Thursday, October 10, 2019
Texas Senator Phil Gramm and his former aide-de-camp recently took to the Wall Street Journal’s opinion page to attack Senator Warren’s plan for accountable capitalism. At base, her plan offers governance reforms that only the federal government may be able to deliver. The reforms may increase the odds that corporations will behave responsibly in our society and limit the risk that they will use their enormous capital and clout to manipulate our political system for their own ends.
Senator Warren’s plan sounds similar to rhetoric coming from business leaders. The Business Roundtable recently released its view on the purpose of a corporation. These leading executives declared a shared, fundamental commitment to balancing important stakeholder interests. Page after page of CEO signatories agree that corporations should deliver value to customers, invest in employees by providing fair compensation and benefits, deal fairly and ethically with suppliers, support communities, respect the environment, and generate long-term value for shareholders.
Warren’s legislation offers a plan for putting the Business Roundtable's vision into practice. The Accountable Capitalism Act calls for federal charters for America’s largest corporations. It would allow employees to vote for a minority of corporate directors and require a supermajority of directors to authorize corporate political spending. Shareholders need not fear they will lose all influence over corporate decisions. Shareholders will still elect the majority of corporate directors.
The Gramm and Solon op-ed gets some things wrong about corporate law. Many state corporation laws already allow directors to consider other stakeholder interests. Nevada, for example, authorizes a significant number of corporations. Nevada corporate law includes a constituency statute, expressly allowing corporate directors to balance stakeholder interests, including the interests of employees, suppliers, creditors, the community, and the state or national economy. Under Nevada law, corporate directors do not need to limit themselves simply to the narrow, short-term interests of some shareholders. Gramm and Solon are simply wrong when they say that corporations now have a “duty to serve investors exclusively.” That just is not true in many states. Of course, directors who ignore shareholders will likely lose their seats.
In fact, many corporations without an exclusive duty to serve investors thrive. Consider noted conservative billionaire Sheldon Adelson. He runs Las Vegas Sands Corp., a Nevada corporation. Nevada’s corporate law grants the Las Vegas Sands’ board of directors the freedom to balance stakeholder interests. They have still delivered enormous profits to shareholders. If Gramm and Solon were right that the law requires exclusive fidelity to shareholders, which they are not, investors could not have done so well over the years by buying and holding Las Vegas Sands’ stock.
Chief Justice Strine has also called for reforms to corporate law. Although his plan differs from Warren's, they both recognize the need for significant changes. Warren’s legislation would create a heavyweight division in American corporate law—putting in place rules for the largest and most powerful corporate entities. Something like this would likely need to be a federal reform because states probably cannot do this on their own. If just one state created a heavyweight division, corporations could simply dodge rules by jumping to a different jurisdiction.
Ultimately, as corporations grow ever-larger, we must keep working to ensure that our corporate entities operate responsibly within our economy. Corporations only exist because our laws authorize their formation. We give corporate entities powers and privileges. They offer their owners a way to do business without accepting any personal liability should things go wrong. This is generally a very good thing because it spurs economic growth and investment. Yet our Supreme Court has also begun to imbue state-chartered corporations with constitutional rights to political speech and religious freedom.
These powers must come with responsibilities, checks, and balances. Corporations do good by creating ways for people to work together to invest and operate businesses. This creates enormous value for society. Purely profit-maximizing corporate actors may make sense in economic theory when they simply operate within the rules society sets up for fair and equitable business practices. Yet as corporations grow ever larger, they gain political power and the ability to shape the law in their favor. The Warren and Strine proposals should help frame a debate around how to deliver reforms.