Publicly Traded Companies Are Still Private Property
No matter what California legislators or Elizabeth Warren think
The first week of September saw the heads of tech companies hauled to Capitol Hill yet again to explain themselves to a bunch of grumpy senators. Whenever this happens, the hearing inevitably begins with hours of bloviation about "the public interest" before someone raises the idea that social media sites should be treated "like public utilities." Rep. Steve King (R–Iowa) is a big fan of this line of questioning, raising it in the previous go-round with Google in July: "What about converting the large behemoth organizations that we're talking about here into public utilities?"
The notion that Twitter or Google are as vital to American citizens as water and electricity—and therefore must be subject to a much higher level of government scrutiny and regulation, or perhaps even government ownership—is misbegotten on several fronts. But at the root of the whole debate is a conflation of different definitions of the word public. Sometimes it means "of the state," as in public sector or public school; other times it means "for general use or benefit," as in public square, public accommodation, or the public good. But often it describes something that is clearly private property but just so happens to have members of the general public as shareholders, as in publicly held or publicly traded.
This same confusion crops up when people refer to Facebook or Twitter as the 21st century agora, with the implication that they must therefore be subject to extra oversight. One problem with this comparison is that it glosses over what people actually did in the agora, which was to buy and sell goods and services as well as to talk and fight about politics. Fun Wikipedia fact: There are two Greek verbs that originate from the word agora: ἀγοράζω or "I shop," and ἀγορεύω, or "I speak in public." So we can blame the Greeks for our messy situation in English; they mixed politics and pleasure right from the beginning.
A more pernicious and far-reaching variation on this theme is the trend of treating all publicly traded companies as public property. In August, Sen. Elizabeth Warren (D–Mass.) debuted her plans for an Accountable Capitalism Act, which would require a federal charter for corporations with more than $1 billion in annual revenue. It would also mandate that said companies permit employees to elect 40 percent of the board of directors and that the firm consider the interests not just of shareholders but of "stakeholders"—a catchall term that can mean almost anyone. Warren wrote in The Wall Street Journal that the owners of stocks have "extracted" $7 trillion in profits since 1985 that "might otherwise have been reinvested in the workers who helped produce them."
A publicly traded company is not the same as public property, akin to a city sidewalk or a national park. Offering shares on an open stock exchange does open up a firm to more scrutiny, but it does not and should not make the firm's internal decisions up for grabs to any passing politician.
Try telling that to the California legislature, which passed a bill at the end of August mandating that publicly traded companies headquartered in the Golden State have at least one woman on the board, with the quota rising from there depending on other factors.
Confusingly, the bill's backers frequently cite the business case for more diverse boards, as if a company itself isn't better situated to know what will be in its own economic interests. State Sen. Hannah-Beth Jackson (D–Santa Barbara), who co-authored the legislation, lamented that "one-fourth of California's publicly traded companies still do not have a single woman on their board, despite numerous independent studies that show companies with women on their board are more profitable and productive." Truly, it is astonishing how many elected representatives have such highly developed views on running other people's businesses.
The state, as usual, is a lagging indicator of change. As veteran board member and early Yahoo and eBay investor Betsy Atkins noted in Forbes, the major index funds—Vanguard, Fidelity, and others—already threaten to "withhold" their shareholder votes from companies in the index that don't have at least two female board directors, essentially punishing insufficient diversity. Last year one massive index fund, State Street, did such a withhold vote on 400 businesses.
There's evidence from Norway, where a requirement for 40 percent female board membership became law in 2006, that fewer companies have chosen to undergo an initial public offering and that firm valuations are down overall. This is obviously not because women are ill-suited to board membership; it's because forcing precipitous change at a faster rate than a culture can accommodate causes disruption and uncertainty.
Fewer stock offerings, lower valuations, and flight to friendlier climes are hardly the desired outcomes of these reforms. Yet some companies will certainly simply leave California, as others before them have done already in the face of high taxes and burdensome regulation. Of course, the exit option will be diminished if Warren has her way and federal charters become de rigueur, with board regulations like the California proposal likely following nationwide.
Another facet of this creeping trend is the suggestion that partaking of public goods or government services negates private ownership. There will always be those who work hard to opt out where they can—sometimes even when the cost is very high, as in the case of the few colleges and universities that refuse federal aid of any kind. But few people can live fully private lives, successfully avoiding any intersection with the public sector. Consuming public resources—especially those that are by design (and in some cases even by law) impossible to avoid—does not make the fruits of your labor public property.
The recent inflection point of this argument is traceable to an infamous 2012 speech by President Barack Obama—cribbed, in large part, from a viral Warren address delivered the previous year. "If you were successful," Obama declared, "somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you've got a business—you didn't build that. Somebody else made that happen."
There is a way to convert property from private to public: nationalizing it. But that is a scary word, and one that many on the modern left disavow. They don't want to seize the means of production, they say. They just want to "empower" workers and do a bunch of wealth redistribution.
The new posse of democratic socialists—of whom Warren is a more moderate and mainstream cousin—balk at mentions of Venezuela, where we are seeing the end stages of what happens when the politically powerful blunder into a decently functional economy and seize key industries. They say such comparisons are unfair, and they prefer to direct our attention to the economies of the Nordic states. But even those countries have moved away from some of the most aggressively socialist policies—especially those that center around corporate governance and decision making. For all of their socialist bona fides, Sweden and Denmark are more economically free than the United States when it comes to legal structures, property rights, sound money, free trade, business regulation, and credit market regulations, according to the Fraser Institute. After a disastrous 1970s and 1980s, Sweden in particular deregulated, privatized, reduced taxes, and opened the public sector to individual providers, all while dropping corporate taxes and reducing limits on the labor market.
The U.S. should certainly not mimic the failed policies of Venezuela, but it should also not follow Scandinavia's bust and boom on a decadeslong delay.
To review: Publicly traded companies are private property held by members of the public who are private citizens. Public utilities generate public goods, but so do private firms. None of this means corporate governance should be subject to veto by public officials. Easy, right?
It can sound like silly semantics, but much of our understanding of the rights and responsibilities of corporations rests on these distinctions. The most alarming of the recent efforts to make incursions on those liberties seek to blur the lines between public and private. They must be resisted.
This article originally appeared in print under the headline "Publicly Traded Companies Are Still Private Property."
