We must hold capitalism accountable. Elizabeth Warren shows how
Earlier this week, Senator Elizabeth Warren introduced a new piece of legislation – the Accountable Capitalism Act – which requires the largest companies in America to get a federal charter that is conditioned on their recognizing their obligations to society. The idea is as simple as the lesson from Spiderman: with great power comes great responsibility. The biggest corporations are extraordinarily powerful, but they often exercise that power in a way that can deepen economic inequality, stack the deck in our politics in favor of the powerful, and undermine the well-being of workers.
The Accountable Capitalism Act addresses these issues. The bill would require corporations with more than $1bn in revenue to apply for a corporate charter from the federal government. To get this charter, the companies would effectively have to become benefit corporations (or b-corps) – companies that recognize that their duties extend beyond maximizing profits for shareholders. In addition, 40% of the board would be elected by employees, top executives would have to hold stock for five years (or three years if there’s a stock buy-back), and three-fourths of the board and shareholders would have to vote before the company used funds for political purposes. These provisions address interlinked problems: companies are too fixated on stock prices, executives frequently try to maximize short-term profits, and workers’ rights and compensation often get the short end of the stick. (Full disclosure: I used to work for Senator Warren.)
‘People across the political spectrum have awoken to the serious reforms that are needed in the corporate world’ Photograph: Cj Gunther/EPA
The idea of granting corporate charters based on meeting certain conditions might seem surprising, but it actually has deep roots in American history. For much of the early American republic, corporations didn’t exist in the form that we now think of them. In the early 19th century, state legislatures issued corporate charters on a case-by-case basis to corporations that demonstrated that the special privilege of a charter was essential to the public good. These charters were issued only for that specific purpose and corporations were barred from expanding the scope of their activities.
Over time, many people worried that legislatures were captured by wealthy and well-connected individuals, and that the special privileges of a charter were not available on fair and equal terms to everyone. Reformers therefore pushed for general incorporation laws, which allowed anyone to start a corporation as long as they organiz ed it according to specified criteria. The result was to unleash more and more corporations into the American economy.
By the Gilded Age, corporations had become some of the most powerful entities in the country. President Rutherford B. Hayes once wrote that America had become “a government by the corporations, of the corporations, and for the corporations.” In response, Gilded Age and Progressive Era reformers adopted a variety of strategies. They passed antitrust laws to break up the biggest conglomerates. They established public utilities regulation for vital infrastructure.
And they also proposed federal chartering of corporations. In some sectors, federal corporate chartering was already in place. The banking sector, for example, has had nationally chartered banks that are supervised and regulated by the Office of the Comptroller of the Currency since the Civil War. The biggest banks in the country are included in this category, and at the same time, they co-exist alongside state-chartered banks.
In 1903, Congress created the Bureau of Corporations, which had power to investigate companies. Some people wanted to require corporations operating across state lines to get a license from the Bureau. In his 1908 annual message to Congress (what we would call the State of the Union), Theodore Roosevelt went even further and called for the “full power of control and supervision” over combinations, in addition to federal regulation of corporations – extending from account keeping to monitoring their issuance of securities. (If you want to read more about this history, check out my book, The Crisis of the Middle-Class Constitution.)
Of course, federal chartering of all corporations didn’t happen. And because general incorporation laws were passed at the state level rather than the federal level, states eventually began to compete for corporate charters (and the fees that came with them). The result was a race to the bottom, in which states offered less and less restrictive charters. Today, that race leads to Delaware, where two-thirds of the Fortune 500 are incorporated, in addition to some 1.2m other companies. So we now have a system of state-chartering in most sectors – and with it, low expectations for corporate governance.
But in recent years, people across the political spectrum have awoken to the need for serious reforms in the corporate world. Many have discussed the importance of reviving antitrust enforcement and breaking up the biggest companies. Some have proposed revitalizing the principles of public utility law in order to regulate technology platforms. The Accountable Capitalism Act takes a bold step forward by recognizing that corporate governance also matters – and that corporate charters are a way to ensure that some of the most powerful entities in the country act responsibly.
Ganesh Sitaraman is a Guardian US columnist. He is the author of The Crisis of the Middle-Class Constitution