    [Joint House and Senate Hearing, 117 Congress]
    [From the U.S. Government Publishing Office]

                                                           S. Hrg. 117-257

                            EXAMINING THE IMPACT OF
                       SHAREHOLDER PRIMACY: WHAT IT MEANS
                           TO PUT STOCK PRICES FIRST

    =======================================================================

                                    HEARING

                                   BEFORE THE

                            JOINT ECONOMIC COMMITTEE

                                     OF THE

                         CONGRESS OF THE UNITED STATES

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 MARCH 16, 2022

                                   __________

              Printed for the use of the Joint Economic Committee

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

            Available via the World Wide Web: http://www.govinfo.gov

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    47-578 PDF                 WASHINGTON : 2022

    -----------------------------------------------------------------------------------

                            JOINT ECONOMIC COMMITTEE

        [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

    HOUSE OF REPRESENTATIVES             SENATE
    Donald S. Beyer Jr., Virginia,       Martin Heinrich, New Mexico, Vice
        Chairman                             Chairman
    David Trone, Maryland                Amy Klobuchar, Minnesota
    Joyce Beatty, Ohio                   Margaret Wood Hassan, New
    Mark Pocan, Wisconsin                    Hampshire
    Scott Peters, California             Mark Kelly, Arizona
    Sharice L. Davids, Kansas            Raphael G. Warnock, Georgia
    David Schweikert, Arizona            Mike Lee, Utah, Ranking Member
    Jaime Herrera Beutler, Washington    Tom Cotton, Arkansas
    Jodey C. Arrington, Texas            Rob Portman, Ohio
    Ron Estes, Kansas                    Bill Cassidy, M.D., Louisiana
                                         Ted Cruz, Texas

                      Tamara L. Fucile, Executive Director
                    Kevin Corinth, Republican Staff Director

                               C O N T E N T S

                                  ----------

                         Opening Statements of Members

                                                                       Page
    Hon. Donald Beyer Jr., Chairman, a U.S. Representative from the
      Commonwealth of Virginia.......................................     1
    Hon. Mike Lee, Ranking Member, a U.S. Senator from Utah..........     3

                                   Witnesses

    Dr. Lenore Palladino, Assistant Professor of Economics & Public
      Policy, University of Massachusetts Amherst, Amherst, MA.......     5
    Ms. Judy Samuelson, Vice President of the Aspen Institute,
      Founder and Executive Director, Aspen Institute Business and
      Society Program, New York, NY..................................     7
    Mr. Frederick Alexander, CEO, The Shareholder Commons,
      Wilmington, DE.................................................     9
    Dr. Joshua D. Rauh, Ormond Family Professor of Finance and Senior
      Fellow at the Hoover Institution, Stanford University,
      Stanford, CA...................................................    11

                           Submissions for the Record

    Prepared statement of Hon. Donald Beyer Jr., Chairman, a U.S.
      Representative from the Commonwealth of Virginia...............    32
    Prepared statement of Hon. Mike Lee, Ranking Member, a U.S.
      Senator from Utah..............................................    33
    Prepared statement of Dr. Lenore Palladino, Assistant Professor
      of Economics & Public Policy, University of Massachusetts
      Amherst, Amherst, MA...........................................    35
    Ms. Judy Samuelson, Vice President of the Aspen Institute,
      Founder and Executive Director, Aspen Institute Business and
      Society Program, New York, NY..................................    48
    Mr. Frederick Alexander, CEO, The Shareholder Commons,
      Wilmington, DE.................................................    57
    Dr. Joshua D. Rauh, Ormond Family Professor of Finance and Senior
      Fellow at the Hoover Institution, Stanford University,
      Stanford, CA...................................................    69
    Response from Mr. Frederick Alexander to Question for the Record
      submitted by Senator Klobuchar.................................    89
    Response from Dr. Joshua D. Rauh to Questions for the Record
      submitted by Senator Lee.......................................    89
    Question for the Record for Dr. Lenore Palladino submitted by
      Senator Klobuchar..............................................    91

                            EXAMINING THE IMPACT OF
                       SHAREHOLDER PRIMACY: WHAT IT MEANS
                           TO PUT STOCK PRICES FIRST

                                  ----------

                           WEDNESDAY, MARCH 16, 2022

                        United States Congress,
                              Joint Economic Committee,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 2:21 p.m.,
    in Room 106, Dirksen Senate Office Building, before the Joint
    Economic Committee, Hon. Donald S. Beyer Jr., Chairman,
    presiding.
        Representatives present: Beyer, Schweikert, Estes, and
    Peters.
        Senators present: Cruz, Lee, and Hassan.
        Staff: Ismael Cid-Martinez, Chelsea Daley, Hugo Dante, Sebi
    Devlin-Foltz, Ron Donado, Carly Eckstrom, Ryan Ethington,
    Tamara Fucile, Devin Gould, Owen Haaga, Erica Handloff, Colleen
    Healy, Jeremy Johnson, Adam Michel, Michael Pearson, Elisabeth
    Raczek, Alexander Schunk, Nita Somasundaram, Sydney Thomas,
    Ivan Torrez, Emily Volk, Brian Wemple, and Katie Winham.

     OPENING STATEMENT OF HON. DONALD BEYER JR., CHAIRMAN, A U.S.
            REPRESENTATIVE FROM THE COMMONWEALTH OF VIRGINIA

