Elizabeth Warren Has A Plan To Restore Corporate Accountability
On this Labor Day, I’d like to highlight one of the most sensible proposals we’ve seen in a long time to address the current radical imbalance between capital and labor. At the same time, this proposal may also provide some answers for the weak investment, the disconnect between productivity and wages, and lackluster growth that has hindered the US economy for years. Moreover, it does so while recognizing that political realities of the moment, especially the current makeup of the Supreme Court and its inherent bias in favor of corporations. In typical fashion for these troubled times, however, this proposal was totally overshadowed by the almost simultaneous conviction of Paul Manafort and the indictment of Michael Cohen.
The proposal is Elizabeth Warren’s Accountable Capitalism Act. Her idea is a radical reform of our existing corporate structures while embracing four current political realities. First, the current Roberts Supreme Court is expanding the rights of corporations, providing them with rights previously reserved to individuals, as cases like Citizens United and Hobby Lobby illustrate. Secondly, the current corporate structure demands adherence to the primacy of the shareholder, exactly the reason why all those repatriated profits that came back to the US after the tax law passed earlier this year have resulted in massive share buybacks rather than any real investment. Thirdly, barriers to unionization have become increasingly hard to hurdle and the expansion of right-to-work laws as well as the recent Supreme Court Janus decision has badly weakened unions. Lastly, raising taxes is really hard and usually unpopular.
The entire premise of Warren’s idea actually echoes Bill Clinton in declaring that if corporations are going to have expanded rights, then they must also bear expanded responsibilities. That means returning to the traditional goals of business which the Business Roundtable defined in 1981 as having “a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” As Warren points out, this traditional view largely worked for both American business and labor, especially after the reforms of the New Deal.
Largely unnoticed to the majority of the American people, the goals of business changed in the late 1970s and early 1980s, driven by the ideas of Milton Friedman. Friedman declared “the social responsibility of business is to increase profits” and by the late 1990s the Business Roundtable had revised the goals of business, declaring the “principal objective of a business enterprise is to generate economic returns to its owners.”
Correlation is not causation but that change in corporate philosophy has also tracked the remarkable rise in inequality, the stagnation of wages, and the general degradation of labor and unions. In addition, this change in goals created an inordinate focus on corporations’ quarterly results at the expense of long-term planning and thinking.
Warren’s solution to this issue is to require a new federal corporate charter that would require corporations “consider the interests of all relevant stakeholders — shareholders, but also customers, employees, and the communities in which the company operates — when making decisions.” In other words, Warren is demanding that business return to traditional corporate values and become responsible corporate citizens. This new charter would apply to corporations with revenue over $1 billion, which comprises a few thousand companies but a majority of actual US employment.
As part of that charter, these companies will have to agree to what’s called co-determination, which requires 40% of the corporate board members be workers duly elected by employees. This will give employees a powerful say in the management of the corporation without necessarily requiring unionization. Co-determination is hardly a radical idea. It is relatively common in most European social democracies, especially where unions are strong.
In addition, Warren’s proposal requires corporate executives must hold options for at least five years before they can be liquidated and wait three years after any stock buyback scheme. This will keep company executives from boosting their stock in the short-term via a large stock buyback and then capitalizing on that buyback by selling their options, both virtually useless investment activity.
Finally, any political activity undertaken by the corporation must be approved by 75% of the board and 75% of the shareholders, thereby ensuring that the political interests of the company broadly reflect its stakeholders rather than the simply the board and/or the CEO.
Needless to say, the criticism on the right has been the usual absurdist howls of “SOCIALISM!”. The already disgraced Kevin Williamson’ review of Warren’s plan was farcical, seemingly as though he hadn’t even bothered to read Warren’s plan. Williamson claimed the plan would force corporations to be “accountable to politicians, who desire to put the assets and productivity of private businesses under political discipline for their own selfish ends” and result in “the wholesale expropriation of private enterprise in the United States, and nothing less.” He continued, writing, “the federal government would then dictate to these businesses the composition of their boards, the details of internal corporate governance, compensation practices, personnel policies, and much more.” Of course, none of this claptrap resembles the truth of Warren’s proposal but it is typical of traditional right-wing propaganda.
Meanwhile, some on the center-left don’t seem to understand how far-reaching and radically progressive Warren’s proposal is. Kevin Drum’s attitude is basically that this is just an indirect way of supporting unions. According to Drum, if Warren really wants to address the weakened bargaining power of unions, “why introduce a bill that primarily changes the composition of corporate boards? My objection isn’t that it won’t work. It might…[but] why choose an oddball proposal that sounds European and vaguely socialist even to the American working class? Why not instead propose a truly simple and powerful proposal to boost unionization throughout the American economy?”
What Drum misses is that even stronger unions will not seriously address the radical inequality between capital and labor. That can only be done by attacking the primacy of the shareholder. That concept has created a situation where the stock market value of corporations is actually higher than the actual book value of their underlying assets. With 80% of stocks owned by a mere 10% of the population, this has created an enormous increase in at least paper wealth for those shareholders. In other words, the primary goal of business over the last 40 years has been to shovel as much money as possible to a sliver of the American people, at the expense of workers and investments in the future. And that effort has been spectacularly effective.
At the same time, median wages have lagged behind productivity gains, a correlation that had tracked closely in the past. That differential has flowed to shareholders instead. Meanwhile, despite that enormous transfer in wealth to shareholders and constant GOP propaganda, some studies indicate that new investment has actually stagnated or even lagged.
Beyond empowering workers, raising wages, and attacking income inequality, Warren’s ideas have the potential to mitigate a host of other issues in the current American economy. Under the new corporate charter, companies now would have to consider the external costs of their activities, such as environmental degradation, that are now borne by society at large. In fact, it will actually reverse the current incentives for corporations to remove government regulation of those externalities, as the largest corporations will now want to see that regulatio actually cover all businesses, rather than being their job alone. With the worker representation on boards, corporations will be far less likely to offshore jobs and abandon communities. And the requirement to get buy-in from all stakeholders on political activity will provide balance to that activity instead of the capital-centric focus that currently exists.
Warren’s proposal will result in an enormous transfer of wealth from the shareholder class to the working and middle class. As such, it will be fought tooth and nail by the capital interests. But the real beauty of her plan is that this transfer of wealth will not cost the American taxpayer a single extra dime. There will be no need for new or higher taxes or a big new government program. And that will make it far easier to sell to the voting public. Far from being socialism, Warren’s plan is a clarion call for American business to return to its traditional role and, as Yglesias notes, is actually a framework for saving capitalism.
