In its August 15, 2018 edition, the Wall Street Journal published an opinion piece written by Senator Elizabeth Warren, (D. Mass.) under the caption “Companies Shouldn’t Be Accountable Only to Shareholders.” In her article, Senator Warren notes a fundamental change in business practices occurring in the late 1980s in favor of rewarding corporate shareholders with corporate largess, while ignoring corporate employees in times of corporate prosperity. She declares that in the early 1980s large American corporations sent less than half of their annual earnings to shareholders, but shifting to 93% to shareholders during the period between 2007 and 2016. She observes that corporate officers are now receiving most of their “overvalued” compensation through corporate stock allowances, which places inordinate premium by management to shift corporate largess to the shareholders.
Senator Warren proposes as a remedy, the passage of the Accountable Capitalism Act, which she intends to introduce to the Senate in the near future. She proposes to federalize the corporate charter process by requiring all companies with over one billion dollars in annual earnings to obtain a federal charter, which would require corporate directors to consider the interests of all major corporate stakeholders in company decisions. The bill provides a civil remedy for aggrieved shareholders, but the article does not mention aggrieved employees or other shareholders. This legislation favors the so-called ”benefit corporation” model which extends additional fiduciary obligations to corporations in some states. Other features would require that 40% of directors be elected by employees and a requirement that 75% of directors agree on corporate political contributions. Corporate management would only be issued restricted stock which could not be sold until after 5 years of receipt or within 3 years of a company’s buyback of stock.
Law schools for many years cited Dodge v. The Ford Motor Company(1919), (See the author’s new book,The Four Trials of Henry Ford), for the proposition that corporate directors and officers have a fiduciary duty to maximize the shareholder returns on their investments. In his opinion in the case Justice Ostrander stated:
“A business corporation is organized and carried on primarily for the profit of the shareholders. The powers of the directors are to be employed to that end. The discretion of the directors is to be exercised in the choice of means to attain that end, and does not extend to a change in that end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.”
In fact, Justice Ostrander’s statement was pure dicta and not precedent for the proposition. The Ford Motor Company, at the time, had only 12 employees (Henry Ford was superstitious that 13 shareholders would bring bad luck). The Dodgecase was actually a minority shareholder oppression case in a closely held corporation. The Dodge shareholders complained about Henry Ford’s autocratic behavior, bizarre economic theories and refusal to release dividends to shareholders on about $50,000,000. of retained corporate earnings. Since then, corporate law cases have repeatedly supported the “business judgment” rule, which liberally defers to the judgment of management in managing corporate assets among shareholders, employees, suppliers, customers and the general public as long as it loosely perceived to be in the corporation’s best interest, writ large.
Senator Warren’s proposed bill appears to auger an ironic interface with the “business judgment” rule, which inherently limits the judgment of management and appears to carve up the corporate turkey among shareholders and employees, without much input or concern for the larger public.