Sen. Elizabeth Warren's proposal for drastic changes to corporate governance, which I wrote about in this space last week, continues to draw thoughtful responses from commentators. Colleague Ryan Bourne notes that one study "found that German firms were 27 percent less valuable to their shareholders" because of the workers-on-boards co-determination laws Warren would have us emulate. Moreover, the value given up was not merely transferred to the firms' workforces but was in part dissipated through inefficiency. At National Review, Samuel Hammond discusses how co-determination undermines the overall dynamism of a national economy (for example, by discouraging the transfer of capital to risky, high-value new enterprises) and also notes some of the problems with making "stakeholder" value a subject of fiduciary duty for investors.
Now NYU lawprof and Cato adjunct scholar Richard A. Epstein, a leading libertarian voice on law, tackles the Warren plan in a piece for the Hoover Institution's Defining Ideas series. Epstein's piece is worth reading in its entirety for his analysis of (among other topics) the "stakeholder" mystique, the efficiency-friendly role of share buybacks and executive incentive stock, and the constitutional infirmities of the overall Warren scheme (citing the unconstitutional-conditions doctrine), as well as his warning that large-scale capital flight from the U.S. could ensue if investors mistrust the whims of a new federal charter regulator.
In the passage I want to highlight, however, Epstein makes a point often overlooked in other critiques. Writing on the popular and populist Left these days often romanticizes the idea that business charters should be revocable by some central authority for misconduct ("corporate death penalty"), although it is often not spelled out whether the assets of a giant bank or oil or pharmaceutical company hit by scandal should be taken into the public sector by some sort of confiscatory state authority, allowed to revert to shareholders, or perhaps transferred to a successor entity that would maintain the same brands and facilities and headquarters as before (leaving the question of what exactly is being accomplished by charter revocation). Epstein takes the broad historical view:
...Warren wholly misunderstands the historical role and constitutional position of corporate charters. The last thing that any country needs for economic growth is a situation in which government officials decide which firms receive charters subject to what conditions. Does she really think that some public bureaucrat should have the power to refuse to issue Apple a corporate charter unless it puts community members or union members on its board, makes gifts to the Sierra Club, or adopts minimum minority hiring set-asides? And what should be done when thousands of firms balk at these conditions? Can they go to court, or does the federal board run the corporation directly?
Lest anyone forget, the great 19th-century corporate reform was the passage of general incorporation laws that allowed any group of individuals to form a corporation, with its attendant benefit of limited liability, so long as they met certain minimum conditions relating to their capital contributions, their ability to sue and be sued, and their board structures. The new legal regime ushered in sustained economic expansion by knocking out the political favoritism that had previously given some businesses corporate charters that gave them a huge edge over direct competitors denied similar authorization. It would be unsurpassed folly to re-open the doors to these abuses today.
Indeed, a key point about general incorporation laws was that they were egalitarian: you could launch an incorporated venture even if you were obscure, new in town, or out of favor with political influentials. Supporters of plans like Warren's should be asked whether they really want some combination of political actors -- very possibly appointees of Donald Trump or another President like him -- to gain power to revoke Google's or Amazon's or Facebook's charter to continue doing business unless the management agrees to cut a deal, perhaps involving private understandings with officialdom, to stave off such a penalty.
Hobby Lobby is a much simpler and less important case than it's been made out to be, for reasons the Court clearly spelled out today. Obamacare's contraceptive mandate had to fall under the Religious Freedom Restoration Act (without even getting to the First Amendment) because it didn't show -- couldn't show -- that there's no other way of achieving its goal without violating religious beliefs. Moreover, the fact that a for-profit corporation is asserting the statute's protections is of no moment because neither the corporate form nor the profit motive undermines RFRA's solicitude for the rights of humans -- including owners, officers, and shareholders. In short, the mandate fell because it was a rights-busting government compulsion that lacked sufficient justification. Nobody has been denied access to contraceptives and there's now more freedom for all Americans to live their lives how they want, without checking their freedom at the office door.
For more on how the "corporate rights" issue in the case was really a misnomer -- because the free exercise of individual humans is at issue regardless of how you style the legalese -- see Cato's amicus brief.
