Companies Shouldn’t Be Accountable Only to Shareholders... by Elizabeth Warren
S E E D E D C O N T E N T
My new bill would require corporations to answer to employees and other stakeholders as well.
Photo: Richard Drew/Associated Press
American corporations exist only because the American people grant them charters. Those charters confer valuable privileges—such as limited legal liability for their owners—that enable businesses to turn a profit. What do Americans get in return? What are the obligations of corporate citizenship in the U.S.?
For much of U.S. history, the answers were clear. Corporations sought to succeed in the marketplace, but they also recognized their obligations to employees, customers and the community. As recently as 1981, the Business Roundtable—which represents large U.S. companies—stated that corporations “have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” This approach worked. American companies and workers thrived.
Late in the 20th century, the dynamic changed. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns. By 1997 the Business Roundtable declared that the “principal objective of a business enterprise is to generate economic returns to its owners.”
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.
Companies also are setting themselves up to fail. Retained earnings were once the foundation for long-term investments. But from 1990 to 2015, nonfinancial U.S. companies invested trillions less than projected, funneling earnings to shareholders instead. This underinvestment handcuffs U.S. enterprise and bestows an advantage on foreign competitors.
The problem may get worse, because executives have a strong financial incentive to prioritize shareholder returns. Before 1980, top CEOs were rarely compensated in equity. Today it accounts for 62% of their pay. Many executives receive additional company shares as a reward for producing short-term share-price increases. This feedback loop has sent CEO pay skyrocketing. The average CEO of a big company now makes 361 times what the average worker makes, up from 42 times in 1980.
Corporate charters, which define the structure and obligations of U.S. companies, are an obvious tool for addressing these skewed incentives. But companies are chartered at the state level. Most states don’t want to demand more of companies, lest they incorporate elsewhere.
That’s where my bill comes in. The Accountable Capitalism Act restores the idea that giant American corporations should look out for American interests. Corporations with more than $1 billion in annual revenue would be required to get a federal corporate charter. The new charter requires corporate directors to consider the interests of all major corporate stakeholders—not only shareholders—in company decisions. Shareholders could sue if they believed directors weren’t fulfilling those obligations.
This approach follows the “benefit corporation” model, which gives businesses fiduciary responsibilities beyond their shareholders. Thirty-four states already authorize benefit corporations. And successful companies such as Patagonia and Kickstarter have embraced this role.
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. To address self-serving financial incentives in corporate management, directors and officers would not be allowed to sell company shares within five years of receiving them—or within three years of a company stock buyback.
For the past 30 years we have put the American stamp of approval on giant corporations, even as they have ignored the interests of all but a tiny slice of Americans. We should insist on a new deal.
Ms. Warren, a Democrat, is a U.S. senator from Massachusetts.
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Corporate capitalism is great for the shareholders... but not for any other stakeholders... to the point that many people will not ever recognize that there any other stakeholders...
I don't subscribe to the WSJ any more. It got just too partisan, after Murdoch bought it.
I found this article through one published in the Guardian . Several commentaries are included there:
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Good work, guys! Both of you went for "BE AFRAID!!" while totally ignoring what she actually said...
I'm willing to bet that most Replies her will be equally free from pertinence.
This bill is going nowhere and is a publicity stunt and a reminder of why we need to keep the Dems from controlling both congress and the White house. I don't want big brother interfering in business.
Please read the seed.
The real answer? The median reported compensation for CEOs of the largest 500 companies in the U.S. is $10.3 million. The average is $12.2 million. Cherry picking 125 companies is a bit disingenuous.
I notice there isn't much complaining going on about the salaries of pro athletes. Football players: 37 times the average income; baseball: 71 times the average; basketball: 135 times the average income. I wonder what the average salary of the peanut thrower is at a basketball game. Average head coach in college football earns almost 30 times more than the average salary earner. But, that's all fine. Corporate big wigs, those are the bad guys. Other people earning what the owners think they are worth...that's fine.
Warren's philosophy.
"the rest of us" That's the problem with this line of thought. You did nothing, the rest of us did everything. It immediately ignores the fact that "the rest of us" includes the people she is lecturing. It also ignores the fact that "the rest of us" are people that are benefitting from the people she is lecturing. Sure there are public ROWs available to all, marketplaces, etc. "F" those that make sound use of those things that are available to all though. You guys owe "the rest of us, " because apparently the rest of us don't have access to these things that we made available.
Warren didn't say that. There's a world of difference between "you didn't do it on your own" and "you did nothing".
Conflating the two is either foolish or disingenuous.
Only as foolish or disingenuous as Warren's remarks.
That’s your answer?
Gawd.....
The pro athlete is the employee, they are the ones making the "sausage" that the teams are selling. It is important to realize that the owners of professional teams, do not make 300% more than their players which is the discussion i believe.
I know the Professional Basketball Club LLC investment group that owns the Oklahoma City Thunder basketball team only make around $30M from the team and the player salaries average $10.3M. The highest paid "employees" are $35M, $30M, $24M, $15M,....etc
I know its easier to pay basketball players more as the rosters are smaller than baseball or football and that extrapolates out to say the "roster" of a Walmart but when you look at how much those Walmart/McDonald type corps are putting into their pockets and not putting into the pockets of those "making the sausage" it gets unappetizing.
Pro athletes are an infinitesimal portion of the economy. So are movie stars.
Let's concentrate on the real world.
So are 7 figure CEOs.
