By Samuel Hammond
Monday, August 20, 2018
The ability of businesses to grow rapidly is a one of the
most defining and precious features of the American economy. Amazon went from a
fledgling online bookstore to an “everything store” and the second-largest
employer in the United States in just two decades. Uber emerged from nowhere
less than ten years ago to become a dominant transportation option in cities
around the world. And earlier this month, Apple became the first U.S. public
corporation to reach a $1 trillion valuation — a far cry from its sorry state in
1996, when it looked doomed to fail.
It’s not just the information sector. The United States
is home to 64 percent of the world’s billion-dollar privately held companies
and a plurality of the world’s billion-dollar startups. Known in the industry
as “unicorns,” they cover industries ranging from aerospace to biotechnology,
and they are the reason America remains the engine of innovation for the entire
world.
Unless Elizabeth Warren gets her way. In a bill unveiled
this week, the Massachusetts senator has put forward a proposal that threatens
to force America’s unicorns into a corral and domesticate the American economy
indefinitely.
Dubbed the “Accountable Capitalism Act,” Warren foresees
the creation of an Office of United States Corporations that would require any
company with revenue over $1 billion to obtain a federal charter, binding
company directors to “consider the interests of all corporate stakeholders —
including employees, customers, shareholders, and the communities in which the
company operates.” The bill further requires 40 percent of a chartered
company’s directors to be selected by employees and adds statutory restrictions
on how executive compensation may be structured.
As motivation, Warren cites stagnant median wages and the
declining labor share of income. Yet to call this bill a non-sequitur doesn’t
quite do it justice. Changes in labor share, such that they exist, are almost
completely explained by rising real-estate prices (which appear in the
statistics as capital income). Stagnant wages, meanwhile, are largely the result
of a secular decline in economy-wide productivity — a force that the country’s
biggest, most productive firms are actively fighting against. Indeed, as
Michael Lind and Robert Atkinson note in their recent book Big Is Beautiful, productivity growth in any era tends to be driven
by a handful of highly innovative frontier companies at one end of the size
distribution. Workers in large firms, for instance, earn on average 54 percent
more than their small-business counterparts. This helps to explain why regulations
that distort the size distribution of firms can have such a big impact on a
nation’s aggregate productivity.
Increasing productivity growth is a hard problem.
Vilifying America’s mega-corporations, in contrast, is easy. Warren’s proposal,
by channeling the very real malaise of much of America’s working class into a
campaign against her favored scapegoats, thus has all the hallmarks of populism
at its most Trumpian.
***
When I met with representatives from the Konrad Adenauer
Foundation, the internal “think tank” for Germany’s center-right Christian
Democratic Union, in Berlin earlier this year, understanding their deficit of
high-growth firms was at the top of the agenda. Germany, they noted, had failed
to become a dominant player in tech, producing just five billion-dollar
technology companies in the last decade. Instead, Europe’s largest economy is
dominated by old behemoths such as Volkswagen and an abundance of specialized,
thoroughly unscalable “small and medium” firms known as Mittelstand.
A central problem, I argued, was hiding right in their
name: Konrad Adenauer. The first chancellor of Germany after World War II,
Adenauer is revered for having instituted the “social-market” model that led to
West Germany’s post-war economic miracle. The model secured the shaky political
order by balancing pro-market reforms with social welfare and worker
representation that, following Catholic teaching on subsidiarity, was largely
instituted at the level of the firm. These are the roots of Germany’s contemporary
“worker councils,” which provide a conduit for employee input into firm
decision making, and its “co-determination” system, the inspiration for
Warren’s proposal to force large firms to share their board of directors with
labor.
While co-determination is not without its strengths —
Germany is still a rich, productive country — it fails as a model for creating
new, fast-growing companies. When Steve Jobs took over Apple in 1996, for
instance, he famously forced the resignation of most of its board of directors,
installing close friends who would be loyal to his vision. He then proceeded to
lay off 3,000 workers and shuttered a number of the company’s biggest
boondoggles. This earned him a reputation for ruthlessness, but it also set
Apple on the path to become America’s first trillion-dollar company. It’s
simply impossible to imagine Jobs’s unilateral vision succeeding in an
environment of constant stakeholder management and worker negotiation.
