Are You an Accountable Capitalist?

October 11, 2019 · by · in

You may get this question in some future due diligence session from an investor, an investment banker working on your IPO or a potential acquirer. If the Accountable Capitalism Act proposed by Senator Warren becomes law, it will become a basic compliance checkpoint for all of us.

As proposed, the law only affects companies with over $1 billion in revenue but we all know about the migration of new regulations. I can remember when the Alternative Minimum Tax applied only to the fabulously well to do.

In the evolution of Adam Smith’s free market capitalism, corporate leaders came to understand that the road to maximizing shareholder value required the continuing satisfaction of several diverse constituencies. These groups included customers, employees, suppliers, their communities, as well as, various other government regulatory bodies. Using Smith’s iconic symbolism, there were many invisible hands (and several quite visible hands) participating in this evolved free market.

Those able to manage in this environment enjoyed great success over long periods of time. Their risk-taker shareholders were rewarded handsomely as a result. Those that abused customers, employees, suppliers or ignored regulators were ultimately doomed to failure at which point Schumpeter’s creative destruction would take over. Others would redeploy the resources of the doomed company in more useful or productive ways.

In executing on their fiduciary duty to shareholders, participants in this system produced a massive social benefit over the past centuries. China’s very modest move towards free market capitalism lifted more people out of poverty than all of the humanitarian aid programs combined over the last 60 years.

Despite that success or perhaps because of it, we now have a proposal that takes this market driven corporate governance and puts it under government control. Senate Bill S.3348, the Accountable Capitalism Act, would require all companies with revenue in excess of $1 billion to present their credentials to the federal government and obtain a charter to operate.

The charter would require that corporations pursue or create a “general public benefit”. “General public benefit (GPB) means a material positive impact on society resulting from the business and operations of a United States corporation, when taken as a whole.” Neither customers, nor suppliers, nor shareholders, nor employees, would make the assessment of GPB. Rather, politicians appointed to the Office of United States Corporations would make the GPB compliance assessment.

To obtain a charter, the corporation would detail the groups they intend to benefit and the activities they will engage in to produce that benefit. A charter could be revoked for any company not producing sufficient GPB. Revocation would mean the loss of limited liability status putting the net worth of every officer and shareholder at risk.

If the term General Public Benefit seems a little vague to you, well, that is by design. It allows the Office of U.S. Corporations great latitude in directing the activities of these corporations through the charter-granting process.

The bill contains other specific requirements. For example, shareholder interests would be subordinated at the board level by granting 40% of the votes to employees. Political contributions would be effectively prohibited, as they would require a 75% approval by the shareholders and the board.

It is important to recognize that this is not a new idea.

During the crisis of the depression in the 1930s, governments in Europe sought to ensure that their economies, although based on private property, were also focused on service to the state. Germany and Italy were the strongest adherents to this concept. The U.S. also pursued this model to some extent, taking control over even the smallest economic decisions. The consummate example is the 3-month jail sentence for a New Jersey man who charged 35 cents to press a suit instead of the 40 cents mandated by the National Recovery Act.

These economic structures subsidized favored companies and, in exchange, gained a direct influence over the activities of those companies. It was crony capitalism on steroids. One of the reasons the U.S. was so slow to recover from the depression was this shift to a centrally planned economy.

Senator Warren is not shy about describing her eventual role in commanding the economy. She recently wrote to the Business Round Table, “I expect that you will endorse and wholeheartedly support the reforms laid out in the Accountable Capitalism Act to meet the principles you endorse. I have attached a copy of the bill.” The implied threat could not have been better expressed by Mussolini, himself.

Fortunately, we don’t need to dig into history to see how this would affect individual corporations. We have two excellent examples of Accountable Capitalism: government-sponsored entities Fannie Mae and Freddie Mac. As the federally favored mortgage guarantee providers, they came to dominate their markets. As a side benefit, they also provided numerous comfortable sinecures for out of work politicians. Finally, their ultimate contribution to General Public Benefit came in the form mortgage guarantees and sub-prime loans.

There is another unfortunate aspect to these government sponsored entities. Like the public schools, the VA hospitals or the old Soviet shoe factories, they never go out of business no matter how bad the performance. There will be no creative destruction and renewal.

Today, the government is puzzling over how to move Fannie and Freddy out of government conservatorship. This bi-partisan effort recognizes that the government should not be running 50% of the mortgage market with the attendant risk of loss to taxpayers. Yet, the hurdles to privatization are so many, so complex and so politically charged that we expect nothing can be done.

Therein lies the irony.

Just as the government is struggling to plot a path to privatization to solve the lingering problem of these two U.S. chartered corporations, Senate Bill S.3348 would create hundreds more.