Friday, August 17, 2018

How Elizabeth Warren's Latest Legislative Proposal Would Pull Down Three Main Pillars of U.S. Corporate Governance

By Walter Olson
Sen. Elizabeth Warren of Massachusetts has introduced legislation that would radically overhaul corporate governance in America, requiring that the largest (over $1 billion) companies obtain revocable charters from the federal government to do business, instituting rules reminiscent of German-style co-determination under which workers would be entitled to at least 40% representation on boards of directors, placing directors under a fiduciary obligation to serve “stakeholders” as opposed to owners as currently, prohibiting political expenditures by corporations unless approved by at least 75 percent of directors and shareholders, and restricting directors and officers from reselling incentive stock within five years. 
“Let’s be clear, none of these are new ideas,” writes leading corporate governance expert Stephen Bainbridge of UCLA. “They are either academic utopian schemes or failed European governance models. There are very good reasons none of these dusty relics of eons of progressive corporate thought have made it into law.” His series of posts picking it apart in detail begins here.
Our friend James Copland of the Manhattan Institute points out that Sen. Warren’s proposal would pull down three main pillars of U.S. corporate governance:
shareholder primacy, director independence, and charter federalism. Each has long been a subject of extensive research and debate, and the alternatives, European or otherwise, simply do not have as good a track record of supporting a dynamic economy that generates world-beating enterprises across a wide range of business sectors (as opposed to, say, the kind of specialty manufacturing at which Germany does well.) Worker board representation, in particular, shapes incentives in ways that discourage important forms of risk-taking and reallocation of capital across sectors. 
All of which helps explain why few startups would willingly accept Warren-style rules in drafting their by-laws. But there’s a big additional problem in applying the rules, as Warren would, to existing companies that have already been capitalized under different assumptions: it would in effect confiscate at a stroke a large share of stockholder value, transferring it to some combination of worker and “community” interests. This gigantic expropriation, of course, might be a Pyrrhic victory for many workers and retirees whose 401(k) values would take a huge hit in exchange for new rights of uncertain value to install board members. Already, some early enthusiasts for the Warren plan are treating the collapse of shareholder value as a feature rather than a bug, arguing that it would reduce wealth inequality. 
Whether or not it would accomplish that, it would test the restraints the U.S. Constitution places on the taking of property without compensation. Alas, the courts have been inconsistent about the extent to which they will recognize as takings, and provide a remedy for, legislative enactments that strip away much of the value of financial instruments or other property rights without expropriating fully 100% of their value.  Cato over the years has been very much part of that legal debate, arguing for a strong interpretation of the Fifth Amendment’s language: “nor shall private property be taken for public use, without just compensation.” 
Confiscatory proposals like Warren’s make it more important than ever that we be prepared to defend this element of liberty in the courts. 

The above originally apperaed at


  1. "Cato over the years has been very much part of that legal debate, arguing for a strong interpretation of the Fifth Amendment’s language: “nor shall private property be taken for public use, without just compensation."

    This is an example of what is so exasperating about Cato calling itself "libertarian." Many (most?) of its professionals accept the Constitution as the starting point for a discussion about liberty. Instead of attacking eminent domain within the circles of D.C. on the grounds that a forced exchange is a breach of the NAP, and that, per Austrian economics, all value is subjective, so any compensation paid under a taking is not properly determined, they throw all their effort behind trying to influence the interpretation of the Fifth Amendment.

    They started going downhill when they parted ways with Rothbard.

  2. Big corporations would be long gone before any such idea became law.

  3. This is a very critical topic for a freedom minded person to consider carefully, not just directly, but also the second order consequences.

    The characteristics of our modern economy which generate strong objections get blamed on capitalism when actually those are the result of bad incentives embedded in the legal system governing corporate institutions.

    If those objections don't get addressed then capitalism will get taken away, good aspects along with the bad, leading to Venezuelan misery for all. Though these particular changes proposed by the senator may not be good, something in this space needs to happen to reduce incentives towards corruption. Otherwise, we'll get a massive pendulum swing towards socialist election victories, or even revolution, which would eliminate individual economic freedom along with corporate.

  4. Such a law would drive half of US based corporations to move to Ireland in the first few years, and in a decade zero large corporations would be based here.