Are Companies Responsible for Employees?

Senator Elizabeth Warren doesn’t think they are and she’s proposing a new bill to put in regulations that would make sure they are.  She wants to establish a new “federal corporate charter” for companies larger than $1B.

Clearly, she detests and abhors Milton Friedman.  I wish Friedman were alive to debate her. He would do so and relish the opportunity.  He would eviscerate her points one by one with logic, smiling all the way.

Here are her points:

In the four decades after World War II, shareholders on net contributed more than $250 billion to U.S. companies. But since 1985 they have extracted almost $7 trillion. That’s trillions of dollars in profits that might otherwise have been reinvested in the workers who helped produce them.

Before “shareholder value maximization” ideology took hold, wages and productivity grew at roughly the same rate. But since the early 1980s, real wages have stagnated even as productivity has continued to rise. Workers aren’t getting what they’ve earned.

Companies also are setting themselves up to fail. Retained earnings were once the foundation for long-term investments. But from 1990 to 2015, nonfinancial U.S. companies invested trillions less than projected, funneling earnings to shareholders instead. This underinvestment handcuffs U.S. enterprise and bestows an advantage on foreign competitors.

Respectfully, Senator Warren doesn’t understand how a business works.  

I will say that if a business wants to make a difference all they have to do is contact Public Good and they will help them setup a program.

First off, let’s think about B Corporations.  They are a recent development.  A lot of startups are B Corporations.  But, it’s a choice.  Becoming a B Corp is something the management team decides to do, with consultation from investors.  It is not a forced march which is what the Senator proposes.

I disagree with some of the premises of B Corporations because some of them are false assumptions and others are impossible to measure because they are subjective and not objective. But, I understand and endorse the spirit of what a B Corporation is trying to do.  I think it can be done with existing policy and doesn’t need any more.

The false assumption is the corporation exists to exploit the people that work for it.  It exploits its environment and doesn’t care if it destroys people, property, or the world around it.  This is just not even close to true.

Corporations have to attract talent to work for them.  No one is compelled to work for them.  They have to design jobs and pay enough wage to get people to show up.  Some people in corporations make more than others.  But, when you are a C suite executive your decisions determine the fate of a multi-billion dollar corporation more so than a person on the assembly line.  You deserve to get paid more.  Besides, there is more personal risk as well when it comes to lawsuits and job security.

Senator Warren says corporations “extract” money.  This is a false assumption.  They earn profits by providing value to customers.  They often reinvest those profits in all kinds of things.  A lot of times it is investing in the human capital that works for them.  How many big companies have a 401(k) retirement plan for employees?  How many of them help pay for continuing education?   

Instead of whining about how corporations spend and invest their money, perhaps the Senator should look at the public policy already in place that guides a lot of corporate financial decision making.

Why are dividend taxes so high?  Why are they taxed at all-since corporations already pay corporate tax on the money?  End taxes on dividends and you’d see corporations do less buying back of stock and more distribution to investors.  I don’t like stock buybacks either but if you look at corporate financial theory there is no difference between a buyback and dividend.  By the way, many employees of large corporations are not only employees, but stakeholders in the firm.  Why does Senator Warren want to penalize rank and file employees of firms?

I think centralizing something like this at the federal level is also a terrible idea.  There is potential for companies to be compelled, coerced or forced into donating money to specific causes that federal bureaucrats deem “the right ones”.  It also opens up companies to potential litigation.  We just saw unions lose the Janus case at the Supreme Court and this strikes me as similar.  

Here are a couple examples.

One day if a company I am invested in decides to buy land in a rainforest, they are disenfranchising me as a shareholder.  The money that is being spent on the rainforest rightfully belongs to me-even if I support the purchase.  I should get a choice.  If I want to take a distribution from the company I risked capital and invested in to purchase a section of rainforest, it’s my choice.  A company could help coordinate it but no company money should go to the purchase.  

However, if a company is transparent about doing something like Tod’s is that is a different story.  Tod’s donates shoes when it sells shoes.  This is a marketing expense and is part of their branding.  As an investor, I know that going in.  All the cards are on the table and I accept the dilution in my investment.  

When I was in Torino, Italy last year advising the i7/G7, we had a spirited debate over B Corporations.  As an investor I have certain objective measurements I can use to ascertain whether I want to invest, stay invested, or not to invest in companies.  I can use GAAP, the FASB, the AICPA and compare United Airlines to American Airlines in an objective way.  

There are no objective standards for B Corps.  It’s impossible to say that Patagonia is doing a better job serving their community than Exxon.  But, it’s probably true that more people think a company devoted to the outdoors is doing a better job on the environment than an oil company.  What’s ironic is the largest investors in clean energy are oil companies.

What can a startup do?

1.  Give a cleaned up board deck to employees after the meeting.  Communicate to them.  They are taking risk working for you and deserve to understand.  It will make them more motivated and help the company in the long run if done correctly.
2. Make sure everyone that works for the company has some equity.  Often, only founders have it or it only gets distributed at the highest levels. It’s good for lower level employees to get some equity.  Even if they only make a token amount on an exit, it might be meaningful for them.  Maybe they could pay for an advanced degree?
3. Be a good citizen.  Each company will determine by it’s own choice what that looks like.  It should not be compelled by the government.  

No one needs federal legislation or an army of bureaucrats enforcing subjective regulations to do those things.