Elizabeth Warren, Corporate Bully

Monday, October 14, 2019
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The fast-shifting winds of American politics have increased the odds that Senator Elizabeth Warren of Massachusetts will be the next Democratic nominee for President of the United States. Joe Biden has been lackluster at best, and his potential conflicts of interest arising from his son’s dealings in both Ukraine and China may well derail his candidacy even before the primary season begins. Bernie Sanders’s heart attack will likely scare voters, and the rest of the pack—Kamala Harris, Pete Buttigieg, Beto O’Rourke, Amy Klobuchar—have failed to connect with the public.

The bad news is that a Warren presidency would be one of the most terrifying prospects ever to hit the American system. Long on confidence but short on judgment, Warren uses her fake professorial air to support proposals that are so dangerous to the nation’s economic welfare that even potential Democratic Wall Street backers are now shying away from her candidacy.

The most recent illustration of her destructive behavior is found in her October 3 letter to Jamie Diamond of JP Morgan Chase, which demands that he follow through on the Statement on the Purpose of a Corporation that the Business Roundtable (“BR”) published to mixed reaction during the summer. The BR blundered by arguing that every corporation should be committed to delivering value to all of its stakeholders. The dodgy term “committed” blurs the line between legal obligation and business relations. As Milton Friedman argued long ago, the only stakeholders in a corporation with legal entitlements are its shareholders.

What the BR should have said was that a corporation can only provide value for its shareholders by making deals that secure cooperation from its trading partners. Whether one speaks about customers, suppliers, employees, or communities, the simple truth is that these people will desert any corporation that demands more from them than they receive in exchange. Business relationships are only stable over time if they produce win/win outcomes. Corporate good will, often valued in the billions, reflects that simple truth, for it shrinks markedly when any of these relationships falter.

Warren’s stakeholder model does not rely on arm’s length transactions as the source of mutual gains. Instead, when putting forward her Accountable Capitalism Act (ACA, an acronym it shares with the equally misleadingly-named Affordable Care Act), she demands corporations assume a fiduciary-like duty of loyalty and care to their other stakeholders.

But that model cannot work. Fiduciary duties arise with public corporations because of the separation of management control from ownership. Shareholders, who often seek to diversify their portfolios, cannot watch every move made by their corporate managers. Hence the law seeks to offset that informational asymmetry by imposing on managers a duty of care and loyalty, which exposes the insiders to litigation if they seek to line their own pockets at the expense of their shareholders. The reason this system works is that all common shareholders stand in the same legal and economic position vis-à-vis corporate insiders, so that no conflicts of interest arises by putting corporate directors and officers in the hopeless position of having to play one stakeholder group off against another.

Those conflicts of interest arise in spades once the corporate officers and directors are said to owe fiduciary duties to parties whose interests are adverse to those of shareholders. Yet these other groups do not suffer from any separation of ownership and control and thus are well able to protect themselves in arm’s length negotiations. Warren misses this bargaining dynamic entirely, and instead wrongly argues in her letter that corporations have harmed these other interests in order to “boost” share prices, like, in 2015, when they paid “$1 trillion back to investors in the form of buybacks and dividends, even as wages and other investments stayed flat or decreased.”

It is hard to compress so much silliness into a single sentence. That distribution of $1 trillion in dividends and buybacks does not take wealth out of the economy. It only transfers it from corporations that may not have an ideal use for it to shareholders who could make better use of that wealth in other investments. Those cash distributions are not spent in an orgy of consumption. They often are used to form start-ups that promise higher rates of return, which in turn leads to more jobs.

There is, in short, no economic connection between wage stability in 2015 and the use of corporate buybacks and dividends in that same year. The simple explanation for the economic wage stagnation of the late Obama years was the administration’s heavy-handed labor regulations that made it too expensive for firms to hire additional workers. That effect was especially large for lower income workers, given that the cost of compliance constitutes a larger fraction of the wages for these workers than it does for upper income workers who are not snared by minimum wage or overtime regulations.

Notably, Warren could not have written that same sentence if she looked at both buybacks and wage increases for 2018, where, as the White House boasts, the largest wage increases have come at the bottom end of the income spectrum. Why? Because easing labor market restrictions has allowed the laws of supply and demand to work their magic. As demand surges, wages will rise—wholly without any prodding from Warren.

She offers, moreover, no evidence whatsoever for the proposition that firm wealth increases “while these companies refused to invest in [their workers.]” The point is sheer madness. Virtually all workers need some training to do their jobs well. Workers routinely receive on-the-job training or tuition support for advanced degrees from their employers.

No one should argue that the current state of the economy is perfect—for example, some forms of labor market regulations have increased, such as state increases in the minimum wage laws. But the Warren proposals will quickly and decisively reverse the ongoing positive trend.

Notwithstanding her flimsy indictment, Warren tries to jam the BR’s stakeholder language down Dimon’s throat by demanding that he take “tangible action that provides real benefits to workers and other stakeholders,” and then report back to her by October 25 the concrete steps that JP Morgan Chase is taking to achieve the targets that she has set out for them. It is a taste of the future: If the ACA becomes law, Warren’s demands will no longer be those of an errant Senator, but the commands of the federal government.

In order to achieve this degree of government domination, Warren treats as self-evident two propositions. First, all “very large” corporations—read $1 billion or more in annual revenue—will require a federal charter. That one proposal will end the competition among states for corporate charters and will impose a one-size-fits all set of controls on all major corporations in the United States. Moreover, the ability to issue charters under the ACA will allow the federal government to attach conditions to their issuance, which could require that these companies meet various targets for diversity hiring, climate change, community investment, and so on. Which of the great American corporations created in the past 50 years could have run that gauntlet?

Thus, the federal government would have the power to revoke a charter for some undefined class of illegal activities. Even if it does not exercise that ultimate sanction, it could still subject the senior officers of these corporations to civil or criminal fines, and even put the firms into receivership for their supposed sins. Judicial recourse could be possible, but only at high cost, leaving firms in limbo until those issues are sorted out.

Warren thinks that her proposal is “consistent with” Chase’s support of the BR statement. Dimon should disabuse her of that assumption by noting that state domination is not the road to national prosperity. To meet her October 25 deadline, he need only send her a copy of his “Dear Fellow Shareholders”—not Stakeholders—letter, which shows that he can run his own business without her assistance.

The Warren proposal also demands that 40 percent of any board of directors be composed of worker representatives. For these purposes, we have no idea who counts as a worker, how these workers are to be chosen, how long they will serve, or how they will be compensated. Nor is it clear whether these board members will be required to keep in confidence information that they receive in the course of their official duties, or whether they will, given their dual loyalties, be allowed, or perhaps even required, to share that information with the parties whom they represent.

None of this matters to Warren, who has neither theoretical understanding or practical experience of corporate culture.  Yet she is prepared to remake corporations from top to bottom, in total ignorance of their vast contribution to human happiness and welfare.


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