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Elizabeth Warren, Corporate Bully
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 goodwill, 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 arise 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.
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.
© 2019 by the Board of Trustees of Leland Stanford Junior University
Published in Economics, Law, Politics
I’ve been wondering this for years. QE/cheap money has been going on in one form or another for a decade. I assumed we’d feel the results in inflation once the economy started back up (maybe after 2010 or so), and while we’ve recovered, extremely slowly, the inflation hasn’t been rampant.
I assume it’s still out there, waiting for us. But it might just be in devalued currency.
Warren doesn’t get this far into the weeds, she doesn’t need to, and can’t explain it (hell, I barely have a toenail grasp of this stuff). But she knows populism sells, so she tailors her message to the people she wants votes from, and acts the part onstage. Easy. I can yell and pound a podium, too, I’m just yelling at other, more stupid, people.
Because of the wage deflation and job destruction of automation and globalized labor, the central bank easy money is mostly going into real estate, equities, bonds, and collectibles. It isn’t making anything better. Also the aging of the West is deflationary.
He’s been CEO for a relatively brief time. The MAX 8 was designed before he was in charge. Prior to that the company was run by James McNerney, a former brand manager at P&G and a McKinsey man. He was also at GE under Jack Welsh, a man so dedicated to making the books look better than the business that he basically doomed the once great conglomerate to the pathetic husk it is today. Before him was Harry Stonecipher who’s claim to fame was running McDonald Douglas…poorly. He only took over because the guy before him got caught in a bunch of government procurement scandals.
McNerney is mostly to blame for the way Boeing is today. He messed with the old processes that had worked for decades because his goal was to do what McKinsey men do, namely ring out every last bit of juice from the pulp, no matter what.
Although he’s done things things the legit way in a free society so far–and he really should stress that–he’s popped off mindlessly and menacingly about how businesses should conduct themselves more than once (Ford, the Carrier division of United Technologies, Harley-Davidson come to mind). In the case of AT&T, it certainly looks like he got DOJ to pursue a frivolous antitrust action because he doesn’t freaking like CNN–although it might’ve just been the natural unprovoked tendency of antitrust lawyers towards the asinine. I’m suspicious that the only thing he doesn’t share deep down with Senator Warren is the ability to do the “stakeholder/shareholder” sleight of hand. Or see the need to. Gonna make a contrast difficult. Note also the recent rise of Economic Patriotism charlatans on the Right. Same song as EW.
There are a lot of cases, though, where the buyback is the right thing to do, if company cash flow can support it. Think of a bank or a shipping company selling at a discount to tangible book. If your company is undervalued (judgement call, always) and your cash flow is steady, it’s a reasonable way to return capital, given the current tax code. As for managers and their stock options, it’s probably better to think of it as a move that benefits (or screws) all shareholders. The shareholder’s ownership stake in the enterprise increases, even in cases where that’s just plain ill-advised.
Depends what you mean by ‘designed’. In my view, the key decisions that led to the crashes were the decisions to (1) activate MCAS based on a single sensor, (2) repetitively keep trying to activate it, (3) fail to properly document the MCAS functions in the pilot documentation. I don’t know what the timeline of these decisions was, but they are all things that could have been changed without aerodynamic or mechanical changes to the airplane, and they are things that could have been changed under Muilenberg’s watch, if they had indeed already been decided.
Certainly a good point. But I would argue (not too strenuously, but argue nonetheless) that the trouble with the MAX 8 started when Southwest pushed Boeing to keep the redesign within the parameters of the old, existing certification that their (Southwest’s) pilots had all gotten for the 737. If the FAA had required a new certification—because the function of the plane was materially different from the existing platform—then Southwest would have to spend a fortune to get their people certified. So the MCAS system, despite being different enough to warrant some serious new training, was not sold as the new thing that it was but rather a buildout and improvement of what was already in service. That was a dubious claim from the word go. The whole disaster was avoidable.
I don’t think that Boeing believed the plane was unsafe. I don’t assign malicious intent to anyone there. I hate when people (usually anti-corporate Leftists) do that No, they don’t want to kill people with their planes. But they didn’t exactly cover themselves in glory, either. And I think the root of that was the desire to squeeze what they could from the product line. It’s not like they forgot how to engineer a safe airplane. But the financial decisions lead to the miscommunications and sometimes outright ignoring of the input from engineers because, frankly, listening to engineers is expensive. They don’t inhabit the same world as the money guys. Boeing failed because they could no longer reconcile the needs of the engineers and the needs of the accountants.
I’d add that “engineers” and “money guys” are not two separate species of humans. If an engineer is running a company, or a business within a company, he needs to be concerned about profitability. If a finance or marketing person is running a company/business, he had better develop a grasp of the key technology issues at some point.
It is not possible to ignore financial matters when making product decisions, and this is as true in a socialist economy as a capitalist one (possibly with some other metrics like “person-hours” standing in for money)
Back when I was a member of DECUS (Digital Equipment Corporation User Group) there was a policy against discussing price. Presenters and Q&A participants were supposed to talk about technology, not prices. I thought that a bit bizarre at first, and more so the more the industry matured. How was I supposed to know if a new technology was relevant to us without knowing about costs?
Peter Drucker wrote about Ford, in the days when Henry Ford was so secretive that the foundry manager was not allowed to know the price of the coal his furnaces were burning…purchase contracts were “top secret.”
This sounds like the same mentality at DECUS…may have been based on antitrust concerns, but a better response would have been to ensure that participants were given a little information about antitrust law.
WRONG
she got into harvard with her fake heritage
she does believe her own lies.
she is not smart and well educated.
if she were smart and well educated, she wouldn’t have to lie about her heritage.
She thought telling America that she is 1/64 native american (not even cherokee) would prove her right.
only an idiot would think that
excellent podcast by richard epstein, one of his best.
in the general election 2 things will hurt her:
richard epstein said it best: her intellectual arrogance combined with her ignorance of how markets work and how nations build wealth will expose her weaknesses.
as amy klobuchar said in the last debate, there is a difference between plan and a pipedream
also i love how bondholders are not stake holders while the ‘community’ is
The difference is that you can get the country to adopt a pipedream, but not a plan.
The very nature of a lie is to know the truth and speak a falsehood. This is the primary MO of the Left to gain power — intelligent people tell lies that appeal to base human nature. To believe otherwise is to underestimate their maliciousness.