Matthew Klein of Barron’s explains why U.S. Sen. Elizabeth Warren “has got it all wrong” when it comes to American businesses.
Sen. Elizabeth Warren (D., Mass.) has a problem with the way most U.S. companies are run. In her view, the primacy of shareholders over executives “is a root cause of many of America’s fundamental economic problems,” including underinvestment and income inequality. She has, therefore, introduced legislation to undermine the influence of investors. This is misguided. …
… The stated rationale for these proposals is that shareholders—supposedly blinded by their “short term” perspective—starve companies of funds for investment by demanding excessive payouts in the form of dividends and buybacks. Disempowering shareholders would therefore improve macroeconomic outcomes by raising investment and lowering inequality.
There are at least three problems with this analysis. First, it fundamentally misunderstands how shareholders think about capital expenditures. Second, what is true at the level of the individual company doesn’t hold true in the aggregate. And third, Germany is not a model of a capital-intensive egalitarian society. …
… Shareholders also have more reason to support transformative capital projects than other stakeholders, since they have a direct claim on any additional profits. By contrast, employees, suppliers, and their communities have to worry that they will be displaced by new machines or advanced software. Shareholders try to limit capital expenditure only when they think managers are wasting their money. Left unchecked, bosses waste shareholder funds building conglomerates worth less than the sum of their parts while fleecing investors to pay for their three-martini lunches and trips to distant golf courses on company jets. The best solution to this problem is to align the interests of managers and owners by paying executives in slowly vesting shares.
