The Accountable Capitalism Act: Should Corporations be mandated to act under moral obligations of personhood or only to maximize the value of their shares?

By: Maryam Karimi

With the widening inequality in corporate America and ever-rising CEO compensation, strides towards restructuring corporate wealth may be one of the most important and onerous tasks a senator can choose to undertake.[1]

On August 15, 2018, Senator Elizabeth Warren of Massachusetts introduced the Accountable Capitalism Act which would create an Office of United States Corporations that which would enforce new laws requiring corporations with annual revenue in excess of $1 billion to operate under a federal charter.[2] The Accountable Capitalism Act also would require that directors of corporations consider all major stakeholders in decision making in that corporations must allow for their employees to elect no less than 40% of the board of directors.[3] This feature of the Accountable Capitalism Act would mirror similar requirements for corporations in Germany.[4]

The act also includes measures that would alter executive compensation structure, including restrictions when and how C-suite executives may sell their corporate shares.[5] The Act requires that shares must be held for at least five years from the time they were received and must be held for three years after a share buy-back.[6] Additionally, the Act empowers employees to influence the political activity of the corporation, requiring authorization by 75% of shareholders as well as 75% of board members for the corporation to engage in political activity.[7]

Senator Warren seeks to restructure corporations by reorienting corporations from a relentless pursuit for profit to corporations that consider the needs of their workers and community:

“For decades, American workers have helped create record corporate profits but have seen their wages hardly budge. To fix this problem we need to end the harmful corporate obsession with maximizing shareholder returns at all costs, which has sucked trillions of dollars away from workers and necessary long-term investments.”[8]

Senator Warren supports her positions by showing that under similar models, such as in Germany where corporate employees receive a great transfer of economic power within the corporation, pay equality and long-term decision making are advanced.[9] Senator Warren discusses that short-term investment strategies are a problem because of the prioritization of shareholder returns over the community and welfare of its workers.[10]

Opposition to the Accountable Capitalism Act assert that US investment is far greater than Germany, and that therefore, the same structure may not have the same effects in the United States as a result of the differing economies. Further, that while Germany established improvements in pay equality, it is still quite weak compared to pay equality in other developed nations.[11] Opponents also argue because the Act will mandate that 40% of share ownership of large corporations be given to employees, this amounts to a taking of the private property of the corporation and as such, the federal government may not require its cessation without just compensation.[12]

Most publicly traded corporations are governed by Federal Securities laws, therefore there exists between the federal government and corporations a regulator-regulatee relationship. Contrary to some assertions that the Act could amount to an unlawful taking, requiring that employees own 40% of the corporation and thus appoint 40% of the directors is not quite a taking. First, the government is not taking possession of the shares, rather, the government is imposing additional regulations on corporations. These regulations are more analogous to a heightened set of requirements within an already regulated industry. For example, in the same way that corporations can have their corporate charter dissolved if taxes go unpaid, so too can the Federal government revoke charters in the same manner under the Accountable Capitalism Act.

The opposition further argues that, although the passage of the bill is well-intentioned, it would ultimately lead to wide spread economic distress. According to Jeffrey Miron, a Harvard University economics professor, the bill, “will create a whole set of new rules that the federal government will enforce. Those rules will not be clean, explicit or simple. They’ll be messy, they’ll be complicated. [It will create a] huge ability for companies to evade and avoid.”[13] Professor Miron asserts that where this heightened set of restrictions is enacted, only the very most law-abiding corporations will comply creating more incentives for other corporations to move away from US investment and towards countries with less regulation.[14] Professor Miron furthers his argument by stating that where there is a true free market, consumers or employees who do not agree with the morality of a corporation can hold power by choosing not to support the corporation as opposed to the power given under an umbrella regulation.

Although Professor Miron’s concerns could be overblown (after all, Germany still has a lot of large corporations) the Act does propose a radical change to large corporations in the United States and therefore could have unanticipated, even detrimental, economic effects. Therefore, the analysis should focus on whether the potential positive effects of corporate personhood are at least as equally valuable as the potential negative effects.

Third, opposition to the bill asserts that passage would support and lead to a socialist economy.

In a CNBC interview, Black Entertainment Television co-founder, Robert Johnson stated that Senator Warren’s plans are a “slippery slope towards a socialist economy.”[15] Johnson and former Medtronic CEO, Bill George, oppose the bill because they claim that corporate boards are already engaged in oversight looking at all stakeholders including employees and communities. Further where corporations are governed by either Delaware law or other federal securities law, additional regulation would not work to resolve ongoing problems.[16]

Although many corporations are resistant to the bill, according to Robert Hocket, a Cornell University professor of law and finance, the effect of the bill could be beneficial to the longevity of these corporations:

“[W]here there are about 1.7 million C Corps in the U.S. and about 1,900 public companies and perhaps 200 private concerns have sales over $1 billion…this means less than 1/10 or 1% of U.S. businesses would be affected by the legislation, namely, those slow-growth mega-firms that are too large for states to oversee, and so large that their officers can do mega-harm, exacerbate mega-inequality, and unaccountably.”[17]

As a measure to preserve and promote capitalism, Senator Warren’s act may in fact support the strong capitalistic society she strives for because contrary to many of her opponent’s views, the status quo will eventually prove to be unsustainable. Moreover, even if the restructure of corporations with revenue above $1 billion causes an effect that is socialist in nature within a capitalistic society, this should not void the intentions behind the bill. Americans overwhelmingly support many social programs redistributing wealth to help vulnerable sections of society such as: Social Security benefits, Veteran Affairs, Medicare and Medicaid. This bill does no more or less than require corporations to have a conscience, think long-term, and consider the cost of their actions on their family, community, and country – as any human would.

[1] https://www.fastcompany.com/90223130/how-elizabeth-warrens-accountable-capitalism-act-works

[2] https://www.vox.com/2018/8/15/17683022/elizabeth-warren-accountable-capitalism-corporations

[3] Id.

[4] Id.

[5] https://www.cnbc.com/2018/08/15/economist-warrens-accountable-capitalism-act-seriously-misguided-.html

[6] https://www.vox.com/2018/8/15/17683022/elizabeth-warren-accountable-capitalism-corporations

[7] Id.

[8] https://www.warren.senate.gov/newsroom/press-releases/warren-introduces-accountable-capitalism-act

[9] https://www.vox.com/2018/8/15/17683022/elizabeth-warren-accountable-capitalism-corporations

[10] https://truthout.org/articles/warren-unveils-plan-to-give-workers-more-control-over-corporate-decisions/

[11] https://www.nationalreview.com/corner/elizabeth-warren-accountable-capitalism-act-germany-corporate- governance-model/

[12] https://www.wsj.com/articles/sen-warrens-blast-at-capitalism-and-property-1534800898