The CSR Newsletters are a freely-available resource generated as a dynamic complement to the textbook, Strategic Corporate Social Responsibility: Sustainable Value Creation.

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Sunday, September 30, 2018

Strategic CSR - Elizabeth Warren

The article in the url below is by Senator Elizabeth Warren (Democrat, Massachusetts), who announces the legislation she recently introduced aiming to broaden the accountability and transparency of corporations. The reason, she states, is largely reciprocal:

"American corporations exist only because the American people grant them charters. … What do Americans get in return? What are the obligations of corporate citizenship in the U.S.?"
 
The answer to that question, according to Warren, has clearly evolved:
 
"As recently as 1981, the Business Roundtable—which represents large U.S. companies—stated that corporations 'have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.' … [However] By 1997 the Business Roundtable declared that the 'principal objective of a business enterprise is to generate economic returns to its owners.'"
 
The result has been a shift in the allocation of resources, toward shareholders and away from other stakeholders:
 
"In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other priorities. But between 2007 and 2016, large American companies dedicated 93% of their earnings to shareholders."
 
Correcting this, Warren suggests, will help address the more fundamental issue of income inequality in the U.S. Her legislation ("The Accountable Capitalism Act") is designed to do that:
 
"Corporations with more than $1 billion in annual revenue would be required to get a federal corporate charter. The new charter requires corporate directors to consider the interests of all major corporate stakeholders—not only shareholders—in company decisions."
 
She claims that this proposal is inspired by the spread of benefit corporations. Some interesting additional aspects of the proposed law:
  • "Employees would elect at least 40% of directors."
  • "At least 75% of directors and shareholders would need to approve before a corporation could make any political expenditures."
  • "… directors and officers would not be allowed to sell company shares within five years of receiving them—or within three years of a company stock buyback."
  • Also, shareholders (meaning anyone who has a single share in the company) "could sue if they believed directors weren't fulfilling those obligations."

So far, so populist. By claiming that "companies shouldn't be accountable only to shareholders," however, Warren perpetuates two key misunderstandings in the CSR debate: First, is a misunderstanding of U.S. corporate law. Firms are, in essence, already not legally required to act in the interests of their shareholders. As Bower & Paine state in their Harvard Business Review article last year, such a claim of shareholder primacy "is flawed in its assumptions, confused as a matter of law, and damaging in practice" (see also the detailed discussion on this issue in Chapter 6 of the 4e).
 
Second, and more important, however, is that, in reality, firms are already accountable to all stakeholders. The issue in western capitalism is not that firms are not accountable to these stakeholders, but that stakeholders do not enforce the leverage they have over firms. Or, perhaps, they engage in some kind of willful shirking, where they make micro decisions that satisfy their self-interest, but complain at the macro effects of these decisions when they are aggregated. To illustrate – I might shop at Walmart because they have the best quality at the cheapest prices (which is something I might value), but then I might complain when all the Mom & Pop stores close down in my town, without recognizing that the reason they are shutting down is because people like me prefer to shop at Walmart than the Mom & Pop stores.
 
For capitalism to work as effectively as possible, stakeholders need to hold firms accountable for the behavior they truly want. If we all want to shop at Walmart (or Amazon, or wherever), then that company will quickly dominate the retail landscape. If we want something else, however, then we have to be willing to enforce that, and accept any sacrifice (i.e., higher prices) that might come with that decision. If we do not want to pay the higher prices, then we should stop complaining about the outcomes that are generated from the decisions we make (the value we truly seek).
 
 
Take care
David
 
 
Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler4e
Strategic CSR Simulation: http://www.strategiccsrsim.com/
The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/
 
 
Companies Shouldn't Be Accountable Only to Shareholders
By Elizabeth Warren
August 15, 2018
The Wall Street Journal
Late Edition – Final
A15