        Chairman Beyer. Our hearing is titled ``Examining the
    Impact of Shareholder Primacy: What it Means to Put Stock
    Prices First.''
        Thanks to all of our distinguished witnesses for sharing
    their expertise today. It is an exceptional panel of experts,
    and I am looking forward to hearing from you. And I want to
    apologize from the start that the House and Senate leadership
    seemed to have determined to augment our hearings with votes.
    So we will do our best to manage that back and forth.
        This hearing will examine how the shareholder primacy model
    of corporate governance has impacted the economy and how
    Congress can help address the problems it has created.
        Shareholder primacy is a corporate model that focuses
    mainly or exclusively on increasing stock prices to generate
    value for its shareholders. This approach, which has gained a
    lot of favor just in the last few decades, encourages
    corporations and their executives to spend a larger share of
    profits on stock buybacks to reward investors in the short
    term.
        Who are the winners when corporations put stock prices
    first? In the United States, shareholders are a relatively
    small group. The top one percent owns roughly 50 percent of all
    corporate equities, and only about half of the U.S. households
    own any stock at all. As a result, the singular focus on stock
    prices concentrates wealth at the very top, while leaving less
    for companies to reinvest in their workers and innovative
    technologies and in long-term growth.
        For example, the seven largest publicly traded oil
    corporations recently announced a near-record $41 billion stock
    buyback program, on top of $50 billion in shareholder
    dividends. While everyday American workers and families bear
    the burden of higher gas prices, big oil is raking in record
    profits and prioritizing padding the pockets of the wealthy
    shareholders. It has not always been this way, though.
        From the 1930s to the mid-1970s, American corporations
    largely followed a retain-and-reinvest strategy to focus on
    long-term innovation and job security for workers. Workers were
    seen as an asset and a long-term investment, not a liability.
    Managers viewed well-paid cared-for workers as vital to their
    success. They primarily used profits to pay workers, provide
    benefits, and make productive investments. Shareholders
    received the residual after companies paid workers, invested
    for the future, and paid down debt. Not accidentally, American
    productivity had unprecedented growth during this period.
        During this time, economic growth was strong and broad-
    based. As the economy grew, workers saw their wages rise and on
    the whole were more financially secure. They had access to
    pensions and pathways to the middle class.
        Since the 1970s, however, as shareholder primacy has become
    more dominant, boards have put shareholders at the front of the
    line for corporate profits, leaving everyone else behind. While
    CEOs and executives at the top have seen their incomes go up,
    940 percent over the last four years, the bottom half of
    earners have seen their wages virtually flatline. These are all
    in constant dollars.
        Across the board, the share of domestic product, gross
    domestic product going to employee wages and benefits has been
    declining for decades. The increased corporate focus on raising
    stock prices has driven this trend which in turn has deprived
    workers of the gains from economic growth.
        Because the corporate executives and shareholders who
    benefit from this model are overwhelmingly and
    disproportionately wealthy and white, this further reinforces
    the widening wealth disparities across income and racial
    groups. For 2019, the top 10 percent of American households
    held 70 percent of all U.S. wealth, and the total wealth owned
    by the entire bottom half of America dropped to just 2 percent.
        The impact of shareholder primacy goes beyond the widening
    difference between winners and losers. It is impacting our
    economy at almost every level. Short-sighted decisions to help
    companies hit short-term earnings for products can explain the
    just-in-time inventory and staffing approaches that left U.S.
    supply chains vulnerable to pandemic-related disruptions.
        Shareholder primacy also hinders investment and innovation
    and sustainability, the driving crux of economic growth and are
    necessary to address threats by climate change. For example,
    despite growing risks from climate change, corporations have
    continued to make decisions that prioritize short-run
    profitability at the expense of broad sustainability and
    climate resilience.
        Surprisingly, investors themselves also lose under
    shareholder primacy. Families investing money in diversified
    stock portfolios for college or retirement suffer when
    individual companies put their short-term profits over their
    long-term investments. It is no coincidence that widening the
    economic inequality in this country, which began in the 1970s,
    coincides with the increased dominance of shareholder primacy.
    It has helped to concentrate economic power among the
    privileged few.
        But this is not how we as a Nation have always done things.
    There are other paths forward that maintain firm profitability
    and promote economic growth that is stronger, stabler, and more
    broadly shared.
        For example, incentivizing business to invest in
    innovation, sustainability, and enhanced productivity, would
    boost competition, workers wages, and economy-wide returns.
    Legislative proposals that place limits and tax share buybacks
    would help realign corporate incentives away from short-term
    stock prices and toward long-term pro-growth investments. And
    legislation that strengthens collective bargaining and raises
    wages, like the PRO Act and the Raise the Wage Act would ensure
    workers take home a larger share of the gains that public
    companies and their executives have been keeping for
    themselves.
        As we dive deeper and deeper into these issues, we look
    forward to the testimonies of our expert witnesses, and I would
    like to turn it over to Senator Lee. Thank you for your
    flexibility and for your opening statement.
        [The prepared statement of Chairman Beyer appears in the
    Submissions for the Record on page 32.]

