop material, joined Mr. Biden's staff in 1972, and now co-chairs his transition team. For Mr. Biden, he added, DuPont's battle with activist investor Nelson Peltz and his Trian Fund Management LP "was an epiphany."

Trian says Mr. Biden's diagnosis is wrong. DuPont's "underperforming relative to its peers...negatively impacted all stakeholders including employees, customers, and communities," a Trian spokesperson said. Trian's goal was "returning the company to best-in-class status...for the benefit of all its constituents, not just its shareholders."

The smaller DuPont left after all the restructuring takes a similar view. "Over its 200-year history DuPont has evolved," says spokesman Dan Turner. "The one constant has been deploying our science and innovation to remain a leader...committed to delivering sustainable value to all the customers, employees, shareholders and communities we serve."

Many academic economists and corporate-governance experts say Mr. Friedman is still mostly correct, although the debate has evolved in recent years, with more executives saying they now look beyond shareholders, and more shareholders saying they look beyond short-term profits.

The rise in so-called ESG investing -- in which funds rate companies by environmental, social, and governance benchmarks in addition to profitability -- suggests the market may be moving past the ostensible focus that Mr. Biden and other critics decry.

The Business Roundtable last year issued a statement declaring that CEOs should "lead their companies for the benefit of all stakeholders -- customers, employees, communities and shareholders." That replaced a 1997 directive that a company's "paramount duty...is to the corporation's stockholders."

Yet for all the talk of change, most companies still give priority to shareholder returns, an emphasis most analysts consider inevitable. "What's changed over time is that there's a view that a lot of customers care about the environment and care about social issues, and companies need to respond to that," says Steven N. Kaplan, an economist at the University of Chicago, Mr. Friedman's academic home when he published his essay. "That said, if you do all of that without maximizing shareholder value, you're going to be uncompetitive." Those forces are driven in by part by the spread of globalization that intensified after DuPont's heyday, says Mr. Kaplan, and can't be reversed "unless the whole world does it."

Charles Elson, a University of Delaware finance professor, agrees. "If you're accountable to everyone, you're accountable to no one, and you create a mess," he said. "Some would argue that's where DuPont found itself."

Mr. Elson made that point to Mr. Biden when the two appeared on a panel discussion at the university's newly created Biden Institute in 2017 titled "Win-Win: How Taking the Long View Works for Business and the Middle Class." Activist shareholders like Mr. Peltz were often "a symptom of problematic management," and gave the economy its dynamism by using their profits "to create new companies, to create new ideas," Mr. Elson said.

A skeptical Mr. Biden replied: "What evidence is there of that?"

Delaware itself offers evidence of how capital and labor can be reallocated from declining to productive sectors. As DuPont shrank, Delaware developed a thriving financial sector. A study by the Economic Innovation Group, a think tank, shows Delaware's new business startup rate outpaces the national average -- in part from ventures by former DuPont executives and scientists. Over the past three decades, total employment in Delaware has grown about 25%, even as the share of employment from manufacturers like DuPont has fallen in half, to about 6%. At the same time, however, income growth has slumped, according to Moody's Analytics, underscoring the Biden argument that workers have lost out from those changes.

Mr. Biden's father moved his family from struggling Scranton, Pa., to Delaware in 1953, where he ultimately ran a used-car dealership, attracted by prosperity attributable in good part to DuPont. Founded in 1802 as a gunpowder maker, its products such as nylon, Teflon, Freon, Lucite, Mylar and Kevlar revolutionized consumer and commercial life. At its peak in 1990, DuPont employed 27,000 in Delaware -- one of every 10 workers.

The company was affectionately dubbed "Uncle Dupie," and family members funded schools and hospitals, ran dozens of charitable foundations, made up their own bloc of lawmakers in the state legislature and periodically were elected governor. It built and ran a country club for employees, and a theater and hotel for Wilmington.

Consumer activist Ralph Nader wrote in a 1971 investigative report that "virtually every major aspect of Delaware life...is pervasively and decisively affected by the DuPont Company, the DuPont family, or their agents." He and other critics accused it of using that clout to suppress unions, avoid taxes, and discriminate against minorities. The company clashed over the years with regulators, antitrust enforcers, and activists over such things as groundwater contamination, hazardous waste and its control of the cellophane market.

