United States: Senator Warren Introduces Bill To Require That Large Companies Create A General Public Benefit

Last Updated: August 30 2018
Article by Steven D. Lofchie

Most Read Contributor in United States, August 2018

Senator Elizabeth E. Warren (D-MA) introduced a bill intended to get rid of "skewed market incentives" and force corporations to be more accountable to employees and other stakeholders. According to Senator Warren, the bill would "reverse the harmful trends over the last thirty years that have led to record corporate profits and rising worker productivity but stagnant wages."

The bill would, among other things:

  • establish the "Office of United States Corporation" within the U.S. Department of Commerce; the President of the United States would, with the consent of the Senate, appoint a single Director of the Office, who would serve a four-year term unless removed by the President;
  • require a legal entity, organized under the laws of any state, with more than $1 billion in annual gross receipts (a "large entity") to obtain a federal corporate charter; and
  • require a company's directors to (i) direct the business of a large entity to "create a general public benefit" and (ii) balance the money interests of shareholders with "the best interests of persons that are materially affected" by the large entity.

The bill would require that at least 40 percent of the directors of the large entities be elected by its employees using a process to be mandated by the SEC, and monitored by the SEC and the Department of Labor. The bill also would:

  • prohibit the sales of company shares by directors and officers of U.S. corporations within five years of receiving the shares or within three years of a company stock buyback; and
  • prohibit a wide variety of political expenditures by a large entity unless the expenditure is pre-approved by "not less than 75 percent of the shareholders of the corporation" and not less than 75 percent of the directors of the corporation, which approval is possible after only each has been informed of the "precise nature" of the proposed expenditure.

The bill would authorize the attorney general of any state to file a petition to revoke the charter of the large entity, if the attorney general believes that the entity has engaged in "repeated, egregious and illegal misconduct that has caused significant harm" to the large entity's customers, employees, shareholders or business partners, or to the communities in which the entity operates. The Director of the Office would determine whether to grant the revocation order.

Commentary / Steven Lofchie

Though this bill is more a political statement than a serious effort at legislating, it is worthy of some examination as it embraces concepts and sets up structures that would pose a real danger to the economy.

First, the bill is fundamentally inconsistent with the operation of a free society, where individual persons and businesses decide how to spend their money, time and effort, so long as the activity itself is legal. Senator Warren would replace this standard by an amorphous notion of "the public good." (Are cars good? Fossil fuels? Legalized marijuana? State or privately sponsored gambling? Professional football? Reality TV shows? Fashion magazines? Fast foods? Meat? Fish? Pesticides? Contributions to the NRA? Contributions to public television?) Under the bill, 2% of the company's shareholders can bring a derivative action asserting that the company is not acting in the public good. What is the standard of goodness? (The bill is weirdly silent on what seems to be a rather important matter.)

Second, the bill would be financially devastating to the United States, as entities would do everything possible to avoid becoming subject to it, including establishing themselves outside the United States or moving away. Further, it would discourage large entities from establishing operations in new states or in new communities, as they would now become subject to uncertain obligations in that state or community.

Third, the bill would subject large U.S. corporations to unknown obligations to non-U.S. employees, suppliers, and business partners. Under the bill, Apple might be required to operate in a way that is in the "best interests" of its Chinese suppliers and business partners, as well as the Chinese communities in which it operates. Would Chinese employees of Apple participate in the vote for Apple's directors?

Fourth, the framework presents a litigation and practical nightmare. What happens if one of the attorneys general decides to go after a major corporation or financial institution that has committed a crime? Is the Director of the Office going to put the company out of business, throwing thousands of people out of work? How much power does this place in the hands of the Director. Is that a power that Senator Warren would want to give to President Trump? Or that supporters of President Trump would want to give Senator Warren, if she were to run for President and be elected?

Senator Warren points out that companies such as "Patagonia, Danone North America, and Kickstarter have embraced [a similar approach] with strong results." Kickstarter is a start-up e-commerce company that, according to its website, is controlled by its founder and has 140 employees (no information on how many of them are part time). That is not a compelling model for remaking the entire U.S. economy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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