DISCUSSION Accountable Capitalism Act – a legislative step too far?

by Michael Wise _______29th August 2018
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It’s been 20 years now since I started my first proper ‘career’ job. It was with a large business IT consulting firm. I remember the excitement of moving to London, and our induction session. “I was sat where you guys are a year ago,” the grad-plus-one standing at the front said enthusiastically. “The following week I was in New York!” In my almost five-year stint there, the furthest I got was Gatwick Airport (we were building a CRM for Airmiles).

Such thoughts resurfaced in recent days after looking at news stories about Elizabeth Warren’s Accountable Capitalism Act. The proposal, which, if passed, would be “the most significant change in U.S. corporate governance in 100 years”, is that corporations with more than $1 billion in annual revenue would be required to get a federal corporate charter requiring directors to consider the interests of all major corporate stakeholders – not only shareholders – in company decisions.

According to Sen. Warren, “my bill also would give workers a stronger voice in corporate decision-making at large companies. Employees would elect at least 40% of directors. At least 75% of directors and shareholders would need to approve before a corporation could make any political expenditures. To address self-serving financial incentives in corporate management, directors and officers would not be allowed to sell company shares within five years of receiving them – or within three years of a company stock buyback”.

Let’s rewind to the millennium. The company I was working for was going great guns. Well, in some respects it was. The share price was ridiculously high: at one point, as I recall, the market capitalisation placed it in the realm of Sainsburys and British Airways. It may have been 24th in the FTSE 100. A staff member on the sharesave scheme was talking of buying himself a boat. And around this time, the chief executive cashed in his chips and became the highest-paid CEO in the land.

I decided I couldn’t afford to join the sharesave scheme. Moreover, I was sitting behind desktops that still ran Windows 95 in offices that looked threadbare. And then there was the work. I’d joined because I wanted to write software. That was what interested me then. I soon learned, however, that the ‘write software’ part of the operation was being outsourced to India. In that context, it makes sense that there was never any skills training to speak of. Over the course of a couple of years, enthusiasm turned to apathy.

As we can see, the news of Sen. Warren’s proposal has been greeted with great interest. More measured – though only slightly – was Samuel Hammond in the National Review. Under the headline ‘Elizabeth Warren’s Corporate Catastrophe’ he argued that a country like Germany, with its emphasis on co-determination, is unable to foster the rapid growth that, Hammond says, is “one of the most defining and precious features of the American economy”.

The examples he cites are Amazon, Uber and Apple. Apple recently became America’s first trillion-dollar company. But, of course, the question is one of how we measure wealth and contentment. What about that Apple factory in China? Or Amazon paying staff to tweet in the manner of kidnap victims with Stockholm syndrome?

Hammond’s worry is that companies that go public already have an added responsibility – a compliance burden that, together with the Accountable Capitalism Act, would create a layer of bureaucratic treacle that would slow everything down. The companies will no longer be lean, mean winning machines.

Crucial in all of this is the view, made famous by economist Milton Friedman, that the only social responsibility of business is to increase profit. So the narrative goes, it’s one that became dogma in the Reagan/Thatcher years – the gilded, glitzy, ‘greed-is-good’ ‘80s.

According to Hammond, though, this is overstated. “In practice, corporate boards don’t have a fiduciary duty to do much of anything in particular, outside of the standard prescriptions of common law,” he adds.

More open to the idea is Rebecca M. Henderson in Harvard Business Review. “A focus on shareholder value maximization at the expense of everything else is an exceedingly dangerous idea, not just to our society but also to the health of business itself,” she writes. “Taken literally, a single-minded focus on profit maximization would seem to require that firms not only drive down wages but also attempt to fix political processes in their own favor. This can’t be right. Markets only lead to prosperity and freedom when they are genuinely free and fair.”

Like Hammond, she points out that people can get Friedman wrong – and he always emphasised that firms must play by the rules. Henderson adds: “The first dean of Harvard Business School, Edwin Francis Gay, said that the purpose of business was to ‘make a decent profit, decently’ – not to maximize profits at any costs – and that, in my view, is where U.S. business needs to go.”

Fair enough. But the question arises: if directors are not legally required to maximize shareholder value at present then why should they be legally required to maximise stakeholder value in the future? Surely, everything – including the viability of political legislation – boils down to a particular culture that prevails. The German idea of co-determination, which sees worker representation on advisory boards, has been enshrined in law for the best part of a century, with works councils an important part of work culture for a long time before that.

This is not to say that such ideas haven’t been tried in the U.S: works councils and company unions thrived in the early part of the 20th century, before the National Industry Recovery Act (1933) and the National Labor Relations Act (1935) enhanced union rights (albeit in a way that pitched employers and unions head-on).

Yet such laws were enacted as part of the New Deal, itself a response to the Great Depression, which does rather suggest that, in the absence of any overwhelming cultural shift, it would need a particularly dire set of circumstances to arise for a bill with as profound in reach as this one to make the statute books.

Inherent in American culture is the idea that anyone can make it with enough talent, grit and luck. But does that mean that every individual aspires to a particular ideal? What is ‘it’ exactly? Apple and Amazon might have a swagger of sorts, but there’s also the likes of Costco and Trader Joe’s, which not only invest heavily in store employees but are also competitively priced, demonstrate solid financial performance, and offer better customer service than competitors. And, as we know only too well, there are plenty of businesses out there committed to social as well as private good. Businesses that invest rather than divest and which have a long-term view of growth.

As things stand, the law in 33 U.S. states authorises the existence of benefit corporations, which differ from traditional corporations in purpose, accountability, and transparency, but not in taxation. So if there is limited appetite for Sen. Warren’s bill, then perhaps a) more states might adopt the benefit corporation law; and b) some sort of tax break might be in order?

So far as cultural change goes, well…there’s a trillion-dollar question right there. It’s more realistic, and right, to encourage a plurality of cultures. For starters, we need to try and match the right individual with the right culture for them, and that can only happen by virtue of straightforward honesty: for a company to communicate exactly what it’s about – its purpose, attitude, what it expects and what it offers – and for an employee to do the same. A simple, no frills conversation.

Back in the late ‘90s I didn’t really do my homework. I wanted a job, was offered one, and took it – or, rather, grabbed at it. You’re young, yet you don’t realise that time is on your side. Why not bide one’s time instead and do other work until the right job comes along?

Still, I did get my trip to New York – the week after the voluntary redundancy payment went into my bank account. The company? It no longer exists.

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