Skip to main content
Senator Elizabeth Warren (D-MA) questions Alex Azar (not pictured) during a Senate Health, Education, Labor and Pensions Committee hearing on his nomination to be Health and Human Services secretary on Capitol Hill in Washington, U.S., November 29, 2017. REUTERS/Yuri Gripas - RC16615E8900
Up Front

Sen. Warren’s Accountable Capitalism Act rightfully challenges a central tenet of corporate governance theory

By introducing the Accountable Capitalism Act, Sen. Elizabeth Warren (D-MA) builds a progressive agenda from what had been a conservative judicial argument that corporations are analogous to people for applications of various legal standards. When people make decisions, they do not just selfishly maximize their own value: they consider the ramifications of their actions on others, including their families, neighbors, communities, and broader society. If corporations are considered to be legally equivalent to people, then shouldn’t they also have a legal obligation to consider the impacts of their choices on a broader set of stakeholders beyond their shareholders?

Sen. Warren’s proposal is a reminder that shareholder value as the first—and sometimes only—priority of a corporation is a recent phenomenon. America’s economy succeeded in creating strong, stable—and widely shared—prosperity under the New and Fair Deal paradigms from the end of the Great Depression until the 1980s. The ‘Greed is Good’ philosophy that dates to the 1980s changed that. Since then, we’ve seen a substantially different allocation of the fruits of economic growth.

The legislation’s good intentions however, rely on another assumption: that management is accountable to the board of directors. That may overstate the power of corporate boards of directors over corporate management.

If corporations are considered to be legally equivalent to people, then shouldn’t they also have a legal obligation to consider the impacts of their choices on a broader set of stakeholders beyond their shareholders?

Though corporate governance theory places boards of directors above senior management, CEOs can, in practice, also chair the board, help select directors, and often exert substantial control over boards. Sen. Warren’s legislation has a creative solution, requiring workers to elect 40 percent of the board and then requiring supermajority agreement for some corporate activities. Further, the legislation requires a company’s board to consider benefits to employees and stakeholders other than shareholders—including communities where the company operates—as part of fulfilling the corporation’s duties.

These elements of Warren’s proposal could result in real changes to corporate behavior and decisions. However, they do not guarantee that the board will actively engage or stand up to management (or employees), and therefore ultimately achieve the broader goals of corporate responsibility that Sen. Warren hopes to achieve. More analysis is needed of who actually makes corporate decisions and whether the theory of primacy of boards of directors in corporate governance represents how the world actually works (or ought to).

Sen. Warren’s effort has intensified a long-overdue debate about corporate accountability. The accounting scandals of Enron, MCI-WorldCom, and others are less than two decades old. They led to important reforms like the Sarbanes-Oxley Act, which stabilized investor confidence during a period of extreme market turmoil. However, the underlying theory of corporate behavior that changed in the 1980s and 1990s, to emphasize the primacy of shareholders, has not been significantly challenged. Sen. Warren is right to pinpoint this issue and should be applauded for proposing an alternative. This should hopefully spark a broader discussion to help make America’s corporations great again.

More

Get daily updates from Brookings