In August of 2018, Massachusetts Senator Elizabeth Warren introduced a bold new bill to the 115th Congress, aptly titled the Accountable Capitalism Act (the “Act”).[1] Senator Warren proposed a number of shifts in corporate governance[2] that would tackle a mounting national concern over uneven wealth distribution, which many believe is rooted in the doctrine of shareholder supremacy.[3]
The Act mandates the creation of an “Office of United States Corporations,” which would operate as a national registry to oversee companies with over $1 billion in annual profits.[4] While the creation of a national registry seems like an unassuming change at the surface level, it actually lays the groundwork to impose the substantive requirements of the Act. Companies with over $1 billion in annual revenue would be deemed “United States Corporations” and would be required to adhere to several requirements that radically depart from current norms.
First, United States Corporations must operate with the purpose of creating a “general public benefit.”[5] When making strategic decisions, United States Corporations directors must consider the interests of the workforce, the consumers, and the global environment.[6] Second, to make political contributions over $10,000, United States Corporations would need the approval of at least 75 percent of both directors and shareholders.[7] Finally, the Act necessitates that 40 percent of the board of directors be workforce appointees.[8]
Although several U.S. jurisdictions are permissive of social enterprises,[9] the national mandate under the Act would be a radical departure from the current conception of corporate purpose.[10] Proponents of social enterprise law will likely welcome the public benefit and political contribution approval sections of the Act because they further the contemporary trend that embraces corporate social responsibility.[11] However, the executives, who control the affected companies, will be sure to take any steps necessary to get out of the crosshairs.
Mandated worker representation at the board level is not a novel concept in the international context. The most notable example is the German system of “codetermination” which has been in place since the 1950s.[12] Decades of German experience have resulted in a number of empirical studies that may have persuaded Senator Warren to recommend the system for widespread adoption in the U.S.[13] Though some research indicates that codetermination results in a reduction of share value, scholars suggest that this reduction is a reflection of wealth redistribution, resulting from other stakeholder interests being taken into account.[14] At the very least, scholars seem to agree that codetermination results in increased employee morale and stakeholder trust in directors.[15] Critics contend that introduction in the U.S. is largely experimental, as German codetermination was adopted under a vastly different economic and political backdrop.[16]
The fatal fault of Senator Warren’s plan is its presupposition that companies will subject themselves to the sweeping changes it prescribes. There are several predictable mechanisms affected companies could use to avoid the Act’s prescribed requirements. Justice Brandeis’ metaphorical “race to the bottom” is alive and well.[17] The theory posits that companies gravitate towards jurisdictions with the most favorable conditions to conduct business.[18] And should the Act be adopted, companies can simply leave the U.S. and reincorporate themselves in countries offering more favorable treatment.[19] This would result in a vastly different type of wealth redistribution than intended, as the U.S. would lose billions of taxable dollars each year. Additionally, firms can simply adopt fiscal methods to avoid exceeding $1 billion in annual profits, resulting in a marked increase of inorganic divestitures and other strategies designed to keep reported profits within the threshold.
It is clear that legislative action is needed to address the disparity in wealth distribution in the United States. Unfortunately, while the Accountable Capitalism Act is a welcome step in the right direction, it fails to appropriately account for the practical limitations of its imposition. Senator Warren’s goals are admirable, but the means by which she seeks to achieve them are equal parts bold and unrealistic.
[1] Accountable Capitalism Act, S. 3348, 115th Cong. (2018).
[2] See, e.g., Matthew Yglesias, Elizabeth Warren Has a Plan to Save Capitalism, Vox (Aug. 18, 2018), https://www.vox.com/2018/8/15/17683022/elizabeth-warren-accountable-capitalism-corporations.
[3] See, e.g., Facundo Alvaredo et al., World Inequality Report § 2.4 (2018).
[4] S. 3348 § 3.
[5] Id. § 5.
[6] Id.
[7] Id. § 8.
[8] Id. § 6.
[9] See, Del. Code Ann. tit. 8, § 362.
[10] Dodge v. Ford Motor Co., 204 Mich. 459 (1919) (holding that a company must act to further the interests of its shareholders rather than society at large).
[11] See, e.g., Josh Bersin, The Rise of The Social Enterprise: A New Paradigm for Business, Forbes (Apr. 3, 2018), https://www.forbes.com/sites/joshbersin/2018/04/03/the-rise-of-the-social-enterprise-a-new-paradigm-for-business/#19f2754371f0.
[12] See, e.g., Ewan McGaughey, The Codetermination Bargains: The History of German Corporate and Labour Law, 23 Colum. J. Eur. L. 135 (2016) (detailing the adoption and subsequent development of codetermination in Germany).
[13] See Larry Fauver & Michael E. Fuerst, Does Good Corporate Governance Include Employee Representation? Evidence from German Corporate Boards, 82 J. Fin. Econ. 673 (2006); Gary Gorton & Frank E. Schmid, Capital, Labor, and the Firm: A Study of German Codetermination, 2 J. Eur. Econ. Ass’n. 863 (2004).
[14] See Gorton & Schmid, supra note 13, § 6.
[15] Id.
[16] See McGaughey, supra note 12 for an explanation on how German codetermination was adopted through a series of voluntary agreements that were subsequently codified).
[17] See, e.g., William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 Yale L.J. 663 (1974).
[18] Id.
