Accountable Capitalism Act: Senator Warren’s call for new business governance - Activate World

Accountable Capitalism Act: Senator Warren’s call for new business governance

Storyline:

U.S. Senator Elizabeth Warren introduced the Accountable Capitalism Act and wrote an editorial about it in the Wall Street Journal. In Senator Warren’s editorial, she highlights how businesses have been focused on maximizing shareholder value at the expense of other stakeholders. In her Accountable Capitalism Act, the structure of Benefit Corporations is leveraged, which gives “business fiduciary responsibilities beyond their shareholders.” Other key points highlighted include:

  • accountable capitalism business governanceEmployees would elect at least 40% of directors
  • At least 75% of directors and shareholders would need to approve any political expenditures by a corporation
  • Directors and officers would not be allowed to sell company shares within five years of receiving them—or within three years of a company stock buyback

Jay Coen Gilbert, the co-founder of B Lab and the movement of Certified B Corporations, also wrote about the Accountable Capitalism Act. In his article, he highlights the fact that 34 states have approved Benefit Corporation legislation, and it was done by Democrat and Republican governors. Mr. Gilbert draws the distinction of Benefit Corporations: “Unlike traditional corporations, the boards of directors and officers of benefit corporations are required to consider the impact of their decisions not only on shareholders, but also on other stakeholders, like workers, customers, communities, suppliers and the environment.”

The difference between the state actions and Senator Warren’s proposed legislation is market choice. With state approved legislation, companies choose whether to organize as a Benefit Corporation. With Senator Warren’s approach, it would become an enforceable requirement upon corporations with more than $1 billion in annual revenue. Companies at this revenue level would need to secure a charter from an Office of United States Corporations, which would be established in the Commerce Department.

Noteworthy:

  • Germany has a codetermination approach, which means an executive must convince shareholders and worker representatives that they deserve a pay increase. Consequently, German executives earn about half of their U.S. counterparts.
  • Some studies of codetermination show that it lessens short-term actions in corporate decisions, delivers higher levels of pay equality, and produces positive results on productivity and innovation.
  • Others argue that German companies are 27 percent less valuable to shareholders because of these laws. Companies are less efficient and restricted in their ability to adapt and restructure.
  • Some argue that the status quo is not acceptable and will foster more division between ethnicity and gender along with taking advantage of our environment.
  • Bill George, a Harvard Business School Professor and former Medtronic CEO, agrees that CEO compensation is too high. However, he believes that Senator Warren’s proposal is flawed, filled with erroneous claims. Mr. George believes most corporations are doing a credible job of serving all stakeholders and considering the company and shareholders in making decisions.
  • Another argument is that Senator Warren’s focus is misplaced. Rather than focusing on corporations, the focus should be placed on investors since they want returns sooner rather than later. Encouraging longer-term investing through tax changes may create a better result with less bureaucracy.

Quests and Actions (Q&A):

  • In what ways can capitalism be enhanced? What do you see as the benefits of capitalism? What do you see as the problematic areas?
  • How can capitalism be more accountable?
  • Larry Fink, CEO of BlackRock, called for better governance of companies. Where can governance be improved?
Sources: Wall Street Journal, Forbes, Weekly Standard, Vox, CNBC
Photo by dylan nolte on Unsplash