Economy & Business

Elizabeth Warren’s Corporate Catastrophe

Sen. Elizabeth Warren (Joshua Roberts/Reuters)
Her bill is based on bad economics and worse business ethics.

The ability of businesses to grow rapidly is a one of the most defining and precious features of the American economy. Amazon went from a fledgling online bookstore to an “everything store” and the second-largest employer in the United States in just two decades. Uber emerged from nowhere less than ten years ago to become a dominant transportation option in cities around the world. And earlier this month, Apple became the first U.S. public corporation to reach a $1 trillion valuation — a far cry from its sorry state in 1996, when it looked doomed to fail.

It’s not just the information sector. The United States is home to 64 percent of the world’s billion-dollar privately held companies and a plurality of the world’s billion-dollar startups. Known in the industry as “unicorns,” they cover industries ranging from aerospace to biotechnology, and they are the reason America remains the engine of innovation for the entire world.

Unless Elizabeth Warren gets her way. In a bill unveiled this week, the Massachusetts senator has put forward a proposal that threatens to force America’s unicorns into a corral and domesticate the American economy indefinitely.

Dubbed the “Accountable Capitalism Act,” Warren foresees the creation of an Office of United States Corporations that would require any company with revenue over $1 billion to obtain a federal charter, binding company directors to “consider the interests of all corporate stakeholders — including employees, customers, shareholders, and the communities in which the company operates.” The bill further requires 40 percent of a chartered company’s directors to be selected by employees and adds statutory restrictions on how executive compensation may be structured.

As motivation, Warren cites stagnant median wages and the declining labor share of income. Yet to call this bill a non-sequitur doesn’t quite do it justice. Changes in labor share, such that they exist, are almost completely explained by rising real-estate prices (which appear in the statistics as capital income). Stagnant wages, meanwhile, are largely the result of a secular decline in economy-wide productivity — a force that the country’s biggest, most productive firms are actively fighting against. Indeed, as Michael Lind and Robert Atkinson note in their recent book Big Is Beautiful, productivity growth in any era tends to be driven by a handful of highly innovative frontier companies at one end of the size distribution. Workers in large firms, for instance, earn on average 54 percent more than their small-business counterparts. This helps to explain why regulations that distort the size distribution of firms can have such a big impact on a nation’s aggregate productivity.

Increasing productivity growth is a hard problem. Vilifying America’s mega-corporations, in contrast, is easy. Warren’s proposal, by channeling the very real malaise of much of America’s working class into a campaign against her favored scapegoats, thus has all the hallmarks of populism at its most Trumpian.


When I met with representatives from the Konrad Adenauer Foundation, the internal “think tank” for Germany’s center-right Christian Democratic Union, in Berlin earlier this year, understanding their deficit of high-growth firms was at the top of the agenda. Germany, they noted, had failed to become a dominant player in tech, producing just five billion-dollar technology companies in the last decade. Instead, Europe’s largest economy is dominated by old behemoths such as Volkswagen and an abundance of specialized, thoroughly unscalable “small and medium” firms known as Mittelstand.

A central problem, I argued, was hiding right in their name: Konrad Adenauer. The first chancellor of Germany after World War II, Adenauer is revered for having instituted the “social-market” model that led to West Germany’s post-war economic miracle. The model secured the shaky political order by balancing pro-market reforms with social welfare and worker representation that, following Catholic teaching on subsidiarity, was largely instituted at the level of the firm. These are the roots of Germany’s contemporary “worker councils,” which provide a conduit for employee input into firm decision making, and its “co-determination” system, the inspiration for Warren’s proposal to force large firms to share their board of directors with labor.

While co-determination is not without its strengths — Germany is still a rich, productive country — it fails as a model for creating new, fast-growing companies. When Steve Jobs took over Apple in 1996, for instance, he famously forced the resignation of most of its board of directors, installing close friends who would be loyal to his vision. He then proceeded to lay off 3,000 workers and shuttered a number of the company’s biggest boondoggles. This earned him a reputation for ruthlessness, but it also set Apple on the path to become America’s first trillion-dollar company. It’s simply impossible to imagine Jobs’s unilateral vision succeeding in an environment of constant stakeholder management and worker negotiation.