Excellent. Let us know when you're ready to start.
If you see no difference between Serena Williams and Mary Barra, that's your problem.
Serena contributes less to society and makes substantially more money.
The point remains that neither athletes nor CEOs represent more than a microscopic sliver of the economy.
Serena is self-employed. The CEO is one among many in the corporation.
C’mon man making 20 mil a year is much worse than making 80 mil a year.
Poor baby Bara ..... she’s barely making it in this world .....
I'm going to give you the benefit of the doubt and assume you think there is an actual point in here somewhere. Can we skip ahead to that part?
... and I was giving you the benefit of doubt... that you would see beyond the your standard bullet-points.
Apparently not.
So....you thought you had a point and then math got in the way again.
Fair enough.
No.
I gave you / us the opportunity to rise above your / our habitual level of knee-jerk / bullet-point discourse. You / I failed.
Being an eternal optimist, I'll surely try again.
OK...so still no point. Unless it has something to do with some sort of 1950s female stereotype where we're all supposed to know what you're thinking.
I point to pro sports for the reason that nobody is complaining that OBJ signed a 95 million dollar contract because they believe he deserves it. I certainly believe he deserves it. But, it begs the question. Why aren't people crying for the men and women that are cleaning the stadium? OBJ will get over 20 mil/year for three seasons, which is more than most of he CEOs on the list of purported jerks Warren and Ellison are griping about. I seriously doubt the regular Giants employee gets anything more than the employees of the companies that are thrown under the bus in Ellison's report. However, the people working behind the scenes are making the sausage right along with the players.
Regardless, this is not necessarily an apple to oranges comparison. Whether it be a CEO or wide receiver, you are talking about a person the company believes is worth a high salary and will make money for the top brass. In both situations, the peanut vendors are getting the shaft (according to the Warrens of the world), yet nobody is crying for the peanut vendors of the pro sports world, nor bashing pro athletes for taking such large salaries while the little guys of the company are earning similar pay as compared to those that work for the evil corps listed in Ellison's report. Why not? Apparently, catching passes for a franchise that employs 3000 is a more noble endeavor than running a corporation that employees 30k.
There are a ton of articles and a lot of people absolutely disgusted with the amount of money pro athletes and celebrities get paid. $25M a year is overkill but its the competition between franchises that bid up a players worth. the NFL, NBA, MLB..etc would have to cap player salaries to fix the situation. $2.5M guaranteed seems more realistic for pro athletes to me.
I can't say whether or not that's true. Those articles don't appear on the pages I frequent. I also didn't notice any articles blasting OBJ for dancing in the locker room, celebrating the pay day. I would assume that if there are a lot of people absolutely disgusted with athlete pay, something would have appeared somewhere on google's front page suggesting the same. Instead, it was all celebration. I can only imagine what the buzz would be if one of the evil CEOs posted a similar video.
BTW...Go Pokes
I will have to admit i might have done a little overreach on that comment. Athlete and Celebrity pay is a routine conversation piece amongst those I communicate with but did not realize there really was not a whole lot of articles (mainstream or otherwise that discuss it in any meaningful way). I did some digging on my own and was quite enlightened it is not as big a hot button issue as i perceived it to be.
Thanks for the team support, first game of season tonight on FS1, Hopefully going to crush Missouri State.
Well, I sometimes find myself discussing athlete and celebrity pay, but not because I think it is gross.
As for college football...gotta stand by your team. Hopefully, we can win the home games we are picked in this year. Tech, Texas, ISU, WV...I'm assuming they'll be picked in 3 of those. I'm betting Boise State will be picked to win in 2 weeks. Regardless, I'm happy football season is here.
She's cynically pandering to the nuts on her left, knowing this would be a massive economic disaster if it ever was enacted, but she's establishing her bona fides with the loons for a Presidential run. She's not dumb enough to propose this if it had a chance of becoming law.
Although it's still scary to see a leader of a major party rip a page from the Mussolini playbook. This is his literally his economic policy, government and businesses working hand in hand, with the government controlling the "private" businesses.
Even though this was just a publicity stunt, these sort of shenanigans do have a deleterious effect on the economy. They create uncertainty in the economy as business owners have no idea what policies the government will enact and shy away from risk and expansion. Uncertainty is one of the main reasons the recovery from the Great Recession was terrible, businesses had no idea what Obama would do, so they hoarded cash. Warren is stoking that uncertainty again, and as Robert Higgs wrote:
" Regime uncertainty pertains above all to a pervasive uncertainty about the property-rights regime—about what private owners can reliably expect the government to do in its actions that affect private owners’ ability to control the use of their property, to reap the income it yields, and to transfer it to others on mutually acceptable terms. Will the government simply take over private property? Will it leave titles in private hands but strip the owners of real control and profitable use of their properties? In any event the security of private property rights rests not only on the letter of the law but also on the character of the government officials who enforce—or threaten—presumptive rights.
Between 1935 and 1940 this matter attained prime importance. So many businessmen and investors lost confidence in their ability to forecast the future property-rights regime that few were willing to venture their money in long-term investments. They constantly sought clarification of the government’s designs, as President Franklin D. Roosevelt raged against “economic royalists” and blamed a “strike of capital” for the economy’s ongoing troubles, including the depression of 1937–38, which undermined the general public’s confidence in the New Deal."
Empty political theater. Her empty-headed proposal is unconstitutional and would never be approved by ANY Congress. The only purpose is to pander to the idiot socialists that follow her.