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Sen. Elizabeth Warren has introduced in Congress a bill called the “Accountable Capitalism Act.” It requires all corporations with over a billion dollars in annual revenue to obtain a special federal charter requiring them to look beyond shareholder interests and consider the interests of employees, customers and the community.
In addition to codifying these requirements and directing federal power to enforce their pursuit, the bill mandates 40 percent of all corporate directors be elected by the firm’s employees.
There is so much wrong with this bill it is hard to know where to begin. We’ll focus on a fundamental flaw.
A for-profit corporation is a legal structure that allows investors to pool their resources to form a business entity. Hundreds, indeed thousands, of individual investors can have a stake in an ongoing enterprise without having to manage the day-in, day-out operations of the business. If the business thrives, the shareholders have claim to the profits of the firm; if the business fails, shareholders can (and often do) lose their entire investment.
The corporate structure has an obvious problem: How does a disparate group of owners, none of whom monitor the day-to-day operation of the company, ensure the managers pursue the shareholders’ interests? What prevents the managers from looting the firm’s assets and playing golf in Bermuda? Or what prevents an honest but incompetent management team from destroying the firm?
The shareholder’s protection lies in the tradability of shares. If for-profit firms are consistently mismanaged, eventually this reflects in subpar earnings. The investor’s escape hatch is selling one’s shares—and investors have every incentive to do so when signs of inferior management crop up.
It should be rather obvious that ownership of common shares of corporations is a risky proposition as is, as any startup firm or active shareholder will attest. What would requiring corporate managers to fulfill a vague-yet-binding dictate to divert an unspecified portion of the earnings of the firm to “other interests” do to the value and risk of shareholder investment? Or giving 40 percent of the control of the corporation to the employees? Clearly, if this bill were passed, equity investment would plummet, to the detriment of all Americans’ standard of living.
In effect, what is being proposed is an uncompensated partial confiscation of ownership of big corporations from shareholders to workers and government bureaucrats. Let’s call it what it is: Caracas light.•
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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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