By Joshua Levin – Nov. 5th, 2018
Senator Elizabeth Warren’s Accountable Capitalism Act bill raises a timely question for corporate governance: for whom is the corporation managed? In her companion op-ed in the Wall Street Journal, Senator Warren specifically references a corporation’s duties to “employees, customers and the community” that she believes America’s largest corporations have been ignoring. She traces American companies’ failures in their duties to those stakeholders to Milton Friedman and the ideal of “shareholder value maximization” as the fundamental corporate purpose. She is not alone in her critique; the shareholder-centric vision of corporate purpose has recently come under fire as misstating the role of shareholders.
To understand each side’s point, it makes sense to start from the beginning and answer a couple questions. The first being, “Why do corporations exist?” Well, they provide an avenue for groups of people to pool their capital to do something that they could not achieve on their own. Unlike sole proprietorships and general partnerships, as Senator Warren points out, the corporate form also limits the personal liability of shareholders (generally speaking; some exceptions apply). It seems Americans think that this is a good thing as a policy matter since we keep them around and people use them…a lot. The incentives and this shareholder-manager structure are simple enough for private, controlled corporations: the shareholders can directly control the management (or, even better for incentive purposes, do the work themselves). For the approximately 3.5 million “mom and pop” firms with fewer than 5 employees, there is no issue of managers not doing what shareholders want. 
Larger public corporations that separate a company’s shareholders and managers raise the second question which we began with, “For whom is the corporation managed?” For the holders of the (staggering) approximately $30 trillion in U.S. public company equity, their inability to direct the management of the company is (potentially) a thirty-trillion-dollar agency problem (that is a 3 with thirteen zeros after it, which looks impressively like this: $30,000,000,000,000). If a company goes bankrupt due to poor management, it is the shareholders (as residual beneficiaries) who are the ones least likely to get any money back. To address this issue, shareholders of U.S. corporations elect boards of directors to run the company. To make sure they are looking out for the company, the common law evolved duties of care and loyalty to prevent maladministration and self-dealing by directors. Courts and legislatures also developed the Business Judgment Rule and director exculpation for breaches of the duty of care, among other protections for those willing to serve the corporation. Finally, because shareholders are the ones who elect directors, they are provided some “voice” to go along with the “loyalty” of their money (that is, until they choose to “exit” by selling their shares). For those who agree with Milton Friedman’s assessment of the role of corporate officers, this all makes perfect sense and provides the right incentives for directors to do their job: maximize the value of the corporation for the benefit of shareholders.
But Senator Warren’s bill focuses on a different agency problem in corporate law: the conflict between the firm and its stakeholders (like creditors, workers, customers and the general public). The scale and effects of that problem are naturally exacerbated when large corporations are involved, so it makes practical sense that Senator Warren’s bill only applies to companies with over $1 billion in annual revenue. So, if we believe (as the Senator does) that corporations owe some general duties to benefit their stakeholders including the public at large, the question becomes, “what is the best way to make corporations act responsibly?” Naturally, Senator Warren’s bill provides two general answers: (1) require directors to consider more than just shareholder value in their decision-making and (2) require 40% of directors be elected by the company’s employees.
Firstly, corporations would be required to provide some “general public benefit” and directors’ decision making must be guided by weighing “the pecuniary interests of shareholders” against “the best interests of persons that are materially affected by the [corporation’s] conduct.” The bill even provides a long list of who those people may be. But directors are generally exculpated from personal liability, only subject to a business judgment standard, and standing under the bill is limited to beneficial owners of the company’s shares. Taken together, this does not seem to amount to much more than a procedural requirement that directors document that they considered the interests of other parties and decided to do whatever they wanted anyway. This is, perhaps, an overly cynical view, but courts generally will not delve into practical business considerations (after all, it is not their expertise), and providing manageable standards for them to do so in this context is difficult if not impossible.
Secondly, and more interestingly, the bill would require forty percent of board members of each corporation to be elected by the employees of the corporation. This would represent a massive shift in power away from shareholders. Now, employee representation on boards is not a new idea, nor is it without substantial precedent (particularly in Europe). But while employees were only identified as one interested group in the bill, they are the only group given a direct say in the management of corporations. In at least some instances, that solution will benefit employees to the detriment of other stakeholders.
The issue of climate change provides a good example of diffuse costs and concentrated benefits. On the one hand, everyone in the world is harmed; some more than others, but mostly we feel like frogs in a warming pot. On the other hand, the people and firms who are warming the pot are making a living in the process. Bowing to investor pressure from the more conscientious frogs, oil and gas companies are reporting significant amounts of data on climate change. They are including carbon pricing in their project assessments. They are losing proxy votes on shareholder proposals requesting reporting on meeting the 2-degree Celsius limit articulated in the Paris Agreement. To give these non-binding resolutions some teeth, shareholders have the power to vote out board members if companies fail to comply. Investors have a pecuniary interest in the continuity and profitability of the enterprise, but they will either be agnostic as to the means by which the company generates profits or prefer some means that aligns with their values (for example, by pursuing renewable energy as an alternative). On the other hand, employees who derive their livelihood from fossil fuel extraction are directly incentivized to vote for directors with stronger commitments to the continuation of that enterprise. This is not to suggest that oil rig technicians are evil, inconsiderate people and investors are climate saints. But people do generally respond to incentives, especially when their well-being is potentially threatened.
