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Let’s Take Elizabeth Warren Literally, But Not Seriously

Elizabeth Warren’s so-called Accountable Capitalism Act is a ruse. But it creates an unexpected opening for the Left.

Marc Nozell / Flickr

Let’s get one thing straight about Elizabeth Warren’s much-trumpeted Accountable Capitalism Act (ACA): even under a President Warren, nothing like it will ever see the light of day. Like a high-concept couture ensemble, it’s designed to make a statement for the cameras, not to be adopted in the wild. The question for the Left is: what kind of statement is Warren trying to make, and how should we respond?

In the Wall Street Journal op-ed where she lays out her plan, Warren rehearses a familiar story of a kindler, gentler Norman Rockwell capitalism that suddenly curdled, around 1980, into an amoral free-for-all. “What are the obligations of corporate citizenship in the US?,” she asks. “For much of US history, the answers were clear. Corporations sought to succeed in the marketplace, but they also recognized their obligations to employees, customers and the community.”

Then came the regrettable declension: “Late in the twentieth century, the dynamic changed. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns.” According to Warren, her ACA proposal “restores the idea that giant American corporations should look out for American interests.” Ideologically, the key word here is “restores.”

You can tell a lot about Warren’s worldview from what’s missing in her account. To illustrate the shift in corporate behavior, Warren aptly cites two policy statements issued sixteen years apart by the Business Roundtable, a high-level grouping of CEOs: the first, written in 1981, paid earnest lip service to the idea that corporations have social responsibilities. The second, published in 1997, starkly insisted that the “principal objective of a business enterprise is to generate economic returns to its owners.”

Warren isn’t wrong to stress the historical importance of this Reagan-era shift in corporate management philosophy (a topic I discussed last fall in an interview with the economist J.W. Mason). But she never explains how the pernicious “new theory” of shareholder-value maximization managed to sweep the corporate landscape so thoroughly.

For an answer, we can turn to the twenty-year-old book that first juxtaposed those two telling Business Roundtable statements side by side: The New Financial Capitalists, an admiring 1998 profile of the corporate buyout firm Kohlberg Kravis Roberts (KKR).

Authored by a pair of free-market business school professors from Harvard and NYU, the book shows in detail how the “new theory” Warren bemoans was put into practice through a campaign of organized pressure from capital owners, who acted through the financial system and used tools like the leveraged buyout, of which KKR was a pioneer:

In 1976, the idea that shareholders would be, or could be, restored to power in the governance of corporations was obvious neither to their managers nor to their shareholders — nor, for that matter, to Wall Street’s more prominent financiers. But during the 1980s, the mere specter of the corporate takeover was prodding more and more executives to undertake internal reforms — in some cases for no better reason than to defend against unwanted buyers, in others because they had been inspired by example . . . As more companies began to link managerial compensation to shareholder value creation, more managers were inspired to respond in kind, increasing corporate productivity, profits, and market values.

As the 1990s unfolded, US business enjoyed a financial and managerial renaissance, in no small measure because of what corporations had learned from the leveraged buyout. The managerial corporation did not in fact disappear, but institutional shareholders became more active, and boards of directors more attentive. Executive compensation became more tied to equity performance. Boundaries separating the interests of managers and owners, of shareholders and other stakeholders, began to blur in both the rhetoric and outlook of corporate managers. With the apparent success American business was having after some fifteen years of structural reform, even European and Japanese companies began tying managerial performance more closely to incentives to improve shareholder value. “In that sense,” wrote the financial economist Steven Kaplan in 1997, “we are all Henry Kravis now.”

In other words, it was quite literally a case of capitalism becoming more capitalistic.

(In making their argument, the authors themselves had been scooped by the left-wing economic journalist Doug Henwood, whose 1997 book Wall Street pioneered the thesis, though from a very different perspective.)

