Thursday, August 16, 2018

Elizabeth Warren's Accountable Capitalism Act and Benefit Corporations

On Tuesday, Elizabeth Warren penned an article in The Wall Street Journal entitled Companies Shouldn’t Be Accountable Only to Shareholders: My new bill would require corporations to answer to employees and other stakeholders as well.

The article announced and promoted her Accountable Capitalism Act. With Republicans in control of Congress and the White House, Warren’s bill almost certainly doesn’t stand a chance of passing in the short-term.

Yet, because the bill draws on benefit corporation governance, a main scholarly interest of mine, and because it may foreshadow moves by a Democrat-controlled Congress in the future, I decided to read the 28-page bill and report here briefly.

Portions of the bill summarized:

  • As has been widely reported, the bill only applies to companies with more than $1 billion in revenue.
  • The bill seeks to establish an “Office of United States Corporations” within the Department of Commerce, which will review, grant, and rescind charters for the large companies covered by the bill.
  • The bill takes language from benefit corporation law and requires that U.S. Corporations must have a purpose to serve a “general public benefit” – “a material positive impact on society resulting from the business and operations of a United States corporation, when taken as a whole.” This purpose is in addition to any purpose in the company’s state filing.
  • The governance requirements are a mix of the Model Benefit Corporation Legislation and Delaware version of benefit corporation law – requiring both that directors balance the “pecuniary interests of shareholders” with the "best interests of persons that are materially affected by the conduct of the United States corporation” (drawn from Delaware) and that directors consider a litany of stakeholders in their decisions (including shareholders, employees, customers, community, local and global environment - drawn from the Model). Only shareholders with 2%+ of the shares can sue derivatively.
  • Employees must elect 40%+ of the board of directors.
  • 75%+ of shareholders and 75%+ of directors must approve political spending of over $10,000 on a single candidate.

My brief thoughts:

  • This is a lot of press for benefit corporations.
  • The press may not be good for benefit corporation proponents who have been largely able to pitch to both sides of the political aisle in their state bills. B Lab co-founder Jay Coen Gilbert has already written an article trying to promote what he sees as the bipartisan nature of benefit corporations: Elizabeth Warren, Republicans, CEOs & BlackRock's Fink Unite Around 'Accountable Capitalism'
  • I have noted in my scholarly work how the state benefit corporation laws fail to align the purported “general public benefit” corporate purpose with effective accountability mechanisms. This bill, however, takes one step toward aligning company purpose and accountability by requiring that employees elect 40%+ of the board. Of course, that still leaves out many other stakeholders that directors are supposed to consider, and shareholders are still the only stakeholders with the ability to sue derivatively. A better solution is to have stakeholder representatives who elect the entire board and also possess, collectively, the right to sue derivatively. This stakeholder representative framework, articulated in my 2017 American Business Law Journal article, has the benefit of keeping the board united on a common goal – instead of fighting on behalf of the single stakeholder group who elected them – while also being held to account by representatives of all major stakeholder groups, collectively.
  • Suggesting that benefit corporation law become mandatory will likely not be popular among many conservatives. See, e.g., this early response in the National Review: Elizabeth Warren’s Batty Plan to Nationalize . . . Everything. Currently, a fair response to conservative critics of state benefit corporation laws is "if businesses do not like the benefit corporation framework, they can just choose to be a traditional corporation." This bill attempts to remove that choice for large companies. 

(My co-blogger Joshua Fershee may be horrified to learn that the bill purports to apply not only to corporations, but also to LLCs, even though they use the term "U.S. Corporations" throughout).

Business Associations, Corporations, CSR, Financial Markets, Haskell Murray, Social Enterprise | Permalink


You'd think if the stakeholder model of corporate governance was a superior means of delivering goods and services, you'd see a lot more of it. After all, we have existed in a world of private ordering for quite some time. Instead, Warren, standing on some Mt. Olympus of corporate governance, has decided that she knows best and wants to do it a different way, her way. Where does her expertise in corporate governance come from? Perhaps her background as a bankruptcy law scholar? Also, where does her authority for proposing such a change come from? Perhaps it comes from her overwhelming list of 14 (yes, I kid you not) professors (which includes a couple of associate professors and an assistant professor) and practitioners who she dug up to sign a letter supporting the Act?

The bottom line is pretty much summed up with what I said on my LinkedIn page: The benefit corporation was meant to be an option, not a good option in my opinion, but an option nonetheless. Now, Elizabeth Warren, in introducing the Accountable Capitalism Act, wants it to be a requirement for companies with over $1 billion in revenues. Plus, there is a whole lot of other goodies for progressives in the proposed law. If Warren is correct in thinking that this bill is going to help her win the Democratic nomination, then we are all in trouble. I think Warren should rename the bill "The Gift to Donald Trump Act." If there is one person in this country trying to help Donald Trump win reelection, it is Elizabeth Warren.

