U.S. Sen. Elizabeth Warren and the CEOs of many of America’s largest corporations now agree on a critical issue for our capitalist system: what is the purpose of business corporations?
The traditional American answer: making money for their shareholders. Warren and the CEOs say there is more to corporate purpose than that. But then they part ways on what to do about it.
The Business Roundtable recently released a statement signed by the CEOs of 181 of the largest corporations in the United States. It asserts that corporations should commit to serving a variety of stakeholders, including employees, customers, suppliers, communities and the environment, as well as shareholders. This mirrors the first provision of the Accountable Capitalism act, a bill that Warren introduced a year ago. Companies subject to that act would be required to consider the interests of those same groups.
Since the roundtable statement came out, commentators, including dueling commentaries in the Star Tribune on Aug. 23 from Stephen Young (“Minnesota laid groundwork for CEOs’ theory”) and Megan McArdle (“Hard to argue with kinder capitalism, but let me try”) have argued about whether this stakeholder vision of purpose improves on the traditional shareholder-focused norm. Advocates on the shareholder side like McArdle make some good points. But when two camps as often opposed as Warren and these CEOs agree, they likely have better points. If we want corporations to benefit the public interest, their leaders should care about the public interest.
But that leaves a huge follow-up question: How do we ensure that the CEOs act on their broad commitments? This divides those who, like Warren and the CEOs, take a broad view of corporate purpose.
The roundtable statement is silent on creating accountability. CEOs are chosen by boards of directors, which in turn are elected by the shareholders. Many boards still defer to their CEO, whose compensation is linked to the share price, and other boards are influenced by shareholder activists who care only about short term shareholder returns. Maybe this newfound commitment to other stakeholders will be more talk than action.
That’s why Warren’s act has a second section. It requires that a corporation’s employees must elect at least 40% of the directors on the board. Employees know what is going on in a business and are motivated to make sure it is doing well, so hopefully they will be better than shareholders at electing directors who weigh many interests and diligently monitor the CEO. Which may be why CEOs have not been big fans of the act.
Furthermore, Warren’s act would bind all companies with yearly revenue over $1 billion. Given shareholder activism and CEO compensation, maybe we need legal force to ensure that the CEOs actually act in the way they proclaim is best.
But there are legitimate arguments against employee directors. They might advocate the interests of employees to the exclusion of the general health of the company. They might create a conflicted and ineffective board. Academics have studied this question in countries with many employee directors (notably Germany), and the question remains hotly debated.
Are we sure Warren is right on how to hold companies accountable? Should we risk the health of our most critical economic organizations on that bet? Is there a middle way between trusting Warren and trusting the CEOs?
There is. Rather than imposing Warren’s corporate charter on all large corporations, we could make it an option for every firm. Those that adopt it would have their corporate tax significantly reduced, or even eliminated. That should get some companies to try it. If they fail, others won’t adopt it (and those that did can drop it). If they succeed, even shareholders should push for others to adopt the new structure given the tax benefits.
So we have found some common ground. Maybe encouraging (but not requiring) an experiment in governance will show us whether bringing a new voice into the boardroom — that of ordinary working people — can help ensure that our public corporations actually pursue the public good.
Brett McDonnell is the Dorsey & Whitney Chair at the University of Minnesota Law School.