Her rationale: Corporate managers used to believe they had a responsibility to balance the pursuit of shareholder value with the public good, but that changed in the 1980s, when corporations embraced economist Milton Friedman’s doctrine that the only “social responsibility of business is to increase its profits.”
The 1980s roots of that “greed is good philosophy” makes it easy to pin current economic problems on the party of Ronald Reagan. But the bull markets and fiscal scandals of the decade were simply the last chapter in a longer historical process, one in which the state gave up its role in defining the rights and responsibilities of business a century earlier, enabling the greed is good philosophy to blossom when the culture in business changed.
During the 1890s and 1900s, state legislatures in places like New Jersey and Delaware worked to improve their economies and increase tax revenue by encouraging big corporations to relocate. Their weapon of choice: a newly permissive type of corporate charter. Practices traditionally banned by charters were now allowed, including the freedom to do business wherever the company pleased, the ability to merge with other companies in the same industry and the flexibility to operate with considerable autonomy from shareholders. The introduction of these charters launched a “race to the bottom” in which states rushed to outdo one another to attract companies.
By the early 20th century, the revolution was complete. These new laws finished a process begun decades earlier during the Jacksonian era, when general incorporation laws put an end to special charters, which enabled individual corporations to form but which placed limits on each new business — such as how big they could be, the range of business they could do, how long they could exist and their specific liabilities.
The rapid implementation of “enabling” corporate laws didn’t just give new, powerful tools to managers. It also undermined the idea that corporations were artificial creations of the state meant to do certain kinds of business, but still serve the common good. Originally, government officials — duly elected representatives of the people — negotiated each charter, laying out the public purpose of every corporation. But under these new laws the charter lost its power to define that public purpose, and corporations came to be seen almost entirely as private institutions owned by shareholders.
Starting in 1903, federal policymakers attempted to counter these state-level changes by introducing the idea of federal corporate charters to regulate and standardize American business. Presidents Theodore Roosevelt, William Howard Taft and Woodrow Wilson all supported incorporation at the national level in the early 20th century. In the early 1940s, the New Dealer Sen. Joseph O’Mahoney resurrected the idea, calling for “National Charters for National Business.”
But businesses beat back such proposals by finding ways to demonstrate their social value. In the late 1940s, the conservative intellectual Peter Drucker articulated a third way when he called the large corporation the “representative social institution of our society” and said that it was not just an economic tool but also a “political and social body.”
Many large corporations such as General Electric and Eastman Kodak cultivated this social role for themselves by making charitable and philanthropic contributions and by establishing nonprofit foundations. These programs were never particularly systematic and were often dependent on individual managers, corporate cultures and broader economic trends. So, when the shareholder-value movement took off in the 1980s, there was little to protect robust practices of corporate citizenship.
General Electric, for example, was transformed under the leadership of Jack Welch, a CEO whose name became synonymous with the maximization of shareholder value. Within just a few years, he helped to eliminate over 100,000 jobs in his quest to remake the industrial giant into a finance company. By the end of the decade, Kodak also eliminated 10 percent of its workforce and stripped its employees of an array of benefits. What might have been good for the bottom line and shareholders clearly wasn’t good for American society as a whole.
While no one wants to go back to the archaic system of the early 19th century, there are plenty of ways in which corporate boards and managers could be made more accountable to the interests of the common good. One, of course, is to reinvigorate the corporate charter. Activists came close during the 1970s, when they worked diligently on the idea of a robust national chartering program. The high-water mark came on “Big Business Day” in 1980, when liberal activists and legislators promoted the Corporate Democracy Act, which sought to redesign corporate governance on the stakeholder model. Reformers hoped the bill would inaugurate a movement reining in the “size and abuses of big business.”
Instead, Big Business Day elicited one of the most coordinated, sophisticated and successful business counterattacks of the rising conservative era. The 1980s, fueled by Reagan’s deregulation agenda, became an era of shareholder value, not a decade of stakeholder goods.
This is not just a question of corporate greed. The problem is also our federal system. Because businesses can choose to incorporate in any state and still do business on a national level, state governments have few incentives for putting restrictive language back into charters. Any state that did so would risk losing business and tax revenue to its neighbors.
Warren wants to resurrect the movement to impose good corporate citizenship. That’s a good thing. Her project rests upon the idea that corporations are quasi-public institutions beholden to a greater array of interests than just shareholders, because the government grants them remarkable privileges like limited liability, potentially eternal life and a variety of legal tools for capital formation. They are governmental institutions that exist in some sense beyond the categories of public and private.
The Accountable Capitalism Act is a significant step toward bringing the corporate system back into line with that reality, if not as a passable piece of legislation, then at least as a conversation starter.
And the conversation is likely to take time and effort. Warren wants not just to curb the bad behavior of business that became entrenched 30 or 40 years ago, but also to reconstruct the institutional framework of corporate capitalism in this country, whose foundations go back well over a century. Her bill demands reimagining how economic power is structured and what business is for. And that means overcoming fierce resistance.
But restoring the original conception of the American corporation offers an important means for addressing a plethora of societal maladies, including income inequality — one that actually requires less government redistribution and for that reason offers the possibility of transcending our normal partisan divisions.