If policy makers want to maximize the benefits corporations provide and they think changing the board is the way to do that, they should be very careful about who they choose to run the business. Directors who answer directly to employees will take a different view of the world than those who are responsible to shareholders. That may be a good thing for general welfare in some instances, but it will not in all.
Joshua Levin is a Quorum Editor & J.D. Candidate, Class of 2019, N.Y.U. School of Law.
 S.3348, 115th Cong. (2018) (requiring certain public company directors to consider the general public benefit and include employee representatives on the board of directors, among other requirements).
 Elizabeth Warren, “Companies Shouldn’t Be Accountable Only to Shareholders”, The Wall Street Journal, Aug. 14, 2018 (https://www.wsj.com/articles/companies-shouldnt-be-accountable-only-to-shareholders-1534287687).
 Milton Friedman, “The Social Responsibility of Business is to Increase its Profits”, The New York Times Magazine September 13, 1970; see also Morris G. Danielson, Jean L. Heck, David R. Shaffer, “Shareholder Theory – How Opponents and Proponents Both Get it Wrong”, 18 Journal of Applied Finance (Formerly Financial Practice and Education) 2, Dec. 3, 2008; Steve Denning, Making Sense Of Shareholder Value: ‘The World’s Dumbest Idea’, Forbes, July 17, 2017 (https://www.forbes.com/sites/stevedenning/2017/07/17/making-sense-of-shareholder-value-the-worlds-dumbest-idea/#623dd52f2a7e) (discussing the prominence of “maximizing shareholder value” and alternatives).
 See generally Joseph L. Bower and Lynn S. Paine, “The Error at the Heart of Corporate Leadership”, Harvard Business Review 95, no. 3 (May–June 2017): 50–60 (https://hbr.org/2017/05/managing-for-the-long-term); Danielson supra note 3.
 See Warren, supra note 2.
 United States Census Bureau, “2015 SUSB Annual Data Tables by Establishment Industry”, Jan. 2018, (https://www.census.gov/data/tables/2015/econ/susb/2015-susb-annual.html) (accounting for 5.9 million corporate organizations in 2015).
 United States Census Bureau, “Mom and Pop Business Owners Day”, Mar. 29, 2018 (https://www.census.gov/newsroom/stories/2018/mom-pop-business-owners-day.html).
 John Armour, Henry Hansmann, and Reinier Kraakman, “Agency Problems, Legal Strategies And Enforcement” Discussion Paper No. 644, at 1, Harvard John M. Olin Discussion Paper Series, July 20, 2009, (http://www.law.harvard.edu/programs/olin_center/papers/pdf/Kraakman_644.pdf) (summarizing the agency problem presented by the separation of corporate management and ownership); Vito J. Racanelli “The U.S. Stock Market Is Now Worth $30 Trillion”, Barron’s, Jan. 18, 2018 (https://www.barrons.com/articles/the-u-s-stock-market-is-now-worth-30-trillion-1516285704)
 See, e.g., Del. Code Ann. tit. 8, § 141(a).
 See Bernard S. Sharfman, “The Importance of the Business Judgment Rule”, Harvard Law School Forum on Corporate Governance and Financial Regulation, Jan. 19, 2017 (https://corpgov.law.harvard.edu/2017/01/19/the-importance-of-the-business-judgment-rule/) (describing the policy behind the business judgment rule); Del. Code Ann. tit. 8, § 102(b)(7) (providing the option to exculpate directors for breaches of the duty of care).
 See, e.g., Del. Code Ann. tit. 8, § 211(b)
 See Friedman, supra note 3.
 Warren, supra note 2. See also Armour, Hansmann, and Kraakman, supra note 7 at 3 (describing the “conflict between the firm itself—including, particularly, its owners—and the other parties with whom the firm contracts, such as creditors, employees, and customers.”).
 S.3348, 115th Cong. (2018).
 Andrea Garnero, “What We Do and Don’t Know About Worker Representation on Boards”, Harvard Business Review, Sept. 6, 2018 (https://hbr.org/2018/09/what-we-do-and-dont-know-about-worker-representation-on-boards)
 See Travis Hunt and Margaret E. Peloso, “ExxonMobil Releases Climate Change Report, Following Similar Reports by Chevron, Shell, and Others” Lexology, Apr. 10, 2018, (https://www.lexology.com/library/detail.aspx?g=5446ce0a-df95-44a6-94dd-0d59c7ddc368).
 See, e.g., Hess Corporation, “2017 Sustainability Report” at 12, July 10, 2018, (http://www.hess.com/sustainability/sustainability-reports/sustainability-report-2017#1).
 Cydney Posner, “Are Shareholder Proposals on Climate Change Becoming a Thing?”, Harvard Law School Forum on Corporate Governance and Financial Regulation, June 21, 2017 (https://corpgov.law.harvard.edu/2017/06/21/are-shareholder-proposals-on-climate-change-becoming-a-thing/).
 Id.; see also Maxx Chatsko, “3 Oil Companies Getting Serious About Renewable Energy — and 2 That Aren’t”, The Motley Fool, June 29, 2018 (https://www.fool.com/investing/2018/06/29/3-oil-companies-getting-serious-about-renewable-en.aspx).