      OPENING STATEMENT OF HON. MIKE LEE, RANKING MEMBER, A U.S.
                           SENATOR FROM UTAH

        Senator Lee. Thanks so much, Mr. Chairman. Thanks to all of
    you for joining us today. Last week we learned that inflation
    has reached a new 40-year high, a new 40-year high of 7.9
    percent. That means that inflation is costing the average
    American family $435 a month more each month, every month, for
    the things that they ordinarily buy.
        Given this new economic reality, I hope we keep in mind the
    severe price increases that are facing American families right
    now, as we hear about foisting environmental and other
    political goals onto private businesses.
        Americans are hurting. Low and middle class Americans are
    the ones who pay the price for uprooting our market economy in
    favor of a political agenda. This agenda will not only compound
    inflation making Americans poor, and our businesses less
    dynamic, less capable of offering products that people need to
    buy, less capable of offering jobs that people want to have.
    But the American people have reached the benefits of free
    markets and of robust competition.
        This free market system that has lifted Americans to the
    highest standard of living ever achieved by a major economy.
    Yet today the free market system that enables American
    prosperity is under attack by bureaucrats, politicians, and
    regulators who seek to impose their personal political goals
    onto private parties, on businesses, and consumers alike. They
    seek to override the competitive forces that grow workers wages
    and keep prices low. They seek to make private companies
    beholden to politicians rather than to the shareholders who
    invest in companies in the first place.
        When we hear the word ``shareholder,'' we do not usually
    think about the average American, but that is exactly who they
    are. Shareholders are the more than 180 million Americans who
    live in a household with a 401(k), a pension, or some other
    form of stockholdings. Shareholders are an ever-growing
    majority of households who invest in the economy. They use the
    return on that investment to save for retirement, buy a home,
    or send their kids to college.
        When the government tells companies not to listen to
    shareholders, it is really telling companies not to listen to
    the American people. When the government tells companies to
    divert their hard-earned resources into work policy goals like
    environmental and social justice, the government is taking
    power and taking wealth out of the hands of the American people
    and consolidating it in Washington.
        When the government interferes with the private sector,
    businesses stop serving their workers and customers. They
    instead serve the bureaucrats who set the rules. We already see
    this happening.
        President Biden recently directed his Administration to
    assess companies' progress on environmental and social justice
    goals. A step toward requiring them to abandon their core
    responsibilities to the school teachers, the firefighters, and
    other everyday Americans who invested in them, and who buy
    their products.
        These actions ignore centuries of evidence that the free
    market system is the best way to create prosperity for workers
    and families and communities. Now America has always been a
    place where the most effective common action occurs in the
    space between the individual and the State. A Federal
    Government that attempts to replace free enterprise is a
    Federal Government that has overstepped its bounds. It has
    started to diminish the very interests it was designed to
    protect.
        We ought to ensure that businesses are free to serve their
    communities by remaining at the forefront of innovation and
    creating value for the American families who invest in them and
    are served by them. In today's environment of surging
    inflation, we can afford nothing less.
        Thank you.
        [The prepared statement of Senator Lee appears in the
    Submissions for the Record on page 33.]
        Chairman Beyer. Senator Lee, thank you very much. I would
    like to introduce our four distinguished witnesses.
        Dr. Lenore Palladino is an Assistant Professor of Economics
    and Public Policy at the University of Massachusetts Amherst,
    Research Associate at the Political Economy Research Institute,
    and a Fellow at the Roosevelt Institute. Dr. Palladino
    researches corporate power, corporate innovation, shareholder
    primacy, and the relationship between corporate governance and
    the labor market, with a specific focus on economic policies
    for innovation and the cost of shareholder primacy and stock
    buybacks. Dr. Palladino holds a Ph.D. in Economics from the New
    School University, and received her J.D. from Fordham Law
    School.
        Ms. Judy Samuelson is the Founder and Executive Director of
    the Aspen Institute and Business and Society Program, which
    works to align business and their investments to the long-term
    health of society. Her work is focused on redefining the
    understanding of the purpose of corporations, and shifting the
    focus away from short-termism toward practices that maintain
    long-term economic and societal well-being. She is the author
    of The Six New Rules of Business: Creating Real Value in A
    Changing World. Ms. Samuelson holds a B.A. from the University
    of California Los Angeles, and a Masters Degree from the Yale
    School of Management.
        Mr. Rick Alexander is the Founder and CEO of The
    Shareholder Commons. He founded the organization and for four
    years as the Head of Legal Policy at B Lab. Over three decades
    he served as a corporate attorney and managing partner at a
    leading Wilmington-based firm where he was selected as one of
    the ten most highly regarded corporate governance lawyers
    worldwide, and is one of the 500 leading lawyers in the
    country. Mr. Alexander's work with the Shareholder Commons
    examines the significant economic risk presented by the current
    practice of shareholder primacy. Mr. Alexander holds a B.A.
    from the University of Maryland, and a J.D. from Georgetown
    University.
        Dr. Joshua Rauh is a Finance Professor at Stanford
    University's Graduate School of Business, and a Senior Fellow
    at the Hoover Institution. His studies focus on government
    pension liabilities, corporate investment, business taxation
    and investment management. Dr. Rauh was formerly the principal
    chief economist on the President's Council of Economic Advisors
    under President Trump. He taught at the University of Chicago's
    Booth School of Business and Kellogg's School of Management.
        Dr. Rauh holds a B.A. in Economics from Yale University,
    and a Ph.D. in Economics from the Massachusetts Institute of
    Technology.
        Welcome all of you, and, Dr. Palladino, let's begin with
    your testimony and then we will continue in the order of
    introductions. Dr. Palladino, the floor is yours.

       STATEMENT OF DR. LENORE PALLADINO, ASSISTANT PROFESSOR OF
    ECONOMICS & PUBLIC POLICY, UNIVERSITY OF MASSACHUSETTS AMHERST,
                              AMHERST, MA

        Dr. Palladino. Chairman Beyer, Ranking Member Lee, Members
    of the Committee, thank you for the invitation to be here
    today.
        Policymakers have a critical opportunity to strengthen
    American innovation and resilience as we emerge from the
    pandemic. The economic and geopolitical challenges that face us
    are not going to stop. That is why it is time to strengthen our
    commitment to American productivity by reorienting our
    corporate governance policies toward innovation and away from
    the single-minded focus on share prices.
        To truly understand the harms of shareholder primacy, we
    must start by understanding what makes the company an
    innovative enterprise? What are the structures within the
    company that enable innovation? And what are the social
    conditions for innovation that policymakers can support?
        Corporations are engines of production. It is inside
    corporations that decisions are made about what gets produced,
    by whom, and how companies can succeed in producing higher
    quality socially beneficial products at lower unit costs over
    time.
        We know from history that innovation comes about from long-
    term risk taking by businesses, enabled by collective and
    cumulative learning. It requires complex organization,
    investment in and retention of a committed workforce, and long-
    term financial commitments based on retained earnings and
    leveraged by debt.
        This brings us to shareholder primacy and how its sole
    focus on share prices hurts the production process, and by
    extension our whole economy. When corporate leaders mainly
    focus on raising share prices, there are lost opportunities to
    invest in the tangible and intangible assets that power
    innovation, including in the American workforce.
        Shareholder primacy is a flawed theory of the corporation
    because it makes three incorrect assumptions about the role of
    shareholders and other corporate stakeholders in the process of
    production.
        First, shareholders are not the owners of corporations.
    Shareholders own their shares. They own the corporate
    securities that they have purchased and that they are free to
    sell. In fact, what distinguishes a corporation from a
    partnership or a small business is that shareholders do not own
    the assets of the company, nor are they responsible for its
    liabilities.
        Second, shareholder primacy is usually framed as necessary
    for corporate financing. Shareholders must have authority in
    corporate decisionmaking and see their share prices increase in
    order for operating companies to have financing available.
    However, most shareholders are traders. When I purchase
    financial assets to save for retirement, the funds that I spend
    do not go to the operating company whose stock is now in my
    portfolio. The money I spend goes to the entity that sells me
    the shares.
        Lastly, the theory of shareholder primacy fundamentally
    misunderstands the role of other corporate stakeholders and the
    risks that they take. Business success hinges not only on the
    actions of management and holders of stock, but the hard work
    of employees, customer interests, and public infrastructure
    supported by long-term financial commitments.
        In practice, the orientation of our corporate governance
    system toward ever-increasing share prices has created constant
    pressure to pay shareholders or face activist shareholder
    wrath. We have to distinguish activist shareholders from
    households holding stock as a financial asset for life cycle
    needs, and remember that corporations that focus on innovation
    are actually best for shareholders who depend on the stock
    market for their retirement, because their retirement security
    depends on the success of the entire economy.
        A key component of shareholder primacy is stock buybacks.
    They benefit those who sell their shares. They manipulate stock
    prices and they benefit corporate insiders.
        U.S. corporations spent $6.3 trillion dollars, with a
    ``t,'' on stock buybacks in the last decade, and are on track
    to spend $1 trillion in 2022. We have to ask what is the
    opportunity cost for this use of corporate funds?
        There are countless examples where the focus on spending
    corporate funds on shareholders has left companies ill-equipped
    to face shocks, not focused enough on long-term investment, or
    using shareholder payments as an excuse for holding down labor
    costs. For example, oil companies announced nearly $40 billion
    in stock buybacks this year.
        Proponents of stock buybacks say that companies conduct
    them when they have no other use for corporate funds, but this
    is plainly not the case for so many companies spending billions
    on buybacks today. There are signs of progress. Intel, for
    example, use to spend tens of billions of dollars on stock
    buybacks every year. However, Intel's new CEO, Pat Gelsinger,
    recently stated publicly that Intel would reduce its stock
    buyback activity drastically in order to engage in long-term
    investment in innovation.
        There are a range of policies that Congress should take up
    to reorient corporate governance. I appreciate the committee's
    attention to these issues and look forward to discussing the
    policies in our discussion. Thank you.
        [The prepared statement of Dr. Palladino appears in the
    Submissions for the Record on page 35.]
        Chairman Beyer. Thank you, Dr. Palladino, very much. Next
    we will hear from Ms. Samuelson.

