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[WSJ] Elizabeth Warren: Companies Shouldn’t Be Accountable Only to Shareholders

Discussion in 'BBS Hangout: Debate & Discussion' started by Os Trigonum, Aug 16, 2018.

  1. Os Trigonum

    Os Trigonum It. Deserves. Its. Own. Thread.
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    https://www.wsj.com/articles/companies-shouldnt-be-accountable-only-to-shareholders-1534287687

    Companies Shouldn’t Be Accountable Only to Shareholders
    My new bill would require corporations to answer to employees and other stakeholders as well.
    [​IMG]
    Photo: Richard Drew/Associated Press

    849 Comments
    By
    Elizabeth Warren
    Aug. 14, 2018 7:01 p.m. ET

    Corporate profits are booming, but average wages haven’t budged over the past year. The U.S. economy has run this way for decades, partly because of a fundamental change in business practices dating back to the 1980s. On Wednesday I’m introducing legislation to fix it.

    American corporations exist only because the American people grant them charters. Those charters confer valuable privileges—such as limited legal liability for their owners—that enable businesses to turn a profit. What do Americans get in return? What are the obligations of corporate citizenship in the U.S.?

    For much of U.S. history, the answers were clear. Corporations sought to succeed in the marketplace, but they also recognized their obligations to employees, customers and the community. As recently as 1981, the Business Roundtable—which represents large U.S. companies—stated that corporations “have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” This approach worked. American companies and workers thrived.

    Late in the 20th century, the dynamic changed. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns. By 1997 the Business Roundtable declared that the “principal objective of a business enterprise is to generate economic returns to its owners.”

    That shift has had a tremendous effect on the economy. In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other priorities. But between 2007 and 2016, large American companies dedicated 93% of their earnings to shareholders. Because the wealthiest 10% of U.S. households own 84% of American-held shares, the obsession with maximizing shareholder returns effectively means America’s biggest companies have dedicated themselves to making the rich even richer.

    In the four decades after World War II, shareholders on net contributed more than $250 billion to U.S. companies. But since 1985 they have extracted almost $7 trillion. That’s trillions of dollars in profits that might otherwise have been reinvested in the workers who helped produce them.

    Before “shareholder value maximization” ideology took hold, wages and productivity grew at roughly the same rate. But since the early 1980s, real wages have stagnated even as productivity has continued to rise. Workers aren’t getting what they’ve earned.

    Companies also are setting themselves up to fail. Retained earnings were once the foundation for long-term investments. But from 1990 to 2015, nonfinancial U.S. companies invested trillions less than projected, funneling earnings to shareholders instead. This underinvestment handcuffs U.S. enterprise and bestows an advantage on foreign competitors.

    The problem may get worse, because executives have a strong financial incentive to prioritize shareholder returns. Before 1980, top CEOs were rarely compensated in equity. Today it accounts for 62% of their pay. Many executives receive additional company shares as a reward for producing short-term share-price increases. This feedback loop has sent CEO pay skyrocketing. The average CEO of a big company now makes 361 times what the average worker makes, up from 42 times in 1980.

    Corporate charters, which define the structure and obligations of U.S. companies, are an obvious tool for addressing these skewed incentives. But companies are chartered at the state level. Most states don’t want to demand more of companies, lest they incorporate elsewhere.

    That’s where my bill comes in. The Accountable Capitalism Act restores the idea that giant American corporations should look out for American interests. Corporations with more than $1 billion in annual revenue would be required to get a federal corporate charter. The new charter requires corporate directors to consider the interests of all major corporate stakeholders—not only shareholders—in company decisions. Shareholders could sue if they believed directors weren’t fulfilling those obligations.

    This approach follows the “benefit corporation” model, which gives businesses fiduciary responsibilities beyond their shareholders. Thirty-four states already authorize benefit corporations. And successful companies such as Patagonia and Kickstarter have embraced this role.

    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.

    For the past 30 years we have put the American stamp of approval on giant corporations, even as they have ignored the interests of all but a tiny slice of Americans. We should insist on a new deal.

    Ms. Warren, a Democrat, is a U.S. senator from Massachusetts.

    Appeared in the August 15, 2018, print edition.
     
  2. cml750

    cml750 Contributing Member

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    Warren farther proves she is a Socialist.
     