DuPont leaders brushed aside those attacks and cultivated an image of a corporation steered by a broad civic mission. "Business is a means to an end for society, and not an end in itself," CEO Lammot du Pont Copeland, great-great-grandson of the founder, wrote in a 1967 corporate publication. "Therefore business must act in concert with a broad public interest and serve the objectives of mankind and society."

That's how many Delawareans, including Mr. Biden, saw the company. DuPont was one of the first companies to provide employees health insurance and pensions. In his 2007 autobiography, Mr. Biden recounted boyhood memories of neighbors who "wore tie clips imprinted with the company trademark: a little oval with DuPont in the center. There was a saying among the DuPont dads: 'The oval will take care of you.' "

After winning his upstart bid for senator in 1972, Mr. Biden quickly developed a good relationship with DuPont, meeting with top executives at least twice a year and speaking regularly to gatherings of the company's rising stars. In 1975, the new senator bought a 10,000 square-foot mansion built and once owned by the du Pont family. He helped DuPont win federal grants and earmarks.

DuPont executives and employees were modest contributors to Mr. Biden's Senate campaigns, as well as to those of his Republican opponents, according to the Center for Responsive Politics. They gave him a total of $46,725 in his four campaigns elections between 1990 and 2008, the years covered by Center data, and $12,525 to his GOP challengers.

"He helped us a lot," says Charles Holliday, DuPont's CEO from 1998 to 2008, now chairman of Royal Dutch Shell PLC. There were also clashes over taxes and regulation: Mr. Holliday recalls lobbying Mr. Biden unsuccessfully to drop support for legislation on safety regulation of rail transport. Still, he adds, "He talked a lot about the company, how it cared about its employees."

Then, through the 1990s and early 2000s, DuPont saw its profit margins squeezed as many product lines such as nylon became commoditized by Asian competitors and the company's vaunted innovation culture struggled to come up with new high-profit patent-protected chemicals to replace them. It tried to pivot toward biotechnology and agriculture, but had trouble catching up with leaders in the field such as Monsanto Co. By the early 2000s, DuPont's Delaware employment had fallen to less than half the 1990 peak.

DuPont faced a new challenge in 2013, when Mr. Peltz's Trian took a 2.2% stake worth $1.3 billion and demanded big changes. A college dropout from Brooklyn, Mr. Peltz first won Wall Street fame trading junk bonds in the 1980s. He and two others later founded Trian, which went on to shake up corporate icons such as H.J. Heinz Co., Wendy's Co., and Bank of New York Mellon Corp. Mr. Peltz said DuPont was "destroying shareholder value" by clinging to its hotel, country club, and theater, and maintaining a large R&D budget with few visible returns. He decried its complex blend of seven business lines, demanding it break into separate, more streamlined parts.

Facing off against Mr. Peltz was CEO Ellen Kullman. She grew up in Wilmington, attending the same Saturday evening mass as the Bidens. With degrees in engineering and business, she was climbing the ladder at General Electric Co. before getting lured back home to DuPont.

Mr. Biden met Ms. Kullman a few times as she rose through the corporate ranks and later served on the Obama administration's Council on Jobs and Competitiveness. Mr. Biden saw her as someone focused on the long term and employees, said Mr. Graves. At a 2015 luncheon with Chinese President Xi Jinping and American business leaders, the vice president singled out Ms. Kullman as "the best one."

Other companies gave Mr. Peltz board seats without a fight. Ms. Kullman and Trian negotiated privately for months to reach an agreement, but those talks broke down, triggering one of the hardest-fought proxy battles in years.

Ms. Kullman noted that since she'd become CEO in January 2009, DuPont shares had outpaced the broader market. She dismissed attacks on the hospitality business, whose costs she said were minimal, and defended R&D as providing value for investors willing to wait a few years to see returns. She ran local newspaper ads warning DuPont's role as a "proud pillar of the greater Wilmington community" was under attack. In a close 2015 vote, shareholders rejected Trian's proposal to replace four of the 12 directors.