     STATEMENT OF MS. JUDY SAMUELSON, VICE PRESIDENT OF THE ASPEN
      INSTITUTE, FOUNDER AND EXECUTIVE DIRECTOR, ASPEN INSTITUTE
               BUSINESS AND SOCIETY PROGRAM, NEW YORK, NY

        Ms. Samuelson. Judy Samuelson with the Aspen Institute,
    Business and Society Program. Mr. Chairman, thank you for
    having us today, and Members of the Committee.
        For close to 25 years the Business and Society Program has
    been engaging business executives, directors, scholars, leaders
    in labor and corporate governance in both critics and those who
    advise business. In pursuit of our mission, which is about how
    do we align business decisionmaking with the long-term health
    of the economy?
        We believe this probably animates our work the most, that
    business today is simply among maybe the most important and
    influential institution of our day. It has extraordinary
    capacity, especially global, international, multi-national
    corporations, remarkable capacity and talent and problem
    solving skills to address the most important problem.
        We the people of course grant the license to operate. I
    think the question that is really behind this hearing today is:
    Are we harnessing that capacity for the public good? Who does
    that license actually benefit?
        I want to clarify one point that I think that my colleague
    made this point, but let me just say again, the point about
    governance and share ownership, but when it comes to redressing
    shareholder primacy, it is important to note that shareholders
    do not own the corporation itself.
        Shareholders own certificates of stock. And, yes, they come
    with very discrete and important rights. But the assets and the
    liabilities are not the property of the shareholders. The
    corporation owns itself. Shareholders do not own corporations,
    and we do not need to treat them as such.
        One thing that is kind of curious, if you will, is that we
    spend this much time talking about the stock market at all.
    When General Motors was at the top of the league tables and was
    the largest corporation in the country back in the 1950s and
    1960s, it had maybe a million employees just in the United
    States of America, and it was constantly accessing the capital
    markets to raise capital for factories, and to hold the
    employee base, and to fill the need and desire of consumers for
    automobiles.
        But if you look at the situation today, many companies when
    they access the public markets, when they initially go for
    their IPO, if they are actually going to raise any money in the
    market. They raise the money privately, and the opportunity to
    go public is really about just providing their early investors
    an exit in the stock.
        In essence, the company receives the money at the IPO. Why
    do you spend so much time talking about the stock market? The
    question was raised about who owns stock. The wealthiest 10
    percent of Americans own between 84 and 89 percent of publicly
    traded stock--10 percent. Seventy seven percent of all U.S.
    stock is held by white college graduates, and we must remember
    that only 33 percent of white Americans have a college degree.
    Only 50 percent of U.S. households own any stock at all, and
    only 30 percent of Black and Hispanic households own stock.
        Stock ownership among Black and Hispanic elites is also
    tiny. Shareholder primacy, putting the shareholders at the
    center of the metrics and of the belief system of the
    corporation, ensures that our economy places the elite and the
    wealthiest first.
        I would like to end with making three discrete points:
        The first is the tremendous cost that shareholder primacy
    brings to the system. We have already spoken about inequality
    and I mentioned it as well. But we also have to look at the
    cost of capital allocation, which the Chairman has already
    raised. The pressure to divert earnings and profits to the
    shareholders has tremendous consequences and places limits on
    investment infrastructure, research and development,
    innovation, and it explains a lot about our tepid response to
    climate change.
        The barriers to addressing climate change of course are
    about the cost of operation. And the Chairman has already
    spoken to the tremendous amount that the high avengers are
    actually placing through share buybacks rather than investing.
        The second point is that shareholder primacy is built not
    just in law, it is built through a set of incentives, and
    practices, and protocols. It is really not a law at all. It is
    baked into assumptions that are not very easy to unwind. It is
    the scaffolding that keeps their whole share of primacy in
    place.
        Finally, in spite of the ESG, environment, society,
    governance, in spite of the ESG narrative and the promise about
    doing well by doing good, this is no longer a win/win world.
    There are real tradeoffs involved, and the solutions, if you
    want to address the solutions, may take us into some
    uncomfortable places. It requires us to think about innovation
    in employees voice and in governance, and it requires us to
    once again really reward long-term investing. Just the capital
    gains tax, for example, to go way beyond one year as a
    recognition of what constitutes long term.
        And finally, we will take a closer look at private capital
    markets. That is really where a lot of the action is today, and
    is growing in importance. It is not all bad news out there.
    There are any number of companies that we could talk about
    today, but to put employees at the center of their market and
    of their enterprise because of the belief that that is how they
    will perform best over the long haul. That is where the
    employees gain their most important income and revenue, and
    that then works for the employees and it works for the
    customers as well.
        [The prepared statement of Ms. Samuelson appears in the
    Submissions for the Record on page 48.]
        Chairman Beyer. Ms. Samuelson, thank you very much. We will
    now hear from Mr. Rick Alexander.

