We have been working on this important topic for our upcoming month end client letter, and yesterday Senator Elizabeth Warren threw down the gauntlet in a Wall Street Journal op-ed proposing an Accountable Capitalism Act requiring corporations with $1 billion+ in annual revenue to operate under a federal charter where their directors must consider the interests of all major stakeholders—not only shareholders—in decisions. Shareholders could sue if they believed directors weren’t fulfilling those obligations, and employees would elect 40% of corporate board members, see Companies shouldn’t be accountable only to shareholders.
These measures seek to turn corporations back from the current myopic preoccupation with short-term financial gimmicks to a pre-1982 style focus on balance sheet strength and long term investment, while balancing the interests of multiple stakeholders including employees, lenders and public health. Warren’s article offers a good factual summary of some key points:
- As recently as 1981, the Business Roundtable stated that corporations “have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.”
- Late in the 20th century, the economist Milton Friedman posited a new theory that corporate directors had only one obligation: to maximize shareholder returns.
- By 1997 the Business Roundtable declared that the “principal objective of a business enterprise is to generate economic returns to its owners.”
- In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other investments. Between 2007 and 2016, large American companies dedicated 93% of their earnings to shareholders. The wealthiest 10% of U.S. households own 84% of American-held shares.
- In the 40 years after World War II, shareholders on net contributed more than $250 billion to U.S. companies, since 1985 they have extracted almost $7 trillion.
- Before 1980, top CEOs were rarely compensated in equity. Today it accounts for 62% of their pay with incentives focusing on short-term share-price increases.
- The average CEO of a big company now makes a record 361x what the average worker makes, up from 42x in 1980.
It is clear that current policies are self-destructive–not only of social stability, our economy and natural resources, but also for the longevity and financial strength of corporations themselves. Change is inevitable, because the current approach is self-defeating.
All of this should be a warning for those holding corporate shares at record high valuations of heavily ‘financialized’ reported profits. Price to earnings multiplies that are egregious now will look insane once share buybacks slow and organic growth rates move down toward historical norms–and they will.
