Last week, Senator Elizabeth Warren introduced the Accountable Capitalism Act. The proposals in the bill included: (a) a requirement that any company earning more than $1 billion of revenue would be governed by a federal charter, (b) a minimum of 40% of the board of directors of such corporations be composed of representatives of employee, and (c) a requirement that these federally chartered corporations offer a vague “public benefit” in addition to operating for profit. While much is unclear about the bill, one thing that is clear is that Sen. Warren does not understand free market capitalism.
Explaining the bill, Sen. Warren asserts that “American corporations exist only because the American people grant them charters.” However, in over 20 years as a corporate attorney, I have never formed an “American corporation.” Rather, corporations are formed in each of the 50 states under state charters. Those corporations are governed by a combination of their private bylaws, shareholder agreements, and the statutes in the state the entity is incorporated. It would be a radical and unnecessary departure from corporate law to create a federal charter. Tremendous uncertainty would ensue as a federal body of legal governance would need to be developed.
More importantly, Sen. Warren’s bill fails to appreciate the nature of corporate accountability embodied by state corporate law and inherent in the free market.
Under corporate law, officers and executives are accountable to boards of directors. Those directors are appointed by and accountable to shareholders. Reading Sen. Warren’s description of the bill, one gets the impression that shareholders are fat cat billionaires. However, shareholders of publicly traded corporations include a multitude of working and middle class retirees through pensions and retirement plans. So-called institutional investors, in reality, are money managers who manage the investments and retirement funds of Americans of every class. Retirees and pension beneficiaries rely on corporations to deliver a financial return on their investment to support them in retirement, not some vague social benefit that satisfies Sen. Warren’s whims.
The institutional investors mentioned above have fiduciary duties for their plan participants. This is the highest standards of accountability known to the law. That level of duty would be degraded by Sen. Warren’s misguided concept of accountability.
It is rich for a Senator to claim that corporations are not adequately accountable. If a pensioner or 401(k) account holder wants to know how his or her money is being invested, he can find it in summary plan descriptions, prospectuses, or by making an inquiry with his or her investment adviser or plan administrator. Try asking a Senator where your Social Security account funds are invested.
Corporations are accountable in other ways as well. When a company makes a defective product, it is often required to repair or replace the product pursuant to a warranty. Also, when a company produces a sub-par product, consumers have an immediate remedy: they can take their business elsewhere. When Senators do shoddy work, a chance for electoral redress may take up to six years. Market accountability is swifter than political accountability.
Among the bundle of rights included in the ownership of corporate stock is the right to vote as a shareholder, including the right to vote for the board of directors. Sen. Warren would expropriate this critical right by requiring that employee representatives comprise at least 40% of the board of directors. With surprising honesty, Matthew Yglesias writing in Vox, praises this aspect of the bill saying it would “redistribute trillions of dollars from rich executives and shareholders to the middle class.” While Yglesias is correct about the expropriation, he is wrong that this would necessarily be a redistribution to the middle class given the fact that so many middle class retirees are already stockholders via their pensions and 401(k)s, as explained above.
It is not the place of Sen. Warren or the government to tell corporations how to comprise their board. The shareholders, as the owners of the corporation should be free to appoint the directors for their corporation who are best suited to lead the corporation. The directors and executives they appoint are responsible for ensuring the corporation meets its many contractual obligations, as well as obligations to bondholders and creditors.
Sen. Warren fails to appreciate the accountability inherent in corporate law and capitalism. But the problems do not end there. The misguided and unwarranted expropriation of shareholders’ rights by the bill would be counterproductive, impose undue cost on companies, and create disruptive inefficiencies in the way corporations make decisions. But, businesses are in the business of doing business. When bad policies become law, corporations respond by making decisions to mitigate the negative effects of those policies Whether those bad decisions are imposing unnecessary tariffs in the name of national security or imposing burdensome restrictions on corporate decision making, corporations will factor in the political risk when make strategic decisions and major capital expenditures. When corporations make corporate development decisions, they choose jurisdictions that are more favorable, have a lower cost of doing business, and have an ample employee skilled labor pool.
Bills such as Sen. Warren’s would impede the formation of capital, discourage corporate growth, and incentivize American companies to relocate to more favorable foreign jurisdictions. It is Sen. Warren, not American companies, who should be more responsible.
Doug McCullough – Director of Lone Star Policy Institute
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