      STATEMENT OF MR. FREDERICK ALEXANDER, CEO, THE SHAREHOLDER
                        COMMONS, WILMINGTON, DE

        Mr. Alexander. Chairman Beyer, Ranking Member Lee, Members
    of the Committee, thank you so much. It is truly an honor to be
    here today.
        My name is Rick Alexander and I serve as the CEO of The
    Shareholder Commons, a nonprofit that focuses on the issues we
    are discussing here today. But my views on this subject
    developed over a 25-year career of private legal practice,
    advising directors, executives, shareholders, and others on the
    rights and responsibilities under corporate law. Essentially, I
    practiced shareholder primacy for 25 years.
        I was often the person in the room telling the directors
    that, no, they could not take the bid that considered the
    American workers at their company. They had to take the highest
    bid that paid the most to shareholders. That was my job for 25
    years.
        Turning to the subject at hand, I want to say that I do not
    believe that shareholder primacy is all bad. I just believe
    that it is a good idea that has become perverted over the last
    50 years.
        Shareholder primacy is the idea that a company is run
    primarily for the benefit of its shareholders. There are two
    reasons that this idea has developed such a following and
    really dominates our economic life.
        The first goes all the way back to Adam Smith. When a
    business maximizes profits, it is creating value. You know,
    profits are just buying inputs at X and then through hard work
    and innovation, and maybe a little luck, selling at X plus,
    creating value. In an economy like ours, that is not controlled
    from the top, this is not just a way of protecting
    shareholders, it is the way we allocate scarce resources and
    determine prices.
        The second reason that shareholder primacy is important is
    that it allows enterprises to raise the large amounts of
    capital necessary to do the work of a modern economy. Think
    about the billions raised by a startup EV or biotech company.
    This risk capital--this is kind of like the magic of
    capitalism--this risk capital receives no contractual rights to
    any return. All they get is a promise that if there's value
    left over after everyone is paid, they will get that value. It
    would be extremely difficult to raise this capital if the
    company did not have a loyalty to those investors, if they
    could decide to shift that profit to someone else.
        I believe these two reasons still hold and do not argue for
    the abandonment of the principal of shareholder primacy.
    However, what I want to suggest today is that we are doing
    shareholder primacy all wrong. We are not protecting
    shareholders, and we are not allocating resources well. In
    short, the problem is that primacy is exercised today with an
    expectation that all investors care about is the enterprise
    value of the individual company at which a decision is being
    made.
        This is agnostic to the kind of sustainability issues that
    we are concerned about sometimes. It might lead a company to
    treat its workers very well in order to induce loyalty. On the
    other hand, it might lead another company to outsource or
    offshore work if that allows the company to increase its
    profits after having thought about loyalty and reputation and
    all those issues. Like I say, it is agnostic.
        But here is the problem with that indifference to social,
    environmental, and economic effects of the decision. Investors
    do not just own one company. Modern portfolio theory teaches us
    that to achieve the best return with the lowest risk, you have
    to own lots of companies. In fact, fiduciaries like pension
    fund managers are required by law to be diversified. And for a
    diversified investor, 75 percent to 100 percent of return is
    based not on returns of individual companies or what they
    produce or on performance, but rather on the performance of the
    market.
        So this means that if you are a shareholder, what is most
    important to you is how the economy does, how the market does.
    So think about the example of the outsourcing company. The
    first question from the perspective of a shareholder ought to
    be not how this will affect the company, but how will the
    outsourcing affect the economy overall, and thus my diversified
    portfolio? I do not have the answer to that question, but a lot
    of people believe that lower paying jobs lead to less social
    stability, less resilience, poor public health. And if that is
    true, a diversified holder is receiving a bad bargain when a
    company in his or her portfolio increases its own return by
    externalizing this cost onto the economy.
        If that is true, we should make sure that the rules that
    govern investing allow investors to take that broader
    perspective and not just think about individual enterprise
    value. How does that translate into policy? Well, currently
    disclosure rules and fiduciary rules, are interpreted as
    focusing on enterprise value. Congress and the Federal agencies
    have the ability to influence the way shareholder primacy is
    practiced, and change these rules, or clarify them to be clear
    that shareholders are empowered to influence the companies in
    their portfolio to be more responsible with respect to the
    entire economy, even if that might cost the individual company
    a little bit of profit.
        Thank you. I look forward to talking more about these
    questions today.
        [The prepared statement of Mr. Alexander appears in the
    Submissions for the Record on page 57.]
        Chairman Beyer. Mr. Alexander, thank you very much. Now we
    will hear from Dr. Rauh.

      STATEMENT OF DR. JOSHUA D. RAUH, ORMOND FAMILY PROFESSOR OF
     FINANCE AND SENIOR FELLOW AT THE HOOVER INSTITUTION, STANFORD
                        UNIVERSITY, STANFORD, CA