Perhaps the most significant difference between my own views and those of my progressive friends is on the relationship between business and government, especially "big business". I've on more than one occasion heard that government needs to be there to off-set the power of big business. That without government, corporations would just continue to grow. Well to me that sounds like an empirical question.
Thanks to the Economic Freedom of the World report, we have some good indicators of just how free-market oriented a country is. What we need are measures of concentration. Unfortunately, these are a little harder to come by. Fortunately, the Office of the Comptroller of the Currency (OCC) did a survey about a decade ago (1999), the data for which are reported in Barth, Caprio, and Levine's Rethinking Bank Regulation. The measure of concentration is the percent of deposits accounted for by the five largest banks. One could argue for a better measure, but it's all we have.
The results? It would appear that the freer an economy, the less concentrated its banking system. The chart below offers a scatter diagram, along with a regression line. The vertical Y axis measures concentration and the X axis economic freedom (the higher the number, the freer the economy). Admittedly, the relationship is not a strong one, with a correlation of only -0.11, but it is negative. If anyone knows of comparable measures for other industries, I would encourage them to either send me the data or reproduce this analysis for other industries.
I note that I'm not hearing many critics of Citizens United decrying yesterday's very welcome Supreme Court ruling, in which the majority held unconstitutional a California statute prohibiting the sale or rental of violent video games to minors. Perhaps that's just because they're concerned with corporate influence on elections as a policy matter, and not so much about Grand Theft Auto, but as a matter of First Amendment interpretation, it seems as though the elements that supposedly made Citizens United a travesty are present here.
As the conservative Justice Alito notes in dissent, for example, the statute at issue here does not prohibit anyone from creating, possessing, freely loaning, or playing violent video games: It regulates only their rental and sale. In other words: Money isn't speech! The majority opinion—authored by Scalia, but joined by the Court's most liberal justices—roundly rejects the relevance of that distinction, which "would make permissible the prohibition of printing or selling books—though not the writing of them. Whether government regulation applies to creating, distributing, or consuming speech makes no difference." While, of course, money isn't speech, the majority here understands that when the effect and purpose of a regulation is to restrict expression, the First Amendment is not some hollow formalism, and also limits regulation that functions by targeting enabling transactions rather than the speech directly.
None of the justices seem to make much of the obvious fact that the great majority of popular video games—and probably just about all of the ones exhibiting the level of graphical sophistication and realism at issue here—are produced, marketed, and sold by (uh oh) corporations. In fact, the passage quoted above focuses entirely on acts ("creating, distributing, or consuming") rather than particular actors, just as the First Amendment itself prohibits government interference with speech not with this or that type of speaker. The Court simply observes that because the statute "imposes a restriction on the content of protected speech, it is invalid unless California can demonstrate that it passes strict scrutiny." In dissent, Justice Thomas argues that the games are not "protected speech" in the context of the statute, because the Founders would have considered all speech directed at minors unprotected (a premise whose chilling implications the majority is quick to point out). Justice Breyer allows that video games—including violent ones—are indeed "protected speech," but argues that studies linking them to violence are enough to give the state a "compelling interest" in limiting their dissemination. What nobody suggests, even in passing, is that video games might cease to be "protected speech" if the statute were limited to games manufactured and sold by corporations—which, in practice, is pretty much all the games we're talking about.
Someone who welcomed this decision as a victory for free speech, but nevertheless supports regulation of independent political expenditures, can always take Breyer's route: Maybe God of War III is not really harmful enough to make its prohibition a compelling state interest, but the degradation of democracy by corporate influence is a serious enough problem that its regulation survives "strict scrutiny," overriding ordinary First Amendment protection even in the domain of political speech normally regarded as its core. That is not a position I find plausible, but it is at least coherent. The position I doubt can be made coherent is one according to which a prohibition of a commercial transaction instrumental to corporate-produced speech (and intended precisely to curtail that speech) should not even trigger First Amendment protections when the speech expresses a political opinion, whereas the same prohibition is unconstitutional if the speech is about Kratos impaling a minotaur on his Blades of Chaos. Though if that's the form political expression has to take to enjoy constitutional protection, I look forward to the impending release of Palinfamous 2 and Barack Band III.