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  3. FranchiseBlade

    FranchiseBlade Contributing Member
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    I love the idea. Employees with a stake will be more productive and this idea could really help the companies do better.
     
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  4. Space Ghost

    Space Ghost Contributing Member

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    The bigger a company grows, the further the executives and boards become disconnected with the lowest employees and customers. In other words, its not the boards who have the final decision is these massive mergers. Government incompetence and corruption plays its fair role.

    A billion dollars is not going to be the same value as a billion dollars in 20 years. More short sighted thinking supported by short sighted people.

    Corporations who do not have the foresight to realize taking care of its employees and customers tend to be the worst in the industry. Talented people will not tolerate this behavior and work for respectful organizations, leaving the less desirable workers to fill these positions. Why would anyone ever support propping up these corporations? We should support measures to accelerate their eventual doom.
     
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  5. tallanvor

    tallanvor Contributing Member

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    Government should totally be passing laws to force private companies to be more productive. That's absolutely the government's job. If there is one thing those not in the private sector know its how to make the private sector more productive. :rolleyes:

    If this helps 'companies do better' (w/e that means), then companies would already do it. Warren, who has never worked in the private sector, thinks she knows best how to run private companies. She's a moron.
     
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  6. NewRoxFan

    NewRoxFan Contributing Member
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    Companies should be accountable to its employees. And their customers. And their suppliers/partners. And their community (local and global). There is an argument that they shouldn't?

     
  7. FranchiseBlade

    FranchiseBlade Contributing Member
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    There is a difference between the private sector being more profitable, and the private sector companies doing better.

    Companies do things not in their best interest all the time and go out of business. :rolleyes:
     
  8. tallanvor

    tallanvor Contributing Member

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    They already are. If customers dont like a company they dont do business with them. If an employee doesnt like a company then they dont work for them any more. This isn't rocket science.
     
  9. NewRoxFan

    NewRoxFan Contributing Member
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    I think the growing disparity in wages is an indication that corporations are NOT being accountable to their employees. Corporations just received a huge tax cut, and very little of that went back to employees.

    And... as trump removes regulations (especially environmental) we will see if corporations are accountable to their local and global communities.
     
  10. txtony

    txtony Member

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    Being employed vs unemployed is an easy decision for most. Ability to move to another job isn't a given. What you are saying is true in fantasy land. In the real world, most employees just suck it up.
     
  11. tallanvor

    tallanvor Contributing Member

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    My crazy fantasy land where a person can look for another job and nobody is forced to work anywhere because we don't have slave labor.
     
  12. JuanValdez

    JuanValdez Contributing Member

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    Really companies are accountable to more than shareholders. They are ultimately accountable to shareholders, but also accountable to government regulation, and to customers. But, I think her bill is interesting, and I'm thinking about whether or not I like it. Governments tinkering in markets often has bad side-effects (I can see companies capping their revenues at $900 million and just proliferating the number of companies to invest in so as to avoid regulation), but markets are also constructs and changing the rules of a market doesn't necessarily make it less 'free.'

    Anyway, her bill isn't anything more than a thought leadership and branding exercise which is why it ended up in the WSJ and not the Senate floor. She's going to need a lot more socialist allies in Congress before something like this got any serious consideration.
     
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  13. Invisible Fan

    Invisible Fan Insider Newsletter™ 2X Diamond Member
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    I've posted this article before because it offers a good overview on corporate management history (No Federalistas, it wasn't always about the shareholders), and it offers an alternative to the current short term focus of stock vested CEOs.

    If I were to start a thread about this with a weasely no-opinion opinion, it would be to read the whole article.

    https://hbr.org/2010/01/the-age-of-customer-capitalism
    The Age of Customer Capitalism
    Excerpt:
    Have shareholders actually been better off since they displaced managers as the center of the business universe? The simple answer is no. From 1933 to the end of 1976, when they were allegedly playing second fiddle to professional managers, shareholders of the S&P 500 earned compound annual real returns of 7.6%. From 1977 to the end of 2008, they did considerably worse—earning real returns of 5.9% a year. If you modify the start and end dates of the two periods, you can produce performance numbers that are at parity, but there’s no sign that shareholders benefited more when their interests were put first and foremost. On this basis, it’s hard to argue that Jensen and Meckling did shareholders a huge favor.

    That counterintuitive answer begs a provocative follow-up question: If the shareholders were all you cared about, would focusing on increasing shareholder value be the best way to make sure they benefited?
    ...

