Making Corporations Great Again

Elizabeth Warren’s Plan for Corporate Accountability and Reform

Author: Erin Lachaal | UC Berkeley School of Law | J.D. Candidate 2020 | Posted: September 8th, 2018 | Download PDF.

“I want to make sure we’ve got a set of rules that lets everybody who’s got a good, competitive idea get in the game,” Senator Elizabeth Warren said in a recent interview with Franklin Foer of The Atlantic.[1] She was discussing her recently proposed legislation that would fundamentally change how corporations in the United States are created and function day-to-day. She is aiming to return corporations back to what they once were: socially conscious entities looking to fill a supply gap in society’s needs.

Most people might describe corporations as inescapable. We are often unable to go more than a few minutes without some interaction with products from one of these large entities, but this was not always the case. The original purpose of a corporation was to allow the government a mechanism to outsource the building of fundamental public infrastructure that was necessary in a world of scarce capital and unpredictable public revenue.[2]

A corporation shielded the owners of these entities from harm inflicted on or caused by the entity, and also shielded the entity from any debts held by the owners.[3] The important thing to note is that these privileges were only granted for very specific purposes and were not the norm.[4] As revenue and capital became more abundant, however, the role of corporations changed. States began competing for corporate revenue generated by these charters.[5] Soon, there was a “race to the bottom,” in which the states were providing increasingly lenient grants, for less-defined purposes.[6] While this may have worked to drive up state revenue, it also facilitated a shift in corporate mentality from providing a public service, to generating a private profit.

In 1970, economist Milton Friedman fueled this shift when he wrote an article denouncing corporate social responsibility, and instead proposing the shareholder agency theory that prevails in the market today.[7] According to Friedman, shareholders want business conducted solely in a manner that would maximize their profits, and it is the duty of directors to manifest those wishes.[8] There is little to no mention of social responsibility in Friedman’s proposal, saying nothing more than companies should “conform[…] to the basic rules of the society.”[9]

At the time of the shareholder-primacy theory’s conception, American wealth was more evenly distributed. But today, ten percent of Americans own more than eighty percent of stocks[10], with more than one half of Americans not owning a single share.[11] This raises the question, are corporations solely allowing the rich to get richer? Many would argue yes with, “managers under increasing pressure to deliver even faster and more predictable returns and to curtail riskier investments aimed at meeting future needs.”[12] Shareholder primacy has a negative impact on long-term growth, innovation, and investment in companies. Over the past 25 years, about $7 trillion of investment has been extracted from American companies to be put in shareholders’ and executives’ pockets.[13] This is not a successful business model: not for a company, not for the country.

Corporate law has historically been determined on the state level. As discussed above, this resulted in a race to provide the most lenient corporate laws to promote business and investment in a given state. Thus, states have been tentative to rein in these laws in fear of driving out business and losing revenue. Senator Warren has offered a solution: make corporate law, federal law. She argues, “we need to level the playing field, and that’s what rules do.”[14]

Senator Warren has proposed the Accountable Capitalism Act. The bill is a radical move in an attempt to revert the US economy back to the stakeholder mentality that once prevailed. During that time period, the US economy was booming, productivity was increasing, and wages were on the rise. The bill, which was likely influenced heavily by the German system of codetermination, would require that companies with more than $1 billion in revenue apply for a federal corporation charter.[15] This bill would additionally mandate a few things of federally incorporated companies:

  1.     It obligates directors to generally take into consideration the many stakeholders of their company including customers, shareholders, employees, and the communities in which they operate;[16]
  2.     It allows workers to choose forty percent of their board of directors: This would give workers a stronger voice in the corporation, and ensure that the directors are not just looking out for short-term profits, but also for long-term investment and the success of the company;[17]
  3.     It prohibits directors and officers from selling company shares within five years of receiving them or within three years of a company stock buyback to ensure their focus is on the long-term interests of stakeholders, rather than the financial incentives of quick shareholder returns;[18]
  4.     Lastly, it would require the approval of seventy-five percent of directors and shareholders prior to making any political expenditures. This is done to ensure that political expenditures are representative of all stakeholders and not just the executives.[19]

The federal government would have the ability to revoke a federal charter if companies act in an egregious manner.[20] If Germany is any indicator on how this would play out, the US should be prepared for less short-term decision making on behalf of corporate executives, higher levels of pay equality, and positive results in productivity and innovation.[21] Corporations have an impact on more than just their shareholders, so they should be accountable to other stakeholders as well. It is time for thoughtful, responsible business practices, and this legislation is one step on the way to getting us there.



[1] Franklin Foer, Elizabeth Warren’s Theory of Capitalism, The Atlantic (2018),
[2] Matthew Yglesias, Elizabeth Warren Has A Plan To Save Capitalism, Vox (2018),
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Joseph L. Bower & Lynn S. Paine, The Error at the Heart of Corporate Leadership, Harvard Business Review (2017),
[8] Id.
[9] Id.
[10] Elizabeth Warren, Companies Shouldn’t Be Accountable Only to Shareholders, Wall Street Journal, August 14, 2018,
[11] Foer, supra note 1
[12] Bower, supra note 7
[13] CNBC, CNBC Transcript: Senator Elizabeth Warren Speaks with CNBC’s Jim Cramer on CNBC’s Mad Money Today, CNBC(2018),
[14] Id.
[15] Warren Introduces Accountable Capitalism Act, U.S. Senate Newsroom (2018),
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] Id.
[21] Yglesias, supra note 2.