“Corporate profits are booming, but average wages haven’t budged over the past year. The U.S. economy has run this way for decades, partly because of a fundamental change in business practices dating back to the 1980s. On Wednesday I’m introducing legislation to fix it.” – Senator Elizabeth Warren, August 14, 2018
The Financial Times Lexicon offers this definition of corporate responsibility: “Corporations have a responsibility to those groups and individuals that they can affect, i.e., its stakeholders, and to society at large. Stakeholders are usually defined as customers, suppliers, employees, communities and shareholders or other financiers.”
During the 1950s, 1960s, and 1970s in the United States, this precept represented the mainstream view embraced by big business. Although, “What’s good for General Motors is good for the country,” is a misquotation of GM’s CEO, this phrase aptly summed up a paradigmatic theme: when GM – and other big companies – did well, everyone benefited. And the broad benefits were direct and tangible, unlike the phantom ‘trickle down’ prosperity we’ve been promised repeatedly since Ronald Reagan became a Republican icon. In the post-World War II era (which stretched over three decades), the American economy was guided by an economic consensus: from the offices of CEOs and other executives to the factory floor – everyone should share the wealth. They all helped build it; they would all benefit from it. Communities with corporate headquarters and factories would also benefit. We were all in it together. Even government had a critical role in encouraging investment, research, education, health and safety, among other elements of a healthy thriving economy.
In Capitalism and Freedom, Milton Friedman’s 1962 offensive against the economic view of the era, he argued that corporations have only one responsibility: to maximize profits for stockholders. He argued against a broader, more inclusive view of corporate responsibility (Chapter VIII – Monopoly and the Social Responsibility of Business and Labor, Social Responsibility of Business and Labor):
“This view shows a fundamental misconception of the character and nature of a free economy. In such an economy, there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits 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.”
Long story short: during the following decades this view took root. Friedman’s vision, which blossomed during the Reagan years, is the economic regime of 21st century America. And actions have consequences. Few Americans – apart from the richest 1% – have reason to celebrate this outcome, as Warren notes:
That shift has had a tremendous effect on the economy. In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other priorities. But between 2007 and 2016, large American companies dedicated 93% of their earnings to shareholders. Because the wealthiest 10% of U.S. households own 84% of American-held shares, the obsession with maximizing shareholder returns effectively means America’s biggest companies have dedicated themselves to making the rich even richer.
In the four decades after World War II, shareholders on net contributed more than $250 billion to U.S. companies. But since 1985 they have extracted almost $7 trillion. That’s trillions of dollars in profits that might otherwise have been reinvested in the workers who helped produce them.
Before “shareholder value maximization” ideology took hold, wages and productivity grew at roughly the same rate. But since the early 1980s, real wages have stagnated even as productivity has continued to rise. Workers aren’t getting what they’ve earned.
Accountable Capitalism Act
Her solution – to ensure that “giant American corporations should look out for American interests” – is strikingly simple in concept: The Accountable Capitalism Act would require all corporations with more than one billion dollars in annual revenue to get a federal charter. Currently, companies are incorporated by the states, which creates a ‘race to the bottom’ landscape featuring a surfeit of corporate privileges and a dearth of social responsibilities. With this requirement, we could level the playing field.
Second, the legislation would require that corporate boards consider the interests of all principal stakeholders in making decisions.
Senator Warren notes that ‘benefit corporations,’ authorized in 33 states and the District of Columbia, provide a rough working model for her plan. (Some readers may be familiar with B-Corps, closely related – though not identical – to benefit corporations.) The prevailing approach (as articulated by Friedman) excludes consideration by corporate boards of any goals apart from maximizing shareholder value. As a Silicon Valley attorney explains on the American Bar Association website:
This real or perceived duty to maximize stockholder welfare often becomes the core guiding principle.