Consider the trend in recent years of private companies’ delaying, or even reversing, the decision to go public. With bigger pools of capital come additional compliance burdens and a degree of backseat-driving by shareholders and the broader public that can drive a CEO insane. Co-determination laws, to the extent that they simply add bureaucracy for public and private companies alike, could diminish whatever competitive edge remains to staying private.


This is not to say there’s no need for reform in America’s system of corporate governance. But before proposing a cure it’s essential to get the correct diagnosis. In his lengthy defense of Warren’s proposal, Vox’s Matt Yglesias argues the disease infecting shareholder capitalism is its embodiment of the view, made famous by economist Milton Friedman, that the only social responsibility of business is to increase profit.

Yet, notwithstanding Gordon Gekko’s exaltations about the goodness of greed, the “requirement” for corporations to maximize shareholder value is virtually nonexistent outside of a few specific circumstances. In practice, corporate boards don’t have a fiduciary duty to do much of anything in particular, outside of the standard prescriptions of common law. As an acquaintance who’s spent decades working in large, publicly traded companies put it to me, “I often don’t know what does motivate corporate decisions, but I can assure you it’s not that.”

Milton Friedman was simply wrong, descriptively and prescriptively. That does not mean, however, that Warren and Yglesias’s alternative theory of corporate social responsibility — what philosophers call “stakeholders theory” — is a good idea. As the influential business ethicist Kenneth Goodpaster once observed, simply multiplying the number of stakeholders

blurs traditional goals in terms of entrepreneurial risk-taking, pushes decision-making towards paralysis because of the dilemmas posed by divided loyalties and, in the final analysis, represents nothing less than the conversion of the modern private corporation into a public institution.

This raises the question of why we have private corporations in the first place. Ever since the late Ronald Coase published his famous theory of the firm, economists have tended to argue for a view grounded in public policy. Namely, shareholder corporations dominate modern economies because they are, as a nexus of contracts, much more efficient at pooling capital and directing resources than any competing organizational form. Thus the normative foundation of corporate law is not any subset of stakeholders, but the welfare of society as a whole.

Business ethicist John Boatright makes the point a bit differently, noting that through bargaining, “any constituency or stakeholder group could conceivably make its interests the objective of the firm and the end of management’s fiduciary duty.” The fact that shareholders tend to bargain hardest for formal control simply stems from their greater exposure to losses as residual claimants.

Enforcing co-determination rules doesn’t change this fact. On the contrary, when scandal struck Volkswagen in 2005, the blame was laid squarely at co-determination’s feet. Members of Volkswagen’s supervisory board, widely seen as an “old-boys network” in its own right, were caught exchanging favors, including access to prostitutes, in exchange for union-member votes. It turns out Coase’s theory drives a hard bargain.


As the Democratic party debates whether or not to embrace “democratic socialism,” Warren, to her credit, claims she’s “a capitalist to my bones.” Yet the fact remains that the Accountable Capitalism Act is in many ways the most radical proposal advanced by a mainstream Democratic lawmaker to date. Not because Germany is a socialist dystopia, but because, unlike universal health care or increased spending on the poor, Warren’s proposal is to fundamentally upend the way the most productive companies in the American economy work from the top down.

Forget “If you like your doctor, you can keep your doctor.” Warren’s plan will have you asking if you can keep your retirement savings. As Yglesias notes in his piece, co-determination could cause average share prices to plummet by as much as 25 percent. But don’t worry, says Yglesias: “Cheaper stock would be offset by higher pay and more rights at work.”

Maybe. Or maybe, after the dust settles, we would find ourselves in a new, lower equilibrium — one with less inequality, perhaps, but even lower productivity, as America’s corporate unicorns are converted into glitter glue.

A wise person once said that a model based on preventing the worst-case scenario risks stopping the best-case scenario from ever coming about. The American system, whatever its flaws, is exceptional in its openness to visionaries. Warren’s plan, based on bad economics and worse business ethics, is nothing short of a plan to hold those with vision to account.

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