“Limited shareholder liability was never meant to protect well-heeled woke investors from the consequences of their actions during PR stunts at woke parades.” — Vivek Ramaswamy, Woke, Inc.

This week, I have another excerpt from Vivek Ramaswamy’s Woke, Inc. that I found quite interesting. And this one comes with a history lesson to boot. After reading the first couple paragraphs, you might think this is an anti-American diatribe and that the American capitalist system was a terrible idea. But, stick with it….

— — —

“Making the pursuit of profit the corporation’s singular mission wasn’t simply a matter of administrative convenience. It was fundamentally a new American invention. In the Old World European model — what is now termed classical ‘corporatism’ — the role of the corporation was to serve as one among many societal institutions tasked with the betterment of the public at large. In Europe, business leaders were supposed to work with labor leaders, church officials, and politicians to determine and implement the common good. But in America, the job of corporate managers has been to maximize profits alone — leaving it to other institutions to look after broader societal goals.

The genius of the American vision was to separate the activities of innovators and entrepreneurs from those of other societal institutions, like church and state and local government. While the leaders of other institutions — including government — looked after the interests of society at large, American capitalists were legally obligated to look after only their own interests.

History supports this view, but so does common sense. Society gave corporations superpowers. Foremost among them was the gift of limited liability. In return, society demanded that companies use that power for only a narrow set of activities — namely, to make products and services — to prevent them from wielding too much power in our politics and other noncommercial spheres of our lives.

Advocates of classical capitalism like Milton Friedman wrongly assumed that both fundamental features of the corporation — limited shareholder liability and the mandate to maximize shareholder value — were strictly about incentivizing entrepreneurs and investors to unleash innovation. They ignored the way in which limited shareholder liability would create titanic corporate monsters with power heretofore unimagined, offering no coherent theory for how society should constrain the power of those monsters outside the marketplace.

By contrast, advocates of stakeholder capitalism were correct to acknowledge a social contract between shareholders and society in which shareholders owe something back to society in return for the great gift of limited liability. They were also correct to recognize that the social contract was one that demanded restraint from corporations. They erred only in surmising that this social contract was ‘implicit’ and that corporate restraint was about tamping down the pure pursuit of profit. To the contrary: if limited liability was the quid from society, then the mandate to maximize shareholder value was the quo from corporations.

That was the true grand bargain. The requirement to maximize profits wasn’t just about protecting shareholders, as Milton Friedman types had assumed. It was about protecting the rest of society from a Frankensteinian corporate monster. That’s why we keep the monster trapped in the cage of capitalism: to protect democracy and other civic institutions from a monster that, once unleashed, would exercise more power than any business or person ever should. Just as society demands that nonprofits confine their activities to the sphere of charitable causes in return for tax-exempt status, with for-profit corporations society did precisely the reverse — not just to protect shareholders but to protect democracy and our other institutions.

And therein lies the solution to the true problem of expansive corporate power in the twenty-first century: limit the scope of limited shareholder liability itself. That might sound scary to business elites at first, but on inspection its effect is intuitive and even mundane. Institutional shareholders like BlackRock, one of the largest asset managers and proponents of stakeholder capitalism, should enjoy the benefit of the limited liability shield when their portfolio companies produce goods and services for profit. But if BlackRock uses the corporate shield to implement its own vision of ‘social responsibility’ for society by using its portfolio companies as a vehicle for advancing that agenda, then aggrieved consumers, employees, and other stakeholders shouldn’t just be limited to suing those corporations. They should be able to go after BlackRock directly — as well as any other social-activist shareholder of that corporation.

Let’s get specific: suppose there’s a big parade organized by a bunch of social activists around a particular cause — say, climate change. Right now, if a regular social activist drives a car in that parade and crashes into someone, she faces personal tort liability. She could be sued in court and lose everything she has. But now, suppose she’s the owner of a company and sends one of her employees in the company car to do the same thing, and the exact same thing happens. Then she can’t be sued: her personal assets are protected by limited liability. That gives her a shield that ordinary social activists don’t get. That’s the shield that woke shareholders like BlackRock or other ESG investors enjoy on a large scale today.

So, I’m just proposing that we level the playing field and make those woke shareholders, like BlackRock or Al Gore’s Generation Investment Management, bear the same liability as any ordinary social activist when they engage in ordinary social activism through the companies that they invest in. Limited shareholder liability was never meant to protect well-heeled woke investors from the consequences of their actions during PR stunts at woke parades. Yet that’s precisely the privilege that these woke shareholders enjoy today — one that society never intended to provide when it created limited shareholder liability in the first place.

This solution may seem modest, but it would completely reorder stakeholder capitalism. Today, BlackRock preaches about the need for corporations to meet the standards of its ‘Sustainability Accounting Standards Board,’ since as a shareholder it is protected from liability from anything that its portfolio companies do. Yet the corporate shield was created to incentivize capital formation for the pursuit of profit — not to use the corporate shield as a way of conducting a protected form of social activism. If BlackRock were to face tort liability for its social advocacy efforts — like an ordinary human social activist would — then its willingness to embrace those social causes would predictably change.

Of course, shareholders like BlackRock can avail themselves in court of the affirmative defense that their primary interest was simply the pursuit of profit itself rather than any social or charitable agenda. In that case, they would continue to benefit from the shield of limited liability — which exists precisely to protect for-profit corporate activities. But it would also reveal the true essence of stakeholder capitalism for the self-interested farce that it is, in a way that would enlighten consumers and citizens alike about the true motivations of today’s newly woke capitalist class. It’s the same motivation that Milton Friedman surmised all along: the pursuit of self-interest above all.

For those like me who believe the rise of Wokenomics represents a problem for democracy, the simple answer is to limit the scope of limited liability of the corporation to cover only the set of activities it was intended to cover. A corporation ought to be free to pursue activities that go beyond the pursuit of profit — America is a free country, after all — but to the extent that it does, its social-activist shareholders shouldn’t receive any special protection from direct liability. There is no government regulatory action needed here. Just a simple legal fix — arguably a form of deregulation — that clarifies that the construct of limited liability is… well, limited.”

— — —

It takes guts for an economically conservative person to challenge Milton Friedman on any point, but Ramaswamy succeeds here, I think. (I’d be curious to read what someone like Thomas Sowell or Henry Hazlitt thinks of Ramaswamy’s assessment.) And it isn’t the only place in his book where he does so. In any case, I am enjoying Woke, Inc. and can recommend it as an informative and challenging read. (“Challenging” in the good sense.)

Tags: American capitalism, corporate privilege, corporate shield, limited liability, Milton Friedman, preserving democracy, profit motive, protecting against corporate monsters, social activism, social responsibility, stakeholders, the common good, Vivek Ramaswamy, Wokenomics

Posted in Politics
No Comments Yet Posted by sirrahc