The benefit corporation changes the game because it turns the corporation into a dual-purpose entity with the twin purposes of optimizing stockholder welfare and creating general public benefit. It expressly authorizes corporations to provide a material positive effect on society and the environment while pursuing profits as usual. The legal architecture of the benefit corporation allows ethical corporations to put the full power of corporate law behind their social and environmental values and higher purposes.
Essentially, benefit corporations broaden the fiduciary responsibilities of corporations beyond stockholder value; our experience with benefit corporations demonstrates that the model Warren proposes has a measure of practical grounding.
Worker participation
Warren’s proposal provides for two significant changes in corporate governance – relating to worker participation and political spending – that would amplify the voices of rank and file corporate employees:
“My bill also would give workers a stronger voice in corporate decision-making at large companies. Employees would elect at least 40% of directors. At least 75% of directors and shareholders would need to approve before a corporation could make any political expenditures.”
The first change would put one of the principal stakeholder groups at the table when corporate decisions are made. Employees – who have a strong stake in the success of the company they work for – would have a voice in the company’s decisions.
Matthew Yglesias cites evidence that worker participation (‘codetermination’) in corporate decision-making has positive effects in Germany, where it is well established:
“Studies from Germany’s experience with codetermination indicate that it leads to less short-termis in corporate decision-making, and much higher levels of pay equality, while other studies demonstrate positive results on productivity and innovation.”
Those are broad, significant benefits, though the presence of employee directors undoubtedly would lead to lower share prices and much less generous compensation for CEOs – hardly welcomed by everyone.
Political reform
The second change, requiring 75% approval for the use of corporate dollars to fund political messages, would have far reaching effects on our political environment. Corruption in Washington is rampant. The Trump administration has brought a wrecking crew to environmental and financial regulation. And ideologues forming a growing majority on the Supreme Court have ushered in a political epoch where corporate dollars – given in secret, often without accountability to candidates or parties, much less to voters – can flood into political campaigns and, after candidates beholden to big business are elected, ensure ‘access’ to elected officials who craft legislation and who can impede enforcement of rules and regulations.
Recall Friedman’s comment about a corporation maximizing profits “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.” This prerequisite is phony if corporate money – shielded from public view – sways elections and buys access. Corporations – and rich stockholders – are rigging the rules of the game.
This simple 75% rule could be a game changer.
Persons under the Constitution
Though Mitt Romney said, “Corporations are people, my friend,” they are not. They were created by government to advance a public purpose. As Teddy Roosevelt put it: “The great corporations which we have grown to speak of rather loosely as trusts are the creatures of the State, and the State not only has the right to control them, but it is duty bound to control them wherever the need of such control is shown.”
Louis Brandeis suggested, “We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.” Dissenting in a 1933 case before the Supreme Court, he endorsed the race to the bottom theory and argued that corporations were created by the state and the state could regulate them to ensure public benefit. Large corporations threaten to monopolize free markets, to infringe on individuals’ liberties and opportunities, and to quash workers’ rights. Most dangerous of all: “Through size, corporations, once merely an efficient tool employed by individuals in the conduct of private business have become an institution—an institution which has brought such concentration of economic power that so-called private corporations are sometimes able to dominate the state.”
Senator Warren asserts the right to make corporations accountable. This is long overdue.
Trampling individual rights
Citizens United unleashed corporate money into our political system with a shrug from Justice Anthony Kennedy that “independent expenditures do not lead to, or create the appearance of, quid pro quo corruption.” Hobby Lobby ruled that corporations can trample on the rights of women – that is to say, of human beings. As Adam Winkler notes, “the rights of employees have to give way to the rights of the corporation.” And, “the data show that the Roberts Court is the most business-friendly Supreme Court in nearly a century.”
Professor Winkler concludes:
So while a business corporation can’t go to church, fast on Yom Kippur, or travel to Mecca for Ramadan, it can still go to court and, on the basis of religious freedom, demand to be exempted from the law that applies to everyone else. Today, women are the victim. Tomorrow, it could be LGBT people. Indeed, after Hobby Lobby, every person is at risk. Everyone, that is, except the corporate person, my friend.