Consider the trend in recent years of private companies’
delaying, or even reversing, the decision to go public. With bigger pools of
capital come additional compliance burdens and a degree of backseat-driving by
shareholders and the broader public that can drive a CEO insane.
Co-determination laws, to the extent that they simply add bureaucracy for
public and private companies alike, could diminish whatever competitive edge
remains to staying private.
***
This is not to say there’s no need for reform in
America’s system of corporate governance. But before proposing a cure it’s
essential to get the correct diagnosis. In his lengthy defense of Warren’s
proposal, Vox’s Matt Yglesias argues
the disease infecting shareholder capitalism is its embodiment of the view,
made famous by economist Milton Friedman, that the only social responsibility
of business is to increase profit.
Yet, notwithstanding Gordon Gekko’s exaltations about the
goodness of greed, the “requirement” for corporations to maximize shareholder
value is virtually
nonexistent outside of a few specific circumstances. In practice, corporate
boards don’t have a fiduciary duty to do much of anything in particular,
outside of the standard prescriptions of common law. As an acquaintance who’s
spent decades working in large, publicly traded companies put it to me, “I
often don’t know what does motivate
corporate decisions, but I can assure you it’s not that.”
Milton Friedman was simply wrong, descriptively and prescriptively. That does not mean,
however, that Warren and Yglesias’s alternative theory of corporate social
responsibility — what philosophers call “stakeholders theory” — is a good idea.
As the influential business ethicist Kenneth Goodpaster once observed, simply
multiplying the number of stakeholders
blurs traditional goals in terms of
entrepreneurial risk-taking, pushes decision-making towards paralysis because
of the dilemmas posed by divided loyalties and, in the final analysis,
represents nothing less than the conversion of the modern private corporation
into a public institution.
This raises the question of why we have private
corporations in the first place. Ever since the late Ronald Coase published his
famous theory of the firm, economists have tended to argue for a view grounded
in public policy. Namely, shareholder corporations dominate modern economies
because they are, as a nexus of contracts, much more efficient at pooling capital and directing resources than any
competing organizational form. Thus the normative foundation of corporate law
is not any subset of stakeholders, but the welfare of society as a whole.
Business ethicist John Boatright makes the point a bit
differently, noting that through bargaining, “any constituency or stakeholder
group could conceivably make its interests the objective of the firm and the
end of management’s fiduciary duty.” The fact that shareholders tend to bargain
hardest for formal control simply stems from their greater exposure to losses
as residual claimants.
Enforcing co-determination rules doesn’t change this
fact. On the contrary, when scandal struck Volkswagen in 2005, the blame was
laid squarely at co-determination’s feet. Members of Volkswagen’s supervisory
board, widely seen as an “old-boys network” in its own right, were caught
exchanging favors, including access to prostitutes, in exchange for
union-member votes. It turns out Coase’s theory drives a hard bargain.
***
As the Democratic party debates whether or not to embrace
“democratic socialism,” Warren, to her credit, claims she’s “a capitalist to my
bones.” Yet the fact remains that the Accountable Capitalism Act is in many
ways the most radical proposal advanced by a mainstream Democratic lawmaker to
date. Not because Germany is a socialist dystopia, but because, unlike
universal health care or increased spending on the poor, Warren’s proposal is
to fundamentally upend the way the most productive companies in the American
economy work from the top down.
Forget “If you like your doctor, you can keep your
doctor.” Warren’s plan will have you asking if you can keep your retirement
savings. As Yglesias notes in his piece, co-determination could cause average
share prices to plummet by as much as 25 percent. But don’t worry, says
Yglesias: “Cheaper stock would be offset by higher pay and more rights at
work.”
Maybe. Or maybe, after the dust settles, we would find
ourselves in a new, lower equilibrium — one with less inequality, perhaps, but
even lower productivity, as America’s corporate unicorns are converted into
glitter glue.
A wise person once said that a model based on preventing
the worst-case scenario risks stopping the best-case scenario from ever coming
about. The American system, whatever its flaws, is exceptional in its openness
to visionaries. Warren’s plan, based on bad economics and worse business
ethics, is nothing short of a plan to hold those with vision to account.
No comments:
Post a Comment