    Consider Johnson & Johnson. It has the corporate world’s single most eloquent statement of purpose—its “credo,” which hasn’t changed since J&J’s legendary chairman Robert Wood Johnson created it in 1943. Here it is, in abbreviated form:

    “We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services….We are responsible to our employees, the men and women who work with us throughout the world….We are responsible to the communities in which we live and work and to the world community as well….Our final responsibility is to our stockholders….When we operate according to these principles, the stockholders should realize a fair return.”

    The credo bluntly spells out the pecking order: Customers come first, and shareholders last. However, J&J has confidence that when customer satisfaction is at the top of the list, shareholders will do just fine.

    ...
    Many executives would take exception to compensation arrangements like Lafley’s, arguing that they’d be unfairly exposed to the mistakes of their successors. That is where culture comes in. P&G’s compensation system would indeed be unfair in a culture in which compensation is stock-based and short-term-oriented, in which it is “every man for himself.” In such cultures, it is difficult to install longer-term compensation, so the culture inevitably remains “every man for himself.” However, in a culture oriented toward serving the customer, a compensation structure like Lafley’s makes lots of sense and isn’t difficult to install—and it reinforces the behaviors that build real value for the long term.

    Even when customer value maximization is the primary objective, the culture is right, and stock-based compensation has exceedingly long vesting periods, the siren call of shareholder value maximization is ever present. At P&G, Lafley inherited a year-old compensation system that tied rewards for senior executives to total shareholder return (TSR), which was defined as the increase in share price plus dividends (if reinvested in stock) over a three-year period. Under the system, P&G’s TSR was benchmarked against that of a peer group; if the company’s TSR was in the upper half of the group, the executives received bonuses.

    Lafley, however, quickly noticed that great TSR performance in a given year was routinely followed by poor performance the next year, because high total shareholder returns were spurred by a pronounced jump in expectations that simply couldn’t be reproduced the next year. He came to realize that increases in shareholder value had very little to do with real business performance and a lot to do with the fertile imaginations of shareholders, who were speculating what the company’s future might hold. This insight prompted Lafley to switch the bonus metric from TSR to something called operating TSR, which is based on a combination of three real operating performance measures—sales growth, profit margin improvement, and increase in capital efficiency. His belief was that if P&G satisfied its customers, operating TSR would increase, and the stock price would take care of itself over the long term. Moreover, operating TSR is a number that P&G’s business unit presidents can truly influence, unlike the market-based TSR number.
     
    #13 Invisible Fan, Aug 16, 2018
    Last edited: Aug 16, 2018
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  14. B-Bob

    B-Bob my celli weighs a ton

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    Yes, this.

    I am intrigued to the extent that the US Government now grants a corporation the same rights, in many cases, as a citizen, but without the same laws regarding conduct. As citizens, we are accountable in so many ways to everyone else. I can't kill people, dump garbage on my neighbor's lawn, or even (technically) go too fast in my car all the time.

    I know there are regulations, (in some cases too many and in other cases too few), but most corporations now get rights to spend copiously on "free speech" but are largely un-penalized on their externalities and costs born by the larger society.
     
  15. txtony

    txtony Member

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    Or company deciding to no longer have employees!

    There is definitely a problem and her solution is interesting. I don't know what to think about it but it would be nice to have that as a serious debate topic. But hey, you are already doing it (I get what you are saying and understand it) and so likely it's going to be not taken serious because SOCIALISM label is enough to turn off most people.

    I do see larger and larger corp eating up smaller corps. It's a growing problem.
     
  16. robbie380

    robbie380 ლ(▀̿Ĺ̯▀̿ ̿ლ)
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    Why would they become more productive?
     
  17. Os Trigonum

    Os Trigonum It. Deserves. Its. Own. Thread.
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  18. dmoneybangbang

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    The issue was never unfair trade practices but corporations. Millions of German and S Korean cars coming out of the non union South.

    NAFTA was good for non union states riding the secular shift of population and logistics to the South/SE.
     
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  19. dmoneybangbang

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    More ownership and more benefits.
     
  20. FranchiseBlade

    FranchiseBlade Contributing Member
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    Because they have a stake in the company doing well. They are on the ground floor of the production and delivery of services. Their input would be valuable. They would care more about the company because the company shows that they care about them and their input matters.
     
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