A little over a month ago, Sen. Elizabeth Warren, D-Mass., introduced the Accountable Capitalism Act to Congress. The introduction of the bill made tidal waves in the media after she described its purpose in an eye-opening Op-Ed published by the Wall Street Journal.
Warren used the Op-Ed to write about the stark wealth inequality throughout the United States. She claims (rightly so) the private sector has directly caused and perpetuated this inequality by always acting to maximize shareholder returns — an idea made famous by conservative economist Milton Friedman in the 1970s.
This idea that companies exist solely to maximize shareholder returns has had drastic effects on the broader economy. Warren includes in her piece that between 2007 and 2016, U.S. corporations dedicated 93 percent of their earnings to shareholders. This transfer of wealth further exacerbates economic inequity when you consider that the wealthiest 10 percent of U.S. households own the vast majority (84 percent) of American-held shares.
In addition, Warren writes real wages have not realized relative increases since this ideology took hold in the late 20th century. Companies have chosen to dedicate less and less of their earnings to their employees through pay raises — instead choosing to distribute wealth to shareholders in the form of dividends and share buy-backs.
Warren, fed up with this unjust state of affairs, devised a solution. Corporations with more than $1 billion in annual revenue would be required to get a federal corporate charter in addition to having a corporate charter in the state where the entity is incorporated. The new charter would require directors to consider the interests of all major corporate stakeholders when making major strategic decisions. Directors would be allowed to choose alternatives (without fear of litigation) that can potentially destroy value — like choosing to allocate earnings toward expanding employee benefits or toward some philanthropic venture.
She also wants employees to elect at least 40 percent of a company’s directors. This would certainly give employees, a stakeholder group that have been historically marginalized and forgotten, a stronger voice in the decision-making process companies must go through.
Warren’s proposed alterations to the way companies conduct themselves would make them more similar to B Corporations. B Corporations are for-profit companies that are “legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment.” Businesses can act with itheir conscience without fear of repercussions from their shareholders.
One of the most famous B Corporations is Warby Parker, the eyeglass-maker that donates a pair of glasses to those in need with every purchase and maintains carbon-neutral production and distribution activities. Warby Parker’s co-founder Neil Blumenthal told James Surowiecki of The New Yorker, “We wanted to build a business that could make profits. But we also wanted to build a business that did good in the world.” Blumenthal continued, “Your ability to have an impact on a large scale is just greater in the for-profit world, and that’s chiefly because of the capital and the talent available to you.”
Considering Warby Parker’s immense success in the past couple of years, it’s clear that businesses can pursue profit while positively impacting society. As Blumenthal put it, the private sector (as opposed to the public sector) has the capacity and potential to be a force for good in our economy.
As I read through Warren’s Op-Ed and learned more about B Corporations, I couldn’t help but think of “A World of Three Zeros” by Muhammad Yunus — a book that I read this summer. Yunus, like Warren, is concerned with the increasing wealth concentration. He writes on its risk to society as a whole: “(wealth concentration) threatens human progress, social cohesion, human rights, and democracy.” As the wealth gap grows, dissatisfaction among society inevitably deepens.
Yunus agrees with Warren that capitalism — specifically the idea that companies must maximize shareholder value — has led to the wealth disparity experienced throughout the world. He devises a different solution, however.
Yunus proposes entrepreneurs create social businesses — non-dividend companies dedicated to solving human problems. His book discusses the various businesses he’s started that provide goods or services which benefit those most in need. He writes extensively about Grameen Bank, the bank he founded to provide micro loans (loans usually less than $100) to impoverished villagers in Bangladesh.
Social businesses are unique because directors can operate and make strategic decisions without the burden of being required to maximize shareholder wealth. Investors who provide capital to entrepreneurs starting these businesses are able to get back their initial investments (with a given rate of return accounting for the time value of money), but nothing more. Any profits generated by the business are kept within the firm — either given to employees or used to expand the firm’s reach.
Yunus’ social business concept may seem farfetched and radical now, but the idea could (and should) be commonplace in the future. The private sector should be able to produce handsome profits without making the rich richer.
While Warren’s Accountable Capitalism Act is a step in the right direction, I believe the private sector should take more drastic action (ideally on their own) toward remedying the devastating wealth gap in today’s society.
Erik Nesler can be reached at egnesler@umich.edu.