Accountable Capitalism Act, Board Activism, Don Boudreaux, Elizabeth Warren, Fifth Amendment, Kevin Williamson, Matt Yglesias, Richard Epstein, Unconstitutional Conditions
Elizabeth Warren wants to nationalize all private businesses with more than $1 billion in annual revenue. She plans to introduce legislation called the “Accountable Capitalism Act” that would, if enacted, authorize an outright theft of private property from the owners of these companies. Among other things, her plan would require large companies to obtain a federal charter and set aside 40% of their board seats for members to be elected by employees. In addition, henceforth these businesses would be answerable not merely to shareholders, but to employees along with a limitless array of other “stakeholders”. That’s because under their federal charters, firms would have a duty to create a “general public benefit”. The operative assumption here is that merely creating a product or service does not produce adequate value for society, regardless of the benefits to buyers, income to employees and suppliers, taxes paid, and the returns earned by millions of working people who have invested in these companies via pension and 401(k) plans.
In the very first place, Warren’s bill is unconstitutional, as Richard Epstein points out. Owning a business is protected as a property right under several amendments to the U.S. Constitution, but particularly the Fifth Amendment. Warren would place unconstitutional conditions on this right via the requirements for a federal charter and the so-called public benefit. If enacted, her bill would quite likely be ruled unconstitutional by the courts. But if it stood, capital would quickly take flight from the U.S., depressing asset values.
Don Boudreaux notes that absent ownership, vaguely-defined “stakeholders” have risked nothing in the success of the company. Shareholders bear the financial risk that the company will fail to produce adequate earnings, lose value, or fail. Management has a fiduciary duty to protect the funds that shareholders invest in the firm, including a duty to protect the firm’s ability to acquire credit. Warren’s legislation would compromise these duties by elevating the objectives of non-owners to the same or greater status than those who have provided the equity capital. Again, this would happen in at least two ways: required representation of employee-elected board members, and the vague public-benefit mandate under the firm’s federal charter.
Significant employee representation on the board is likely to distort decisions about labor compensation and virtually any decision affecting employment. While 40% is short of a board majority, union pension funds already purchase shares in companies both as investments and as a way of driving labor issues before shareholders and into boardrooms. Those votes, along with the 40% board representation and oversight from federal bureaucrats, would give additional leverage to labor in influencing the firm’s decision-making. To take the simplest case, economic efficiency requires that the rate of labor compensation be the same as the marginal value of labor productivity. Warren’s proposal would surely result in wage payments exceeding this threshold, diminishing the economic value of the firm and its ability to raise capital. And by reducing the efficiency of the production process, it would raise costs to consumers and/or business customers.
There any number of other worker demands that would gain viability. For example, extended break times or extra paid-time-off would certainly raise costs, and such demands from a plurality of the board would be unrestrained by the need to negotiate other terms. Or how about a plant-closing decision? The upshot is that mandated board representation for labor would create instability and lead to a decline in the firm’s performance, competitiveness, and attractiveness to suppliers of capital. Ultimately, the very jobs on which labor depends would be threatened.
Further dilution of business objectives would arise from the requirement under the federal charter to produce a “public benefit”. Serving customers is not enough, but what will satisfy federal overseers that the firm has fulfilled its social obligations? And what are the limits of those social obligations? Again, these amorphous requirements would constitute a theft of resources from the business owners, requiring the payment of alms in order to produce something of value. There is already evidence that board activism in pursuit of non-business, social objectives destroys business value:
“Labor-affiliated pensions regularly file shareholder proposals, usually involving social and political concerns. Those social and political shareholder-proposal campaigns are associated with lower shareholder value. These labor investors also tend to attack companies facing ongoing union-organizing campaigns, as well as companies with political action committees that support Republicans.”
In time, the dilution of objectives undermines a firm’s viability, its health of its suppliers, and its ability to employ workers and hire other resources. Many of the suppliers hurt by Warren’s proposal would be smaller firms. It would ripple through the ranks of consultants, repair shops, electricians, plumbers, accounting firms, janitorial services, and any number of other businesses. But even before that, Warren’s proposal would send capital scrambling overseas.
I share Don Boudreaux’s astonishment that writers such as Matt Yglesias in Vox can assert that the Warren plan would have no costs. It might or might not have an impact on the federal budget, but the cost of destroyed economic value in the business sector would be massive, not to mention the jobs that ultimately would be lost in the process. It’s also astonishing that proponents can pretend that Warren’s bill would “save capitalism” when in fact it would do great harm.
Finally, here is Kevin Williamson expressing his disdain for Warren’s true intent in putting her bill forward:
“Warren’s proposal is dishonestly called the ‘Accountable Capitalism Act.’ Accountable to whom? you might ask. That’s a reasonable question. The answer is — as it always is — accountable to politicians, who desire to put the assets and productivity of private businesses under political discipline for their own selfish ends. It is remarkable that people who are most keenly attuned to the self-interest of CEOs and shareholders and the ways in which that self-interest influences their decisions apparently believe that members of the House, senators, presidents, regulators, Cabinet secretaries, and agency chiefs somehow are liberated from self-interest when they take office through some kind of miracle of transcendence.”