Why ask these questions? Usually it has something to do with the earnestness of someone commenting on an issue. If you have no real connection to the issue, then maybe your opinion is not as important as those of others more directly involved.
“Let’s raise lip stick prices by 100% tomorrow”, said Peter. Diane, who actually wears lipstick disagreed. If Peter has no lipstick and no real connection to lipstick, we might want to put more stock into Diane’s opinion on this matter. Of course if the topic changes to jockey shorts, then the situation might be reversed. Peter is a known jockey shorts wearer.
Presidential candidate Elizabeth Warren recently introduced the Accountable Capitalism Act. If passed it would affect all companies with more than a $1 billion in annual sales. All those companies would have to obtain a new Federal Charter. CEOs and directors would have to serve stockholders and the workforce, its customers, the local and global environment, and community and societal factors.
This is newsworthy for several reasons. First, it makes explicit that companies can no longer be solely focused on stockholders. Second, it makes explicit who all the stakeholders are. Third, it expands the scope of government as it relates to regulating business by creating a very complicated and unspecified (ie risky) responsibility for CEOs and company directors.
Let’s take the explicit part first. Please tell me how a billion dollar company can ignore any one or more of these mentioned stakeholder groups. I cannot imagine a director’s meeting where the agenda did not include issues relating to the employees, the local community, social responsibility, and so on. The issue is not so much whether companies do this sort of thing – because they do.
The issue here is to shift the responsibility for running the business from the CEOs and directors and into the hands of workers, union leaders, community representatives, and perhaps members of the Greenpeace Fund. Yes, when it comes to pricing milk in March and deciding on where to buy other productive inputs, Elizabeth Warren believes we need a conglomeration of these people to vote and make the decisions. It is not enough that federal and local government entities regulate many aspects of business (health, safety, hiring, firing, etc), we now need, according to a broad committee, to make sure directors do the best thing for everyone.
And what is the best thing for everyone? And who is everyone? Should local City Council members be on each board? Should United Way officials help companies vote on safety policies? Maybe the local Boys and Girls Club should be represented as well. What expertise do these and other stakeholders have when it comes to objectively judge the impacts of the myriad business decisions made by CEOs and boards?
These questions are not meant to be my usual silliness – but rather to focus on the main issue here. The main issue has to do with how you choose or regulate who is on the board and who is off. When it was only stockholders interests, making decisions was easy. Stockholders are the reason the corporation exists. Think about the origins of corporations. A simple view is that someone decided they had a great idea that would sell. Today all sorts of people are sitting behind their computers trying to develop the next best Internet Application. At some point they need money to keep their efforts going. Just because they have brains and energy does not mean they also have enough money to fund their development process.
These entrepreneurs raise the money from people who want to invest in projects that will give them great returns. Most of us don’t want to take that kind of risk. Even when companies make it and are more mature, many of us worry that buying company stock is too risky for us. We put the money instead into government bonds that offer less risk. Luckily for those entrepreneurs there are people willing to take that risk.
I am not trying to romanticize capital, but I am trying to point out that companies come into existence and stay that way because there are people who don’t mind having skin in the game. Without those people, you can have the greatest ideas and the best employees – but you don’t make it.
Point – stockholders have skin in the game and thus are important contributors to the existence and life of a corporation. Compare that contribution to that made by any of the other stakeholders mentioned by Warren. Clearly the City Council loses but loses a lot less than the stockholders when the company has a bad year. What about the workforce? I think the answer there is more complicated. Employees are clearly critical. While employees are not always stockholders, they stand to lose a lot if the company has a very bad year. They might get laid off or fired. They might not get a raise. These are not insignificant amounts of employee skin.
In the worst case of a company going out of business, the employees differ in one fundamental way from stockholders. First, an employee’s loss might be looked at in terms of a month or more of unemployment. Some of that loss might be cushioned by unemployment insurance. Most employees will find new jobs. But when the value of the stock plummets and stays low – the stockholder loses the sum. The stock value does not return by buying into another company. The loss of investment is permanent.
This in no way minimizes the losses employees suffer -- but it does point out a difference between temporary and permanent losses.
I am not sure of all the specifics related to Warren’s proposed policy. Clearly companies make mistakes. Clearly companies impact workers, schools, children, the environment, and many other things. But running a company is not for everyone. Running a company is not for political ideology. Running a company means being successful and not going out of business. Typically, when a company is run well it must treat its employees well and it must attend to the very many modern regulations and social responsibilities. If it ignores these stakeholders it does it at its own peril.
I am not convinced that getting government into the game of day to day management is the best way to help all these stakeholders. Hopefully Candidate Warren will convince us of why these new broad corporate committees will be better for any of us.