Skewed Market Incentives and the Accountable Capitalism Act

Dana Kraus
Sep 3, 2018 · 7 min read

Or, if corporations are people, then they are sociopaths. The idea that corporations are people has a long, entrenched history in the US, dating back to before the Civil War. But it’s only been the last 40 years or so, with the supremacy of the shareholder, that corporations have become something inimical to the health and wellbeing of both the economy and people at large.

The world of business is not the world that baby boomers grew up with. We know this either as a lived experience or a history lesson. Either way, there’s an intuitive understanding that the halcyon days of working for one employer for 20–30 years then retiring with a decent pension were stabbed to death by a coked-out stockbroker in the 1980s.

The 1980s is generally when corporations shifted from upholding profits for a broader base of stakeholders (shareholders, customers, employees, vendors, communities, etc.) to a narrower focus on shareholder value. The upside of this was a boom in wealth for companies and shareholders. The downside was that other stakeholders largely lost their seat at the table. The resultant changes in how corporations operate — a high focus on short-term earning and profits to the near exclusion of long-term financial planning, minimal consideration of unprofitable stakeholders, such as employees and communities — had turned some companies into, frankly, literal sociopaths.

Balance and objectivity be damned — corporations that profit from ignoring the external harms they inflict are preying on their customers, their employees, and their communities. (Ex: Enron’s market manipulations directly contributed to rolling blackouts in California in the early 2000s. WellPoint targeted women who were diagnosed with breast cancer for rescission. BP’s cost-cutting measures contributed to the severity of the Deepwater Horizon spill. And don’t get me started on the Great Recession.) A few minutes on the search engine of your choice can unearth countless examples of companies placing profits over any other consideration. So, why does this happen and how can we address it?

I’ve alluded to my core theory above — short-term boosting of earnings is held above all other criteria. The all-important quarterly earnings report can have dramatic impacts of a company’s stock price, which in turn determines the market value of the company. Beat the expected quarterly earnings, watch your stock price grow. Now, add in that stock in the company is frequently part of the executive compensation package and you have a deeply skewed incentive for the leaders of a company to “maximize shareholder value”.

Maximizing shareholder value doesn’t just mean scamming governments, canceling the policies of cancer patients, or shaving pennies and eschewing proper safety protocols on complex engineering feats. It also means investing heavily in political lobbying to reduce regulatory oversight and supporting politicians that will not vote to increase the minimum wage. It’s glossy ad campaigns touting privacy and then selling personal data. It’s the fact that the vast majority of the recent tax cut went to share buybacks, which increase the value of the remaining stock, instead of being invested in the companies or in raising employee wages. Maximizing shareholder value only benefits shareholders.

Addressing this is difficult. It’s not just any one thing, it an entire ethos of how business is supposed to work. Failing to adhere to these practices can hinder a corporation’s ability to raise and sustain the capital needed to operate and grow. In other words, play the game or go out of business. Which brings me to Senator Warren’s Accountable Capitalism Act.

Her act is a narrowly-targeted bill that is designed to address the corporate culture in America that enables the kinds of predatory behavior that have become commonplace. It has five key parts:

  • Very large American corporations must obtain a federal charter as a “United States corporation,” which obligates company directors to consider the interests of all corporate stakeholders
  • The boards of United States corporations must include substantial employee participation
  • Sales of company shares by the directors and officers of United States corporations are restricted
  • United States corporations must obtain shareholder and Board approval for all political expenditures
  • A United States corporation that engages in repeated and egregious illegal conduct may have its charter revoked

The bill attempts to prevent corporations from acting solely in the shareholders’ interest and include the needs of other corporate stakeholders with the expectation of reversing the worst aspects of corporate behavior over the last 40 years. Each piece supports this overall goal.

The first portion of the bill, the corporate charter, only applies to companies with over $1 billion in annual gross receipts. This is the narrow focus of the bill. Multi-million-dollar corporations that don’t meet the billion-dollar threshold are not subject to this bill. I also take this as a sign that Warren’s efforts are focused less on punishing companies than on bringing about a cultural shift in how companies do business.

Adding employee representation to corporate boards is explicitly designed to break up the shareholder monopoly on corporate governance. This idea comes straight from Germany, which has been doing this for decades; their corporations are still profitable, but their workers are better off as well. Employee representation will likely support greater investment over stock buybacks or dividends and better community integration.

