Will Warren’s Accountable Capitalism Act Help? The Answer is No.

Denise Kuprionis is President of The Governance Solutions Group (GSG). This post is based on a GSG memorandum by Ms. Kuprionis, originally published on The Conference Board’s Governance Center blog.

U.S. Sen. Elizabeth Warren has proposed legislation that would require all companies with more than $1 billion in annual revenue to secure a charter from a newly established Office of United States Corporations. It’s hard to think of a sillier idea. I don’t disagree with her proposition that we “need to end the harmful corporate obsession with maximizing shareholder returns at all costs.” However, I believe federalization of all large corporations, which would likely morph into all corporations, will not accomplish this goal, will not improve corporate governance and will not make our country better for middle class Americans, her target group of beneficiaries.

Sen. Warren said in an August 15, 2018 Mad Money interview on CNBC with Jim Cramer that all stakeholders should be rewarded (when companies are successful), not just shareholders. Agreed. Successful companies treat employees, customers and vendors fairly and with respect. The boards of directors and management at these companies understand the value of listening, hearing and reacting to employee and community concerns. They also know the importance of sustainability and thinking long-term.

Each individual corporation determines for itself how it will best do its work and how it will spend its money. As governance experts often say, there is not one right governance structure. How will an Office of United States Corporations determine if a company is making the country better by working toward a “public good?” Just as individuals each have their own preferences for “doing good,” so do companies. I might like using Uber to save on fuel and help cut down on traffic congestion and do less damage to our air quality. You might think that’s hogwash but want to contribute to the NRA where I might not. That’s the benefit of a free society. I determine where and how I divert resources. Corporations do the same in our free market.

In the same Mad Money interview, Sen. Warren said she believes in the market, but the market needs rules. Agreed. Every public company CEO I know will tell you that he or she operates within rules—NYSE listing rules, SEC rules, the tax code, EPA regulations, just to name a few. Even if it were true that companies at one time operated by only one rule—increase shareholder value—an array of events, including the Enron and WorldCom scandals, the 2008 financial crisis and the passage of the Sarbanes Oxley and Dodd-Frank acts, caused directors to reassess how they do their work. Perhaps we could do a better job of enforcing rules and promoting good governance practices, but we don’t need more rules.

Yes, there is that occasional corporate scandal (albeit, sometimes it seems like there’s a new one every other week), and some companies have done things wrong. However, most companies do most things right. Management and directors look at what’s in the best interest of employees, customers, partners, and the communities where they do business.

Let’s look a little more closely at what Sen. Warren’s legislation would require.

Companies with more than $1 billion in annual revenue would be required to obtain a federal charter. The charter would obligate the company’s directors to, when making any decision, consider the interests of a variety of stakeholders, not just stockholders.

This idea is not new. It’s a form of governance based on the for-profit benefit corporation model, which 33 states already sanction. This model is voluntary and if chosen, companies adopt a mission that includes making a positive impact on society and the environment. When making decisions, these companies are required to consider the impact on all stakeholders, i.e. shareholders, employees, customers, suppliers, communities.

Further, the idea behind the idea is already in play. Corporations consider many different perspectives in decision making:

  • Today there is increased focus on Environment, Social, and Governance (ESG), more specifically on the E&S matters. As evidence, read BlackRock CEO Larry Fink’s 2018 letter to CEOs in which he highlights BlackRock’s view that boards are central in the oversight of companies’ long-term strategic direction and what he believes is a connection between companies’ management of ESG risk factors and long-term value creation.
  • The debate over whether companies should be required to report quarterly earnings or report every six months is ongoing with both camps agreeing that companies focused on the long-term out-perform short-term players.
  • Boards of directors and CEOs understand longer-term sustainable growth requires an investment in people. Compensation committees are focused on talent development and succession planning, with many renaming the committee, “Compensation and Management Development.”

Sen. Warren says her legislation “restores the idea that giant American corporations should look out for American interests.” Just one question here, how does she define American interests? Does it mean companies hire more immigrants, or less? Does it mean we support marijuana legalization, or we don’t?

Requiring corporations to secure a federal charter puts the federal government in charge of corporations—not investors, not the board, not management. Does anyone believe the government could effectively and efficiently run corporate America?