Posted by: Bernard S. Sharfman | Aug 16, 2018 7:38:16 PM

Thanks for the comment, Bernard. I agree that benefit corporations are better as a voluntary choice. I would be in favor of favorable tax treatment for benefit corporations, however, IF there were better accountability mechanisms in place.

Posted by: Haskell Murray | Aug 17, 2018 6:54:57 AM

As for Bernard's comment: if you take a global and historical perspective, a stakeholder approach is the norm, and shareholder wealth maximization is a recent innovation that is still quite controversial in most of the world. Plus, if one thinks there are any significant agency problems or externalities, there are lots of reasons to think the number of companies following a stakeholder approach may be quite sub-optimal. And if you read Matt Yglesias over at Vox, you will see some interesting polling data that suggests this could actually be more popular than most potential Democratic initiatives. Even plenty of Republicans like the idea.

That said, I agree with both Haskell and Bernard that a voluntary choice would be much better. But, given the significant external benefits, I would incentivize opting in with either a lower corporate tax rate or with increased flexibility in applying federal employment and labor law, or both.

As for Haskell's comments on giving employees representation on the board, we are both on record as supporting some representational mechanisms for a range of stakeholders, so I don't disagree. But I do think that employees are a uniquely important stakeholder group, with a strong interest in monitoring and influencing what goes on in a company, and in many cases their interests will tend to align with other stakeholders as well, so the employee director provision is a big step forward.

Posted by: Brett McDonnell | Aug 17, 2018 12:11:20 PM

Although proffering a benefit corporation is fine, I’ve yet to have a single or group of clients in the start-up process who – in the throes of capitalizing a business, liquidating or pledging their personal assets and diverting their retirement in the hope of a greater return – have the public benefit as motivation. Since adoption of Tennessee’s act, I would find it interesting the number of formations and conversions. Aside from academic discussion, it has been my experience that Tennessee’s adoption has gone unremarked in colleague circles. I’m pretty certain that the TN Secretary of State keeps these statistics.

A recent article, April 5, 2018, indicated that a law firm became the first law firm and fifth corporation to become a B Lab certified business. Interesting, in part, because only licensed attorneys may be shareholders. However, it’s an interesting marketing tool which may attract benefit formations and guidance.

I find the Warren proposal naïve but unsettling. Another elected official enamored with governmental regulation but with a background devoid of ever having any "skin in the game of business." A mandatory Act of this type would do something that the prior and current Administrations have tried to squelch – by force of regulation (which only incentivizes greater creativity in avoidance) or inducement (which is usually more effective) – giving greater incentive to offshore business. I would be far happier if it was the Accountable Government Act allowing for recall of bureaucrats and public referendum striking regulations.

As pointed out with the breadth of Warren’s proposed envelopment of uncorporations, the attractiveness of “freedom to contract” and the evolution away from mandatory duties would most certainly make the public take note.

Posted by: Tom N. | Aug 17, 2018 1:06:57 PM

In response to Brett's comment, I think shareholder wealth maximization has been an objective of corporate governance for a long, long time. Perhaps those exact words were not used, but it existed nonetheless. If anything, the dicta in Dodge v. Ford (1919) reflected the prevalent corporate governance norm of its time, the duty of a board is to maximize profits for the benefit of its shareholders. This sounds to me like shareholder wealth maximization.

Posted by: Bernard Sharfman | Aug 17, 2018 6:41:31 PM

I've always thought that the reliance on Dodge v. Ford was a sign of some desperation. If shareholder wealth maximization was indeed the long term norm, why can its advocates only find one 1919 case from Michigan of all places? Such a central legal rule should be supportable by a very lengthy string citation, one would think. If the eBay case didn't exist, its advocates would need to invent it. I think views on this subject have been rather mercurial and changeable over time. One quite interesting piece of evidence for that is Berle's admission in the 1950s that time had proved Dodd's position in their debate to be correct.

Posted by: Brett McDonnell | Aug 20, 2018 8:26:52 AM

Ok, I am back from vacation. I still disagree with Brett and still don't feel desperate. Again, the idea of shareholder wealth maximization has been around for a long time. For example, in 1932, Adolph Berle began his Harvard Law Review article, "Corporate Powers as Powers in Trust" with the following:

"It is the thesis of this essay that all powers granted to a corporation or to the management of a corporation, or to any group within the corporation, whether derived from statute or charter or both, are necessarily and at all times exercisable only for the ratable benefit of all the shareholders as their interest appears."

He was making this argument in the context of what he believed equity required under corporate law in 1932. But it was also an aspirational statement of what he thought corporate governance was all about. In the Article's conclusion he stated:

"No form of words inserted in a corporate charter can deny or defeat this fundamental equitable control. To do so would be to defeat the very object and nature of the corporation itself."

Whether or not Berle felt that corporate law was providing this in the early 1950s, this sounds like shareholder wealth maximization to me, consistent with the norm reflected in Dodge v. Ford and our current understanding.

Posted by: Bernard S. Sharfman | Aug 25, 2018 7:59:20 PM

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