In an attempt to distinguish herself from her “establishment” colleagues, Elizabeth Warren has embraced the rhetoric of class warfare, singling out allegedly the “ultra-rich” as the subject of her perpetual ire. In the same vein as Bernie Sanders, Warren has adopted a punishing tone when discussing American corporations, so much so that she has constructed entire legislation centered upon restructuring incentives within the stock market in order to “produce broad-based growth that help[s] workers and shareholders alike.”
There’s only one problem with this narrative. Warren’s proposed legislation to rein in corporate governance practices — predictably named the “Accountable Capitalism Act” — likely would torpedo retirement savings, punishing everyday Americans for the alleged sins of nebulous corporate overlords.
Something you will never hear the Warren campaign mention is that the proverbial wealth gap in the United States is largely an age gap. As Phil Gramm and Mike Solon of the Wall Street Journal point out, 73 percent of the value of domestically owned stock is held by households with a head who is 55 years old or older. By the same token, the average wealth of households aged 65 to 74 is approximately $1 million, while the average wealth of households aged 35 to 44 is less than a third of that amount, or just under $300,000.
Unsurprisingly, just over 70 percent of all domestically held stock is held by pension plans, 401(k)s, individual retirement accounts, or life insurance companies. When Warren professes she wants to fundamentally change Wall Street, her ambitions ultimately translate into a hit job on middle-class retirement savings under the banner of supposedly punishing the uber-rich.
Warren’s Accountable Capitalism plan, a facet of her 2020 platform, merely rehashes her proposed 2018 legislation, the Accountable Capitalism Act, which would refashion the federal charter for corporations, forcing the directors of larger corporations (those with annual revenues over $1 billion) to “consider the interests of all corporate stakeholders — employees, customers, shareholders, and the communities in which the company operates.”
But corporations, with good reason, have never operated upon this notion. For instance, in the case of retirement savings, since the passage of the Employee Retirement Income Security Act of 1974 (ERISA), corporate executives and fund managers have been expected, under penalty of law, to act as fiduciaries on behalf of their specific beneficiaries, which in this particular instance, consist of millions of retirees.
Under the Warren plan, the fiduciary duty legally compelled by ERISA would be rendered defunct by changes in overall corporate fiduciary responsibility, as Gramm and Solon note. Companies whose stocks comprise the bulk of retirement funds would be forced to subvert the interests of shareholders to the interests of a host of others, whose stakes in the company’s stock performance are neither clear nor concrete. For instance, how does a fund manager define “community” interest? Better yet, who or what constitutes the peripheral “community”?
Injecting a set of arbitrary, non-quantifiable “interests” into the traditional fiduciary framework creates uncertainty within the markets, and historically, stock markets react negatively to uncertainty. Furthermore, Warren’s plan does not clarify whether every industry would be subjected to the same expectations and, if so, the material benefit of such blanket expectations. As a series of Harvard economists recently noted in a piece discussing environmental, social, and corporate governance, “the carbon footprint of a bank, for example, is not material to a bank’s economic performance, nor would reducing its footprint materially affect global carbon emissions.” In other words, what is expected of a bank should not necessarily be what is expected of a natural gas company.
Additionally, Warren’s plan calls for 40 percent of a given company’s board members to be elected by the employees, another strange modification, considering that a company’s board members are supposed to represent the interests of the shareholder. Matt Yglesias performed an analysis of how this voting schema might affect stock value, since Germany already engages in a similar practice called “codetermination.” Unsurprisingly, under Warren’s Accountable Capitalism Act, Yglesias found that stock prices could drop as much as 25 percent. And given retirement plans are bottled up in the stock market, it’s hard to imagine a world in which retirees wouldn’t feel this precipitous drop.
Warren’s plan ultimately would require corporations with certain revenue levels to stop prioritizing the interests of their shareholders in order to accommodate the interests of actors and undefined groups whose stakes cannot be clearly defined on any tangible mathematical level. Furthermore, in doing so, Warren’s plan would only serve to punish the millions who have patiently held stock holdings in the hopes of retiring with some sort of financial cushion. It’s worth remembering that when Elizabeth Warren breathlessly announces she is going after big bad corporations, she isn’t. She’s going after grandma.