The new ACA (this time, instead of the Affordable Care Act, it’s the Accountable Capitalism Act) will be successful only in creating board governance chaos. Instead of dealing with the occasional corporate scandal, American business will deal with more gridlock on the hill, and long, complex rules that will take companies lots of time and money to understand. This could turn into a reason for companies to choose not to be a U.S. company or to leave for somewhere else.

Employees would be empowered to elect at least 40 percent of the company’s board of directors.

Today, employees, if they are shareowners, have a voice in the election of 100 percent of the board. It’s often said that individual shareholders don’t make much difference in the election of directors and other matters on annual meeting agendas, and it may be true that large investors have more sway. However, a review of this past summer’s voting at Procter & Gamble demonstrates that individual shareholder votes do count.

The Warren bill isn’t clear if its intention is to have employees sit on the board, but in interviews she has said she wants employees on the board of directors because it would make for a more diversified board. I’m not sure where the logic is in that thought. Yes, one employee may add one different perspective, 40 percent of employees on the board is still just one perspective. Regardless of this fact, adding employees to the board is a bad idea, except for the CEO and possibly one other executive, because employees are not independent and may have an even narrower and shorter-term view of where the company is headed.

Even if an employee is included on the board of directors, will Sen. Warren’s next draft require a customer, a vendor, a community member from each place the company operates, on the board? Yes, it’s important that the board hear from employees and customers, but there are better ways to gain that knowledge without disrupting the need for director independence.

A better alternative, and one that directors are currently using, is for boards to more meaningfully use an old tool—the skills matrix. It helps directors visualize current board composition and gives the board a map for considering future talent needs as it thinks through the skills and experiences needed to reach the company’s strategic goals.

Directors and officers would be restricted from selling company shares within five years of receiving the equity or within three years of a company stock buyback.

Because many, if not most, stock awards to directors and management are granted with vesting restrictions, this requirement does not improve current practices. Additionally, many companies incentivize long-term decision making by setting strict stock ownership guidelines that require executives to own a certain amount of equity in the company.

Companies would be prohibited from making any political expenditures, unless a company had the approval of at least 75 percent of its shareholders, and 75 percent of its board of directors.

For a company to go to shareholders for a vote on a decision that is likely an operational matter opens the door to allowing an Office of United States Corporations to require shareholder votes on other operational matters. Not only would this be inefficient, it is impractical to go to shareholders for operational decisions and would be expensive to prepare for additional shareholder meetings and proxy voting.

In the last few years we’ve also seen enhanced disclosure around political contributions, perhaps we simply could get better with company disclosures.

The federal government would be permitted to revoke a company’s charter if it has engaged in repeated and egregious illegal conduct.

Today, state attorneys general are authorized to revoke a corporation’s license or registration, so this seems to be covered.

In recent history, we’ve witnessed companies shut down because of illegal behaviors so revoking a charter hardly seems necessary.

Sen. Warren argues that for much of US history corporations succeeded in the marketplace and recognized their obligations to employees, customers and the community, and everyone was “happy.” She then suggests that in the late 20th century this changed, and business became driven by a single rule, “maximize shareholder wealth.” As described above, there is no need for the federalization of corporations because successful companies are indeed measuring shareholder “value” not only as a dollar value, but also considering sustainability and good governance.

Perhaps a better answer than the ACA is to better promote benefit corporations as an option for companies. Then to determine and highlight the accountabilities in that model—and perhaps incentivize with some form of tax break. And for those companies that don’t opt for the benefit corporation model, to better enforce the rules that are on the books today and to encourage good governance practices.

Bottom line, Sen. Warren’s proposition that we “need to end the harmful corporate obsession with maximizing shareholder returns at all costs” is true. However, most directors and managers understand the imperative of increasing long-term shareholder value, which means nurturing corporate culture and valuing the well-being of all employees. This formula translates into stronger customer and vendor relationships—which in turn creates better communities.

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One Comment

  1. Daniel W. Small
    Posted Monday, September 10, 2018 at 9:43 am | Permalink

    This is a thoughtful and incisive analysis. It seems that in some people’s minds, more legislation aimed at Utopian goals is the Gold Standard. In fact, it is more frequently a way of betting investors’ money against the law of unintended consequences. It ignores the fact that investors – not the legislators or the taxpayers – who are risking their money for a return that never occurs. As a corporate counsel of several decades, I have yet to experience even one occasion where a law deters unethical conduct or greed. The Senator may believe that she has offered a panacea. It appears more to me to offer only another Pandora’s Box.

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