Last week Senator Elizabeth Warren, seeking re-election as our state’s US Senator, proposed a corporate reform bill she calls the “Accountability capitalism Act.” I dislike her proposal on several grounds. First, however, let’s look at what she proposes :
- Requires very large American corporations to obtain a federal charter as a “United States corporation,” which obligates company directors to consider the interests of all corporate stakeholders: American corporations with more than $1 billion in annual revenue must obtain a federal charter from a newly formed Office of United States Corporations at the Department of Commerce. The new federal charter obligates company directors to consider the interests of all corporate stakeholders – including employees, customers, shareholders, and the communities in which the company operates. This approach is derived from the thriving benefit corporation model that 33 states and the District of Columbia have adopted and that companies like Patagonia, Danone North America, and Kickstarter have embraced with strong results.
- Empowers workers at United States corporations to elect at least 40% of Board members: Borrowing from the successful approach in Germany and other developed economies, a United States corporation must ensure that no fewer than 40% of its directors are selected by the corporation’s employees.
- Restricts the sales of company shares by the directors and officers of United States corporations: Top corporate executives are now compensated mostly in company equity, which gives them huge financial incentives to focus exclusively on shareholder returns. To ensure that they are focused on the long-term interests of all corporate stakeholders, the bill prohibits directors and officers of United States corporations from selling company shares within five years of receiving them or within three years of a company stock buyback.
- Prohibits United States corporations from making any political expenditures without the approval of 75% of its directors and shareholders:Drawing on a proposal from John Bogle, the founder of the investment company Vanguard, United States corporations must receive the approval of at least 75% of their shareholders and 75% of their directors before engaging in political expenditures. This ensures any political expenditures benefit all corporate stakeholders.
- Permits the federal government to revoke the charter of a United States corporation if the company has engaged in repeated and egregious illegal conduct: State Attorneys General are authorized to submit petitions to the Office of United States Corporations to revoke a United States corporation’s charter. If the Director of the Office finds that the corporation has a history of egregious and repeated illegal conduct and has failed to take meaningful steps to address its problems, she may grant the petition. The company’s charter would then be revoked a year later – giving the company time before its charter is revoked to make the case to Congress that it should retain its charter in the same or in a modified form.
I find nearly every portion of her proposal misguided or unworkable or both. To be
( 1 ) Requiring a large corporation to obtain not one but two corporate charters is a
recipe for gridlock and contradiction. Corporations are rightly creations of the
individual states, to whose laws they are responsible. These laws might well conflict
with Federal law, in which case the Supremacy Clause overrides. As corporations
make significant decisions every day, even every hour, the potential for conflict of
laws and resulting litigation could make corporate activity impossible; or else the
Federal law would take control, rendering the corporation’s state charter useless.
( 2 ) what does it mean, that a chartered corporation must “take into account” the
interests of ‘all stakeholders,” including employees, customers, ad the communities in
which the corporation operates ? Corporations already take customers into account, and
employees, and the tastes of the communities in which they have locations and, or
customers. So, does Warren mean to suggest that customers, employees, and
communities will be included in management decisions ? If so, no suggestion could be
more unworkable. Communities differ. What one wants, others oppose. Customers vote
with their buying decisions. market power is their input. Management is not within
customers’ expertise or time constraints, and customer complaints have their own path
to management, without being formalized into corporate legal duties.
( 3 ) Including employees on corporate boards sounds good to many, but in practice it
guarantees corporate conservatism, a death sentence in a competitive environment
where entrepreneurial innovation renews the economy every year. German corporate
governance is cited as a model: but it works — to the extent it does work — in Germany
because almost all employees of major corporations belong to a union. In this country,
less than 15 percent belong. warren’s proposal would mean a vote, which to organize
would import the equivalent of a union into the corporation’s affairs without the
requirements — and the safeguards — of a union organizing election pursuant to the
national :Labor relations act.
The German model produces cautious corporate management which has led to the death
of many old-line German big-names. Union executives’ first priority is saving their
members’; jobs and wages. Unions are rarely good at reform or change, and both are
requirements of successful economic competition. To the extent this caution doesn’t kill
the German economy’s competitiveness, that’s because Germany benefits from a huge
“mittelstand” of medium-sized, family-run, specialty businesses which combine
expertise with innovation and make Germany one of the world’s dominant export
So much for the most unworkable portions of Senator Warren’s proposal.
The activity of publicly traded corporations does merit much reform, but Senator
Warren’s proposals fail to address them. Her proposal that 75 percent of corporate
shareholders be required for political expenditures would all but guarantee that none
would be made: almost all publicly traded shares today are owned by investment
institutions, which do not share the same goals, indeed pursue conflicting goals. Rather
than warren’s proposal, which like most of this bill’s provisions would freeze a
corporation in its tracks, I have long proposed the following, and now do so again :
( A ) Require institutionally owned shares to be non-voting
( B ) Apply Section 144 restricted stock provisions of the Securities Act of 1940 to all proposed stock buybacks.
( C ) Limit the sale by an Insider, as defined in the Securities Act, of option stock by requiring GAAP to value option stock at the market price on the day of sale.
( D ) impose a 100 percent margin requirement on stock purchases of more than 10,000 shares.
( E ) impose a 100 percent tax on profits obtained by taking a publicly traded company private.
These reforms would curb the irresponsible, short term and very short term speculation
that vitiates the investment goals of capitalism, which are of necessity long-term in
nature. Business cannot control their own operations if speculators and privatizers have
power to commandeer corporate assets for their own benefit. If we are actually practice
capitalism, which I define as the investment of private money, not government money, in
economic ventures — and I feel strongly that capitalism is by far preferable — then let’s
practice capitalism, not speculation and asset capture. In no way does Senator Warren’s
proposal get us closer to that goal.
— Mike Freedberg / Here and Sphere