        Dr. Rauh. Chairman Beyer, Ranking Member Lee, Members of
    the Committee:
        In a competitive market, companies must serve their
    customers, employees, and communities well, otherwise they go
    out of business. Companies cannot sell products to consumers
    who do not trust them, and they cannot hire and retain
    employees who prefer other jobs.
        Yet, clearly the interests of shareholders are not always
    aligned with those of other stakeholders. For example, cutting
    prices to levels below cost would be well received by
    consumers, but bad for shareholders who are, after all, the
    owners of the corporation in the traditional sense that they
    control the corporation.
        The CEOs who have claimed corporate purpose in the Business
    Roundtable statement are not the owners of the corporation,
    they are employees appointed by shareholder-elected boards. A
    CEO announcing that shareholders are no longer in charge is not
    far from a government official telling the American people that
    they are no longer in charge.
        So who are the shareholders? Most of the benefits of strong
    stock returns accrue to U.S. households. U.S. households own 38
    percent of the U.S. stock market directly, and most of an
    additional 28 percent of the market through mutual funds and
    ETFs. And then you have pension funds that own another 11
    percent of the stock market. The benefits there also accrue to
    households. And equity ownership is broad-based. Fifty three
    percent of all U.S. households own publicly traded stock. When
    you add on households that do not and are relying on a pension,
    or own a private business where your principles also would
    apply, or nonresidential real estate, over 68 percent of
    households are in some sense shareholders.
        So what do shareholders want? While I sense that other
    witnesses here want some authority to prescribe what firms
    should do, I would contend that Milton Friedman in 1970
    basically got it right. He said shareholders want ``generally
    to make as much money as possible while conforming to the basic
    rules of the society, both law and ethical customs.''
        So under shareholder capitalism, executives have a strong
    incentive to make ethical decisions and plenty of leeway under
    the business judgment rule to do so even if it does not
    maximize the returns on the company's stock in all cases.
        Regarding conflicts between short-term and long-term value,
    more than 80 percent of companies that do IPOs in the U.S. have
    negative earnings, yet they raise hundreds of billions of
    dollars a year for investors, plus the venture capital referred
    to by Mr. Alexander. So it is hard to see excessive short-
    termism here. Still, in case of conflicts, the solution is
    simple. It is to structure executive compensation to reward
    long-term performance. It is not to give managers free reign to
    make decisions in the interest of any stakeholders they want.
        Of course some shareholders may and do have a taste for
    investments that achieve non-financial goals. Chairman Beyer,
    your description of this hearing says this hearing is supposed
    to, quote, ``Examine the Rise in the recent decade of
    shareholder primacy,'' unquote, but the hearing really should
    be examining the erosion of shareholder primacy. Over 33
    percent of total managed financial assets in the U.S. as of
    2020 are now in sustainable investments, broadly defined. This
    is the new phenomenon of recent decades.
        Now if shareholders want to achieve social goals, even at
    the expense of financial ones, should companies act
    accordingly? Yes. But the difficulty comes if there is lots of
    passive capital such as in the massive market tracking index
    funds that many Americans own in their 401(k) plans. Large
    numbers of smaller investors just want a good return on their
    investments.
        Meanwhile, powerful managers of the index funds they hold
    impose ESG on corporate America as they vote on behalf of
    trillions of dollars of other people's money. And investors may
    be at risk. The surveyed evidence in over a thousand papers in
    the performance of ESG investments in public markets is quite
    varied. In my own work on private markets, I find that
    preferences for ESG are related to significantly lower rates of
    return.
        In 2020, the Department of Labor protected investors from
    arbitrary actions in the name of social responsibility when it
    limited the extent to which ESG funds can be offered in 401(k)s
    and other plans. The Biden administration's lack of enforcement
    of that rule, and the new proposed ESG rule of Fall 2021,
    threatened to undermine that.
        In many cases, the majority views of the American people do
    not even line up with the received wisdom of the ESG. For
    example, Gallup polls from last year showed that only 39
    percent of Americans want less emphasis on producing energy
    from oil, and only 19 percent want less emphasis on producing
    energy from natural gas. That is not good support for shaming
    companies into pursuing these actions.
        Finally, it is misleading to focus on bad examples without
    considering the good of the entire system. Over the past 50
    years, real per capita GDP in the United States increased 132
    percent to $64,000 per person, the highest among all countries
    with a population of at least 10 million people. Since 1959,
    incomes for the bottom fifth of the income distribution
    increased by 262 percent, the highest of all income quintiles.
    Those are the fruits of shareholder capital.
        In conclusion, the focus now should be how to protect
    regular investors from the potential financial harms of
    arbitrary decisions under the guise of ESG and financial
    responsibility. And for fund management, we should return to a
    default of shareholder value maximization within the bounds of
    law and ethics, unless an individual shareholder actively
    specifies otherwise.
        Thank you very much.
        [The prepared statement of Dr. Rauh appears in the
    Submissions for the Record on page 69.]
        Chairman Beyer. Dr. Rauh, thank you very much. We will now
    begin with questions for our witnesses. I will begin with Dr.
    Palladino.
        Proponents of stock buybacks have argued this practice
    serves the stock market by moving capital from firms that have
    no use for it into companies with a higher need for new funds.
    Why doesn't this hold true, in your opinion?
        Dr. Palladino. Thank you very much for the question. That
    is a great question that I will break into two parts. The first
    is what I mentioned in my testimony. The argument for stock
    buybacks often is that it is a way to efficiently move
    financial assets or capital from a company that no longer needs
    it to other companies.
        So when we look at examples like for example Amazon who
    just announced $10 billion in stock buybacks this past week,
    and we look at the fact that Amazon workers have been
    protesting and organizing for decent living wages for years, we
    see there is availability for investment in the workforce.
        When we look at Exxon and we see that they have invested
    very little in the low carbon transition, we see that there is
    opportunity for investment. So I look at the opportunity costs
    as critical.
        The other answer to your question is that we actually need
    more information about the private markets to understand the
    flow of funds that go from an operating company that
    repurchases stock to an asset manager, and then back out into
    the market. We know that net equity issuance has been negative
    for the last two decades, meaning that publicly traded
    companies are issuing less stock than they are repurchasing. We
    need more disclosure and data for the private markets to fully
    understand the flow of funds, but I believe that these
    arguments are mainly misguided. Thank you.
        Chairman Beyer. Ms. Samuelson, proponents of shareholder
    primacy contend that shareholders own the company. We just
    heard this from Dr. Rauh. And yet you have argued that the
    corporations are actually owned by the corporations themselves.
    Can you expand on this, and why we should not think that the
    shareholder through their 401(k) or whatever, own the
    corporation?
        Ms. Samuelson. Well, the corporation owns itself. When the
    corporation legally incorporates, it becomes legally a, you
    know, fictitious person. And a person owns its assets and
    liabilities just like any of us do.
        The shareholder has the certificate of stock, but what that
    certificate of stock enables the shareholder to do is to vote
    for the board of directors, a critically important right. It
    gets to do things like weigh in on whether or not the executive
    is appropriately paid. And then of course, you know, it can put
    votes on the ballot. It can ask, you know, at the annual
    meeting for certain things to be taken up and considered. But
    it does not add up to controlling or running the corporation,
    as might have been the case if we went back a hundred and some
    odd years in terms of how it was structured then.
        So the situation has changed a lot. And if we kind of look
    at the results of the incredible dependence on the shareholder
    as to the organizing principles of the corporation today, we
    would wind up with things like, another example, she talked
    about Amazon. I will tell you about Target. Target got a lot of
    great press a couple of weeks ago because it announced that it
    was going to be doing about $300 million of investment in its
