WASHINGTON—Giant U.S. corporations deliver substantial returns to their investors, thanks to the shareholder value thinking that has dominated the business world over the past few decades. But that doesn’t necessarily mean they have done well in protecting American interests, says Sen. Elizabeth Warren (D-Mass.).
The Accountable Capitalism Act aims to give companies fiduciary responsibilities beyond their shareholders, and requires them to take into account the interests of other stakeholders, including employees, customers, and the communities in which they operate.
The bill would require corporations with more than $1 billion in annual revenue to obtain a federal corporate charter. This new charter will ask corporate executives to take into account the interests of all key stakeholders in decision-making.
The bill also requires substantial employee participation in decision-making at large companies. Employees would elect at least 40 percent of the board of directors, according to the proposal.
“In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other priorities,” Warren wrote in an op-ed for the Wall Street Journal. “But between 2007 and 2016, large American companies dedicated 93 percent of their earnings to shareholders.”
This is the major reason behind the productivity and wage-growth gap in the United States, she argued.
“Before ‘shareholder value maximization’ ideology took hold, wages and productivity grew at roughly the same rate. But since the early 1980s, real wages have stagnated even as productivity has continued to rise. Workers aren’t getting what they’ve earned,” she said.
Warren calls “maximizing shareholder value” a harmful corporate obsession and is urging lawmakers to end it.
“The great service of this bill—whether it ever gets passed or not—is that it has raised the issue. It has become a public issue,” he said.
Gomory served on the President’s Council of Advisors on Science and Technology under Presidents Ronald Reagan, George H.W. Bush, and George W. Bush, and also has held executive roles in corporations that include IBM. He has raised issues of corporate governance in his articles and inspired Warren in drafting the bill.
Origin of the Idea
Excessive focus on maximizing shareholder value can threaten companies’ health and financial performance in the long term, experts warn.“In his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation,” he wrote, adding that the manager’s primary responsibility is to the owners.
That responsibility is to conduct the business in accordance with the owners’ desires, which “generally will be to make as much money as possible while conforming to the basic rules of the society,” Friedman said.
This thought system has been embraced not only by institutional investors, but also many board members, managers, lawyers, and academics. It has come to be widely regarded as the best way to ensure “good governance.”
But corporate executives didn’t embrace this new idea willingly, says Gomory. “They disliked it so much. That was the reason why they had to be paid so high.”
“Shareholders had to pay managers that much to change the way they did business,” Gomory said, adding that in his view, there is a reason why the shareholder value thought system took hold in the 1980s and not earlier.
“During the period after the Second World War, there was a very strong threat from communism,” Gomory explained. “If our corporations had been acting towards our people as they do now, we would not have won the cold war.”
During that whole post-war period, from the end of the war to about the mid-1970s, the average wage went up together with the stock market, Gomory said.
Corporations had to recognize their obligations to employees, customers, and the community. But this trend ended when the threat of communism start to disappear in the 1970s, he explained.
Today, there are conflicting views on the corporate governance issue and Warren’s bill has drawn criticism from both academics and the business world.