Senator Elizabeth Warren yesterday introduced Senate Bill 3348, entitled “A bill to establish the obligations of certain large business entities in the United States, and for other purposes.” It’s more popularly known as the Accountable Capitalism Act. (Note: the text of the bill has not yet been posted. It may be a few days before it is available.)
It proposes requiring a federal charter for U.S. companies with more than $1 billion in annual revenues and would place limits on how corporations spend their earnings and even make political contributions.
The motive behind the legislation is laudable. Sen. Warren wants to rein in the enrichment of shareholders at the expense of everyone else, especially rank-and-file employees. When companies give raises that average a few percent while lavishing cash on dividends and stock repurchases. U.S. companies spent an estimated $780 billion on stock buybacks in 2017. In fact, when a group of S&P 500 CEOs was asked how they intended to spend the windfall from the Republican tax cuts, most said the money would go to reward shareholders. Employee benefits were mostly in the form of one-time bonuses instead of permanent wage increases.
It’s no secret that wealth inequality is a significant issue. There’s no denying that the lion’s share of economic gains have gone to the 1% at the top of the income range. This has been going on since at least the Reagan administration.
It’s also no secret that most share repurchases are only slightly more productive than simply burning the cash in the company parking lot. Money that could be spent on better pay and benefits, research and development, facility upgrades and other purposes goes to a very small percentage of Americans.
But what seems to be overlooked is the fact that stock buybacks and increased dividends are often triggered by activist investors, especially fund managers, that want a bigger, faster return. These wealthy investors will buy up large blocks of stock and threaten to take control of the company.
Sen. Warren wants employees to elect 40% of the board members of the federally chartered corporations she proposes. She also wants supermajority (75%) approval of all political contributions.
The Accountable Capitalism Act would also require chartered corporations to consider stakeholders, not shareholders in their plans and decisions. In addition to shareholders, stakeholders in Sen. Warren’s definition include employees, state and local governments and other entities.
Sen. Warren envisions this act as a way to redress the imbalance in American wealth.
The main question that must be asked is does the federal government even has the authority to require this type of charter? Is it legal for the federal government to regulate companies according to their size?
In her press release, the Senator cited a letter of support from the academic community. The letter cites the history of corporations in early America that were formed to construct public works. That’s all well and good, but that wasn’t the purpose of corporations, a concept we brought with us from England. Today, a corporation’s statement of purpose has nothing to do with the public and can be something as simple as “The purpose of the corporation is to engage in any lawful activity for which corporations may be incorporated in this state.”
In truth, the British for-profit corporation was the source of both the Jamestown and Plymouth settlements. The London Company was chartered in 1606 to establish colonial settlements in North America with an eye toward making profits from crops, including tobacco, and timber. While the greater glory of King James I may have played a part in getting the charter, making money for its shareholders was the real purpose.
Beyond a matter of legal authority to charter for-profit companies, there is a matter of the Act calling for control of certain functions that, to the best of my knowledge, aren’t even addressed by existing state incorporation laws. If that’s true, than the federal government, under the Tenth Amendment, absolutely does not have the power to impose them. Rights and powers not specifically delegated to the federal government are reserved to the states and the people.
I make no pretense to being an attorney, I have never even played one on TV. But, writing as a layman who does have some experience at least reading the law and knowing how to source legal information, Senator Warren’s proposal seems to venture beyond the limits of Congress’ ability to enact without an ultimate reversal in the courts.
A better strategy would have been to introduce a special federal tax on companies of a certain size that do business in the United States but do not honor the social contract the senator proposes. That is clearly in the federal government’s power to enact and enforce.