    employees, with some wage increases in Targets across the
    country, greater access to health care.
        We can debate whether or not those things add up to much,
    but if you kind of roll back in time, six months ago, this is a
    $300 million investment announced on their employees, six
    months ago they announced $15 billion in share buybacks. If you
    go back over the last 10 years, something like 93 percent of
    profits have been returned or, I do not even like to use the
    ``return,'' because I am not so sure they were necessarily due
    to begin with, but were paid out to shareholders, 93 percent.
        The factor that is most important in this environment is
    what we are doing to reward executives. And the executives
    today are being paid in stock, as well. So all of this is
    consistent with their worldview and what they are being paid to
    do. But, no, the shareholders do not own the corporation. They
    own shares of stock that give them some rights.
        The last thing I would just say is that if you look at the
    stay on pay votes, they correlate with the stock price. As long
    as the stock price is going up, the stay on pay votes largely
    go with saying the pay is fine. It is only when the stock price
    is going down that someone may raise an objection, the
    shareholders raise an objection to how the CEO is paid.
        So the system is kind of reinforcing of where we are now.
        Chairman Beyer. Thank you, Ms. Samuelson, very much. We
    will now introduce Senator Lee for his questions.
        Senator Lee. Thank you very much, Mr. Chairman.
        Dr. Rauh, I would like to start with you. We have heard a
    lot today about reform proposals, and critiques of the way the
    market works. I am concerned that in many cases when the
    Federal Government gets involved in order to make the world
    appear to be a more equitable place, or to enhance the fairness
    of the marketplace, which can end up not only not achieving
    that but having the opposite effect. It is particularly
    dangerous in an environment like this one in which you see that
    inflation--what we are experiencing today relative to a year
    ago, the average family in Utah is spending an additional $582
    a month every single month, just on the things that they
    already have to buy. It is just higher prices on the things
    they have already got to buy, relative to a year ago.
        This is about $7,000 a year that they are having to cough
    up just to buy the same stuff that they bought a year ago. Gas
    prices are striking well over $4 a gallon, and just in this
    last week alone the prices at the pump in Utah reached their
    highest levels ever on record.
        And so if we do these things right now, when we try to do
    something like pursue the SEC's current plan to mandate
    climate-related ESG disclosures, I feel it would undercut the
    very interests that that they are supposed to serve. These
    sorts of things inevitably hurt the poor and middle class. They
    do so in a few ways.
        Number one, I think they tend to entrench market
    incumbence, well-funded market incumbence, who are in a better
    position to absorb the compliance costs that startups would not
    have to deal with. They also have superior access. You can
    further degrade the ability of a startup to gain access to
    capital when you do this.
        And then, but across the board you are increasing
    compliance costs. And so the cost of goods is going to become
    higher, and made higher still by the relative lack of
    competition from new entrants into the marketplace.
        So tell me what your perspective is on this, on whether
    mandatory ESG reporting, how that might impact ordinary
    Americans?
        Dr. Rauh. Well thank you for the question, Senator. I think
    there is little question that ESG action, including both
    reporting and ESG activism, has reduced production of oil and
    gas in ways that are impacting regular Americans.
        You know, Exxon Mobile lost four board seats last year to
    Engine Number One, an ESG activist fund, and Chevron's board
    forced them to commit to reducing their indirect emissions,
    meaning the emissions from people buying their products. And
    there has been a litany of sustainability statements from many
    of the energy companies they have released recently, I sense
    under ESG duress.
        Commitment to--BP's commitment to decarbonize, that
    involved the premise for new exploration, a decline in
    production of 40 percent by 2030. Other oil and gas companies
    have made similar statements. And so this must be affecting
    production.
        And actually another point, which is the companies that are
    not subject to as much ESG pressure because they are private as
    opposed to publicly traded and may not be subject to as many
    regulations, they are now the ones who are stating that they
    are going to do the most, the majority or more, of more capital
    expenditures this year, 2022, than publicly owned companies,
    particularly in the shale sector.
        There is no question in my mind: ESG pressure has been
    substantial and has had effects on production, driving down
    quantity, and driving up prices.
        Senator Lee. Thank you. That is very helpful. It seems to
    me the last thing we ought to be doing in the name of making a
    more competitive environment, an environment in which poor
    economic mobility remains part of the American dream, the last
    thing we would want to do is adopt a series of policies that
    will further entrench elites, those who are already wealthy and
    well connected, making them wealthier and more well connected
    altogether at the expense of poor and middle class Americans.
        Tell us a little bit from the investor standpoint, a little
    bit about how you might create risks that would go to poor and
    middle class Americans, today's workers, tomorrow's retirees,
    those saving for retirement, or saving to buy a home or what
    have you. How might that be affected by any system that would
    prioritize political, social, environmental goals above and
    beyond those required by existing environmental laws, instead
    of growing their company and answering directly to their
    shareholders?
        Dr. Rauh. Well, Senator, in order to implement those
    requirements, the money has got to come from somewhere. And so
    that means it either has to come from customers in the form of
    higher prices the consumers are going to pay, or it would have
    to come from workers in the form of lower wages that we pay to
    workers, or it is going to come out from shareholder returns.
        And, you know, while there has been a lot of talk of how
    much the top one percent owns of the stock market, and so on,
    the fact is that we have a society where there is broad
    ownership, where many, many Americans, 53 percent of Americans
    own some stock, and a lot of people are relying on the stock
    market for their retirement.
        And it seems rather problematic to require companies to do
    things that would reduce the returns that individual investors
    are expecting and are relying on in the interest of goals that
    are not actually part of the law. And it is an interesting
    question to wonder why are these requirements not part of the
    law?
        I think part of it is because these requirements are just
    not very popular, according to polling data. So the bottom line
    is that whenever you put these types of requirements on
    companies, it has to come out of something. There are
    tradeoffs. There are conflicts. There are conflicts and
    tradeoffs. And the market system has done a good job with
    managing these over many decades.
        Senator Lee. Thank you.
        Representative Peters [presiding]. Thank you, Senator. In
    the absence of the Chair, I will recognize myself.
        Mr. Alexander, you have noted how shareholder primacy is
    not the only doctrine that companies have used in the past to
    inform their operations because it has become more standard
    recently.
        Can you tell us how companies operated before shareholder
    primacy became the dominant doctrine, and how model companies
    might take a different approach that would better align their
    incentives, in your view, with what is the common good?
        Mr. Alexander. So I would say that--thanks for the
    question. I would say that, you know, in some sense there has
    been a pretty direct line of shareholder primacy throughout the
    20th and 21st centuries. As shareholders became more diffuse,
    as there was more separation of ownership from control, and the
    real issue has been in sort of, you know, what does it mean to
    sort of represent the residual risk there to the equity holder.
        And I think an important thing to think about, as we talk
    today, is that the question of shareholder primacy or not, or
    how we practice it, it is not a question of whether we practice
    ESG or not. ESG is practiced today. It actually buys into the
    shareholder primacy thing.
        If you think about the Exxon Mobil, the Engine Number One
    campaign last year, that was a campaign based on sort of the
    ESG principles, shareholders saying, you know, the company has
    not done a good enough job addressing climate change issues.
    But the point they made was that the company had misallocated
    capital in anticipating the switch to more renewable, and that
    therefore they had done poorly for their shareholders.
        Engine Number One is a hedge fund that was concentrated in
    company stock, and they just wanted the company to do better,
    and that was their theme. They were not asking the company to
