Sen. Elizabeth Warren (D-MA) wrote recently in The Wall Street Journal that “companies shouldn’t be accountable only to shareholders.” She then outlined her new bill that “would require corporations to answer to employees and other stakeholders as well.”
She proposes to mandate that “corporate directors … consider the interests of all major corporate stakeholders — not only shareholders — in company decisions.” To help ensure that this mandate is carried out, she wants at least 40 percent of the members of corporate boards to be elected by workers.
If this mandate is ever enacted, it would radically restructure corporate law, governance, and finance, which is especially frightening because seldom have I encountered so many fallacies packed into so few words as are on display in Sen. Warren’s op-ed.
As my colleague Dan Klein pointed out to me in an email, “The title of her piece [“Companies Shouldn’t Be Accountable Only to Shareholders”] presupposes that companies are accountable only to shareholders. That is untrue.” Dan then listed the groups to whom companies in market economies are already accountable:
- Employees (suppliers of the vital input of labor)
- Trading partners and suppliers of non-labor inputs
- Fellow human beings whose stuff the company is not to mess with
- Government, which extracts tax dollars and regulates
- Humankind generally, in that it just isn’t true that companies ruthlessly maximize profits
A moment’s thought reveals this reality: because no company in a market economy can force anyone to buy its outputs or to supply it with labor and other inputs, every company, to survive, must continually make attractive offers to consumers, workers, and suppliers. The ability of consumers, workers, and suppliers to say no combines with the law of contract — which requires parties to honor whatever commitments they voluntarily make to each other — to guarantee that companies are fully accountable to everyone with whom they exchange. Companies therefore are fully accountable to their customers and to their workers and other suppliers.
Where’s the Evidence?
Sen. Warren disagrees. Her chief piece of evidence that companies are no longer accountable to workers appears in her assertion that “since the early 1980s, real wages have stagnated even as productivity has continued to rise. Workers aren’t getting what they’ve earned.”
But Sen. Warren’s facts are fictional. Despite many claims in the popular press to the contrary, there has been no decoupling of worker pay from worker productivity. As Liya Palagashvili and I explained a few years ago in The Wall Street Journal, when the value of fringe benefits is taken into account, and when nominal pay is adjusted for inflation using the same method as adjusting the nominal value of output for inflation, the data clearly show that worker pay has indeed kept pace with rising worker productivity. In short, companies remain accountable to workers.
What about companies’ accountability to consumers? Given that the ultimate purpose of economic activity is not to create work but to supply goods and services that enhance people’s living standards, it’s a bit surprising that Sen. Warren mentions consumers (or “customers”) only once, and then only in passing. If companies have indeed become so unaccountable that a revolutionary restructuring of corporate governance is in order, surely evidence of unaccountability to consumers would be vivid, vast, and the stuff of banner headlines.
Yet the senator offers absolutely no evidence — not even a single anecdote — that companies are unaccountable to consumers. This absence of evidence suggests that even Sen. Warren grants, if only implicitly, that companies’ accountability to consumers remains strong.
How about companies’ accountability to people with whom companies have no contractual relationships — people such as residents of the town where a company operates or motorists who drive on the same roads used by company vehicles? Although at first not obvious, every company is accountable also to such people. Tort law and criminal law ensure this accountability.
A company whose delivery-truck driver negligently runs over a pedestrian is held accountable by tort law for the loss. Ditto for a firm that dumps pollutants into a stream it does not own; this firm is held accountable by the common law of tort to stop harming or to compensate those who suffer from such pollution. A company whose employee steals another firm’s inventory or who spreads objectively false rumors about a competitor’s products is punished — that is, held accountable — by both tort and criminal law.
Reasonable people can and do disagree over the details of what actions should or should not be regarded as tortious or criminal. But despite its many flaws, Anglo-American tort and criminal law have a long and rich history of holding accountable those who do wrong to others.
And yet Sen. Warren writes as if corporations do and will continue to act only in ways that enrich shareholders at the expense of workers, consumers, and the general public until and unless the government mandates both that corporations take account of stakeholder interests and that corporate boards be staffed with worker representatives.
Again, Sen. Warren seems to be wholly detached from the reality she is hell-bent on changing.
Who Are the Stakeholders?
Sen. Warren is also disturbingly naïve about the reality of legal processes. Nowhere is this naïvete more evident than in her silence on just what are the “stakeholder interests” she wants corporations to consider. It’s easy to say “stakeholder interests.” But unlike one’s status as a shareholder, which is clear and objective, one’s status as a stakeholder is hazy and subjective.
Because in a modern economy the actions of each economic entity ripple out to affect countless other entities and persons in many and varied ways, it is nearly impossible to find individuals who are not at least potentially affected by even the most mundane action of a business firm. The resulting imprecision in identifying stakeholders means that an individual who is regarded by Bureaucrat Bob and Judge Jones as a stakeholder (and hence statutorily entitled to have her interests served by private companies) is all too likely to be regarded by Bureaucrat Betty and Judge Smith as not a stakeholder.
And so it is fair to ask: other than workers, who, exactly, are the stakeholders Sen. Warren has in mind? Do they include all citizens of the state in which a corporation is headquartered? Do they include the children and grandchildren of companies’ employees? Do they include each company’s competitors? Sen. Warren doesn’t say.
The reality of politics and legal processes means that in practice those persons who come to be identified as stakeholders will be people who are most visibly affected by companies’ current decisions — people such as workers and workers’ family members, and entities such as governments and (beware!) companies’ competitors. As always, when decision-making is politicized, the fate of the countless unseen people affected by companies’ decisions will be ignored.
Under Sen. Warren’s scheme, we must be prepared for the likelihood of, say, Ford and GM claiming status as stakeholders in Chrysler to prevent Chrysler from cutting the price of its pickup trucks. After all, Chrysler’s corporate decisions do indeed have an impact on Ford and GM, as well as on those companies’ workers. While Sen. Warren almost certainly doesn’t envision the concept “stakeholders” to include economic competitors, its vagueness and open-endedness guarantee that it will eventually be defined in ways that even she might recognize as calamitous for the economy, such as in this plausible example in which stakeholders are protected from economic competition.
While there are imperfections in today’s economy in general and its system of corporate governance in particular, these are nowhere as extensive and threatening as Sen. Warren thinks them to be. And these imperfections are certainly not so serious as to justify any militant and wholesale restructuring of corporate law of the sort that Sen. Warren — with her mix of extraordinary arrogance, ignorance, and recklessness — proposes.