‘Accountable’ Capitalism

Elizabeth Warren introduces Senate bill to hold capitalism ‘accountable’ (The Guardian)

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: Warren Bill Would Stop Companies From Placing Shareholder Paydays Over Worker Rights  (Julia Conley, Common Dreams) via: (Yves Smith, Naked Capitalism)

Image: Amanda Andrade-Rhoades/Reuters

[ed. If we were truly a properly functioning democracy/meritocracy Elizabeth Warren would have been elected President years ago. Glad she's still a US Senator though.]