Elizabeth Warren, the ultra-progressive senator from Massachusetts, is angry. She is angry about the size of CEO salaries on Wall Street. She is angry at the top 10 percent, who own, she says, too much of America’s wealth. She is angry about the gap between those on the top rung and those on the bottom rung of the income ladder. She has decided that the main cause of these inequities is the corporate focus on maximizing returns to shareholders, thereby redirecting “trillions of dollars that could have gone to workers or long-term investments.” She wants a return to the good old days when corporations allegedly balanced their responsibilities to all their stakeholders when making decisions, not just shareholders.
The senator omits two important facts: Larger companies have dedicated much of their earnings to shareholders over the last decade to make up for the widespread losses incurred in the Great Recession; and a record number of small businesses are making capital investments and paying their employees more. The president of the National Federation of Independent Business (NFIB) says, “The optimism small business owners have about the economy is turning into new job creation, increased wages and benefits, and investment.” Such optimism is consequential because nearly 50 percent of the U.S. work force is employed by small business.
Senator Warren, however, prefers to rail against Big Business. Her solution is a federal solution — the Accountable Capitalism Act, which will require corporations with annual revenues of $1 billion or more to obtain a “federal charter.” The charter will obligate the board of directors of a corporation to consider the interests of all the stakeholders, including employees, customers, suppliers, the communities in which the corporation operates, and shareholders. An estimated 3,500 companies will receive a charter from a new Office of United States Corporations in the Department of Commerce.
Warren’s Accountable Capitalism Act has serious enforcement powers. It permits the federal government to revoke the charter of a U.S. company if it has engaged in “repeated and egregious illegal conduct” — as defined, of course, by the federal government.
ACA is not a small or even a giant step toward socialism. It is socialism. Senator Warren’s legislation is the most radical congressional proposal since the National Recovery Administration Act of 1933, which was declared unconstitutional by the Supreme Court just two years later.
Let us begin with a simple question: What if all the stakeholders disagree about the size of the next pay raise or the hiring of transgender workers or the construction of a new plant or how to market a new product? Who is going to resolve the impasse — the Office of United States Corporations? As the business ethicist Kenneth Goodpaster put it: Multiplying the number of stakeholders “blurs traditional goals in terms of entrepreneurial risk-taking” and “pushes decision-making towards paralysis.”
And why is it more “just” for assorted stakeholders to claim a share of the profits? The owners of a company are its shareholders who invested their money in the enterprise. If there is a loss, it is the shareholders who suffer. Other stakeholders — workers, suppliers, the community at large — do not share the direct risk that shareholders do. Warren’s plan, despite its superficial leveling philosophy, may end up benefiting wealthy stakeholders at the expense of small shareholders.
A principal problem with the Warren solution, says the Hoover Institution’s Richard Epstein, is that it’s unconstitutional. The doctrine of “unconstitutional conditions” prevents the government from attaching whatever conditions it wants to corporate charters any more than it can with licenses and permits. The state can direct drivers to take a driving test to use public highways, Epstein explains, but “cannot insist that drivers surrender their rights to participate in political debate . . . to use public highways.” Any conditions attached to corporate charters (now the responsibility of the states) must be “reasonably related” to the prudent operation of their business and not the socialist objectives Senator Warren champions.
If a case questioning the constitutionality of the ACA ever came before a Supreme Court that included Justices Thomas, Alito, Gorsuch, and Kavanaugh and Chief Justice Roberts, it would, in all likelihood, be struck down — another reason why Judge Kavanaugh’s confirmation is so important.
A philosophical target of Senator Warren’s legislation is the late Nobel laureate Milton Friedman, who is often quoted as having said, “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.” But that is only the first part of the quotation. The other half is: “. . . so long as it stays within the rules of the game, which is to say engages in open and free competition without deception or fraud.”
Friedman explained that his aim was to stop corporate insiders from using corporate funds to endow pet projects like the Sierra Club. He said that it was up to the shareholders, not corporate executives, to decide what social initiatives to support. Friedman did not oppose firms’ engaging in activities — such as helping a community hit by a natural disaster — that enhanced public trust and increased the company’s sales and profits.
And who says that U.S. companies do not consider all the stakeholders in their decision-making? Robert Johnson, the first black billionaire, insists that “most companies and most boards look at all their stakeholders, not only their shareholders.” It is just common sense to do so. Despite Warren’s intention to channel Robin Hood, adds Johnson, “the type of government intrusion in industry she is proposing has the potential of channeling Karl Marx.”
The Accountable Capitalism Act is not only unconstitutional but deceptively partisan. It is a gift to organized labor, which is still reeling from a recent Supreme Court decision that public-sector unions may not collect dues from non-members. In the name of “codetermination,” ACA sets forth conditions that would materially strengthen the role of union employees — and therefore the Democratic party, which depends on unions for much of its political action. Under ACA, employees must elect at least 40 percent of the board of directors, and at least 75 percent of the board and the shareholders must approve any political expenditures. Such a high percentage gives the board virtual veto power.
Under our election laws, corporations cannot make direct contributions to political candidates and PACs, but they can engage in independent political expenditures. A corporation can pay for a TV or newspaper ad that urges voters to support or oppose a candidate as long as there is no direct coordination with the candidates. We can assume that directors elected by union members would more readily approve “independent expenditures” on the left but block expenditures on the right.
A final point about “shareholders” whom Warren and other progressives seem to scorn. They are not all greedy Gordon Gekkos. There are in fact 80 million shareholders in America, some 25 percent of the population. ACA would diminish their role and quite likely their faith in the stock market, sparking perhaps an economic downturn.
It is a fatal conceit of ultra-progressives like Senator Warren that they believe they can make better decisions for the people than the people themselves can. Under Woodrow Wilson, FDR, LBJ, and Barack Obama, they have sought to bring about a socialist state in which the people assume they are entitled to free education, health care, and even a job. ACA is a variation on the old Marxist theme of placing the control of all business and industry in the hands of the state. But socialism has never worked wherever it has been tried, from the Soviet Union, Cuba, and Venezuela to China, India, and North Korea. Still, the Warrens and the Sanders insist on revering a god that has failed every time.