Democratic House leaders apparently have reached a compromise that may bring the DISCLOSE Act to a vote. The National Rifle Association, a group that enjoys some support from House Democrats, objected to the bill's disclosure provisions. DISCLOSE's authors have now agreed to exempt "organizations that have more than 1 million members, have been in existence for more than 10 years, have members in all 50 states, and raise 15 percent or less of their funds from corporations." The National Rifle Association qualifies for the exemption. But you knew that.
I wonder what principle of campaign finance regulation justifies this exemption? Earlier the authors of DISCLOSE said the American people deserve to know who is trying to influence elections. Now it would seem that voters only need information about relatively small, young, geographically-confined organizations that receive more than 15 percent of their money from corporations.
There is no principle at stake here. The NRA had enough support to stop the DISCLOSE Act. House leaders had to compromise by cutting the NRA a deal, a special exemption from the proposed law. The deal does show, if nothing else, that House Democrats are really worried about new money entering the fall campaign. They are willing to go a long way -- even as far as helping the NRA -- to make sure other speech funded by businesses and groups is not heard.
Finally, imagine you are a member of a group not exempted from DISCLOSE. You have been treated unequally by Congress. The courts have said Congress can treat you unequally if they show that this exemption for the NRA has a rational relationship to an important government purpose. How does exempting older, bigger, more widespread groups with less than fifteen percent corporate funding help Americans cast an informed vote? Put another way, if the NRA deserves an exemption, doesn't everyone?
Lawrence Lessig has proposed a constitutional amendment in response to the U.S. Supreme Court's decision in Citizens United. It reads:
"Nothing in this Constitution shall be construed to restrict the power to limit, though not to ban, campaign expenditures of non-citizens of the United States during the last 60 days before an election."
In Citizens United, the Court said that the First Amendment concerns speech rather than speakers. Congress has no power to discriminate against speakers; hence, a source of speech - people organized as a corporation - could not be prohibited from speaking (or funding speech).
Professor Lessig hopes to introduce a discrimination among speakers into the First Amendment. His proposed discrimination will not lose a popularity contest. He wishes to allow Congress to control the speech of non-citizens. He follows two lines of argument in support of his amendment, one less rational than the other.
The less rational line of appeal to the reader is both implicit and predictable. The Chinese are invoked along with the Chamber of Commerce. A denial of xenophobic intent follows immediately, and "We the People" appear near the end. Carl Schmitt would recognize the rhetorical construction of "friend and enemy." Rather cleverly, Lessig manages to equate the foreign devils with the internal demons of the liberal mind. Corporations (including the Sierra Club?) and the Chinese (or other foreigner) are on one side of political struggles while "We the People" are on the other.
David Price, a Democratic member of the House of Representatives from North Carolina, has introduced a bill, the Stand by Every Ad Act, to mandate disclosure of support for political speech by business and union officials.
Rep. Price cites three harms from such speech: "the opportunity for corporations, unions and associations to dominate the playing field, intimidating public officials and drowning out the candidates' own messages."
Notice that these alleged harms are caused by the speech itself and not by the fact that the speech might be anonymous. Notice also that Rep. Price provides no evidence at all that such harms will take place. Where would such evidence be found? Prior to McCain-Feingold, corporations and unions could fund speech. Several states also have permitted independent corporate expenditures. What happened in those years or those states to support Rep. Price's extreme claims?
It is striking that two of the three harms cited by Rep. Price concern only members of Congress. He claims members will be intimidated or have their "own messages" drowned out. What Rep. Price does not say is how these problems for members of Congress would translate into problems for voters. Of course, such arguments about the welfare of voters exist, but they are not obvious to most people. Rep. Price, however, saw no need to make the connection between an alleged harm done to a member and the interests of voters. His argument is centered on the interests and concerns of incumbent members of Congress. Apparently members consider first their own interests in thinking about campaign finance regulations.
Rep. Price also ignores the fact that voters are likely to receive more information about candidates for office after Citizens United since the hand of the censor has been lifted.
Rep. Price clearly believes mandated disclosure by business and union leaders will effectively discourage them from speaking out during elections. Given that motivation behind the new disclosures laws, at what point does mandated disclosure translate into chilled speech?
One other disturbing part of Rep. Price's case for his bill: he hopes to extend disclosure to the Internet. Of course, disclosure of Internet speech may well lead to other restrictions on speech online.