But why did corporations ever feel the need to consider interests other than shareholders’ in the first place? The answer has everything to do with class struggle. Over time and across countries, as Harvard corporate governance scholar Mark Roe has shown, governance regimes are inexorably shaped by the strength or weakness of labor. When workers are strong, managers need greater autonomy to balance the interests of labor and capital, which requires suppressing the erratic and destabilizing demands of capital markets.

But when workers are weak, owners can pursue immediate and unbridled profitability without fear of labor conflict. It’s not an accident that capital owners’ successful 1980s campaign to restore their grip over the corporation coincided with managers’ sudden systematic use of permanent replacements to defeat striking workers — a “nuclear option” that companies had been legally allowed to use for decades, but had seldom actually dared to deploy during the postwar decades when labor was stronger.

In both the capital market and the labor market, in other words, it was the shift in the balance of class power that caused the “norm erosion” Warren decries — not the other way around.

No There There

So how does Warren propose to return us to the halcyon days of Main Street capitalism? This is where things get interesting.

But first, unfortunately, they get boring. Warren starts by exhuming a long-forgotten idea first proposed in 1902 by the blue-ribbon US Industrial Commission: requiring federal, rather than state, corporate charters for very large businesses. This idea, in itself a harmless tweak, was warmly embraced at the time by a roster of corporate titans, starting with John D. Rockefeller of Standard Oil. In 1908, Teddy Roosevelt sent Congress a bill along these lines, where it promptly disappeared into oblivion. That’s where things stood until last month, when Sen. Warren revived it in her Wall Street Journal op-ed.

Once federal chartering is established, Warren would use it to impose four changes to corporate governance rules, ranging from the relatively minor to the incongruously grandiose. I’ll cover them in ascending order of radicalism.

First, the bill would limit short-term stock selling by corporate executives and directors. Those who receive company stock would be required to wait five years before selling, and would be barred from selling within three years of a stock buyback. Marketed as an antidote to “short-termist” corporate management, this modest step resembles Hillary Clinton’s desperately wonkish plan from 2016 for a two-tiered capital-gains tax that would penalize short-term stock trading and incentivize longer-term holdings.

Second, Warren’s new charter would require corporations to obtain the consent of 75 percent of board members and shareholders for any political spending. That may sound like a radical change in the campaign finance landscape — until you remember that for most of the last fifty years, political spending by corporate treasuries was actually subject to a near-blanket ban.

To get around the ban, corporations turned to PACs: committees that pool money from individual executives and shareholders, rather than directly from the company chest. And while this fact is hardly Warren’s fault, in the era of Citizens United with its lavish First Amendment protections for political spending, companies will use similar means to get around her proposed spending restrictions — using spuriously “independent” PACs and trade associations, for example, just as political candidates now use spuriously independent Super PACs and nonprofits.

Warren seemingly moves onto edgier terrain with her bill’s third plank. This measure would effectively turn all giant companies into “public benefit corporations” (PBCs), the latest fad in the world of “corporate social responsibility.” What that means in practice is that her new federal charter would, in her words, require corporate boards “to consider the interests of all major corporate stakeholders — not only shareholders — in company decisions,” and “shareholders could sue if they believed directors weren’t fulfilling those obligations.”

It takes a bit of background to convey how meaningless this proposal actually is.

There’s an oddly widespread belief that if corporations are so obsessed with profit, it’s because courts legally require them to act in the interests of their shareholders alone. Believers in this legend tend to throw around terms like “fiduciary duty” and allude darkly to a 1919 Michigan court case called Dodge v. Ford.

The reality is that courts grant corporate directors almost unlimited discretion when it comes to determining what’s in the best interests of their company. This “business judgment rule” is based on the premise that judges are in no position to second-guess managers’ on-the-ground decisions, or insert themselves into complex spats over corporate strategy. As long as they’re not lining their own pockets, managers are pretty much free to be as munificent as they want with their company’s funds. That’s why Goldman Sachs, for example, is free to spend its shareholders’ money on symphony orchestras and urban mural-painting programs, without the slightest fear of lawsuits from shareholders charging breach of fiduciary duty.

