Update 297: Corporate Governance/Citizenship
A Look at Issues and Progressive Solutions
Whether or not corporations are people, my friends, they certainly have citizenship-like functions from paying taxes, to engaging in community relations, to supporting candidates for office. For the many progressives who believe that corporate citizenship in the U.S. can be improved, reform of rules relating to corporate governance is a high priority.
Today we take a look at the challenges facing the country regarding corporate governance rules, the solutions proposed recently in this area by leading progressives, reflecting what’s playing on this issue on the campaign trail.
Historically, courts and legislatures have considered a corporate charter akin to a public trust. Most corporations in the United States are chartered under state law and have thus followed the corporate governance provisions in their state’s statutes. State corporate governance statutes have required directors of corporations to seek maximization of shareholder profits as the primary objective of the corporation they serve.
High-profile corporate scandals, however, have called into question the doctrine of shareholder primacy with recognition that the participation of other major stakeholders, such as employees and the community at-large, could benefit and refocus the corporate decision-making process.
The Accountable Capitalism Act
On August 15, Senator Elizabeth Warren introduced the Accountable Capitalism Act (S.3348) in an attempt to challenge the status quo of corporate governance. Sen. Warren uses the corporate personhood argument long advocated by conservatives (think Citizens United) to argue that if corporations can claim legal rights of personhood, they should also be legally required to accept the moral obligations of personhood that this status logically implies.
The bill’s primary focus is to make American corporations beholden not just to their shareholders, but also to their workers, the community, and participants in the economy at-large. Given the fact that 84 percent of American-held shares are in the hands of the top 10 percent of earners, “maximizing shareholder value” does not maximize value for middle and working class Americans.
The bill makes four key proposals:
- Creates the Office of United States Corporations inside the US Department of Commerce: American corporations with over $1 billion in gross revenue would have to obtain a federal charter from the new agency, which would obligate directors to consider all stakeholder interests, replacing the doctrine of shareholder preeminence.
- Mandates that employees elect at least 40 percent of the membership of the Board of Directors: This bold provision would return power to employees by giving them a voice over the direction of the company they work for. This idea is gaining traction among voters; a recent poll by Civis Analytics found that a majority of likely voters, and 71 percent of Democrats, support the principle of employee-elected board members.
- Limits executives’ ability to sell stock: Stock that executives receive as part of their compensation must be held for five years, or three years after a share buyback. This provision aims at tackling the “short-termism” issue which rewards executives for taking actions that have short-term benefits rather than making more sustainable decisions that invest in the future.
- Requires corporate political activity to be authorized by both 75 percent of shareholders and 75 percent of board members (many of whom would be worker representatives under the full bill): An attempt to mitigate the effects of the 2010 Citizens United ruling, this provision would democratize corporate political spending and make the process more transparent.
Alternative Congressional Dem. Proposals
Sen. Warren’s bill is not sui generis in some of its provisions. The Reward Work Act of 2018 (H.R.6096 and S.2605), introduced in the Senate in March and in the House in June, introduced the concept of codetermination into the political zeitgeist. The bill is supported by AFL-CIO, Americans for Financial Reform, Take on Wall Street, and Public Citizen.
The bill proposes to give employees the right to elect one-third of the board of directors, a similar percentage to Sen. Warren’s proposal. The Reward Work Act of 2018 also prohibits stock buybacks on the open market by repealing SEC “safe harbor” rule 10b-18 and shifting all buybacks to tender offers.
The Reward Work Act of 2018, like the Accountable Capitalism Act, focuses on shifting the balance of power in corporate boardrooms and eliminating the incentives for short-term arbitrage from the corporate elite. The Senate bill has three original cosponsors: Sens. Warren, Baldwin, and Schatz, who were joined by Sen. Kirsten Gillibrand in April. The House bill has two original cosponsors: Reps. Keith Ellison and Ro Khanna.
Shareholders versus Stakeholders
Calls for changes to the corporate governance status quo have come from academia and think tanks for years. An overriding goal of these is to alter the makeup of firms’ Boards of Directors to reflect the wishes of a broader swath of stakeholders, with a view to improving decision-making and allocating corporate surplus more fairly, and ultimately helping stem the tide of rising inequality, should changes in corporate finances practices follow:
Source: Center for American Progress
The issue pits stakeholders versus shareholders. Sen. Warren’s bill is influenced by other models of corporate governance around the world that question the ideology of shareholder primacy and considers a corporate governance structure that is run by, and therefore benefits, a wider array of stakeholders and the community at large.
The Reward Work Act of 2018 and the Accountable Capitalism Act begin to question prevailing corporate governance wisdom that has not seen a significant challenge since the 1980s. Some see Sen. Warren’s challenge as an affront to a free market, but given diminished union power, large corporate dominance, and poor wage growth, it’s beginning to look like the market-led corporate governance structure in America and its practices work for fewer and fewer.
GOP Solution: Making a Bad Situation Worse
President Trump recently requested the U.S. Securities and Exchange Commission (SEC) to look into changes that would alter the current reporting requirements for publicly traded companies from a quarterly period to a semi-annual basis. This change makes clear that the current administration is intent on obscuring corporate disclosure, exacerbating the current problems with corporate governance, rather than seeking to improve them.
In addition, in a recent interview with Politico, SEC Commissioner Hester Peirce expressed her view that public companies should “absolutely” have the right to require arbitration, taking away the rights of shareholders to bring legal action against the companies which defraud them. SEC Commissioners Robert Jackson and Kara Stein, ardent supporters of robust corporate governance, are likely to oppose these changes that would jeopardize corporate disclosure in a disingenuous attempt to “reduce red tape.”
Policy for the People
According to the Trump Administration and the GOP-controlled Congress, the economy is going gangbusters and the tax cuts were a huge boon for all Americans. This is belied by the fact that the recent growth is increasingly benefiting a select few.
The theme we’ve seen play out in other policy areas this election cycle remains prominent in the fight for corporate governance. As the House Democrats’ new slogan puts simply, “Democrats are for the people and Washington Republicans are for the special interests who are lining their pockets at the expense of everyday Americans.”