Authored by: Matt Palumbo

Sen. Elizabeth Warren has a plan to “save” capitalism, a system in no need of saving. Her newly introduced “Accountable Capitalism Act” aims to “save” capitalism by making it more socialistic. While workers wouldn’t have complete control over the means of production, Warren wants to give them a sizable amount of influence over them.

The Act would require companies that bring in over $1 billion a year in revenue to obtain a “federal charter” to continue operating. That charter would obligate corporations to permit their employees to elect 40% of the company’s board of directors.

Warren defended her Act in a Wall Street Journal column. Among the key problems she cites to justify it include the following.

She says that wages are stagnating while corporate profits are booming, and this Act aims to solve that. She claims wages have been stagnant since the 1980s because of Reaganite policies (we debunked this myth in a separate article).

She cites an increase in a percentage of company earnings paid out as dividends (or used for share buybacks) as opposed to retaining earnings for reinvestment. However, this could simply reflect a lack of profitable investment opportunities presently available. Warren is wrongly assuming corporations only think in the short-term. Furthermore, employee compensation as a percentage of corporate profits has remained constant since the 1940s.

She says that the average CEO pay has climbed from 42 times the average worker’s in 1980, to 361 today. However, that statistic is only true of the 500 companies in the S&P 500 index, not your typical corporation. The average dentist in America earns more than the average CEO. Since the 1980s, the increase in top-tier CEO pay correlations perfectly to the increase in market value of the firms they lead (as CEOs tend to receive a large share of their pay in the form of stock).

Warren notes that such charters are already legal in most states, and Kickstarter and Patagonia use this “benefit corporation” model.

The goal is to redirect trillions of dollars in corporate profits that would’ve otherwise been distributed to shareholders towards employees, or even back to the company itself to be retained to future investments.

So, what’s wrong with this plan?

Revenue Does Not Mean Profit

There are countless companies that bring in over $1 billion a year in revenue, and yet don’t have a dime in profit. Twitter, Uber, Tesla, Square, Lyft, and Snapchat and are all examples of companies with revenue in the multi-billions that have never closed out a year with a penny of profit.

In the case of Amazon.com, which only recently became profitable, they went through two decades of unprofitability because they were reinvesting all of their cashflows back into the business. They didn’t need the government to tell them to sacrifice small profits now for bigger profits later. You’d think Amazon would be the kind of corporation that Warren would praise, but of course she makes no mention of Amazon, which she has criticized elsewhere for their business practices.

Similarly, pharmaceutical companies tend to rack up valuations in the billions of dollars even when they’re years away from bringing a product to market (and will continue losing millions until one is). If shareholders thought as short-term as Warren thinks they do, such an industry wouldn’t be able to exist.

Warren wants her “benefit corporation” model implemented to both boost employee wages and reinvestment in companies, but for a rapidly expanding company (like Amazon, or a drug company) those two will be at conflict with one another. Higher employee pay may benefit some workers now – but what if they would’ve earned more had the company been more profitable a few years down the road because they could expand?

Paper vs. Practice

Implementing Warren’s Act would cause some absurd scenarios. As UCLA law professor Stephen Bainbridge noted, the Act:

Would require corporate directors to consider the interests of all major corporate stakeholders—not only shareholders—in company decisions. Shareholders could sue if they believed directors weren’t fulfilling those obligations. I just want to point out the bizarre enforcement mechanism she’s chosen: She wants directors to consider the interest of non-shareholder constituents who making corporate decisions, but if the directors fail to do so it is left to shareholders to sue. That makes no sense. The problem here is that the decisions that matter are often zero sum ones in which the board must chose between shareholder and non-shareholder interests.

Given the immense headache that compliance would case, Warren’s Act could prove a regulatory nightmare when it comes to enforcing. We know that corporate inversions happen (when a corporation merges with another company in a different country, so they can pay that lower country’s comparably lower tax rate), and if businesses will find loopholes to dodge taxes, why not to dodge such onerous regulations?

And what of foreign companies operating in the U.S.? Could there be a greater deterrent for investment than to tell foreign investors that for them to invest in the U.S., they’ll have to sacrifice 40% control in their own companies?

There is No Evidence that Employee Elected Boards Would Provide Better

Warren doesn’t cite a single study to back up the “employee elected board” concept in her entire op-ed, and that’s because she couldn’t find one to confirm her bias. The only study I could find wasn’t specific to employees, but analyzed “women and employee” elected boards. The study’s authors, which favor the concept, could only conclude that this board structure “may” help boost company effectiveness, noting that all prior studies have yielded mixed results.

Good Ideas Don’t Need Government Force

If this is such a successful corporate structure, why the need for government to get involved? Why wouldn’t corporations voluntarily adopt such a system? In the entire history of ideas, has there ever been a case where a good idea needed to be mandated by the government?

Obviously not.