Warren Bill Would Stop Companies From Placing Shareholder Paydays Over Worker Rights

Yves here. While it is welcome to see Elizabeth Warren using a quixotic bill to call attention to the fact that Corporate America is increasingly in the business of looting companies for their and shareholder fun and profit, one has to wonder at the timing. During the Biden almost lame duck phase? Note she first introduced this legislation in 2018, as in under Trump, so this is a rerun. That makes the timing even odder. Was Warren that concerned about spending points via a bill that one has to assume runs afoul of pet Administration views?

I see nothing on Twitter about this bill, but the Guardian, which has renounced Twitter, has a write-up that sets forth its key provisions:

The bill would mandate corporations with over $1bn in annual revenue obtain a federal charter as a “United States Corporation” under the obligation to consider the interests of all stakeholders and corporations engaging in repeated and egregious illegal conduct can have their charters revoked.

The legislation would also mandate that at least 40% of a corporation’s board of directors be chosen directly by employees and would enact restrictions on corporate directors and officers from selling stocks within five years of receiving the shares or three years within a company stock buyback.

All political expenditures by corporations would also have to be approved by at least 75% of shareholders and directors.

What concerns me about the framing in the Guardian, and it’s even more apparent in the Common Dream account below, is that it IMHO does not make it clear that the maximizing shareholder value is a made up economists’ creed, first promulgated by Milton Friedman in a New York Times op-ed. It is not a legal duty, as management touts regularly and falsely assert. Legally, equity is a residual claim. All other obligations, like payments to employees, suppliers, creditors, landlords, tax authorities, successful litigants, regulatory fines, come first.

Since this bad idea seems as resistant to extermination as cockroaches, let us hoist from a 2017 post, Why the “Maximize Shareholder Value” Theory Is Bogus:

From the early days of this website, we’ve written from time to time about why the “shareholder value” theory of corporate governance was made up by economists and has no legal foundation. It has also proven to be destructive in practice, save for CEO and compensation consultants who have gotten rich from it.

Further confirmation comes from a must-read article in American Prospect by Steven Pearlstein, When Shareholder Capitalism Came to Town. It recounts how until the early 1990s, corporations had a much broader set of concerns, most importantly, taking care of customers, as well as having a sense of responsibility for their employees and the communities in which they operated. Equity is a residual economic claim. As we wrote in 2013:

Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation. From that flow more specific obligations under Federal and state law. But notice: those responsibilities are to the corporation, not to shareholders in particular…..Equity holders are at the bottom of the obligation chain. Directors do not have a legal foundation for given them preference over other parties that legitimately have stronger economic interests in the company than shareholders do….

One of their big props to this campaign was the claim that companies existed to promote shareholder value. This had been a minority view in the academic literature in the 1940s and 1950s. Milton Friedman took it up an intellectually incoherent New York Times op-ed in 1970….

Why The Shareholder Value Theory Has No Legal Foundation

Why do so many corporate boards treat the shareholder value theory as gospel? Aside from the power of ideology and constant repetition in the business press, Pearlstein, drawing on the research of Cornell law professor Lynn Stout, describes how a key decision has been widely misapplied:

Let’s start with the history. The earliest corporations, in fact, were generally chartered not for private but for public purposes, such as building canals or transit systems. Well into the 1960s, corporations were broadly viewed as owing something in return to the community that provided them with special legal protections and the economic ecosystem in which they could grow and thrive.

Legally, no statutes require that companies be run to maximize profits or share prices. In most states, corporations can be formed for any lawful purpose. Lynn Stout, a Cornell law professor, has been looking for years for a corporate charter that even mentions maximizing profits or share price. So far, she hasn’t found one. Companies that put shareholders at the top of their hierarchy do so by choice, Stout writes, not by law…

For many years, much of the jurisprudence coming out of the Delaware courts—where most big corporations have their legal home—was based around the “business judgment” rule, which held that corporate directors have wide discretion in determining a firm’s goals and strategies, even if their decisions reduce profits or share prices. But in 1986, the Delaware Court of Chancery ruled that directors of the cosmetics company Revlon had to put the interests of shareholders first and accept the highest price offered for the company. As Lynn Stout has written, and the Delaware courts subsequently confirmed, the decision was a narrowly drawn exception to the business–judgment rule that only applies once a company has decided to put itself up for sale. But it has been widely—and mistakenly—used ever since as a legal rationale for the primacy of shareholder interests and the legitimacy of share-price maximization.

Now to the current post.

By Julia Conley, staff writer at Common Dreams. Originally published at Common Dreams

Aiming to confront “a root cause of many of America’s fundamental economic problems,” U.S. Sen. Elizabeth Warrenon Wednesday unveiled a bill to require corporations to balance growth with fair treatment of their employees and consumers.

The Massachusetts Democrat introduced the Accountable Capitalism Act, explaining that for much of U.S. history, corporations reinvested more than half of their profits back into their companies, working in the interest of employees, customers, business partners, and shareholders.

In the 1980s, said Warren corporations began placing the latter group above all, adopting “the belief that their only legitimate and legal purpose was ‘maximizing shareholder value.'”

That view was further cemented in 1997 when the Business Roundtable, a lobbying group that represents chief executives across the country, declared that the “principal objective of a business enterprise is to generate economic returns to its owners.”

Now, Warren said in a policy document, “around 93% of American-held corporate shares are owned by just 10% of our nation’s richest households, while more than 40% of American households hold no shares at all.”

“This means that corporate America’s commitment to ‘maximizing shareholder return’ is a commitment to making the rich even richer, while leaving workers and families behind,” said Warren in a statement.

The Accountable Capitalism Act would require:

• Corporations with more than $1 billion in annual revenue to obtain a federal charter as a “United States corporation,” obligating executives to consider the interests of all stakeholders, not just investors;
• Corporate political spending to be approved by at least 75% of a company’s shareholders and 75% of its board of directors; and
• At least 40% of a company’s board of directors to be selected by employees.

The bill would also prohibit directors of U.S. corporations from selling company shares within five years of receiving them or within three years of a company stock buyback.

Warren noted that as companies have increasingly poured their profits into stock buybacks to benefit shareholders, worker productivity has steadily increased while real wages have gone up only slightly. The share of national income that goes to workers has also significantly dropped.

“Workers are a major reason corporate profits are surging, but their salaries have barely moved while corporations’ shareholders make out like bandits,” said Warren told The Guardian. “We need to stand up for working people and hold giant companies responsible for decisions that hurt workers and consumers while lining shareholders’ pockets.”

The senator highlighted that big business interests invested heavily in November’s U.S. presidential election.

“Following the most lucrative election in history for special interests,” she said, “my bill will empower workers to hold corporations to responsible decisions that benefit more than just shareholders.”