Massachusetts Senator, Elizabeth Warren has fired a warning shot at the American corporate governance community with her newly proposed Accountable Capitalism Act. The Act calls for a rewrite of American corporate governance basics, shifting away from the current shareholder dominated paradigm to a more worker-friendly model AND introducing federal government involvement in what has traditionally been the domain of states. The five primary features of the bill are sure to generate chatter well beyond the cloistered US corporate governance complex. But is such a rewrite a good idea?
I confess that I’m conflicted. The Accountable Capitalism Act is a response to some of the most important questions of our day: Why does society allow corporations to exist at all? To whom should corporations be accountable? How can we adequately protect the interests of workers and communities against the harshest negative impacts of putting shareholders first?
The simplicity of the Act’s five major features is extremely attractive, but also a weakness. Underneath the surface are many unresolved details that will be the difference between progress or unwelcome and unintended consequences. In short, the Act is an important policy conversation starter but incomplete as policy.
We Can’t Skip the Hard Questions
The first pillar of the Accountable Capitalism Act is a new requirement for all very large American corporations to receive an additional charter to be a United States Corporation from the Federal government. United States Corporations would be legally obligated to consider the interests of all stakeholders in their decisions and pursue “general public benefit.”
As admirable as this “public benefit” requirement is, lots of questions need to be answered well for this to translate into good policy. The details really matter. How would “public benefit” be defined for the wide variety of industries and business models across the modern economy? How would they be enforced?
Requiring large corporations to receive multiple charters could be redundant and complicated- a recipe for abuse and corruption. If large corporations require a Federal charter, where do we define the boundaries of Federal and State authority? How do we ensure those boundaries remain over time? This is no small consideration for a state like Delaware, the most important corporate governance jurisdiction in the world, where 25% of the state budget comes from fees and taxes collected from companies that organize and incorporate there. And how would we ensure that a federal chartering authority is not abused or corrupted for political purposes?
Similar complexity surrounds the intriguing notion of workers electing corporate directors. This idea is borrowed from the German corporate governance model but that system emerged in Germany long ago and it’s rooted in German institutions, culture and traditions. While the German model has inspired others in continental Europe, I’m doubtful that we can simply copy and paste the German model of “codetermination” here in the US and expect good results without first building new institutions and traditions that make codetermination work elsewhere.
(Re)discovering Answers in America’s Traditions
Enhancing worker power in corporate governance is essential to ensure that the American economy generates shared prosperity, but to do so thoughtfully requires crafting a system fit for American institutions and traditions. We could, for example, aim to make corporate governance more democratic and fair, consistent with American political traditions and values.
While it’s true that today American corporate governance is decidedly undemocratic, insights from America’s founding decades underscore that it does not have to be that way. Consider the current reality that shareholders who own more stock get more votes. This ensures that the wealthiest individuals and powerful investing institutions control our “corporate republics” while the voice of workers and people who own few shares are drowned out. Activist hedge fund managers leverage their voting power to threaten (and some say, distract) corporate boards for their own purposes. That’s something James Madison and Alexander Hamilton would have surely recognized as a “faction” usurping power to the detriment of the common good.
Might it be time to revisit a truly democratic corporate voting system where every shareholder has equal voting power—one vote per shareholder? This concept isn’t novel. Most early American corporations were organized this way, though that norm faded in the 19th century. A more democratic corporate voting system would dramatically realign corporate power towards a wider population that would include workers and other stakeholders. This change would be accompanied by its own complexities, but it has the advantage of aligning with America’s traditions and values.
Facing the Right Direction is a Good Start
One pillar of the Corporate Citizen Act that appears relatively simple and less fraught is the proposed requirement of 75% shareholder approval for corporate political spending. This speed bump in the service of a healthier political contests wouldn’t solve the issue of campaign finance, but it might help. Indeed, in his majority opinion in the infamous Citizens United case, Justice Kennedy argued that “shareholder democracy” would be the most appropriate check on corporate political spending. Sure, shareholder voting on political spending still empowers the wealthy (because 80% of corporate stock is held by the wealthiest 10% of the population) but it’s harder to envision serious unintended consequences from this proposal.
Senator Warren has gone bold in reimagining American corporate governance. Her proposals are provocative and the ideas she presents poll well among the public. But this does not make them good policy. Not yet, anyway. More importantly, she has opened a conversation in the public that has been growing among specialists for years. She should be applauded for raising important questions about the most basic design of American corporate governance and for challenging the norms that disempower the worker voice and too easily encourage big business to serve shareholders above the interests of society. She has raised the right questions and the hard work is ahead for our leaders to craft wise answers.
Miguel Padró is a Senior Program Manager in the Long Term Strategy Group in Aspen’s Business & Society Program.