But even though this “fiduciary duty” problem is largely mythical, corporate responsibility activists have recently persuaded a number of state legislatures to combat it by passing PBC statutes, which give companies the option of incorporating under an alternate set of rules. These rules explicitly permit, or even ostensibly require, boards to “balance” the interests of shareholders with those of other “stakeholders” (workers, customers, the environment, etc.). A handful of granola-ish companies, like fleece purveyor Patagonia, have already adopted PBC charters, to much applause from organizations of the conscientious rich. And what Warren’s plan would do, in essence, is turn all big corporations into such public benefit corporations.

So what would that look like in practice?

For a hint, look to Delaware, the top state destination for business incorporation, which adopted a PBC law in 2013. Since then, 739 PBCs have been created under Delaware law. Yet, so far, the state’s famously efficient equity court system, known as the Court of Chancery, hasn’t had to adjudicate a single dispute about whether one of these corporations has violated its charter. That alone should give some idea of how much of a nullity the PBC model promises to be.

An even clearer picture comes from an authoritative analysis of PBC jurisprudence written by a corporate governance specialist at Wake Forest Law School: since the “business judgment rule is equally, if not more applicable in the PBC context,” he writes, “the discretion courts afford managers is likely to remain broad and permissive to prevent inefficient nuisance litigation that would seriously undermine investment and other prospects for a PBC.”

“Overall,” he concludes, “the PBC brings few surprises and has an oxymoronic quality in the sense that ‘the more things change, the more they stay the same.’” Expect no different from this plank of Warren’s bill.

Literally, But Not Seriously

Finally, we arrive at the most jarring item on the Warren agenda — though in her Wall Street Journal op-ed she oddly devotes a mere eight words to it: “Employees would elect at least 40 percent of directors.” In other words, workers would choose almost half the voting members of corporate boards.

Here we’re dealing with something altogether different from the other three proposals. This idea, if taken literally, is neither minor nor meaningless. Though it hardly spells the end of capitalism, it would constitute by far the biggest pro-worker shift in labor law since the Wagner Act, and possibly the greatest change to the corporate governance regime since the emergence of general incorporation laws in the early nineteenth century.

There’s only one problem: Elizabeth Warren will never, ever make it happen.

This shouldn’t be a controversial point. Recall the last time a Democratic presidential hopeful promised a dramatic power shift from capital to labor. “We will pass the Employee Free Choice Act [EFCA],” Barack Obama declared at a labor rally in March 2007, referring to the unions’ desperately hoped-for labor law reform bill. “It’s not a matter of if, it’s a matter of when. We may have to wait for the next president to sign it, but we will get this thing done.” Every time he passed through a union hall — which was often — candidate Obama repeated that promise, and unions spent hundreds of millions of their members’ money to elect him.

In the wake of the 2008 election, a rare convergence of political forces created near-ideal conditions for passing an ambitious pro-labor bill: a liberal Democrat in the White House; Democratic control of Congress; a near-filibuster-proof Senate majority; a political atmosphere suffused with popular outrage at bankers and plutocrats.

And yet, just a few months later, as if on cue, the Las Vegas Sun’s labor-attuned political reporter noted a “shift” in the “tone” of the bill’s Washington supporters. “Although Obama pledged to sign the bill into law during the campaign, his chief of staff, Rahm Emanuel, in a meeting of chief executives and business leaders this month, declined to say whether the White House would support the legislation. The reason is clear: The new law could be the most consequential social and economic policy shift since President Reagan reshaped the country by slashing taxes and regulation and crushing unions.”

With that, the EFCA was swiftly buried.

This sequence of events no doubt disappointed many union members. But none of it came as a shock to knowledgeable observers. A prominent labor scholar titled his analysis of the episode, “The Unsurprising Failure of Labor Law Reform.” This, after all, is how Democrats win elections: they promise things they have no expectation of delivering.