Mr. Peltz lost the battle but won the war. Later that year, DuPont fell far short of its earnings guidance. Management blamed the miss on a strengthening dollar and a sharp slowdown in big agriculture markets such as Brazil. But investors had grown weary of repeated profit shortfalls and called for deeper cuts. Ms. Kullman resigned amid board pressure.

Her successor, consulting closely with Mr. Peltz, announced at the end of 2015 a complex plan to merge with Dow Chemical Co., then to break the combined company into three smaller parts, mirroring a Peltz demand. Shortly after the merger announcement, DuPont said it would lay off 1,700 of its remaining Delaware employees, leaving around 4,400. The Wilmington News Journal ran a column headlined: "Uncle Dupie is Dead."

The new smaller, more-focused DuPont makes specialty-sciences products ranging from adhesives to biomaterials.

Five years after the DuPont-Dow merger was announced, the combined market value of the current DuPont and the two other companies spun out of that process is roughly the same as it was back then, lagging behind the S&P 500, which is up about 70% over the same period. Total jobs fell about 9% through 2019 to around 92,500.

Most analysts following the company say the transformation was worth it. "They're far more efficient and lean than they would have been," says David Begleiter, managing director for chemicals and agriculture for Deutsche Bank Securities Inc.

Still, this past February DuPont's board, disappointed with the pace of restructuring, shook up management yet again.

Mr. Biden didn't comment publicly on DuPont's turmoil but in private was frustrated at Ms. Kullman's departure and the company's breakup, said Mr. Graves.

Ms. Kullman, now CEO of Carbon Inc., a 3-D printing technology company, recalls running into Mr. Biden a few times after departing DuPont. When they crossed paths, she says Mr. Biden would indicate to her his displeasure.

In January 2016, he decided to make a major declaration on the failings of 21st century American capitalism at the World Economic Forum in Davos, Switzerland. He recounted to a room full of CEOs a conversation that he said he'd had with a top corporate executive.

The men met, in Mr. Biden's telling, on the Amtrak platform in Wilmington, the politician heading southwest to Washington, the business leader northeast to New York. "I said 'Where are you going?' " Mr. Biden recalled. "He said: 'To meet with some sniveling little guy on Wall Street who's gonna tell me that I have to increase profitability in the next quarter, or I'll be downgraded.' "

The executive complained that would force him into "short-term decisions that were not in the long-term interest of his company," Mr. Biden said, then lectured his audience: "A lot of you corporate leaders don't like me saying that, but you know it's true."

Biden aides said the company was DuPont, but couldn't identify the executive.

Around then Ben Harris, the vice president's chief economist, and Mr. Graves organized nearly a dozen meetings with CEOs, investors, labor leaders, and scholars in which Mr. Biden delved deeper into the intersection of finance and business. Jeff Zients, an Obama economic adviser now co-chairing the Biden transition team, was also involved.

The guest lists were heavy with outspoken critics of so-called short-termism and shareholder focus, including BlackRock Inc. CEO Larry Fink, Virgin Group founder Richard Branson and Jeffrey Sonnenfeld, a Yale School of Management professor. At one meeting, University of Massachusetts Lowell economist William Lazonick argued buybacks explained why workers' wages lagged behind their productivity, which became a regular theme for Mr. Biden, though other economists dispute it.

Aides say Mr. Biden's original goal was to persuade the Obama administration to end its term embracing an ambitious agenda for reorienting American business. Some administration economists balked: They said curbing stock buybacks wouldn't raise wages or capital spending. Officials also concluded there wasn't time to write new regulations, and legislation stood no chance in the Republican-controlled Congress.

Shortly after leaving office, Mr. Biden compared the effort to the famous observation from British philosopher G.K. Chesterton about religion -- "it's not that Christianity has been tried and found wanting; it's been found difficult and left untried." He added: "that's kind of where we are in a policy sense."

--Jacob Bunge in Chicago contributed to this article.

Write to Jacob M. Schlesinger at jacob.schlesinger@wsj.com

(END) Dow Jones Newswires

November 23, 2020 14:03 ET (19:03 GMT)

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