Restricting sales of the shares by corporate officers should have a two-fold effect. First, it will remove the incentive for those officers to act to maximize short-term shareholder value as they cannot benefit from it directly. Second, it should encourage corporate officers to seek alternate forms of compensation, which again will lessen their incentive to maximize short-term shareholder value.

The fourth tenet is designed to mute the consequences of the Citizens United ruling. The Citizens United ruling is basically a consequence of viewing corporations as people. If they are people, they have a right to free speech. Money is speech, ergo, corporations are allowed to spend as much as they want on political speech. While companies cannot directly contribute to a candidate, their political action committees (PACs) can. They can also spend directly. In the current environment, this means that most spending will be in favor of policies that reduce oversight and operating expenses (such as minimum wage laws, which could raise the cost of labor). By forcing a board with “substantial employee participation” to approve those expenditures with a super-majority, the result is likely to be significantly reduced political spending overall.

Finally, a corporation that violates its charter can have its charter revoked. This, according to the text of the bill, means the corporation “shall not be treated as a corporation, body corporate, body politic, joint-stock company, or limited liability company, as applicable, for the purposes of Federal law”. In other words, the corporation will no longer be recognized as such by law. Without this recognition, I’m not sure a corporation can sign a contract, let alone do business.

These pieces interlock to not only put the largest companies in the position of not being complete sociopaths but also setting the example of better corporate behavior for smaller companies, complete with consequences for failing to adhere to the rules.

The bill is not without its critics. Jeffrey Miron, an economics professor at Harvard and affiliated with the Cato Institute, said Warren’s proposal “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.” While his later comment that this bill will destroy capitalism can be dismissed as hyperbole, the above is a legitimate criticism. Warren’s bill creates a new Office of US Corporations in the Department of Commerce to manage corporate charters and validate compliance. As with most legislation that creates new agencies and departments, very few of the rules are laid out in the law; they are written by the new office after it is established. Rules and regulations to prevent companies from profiting from harm they inflict are going to be complicated and messy and generally revised after the fact. But to use this as an excuse to not establish those rules is like saying there’s no point to having a law against murder because people will find ways to kill each other no matter what.

Miron also says that companies will work to avoid the legislation, placing the burden on law-abiding companies. This is also true and, generally, has always been true. Companies that try to balance stakeholder needs generally suffer in a market where their valuation is determined by their stock price. Likewise, companies that strive to be environmentally friendly suffer in competition from firms that pollute freely. However, that is the point of enforcement — to make the cost of non-compliance sufficiently high so that compliance is the better option.

A third criticism, also voiced by Miron, that this will encourage companies to leave the US, is also valid. Some companies will choose to leave the US and incorporate in another country. However, the scope of this bill is such that the companies that are subject to it already have that option available. We’re not talking about mom and pop stores on Main Street. We’re talking about corporations with over $1 billion in annual gross receipts. This is going to target companies like Apple, which already uses overseas subsidiaries to minimize its US tax burden and outsources its product manufacturing globally to minimize production costs. I believe that Miron overstates the willingness of these companies to exit the US market versus the cost of compliance.

Finally, Miron’s suggestion that customers and investors can target companies with boycotts to obtain better behavior and governance is spoken like someone who doesn’t shop at Wal-Mart. Frankly, exercising discretion in where to shop or invest requires money. If you’re just getting by, you’re shopping at Wal-Mart because that’s generally the most affordable option. It takes money to care about Wal-Mart’s history of shady employment practices. It takes even more money and knowledge to invest significantly enough in a company for them to pay attention to your preferences.

While there are valid criticisms of the bill, the narrow scope, reliance of previously implemented ideas, like employee representation on boards, and desperate need for something to counter the behavior of profit over all else means this is well worth trying. The underlying idea of Warren’ Accountable Capitalism Act can be summed up as, “If corporations are people, then they shouldn’t behave like sociopaths.” Or as John Oliver put it, “people who kill people generally don’t get off with a fine.” So let’s fix that.


Originally published at battlebornecon.wordpress.com on September 3, 2018.

Dana Kraus

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Armed with a Masters in Economics, this mistress of the dark arts and dismal science is establishing her space on the digital pavement.

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