And yet, there’s an audacity to Elizabeth Warren’s version of this gambit that puts it almost in a separate category. With the EFCA, Obama was at least endorsing a well-known measure that had been championed for years by a serious, organized constituency, one that was willing to put all its muscle into the fight — namely, the AFL-CIO and its affiliated unions. That established a baseline level of plausibility.

Warren’s codetermination plan, by contrast, comes out of nowhere: apart from a few academics, it has no constituency behind it at all, despite being far more radical than EFCA on the merits.

Admiring articles in liberal outlets often mention Germany’s system of codetermination as a precedent for Warren’s idea. Yet the moderate form of codetermination Germany has today was the watered-down outcome of decades of intense, sometimes violent struggles by trade-unionists and socialist militants, who rallied to the banners of “Wirtschaftsdemokratie” and “Mitbestimmung” from the very outset of Germany’s post–World War I democratization: from the shop stewards’ movement for “economic democracy” during the 1918-1920 German revolution (which birthed a weak works-council law under the Weimar Republic), to the West German union federation’s dramatic 1950 strike threat, in which 98 percent of workers voted to shut down the newly formed state through nationwide walkouts if codetermination in the coal and steel industries were not forthcoming.

As a study of postwar German labor put it: “The implementation of full-parity co-determination throughout the West German economy was perhaps the most fundamental political goal of the West German labor movement” — a goal that, to this day, has not been fully realized.

So, to take Warren seriously when she pledges to pass a law in a couple years that will strip the American capitalist class of 40 percent of its control over the means of production — a law that she apparently just thought up on her own — requires a suspension of disbelief that borders on delirium.

And yet, there’s a method to Warren’s madness; it’s right there in the name of the bill. Ever since she unveiled the Accountable Capitalism Act, Warren has gone out of her way to make it clear that, unlike some people, she is not a socialist: “I am a capitalist” . . . “I believe in markets and in capitalism” . . . “I am a capitalist to my bones.” As Franklin Foer of the Atlantic wrote, “she’s doubling down on market competition at a moment when her party is flirting with socialism.”

That may seem like exactly the wrong thing to do for a candidate gearing up to face a national primary electorate in 2020. But the strategy she appears to be following is a shrewd one. To anxious donors and party moderates, she can present herself as a credible champion of traditional Democratic Party capitalist values: a bulwark against the party’s recent, inexplicable outbreak of “socialist” madness. To the left-wing part of the primary electorate, she can dangle a policy plank that outbids even Bernie Sanders in its feint to the left — safe in the knowledge that it will never become law. And perhaps she also hopes that by aggressively flaunting her capitalist bona fides she can provoke socialists into self-isolating sectarian attacks that focus obsessively on words like capitalism and socialism rather than the substance of her — on paper — quite radical proposal.

The irony is complete: to position herself as the savior of capitalism, Warren has floated a measure that, in real life, has only ever been been championed by socialists.

So what should socialists do now?

We should thank her. However much of a ruse it may be, Warren’s codetermination proposal has, bizarrely, placed a trademark objective of socialist politics — worker control of the means of production — on the agenda of national political debate for the first time in forever. Aside from insisting that her 40 percent figure be raised to 50 percent, we should embrace her proposal wholeheartedly.

In fact, we should make Warren’s codetermination plan a litmus test. We should demand that every Democrat endorse it, at all levels of government. Is Chuck Schumer in favor of workers electing their bosses? Is Nancy Pelosi? How about Tim Kaine? If not, why not? As Matt Yglesias points out, the idea of codetermination actually polls extremely well: “almost shockingly well, in fact, for an idea that’s had no organized advocacy community or high-profile champions until extremely recently.” In one recent poll even Republicans were in favor, or almost evenly divided, despite a survey question that explicitly noted Republican criticism of the plan for making “companies less efficient.”

A leading presidential contender has issued a call for mandatory worker codetermination — and somehow won praise from liberals for her stout defense of capitalism. We’re living in strange political times. We might as well make the most of it.