    make sacrifices in order to benefit, you know, the greater
    good. You know, the question I think we are wrestling with is
    whether, when a management team says we are going to put the
    shareholders first, are they doing so in a way that
    externalizes costs that hurts society as a whole, that hurts
    the market, and in my mind that is not a good practice of
    shareholder primacy because it is very likely that your
    shareholders are invested in other companies who are hurt when
    the economy is hurting. Thank you.
        Representative Peters. Yes. I was sort of asking about
    whether the perspective of companies has changed with respect
    to shareholder primacy over time. You said it has been
    different?
        Mr. Alexander. So I will confess not being enough of a
    historian to really answer that question well. But I don't--you
    know, in the New Deal era this question was really wrestled
    with. There was the Berle-Dodd debate that asked are companies
    run for the benefit of society, or are they run for the benefit
    of their shareholders?
        And I think what happened post-War was there was not a
    conflict. Companies were able to pay their employees well, do
    well by their shareholders, and they just were not thinking
    about, I would say, some of the debts that they were incurring
    to the future in terms of what was happening to the
    environment, what was happening to society. And what happened I
    think in the last 50 years was, as we approached certain
    planetary and social boundaries, management had to begin
    focusing on the real tradeoffs that existed. And that is what
    sort of called the question.
        Representative Peters. Ms. Samuelson, when we talk about
    the role that shareholder primacy plays in global climate
    change, how do you think that companies can move beyond paying
    lip service to sustainability and commit real resources to help
    fight that particular cause?
        Ms. Samuelson. Well these are definitely creative, but can
    I steal a little time to respond to your earlier question?
        Representative Peters. You have 45 seconds.
        Ms. Samuelson. When the shareholder primacy really took
    off, it was in the early 1980s. And what happened is, you asked
    if it was a masked idea that we needed to put shareholders. The
    single objective function is we needed to wake up corporations,
    and they will then listen, perhaps.
        But what happened is, in the 1980s we started connecting
    the CEO pay back, to start. So they could hire people cheap and
    promise them stock, and things really then began to take off.
    It also happened in 1993 when Clinton put a one million dollar
    cap on what could be deducted of the CEO's pay. And that's when
    it really took off, stock options really took off at that
    point.
        You have really got to go back to that point of when this
    whole thing started to launch and really took on steam.
        Representative Peters. Maybe we can explore that later. We
    will turn now to Mr. Schweikert for five minutes.
        Representative Schweikert. Thank you. Just for the fun of
    it, what was the second half of Milton Friedman's sort of
    treatise from, what was it, 1970? ``So as long as it stays
    within the rules of the game, which is to say, engages in open
    and free competition without deception or fraud,'' we always
    seem to forget that second half of the 1970 treatise from
    Milton Friedman.
        I actually have a slightly different view. In many ways,
    this hearing actually bothers me from the standpoint of we
    should have done something much more global with what is going
    on in the economy and our world, and right now, and then this
    sort of soft, nationalization of corporate boards, which is
    functionally what it is, let's be honest, and the last witness
    just said something that actually I think rings quite true.
        Much of what is going on that the left considers bad is our
    fault. We have made it so expensive that many companies are
    choosing to go private. You know, in many ways would you take a
    company public in this environment right now, if there is
    enough liquidity in the market to stay private and not have to
    deal with this sort of stuff? Our tax policy. In many ways we
    drove this by our own tax policy.
        And for Mr. Rauh, I really want you to touch on two things.
    Because there is one thing in your written testimony about
    rates of return, how many companies really do not have rate of
    return, but people are willing to invest in it because it is a
    new drug, but we are not going to see it for 15 years, or sort
    of that hope. And also touching on the fact of the incentives
    as we have so screwed up the market. How few companies come
    public today to be available for society to invest in, and we
    are creating a world where the haves, through family offices,
    through others, get to own shares. But the availability to the
    public keeps shrinking in many ways because of what we in
    Congress do, which is making it miserable, difficult, and
    expensive to go public.
        Dr. Rauh. Thank you. Thanks for the question, Congressman
    Schweikert.
        Yes, there has clearly been a major trend over the past
    couple decades toward companies remaining private. And going
    public introduces a number--has always introduced various
    government requirements, disclosure requirements.
        And now with the advent of the ESG requirements, and now
    with the SEC potentially getting involved and potentially
    regulating what those requirements would be, that adds another
    layer on top of this that adds further disincentives to go
    public.
        And firms not going public have major consequences. You
    know, in a 401(k) individual investors do not have access to
    private companies. They have to invest in publicly traded
    companies. And so it is incredibly important that we have a
    robust setting where firms are going public, and where
    individual investors have access to invest in them. And it is
    also important to ensure that the individual investors know
    that the mutual fund managers who are managing their money on
    behalf of them in Index Funds--that is when you buy, when an
    investor just, you know, checks the default option in their
    401(k) invested in the stock market broadly--that those
    investors are going to be concerned with maximizing the returns
    that the investor can get, not with some considerations that
    are non-financial, but that the individual investor may simply
    not share.
        Representative Schweikert. Doctor, if I came to you right
    now and said we do not like some of the corporate governances.
    Would a much more egalitarian solution be to create an
    environment where you minimize these sort of oligopolies, which
    are essentially what we have created in our corporate world,
    whether it be airlines, and you know, banks, so regulatory
    constructs: We have made monster companies. To actually create
    an environment where lots of disruptors, whether it be their
    business model, the business plan, the technology, but it is
    time to actually have the disruptive business environment where
    you, if you want to invest in social good, that is the model
    you choose.
        My fear is, we are trying to change our own sort of almost
    oligopolic, if that is a word, model right now instead of doing
    a much more egalitarian holistic solution of screw it, we want
    lots of competition out there.
        Dr. Rauh. Well, regulation creates, as you say, benefits
    for incumbents are able to make investments necessary to
    comply. And it harms competition. And more competition means
    more price competition for consumers and the products that
    consumers buy, and it is better for the end consumer at the end
    of the day.
        Representative Schweikert. Thank you for your tolerance,
    Mr. Chairman.
        Representative Peters. Thank you. I will go to Mr. Estes.
        Representative Estes. Well thank you, Mr. Chairman. And
    thank you to all the witnesses for joining us today. I think
    many Americans are right to be alarmed at the rapid increase of
    political activism and bullying among our Nation's top
    corporations. Rather than focusing on the well-being of their
    employees, customers, and shareholders, there have been a
    notable number of examples of large companies using their
    market power to push far left political causes at the expense
    of everything else.
        Predictably, this has led to discrimination against hard
    working families who disagree with those causes being pushed.
    And whatever your political views, I think we can all agree
    that it is not good for American capitalism to have our most
    known brands bullying certain Americans for holding mainstream
    beliefs.
        I believe many of the current proposals from the left
    involving stakeholder primacy would make this problem even
    worse, mandating that companies partake in these unfair
    activities. When it comes to the different metrics being
    proposed, like environmental impact, or some of the ESG scores,
    I am concerned about how these will be implemented. And if 53
    percent of the U.S. households that own publicly traded stock
    are best served when companies focus on building good companies
    that are profitable not by getting investments into profitable
    companies through ambiguous ESG scores.
        To recover from our current economic catastrophe that the
    Democrats and President Biden have steered us into over the
    last year, we need permanent policies that encourage active
    participation by U.S. investors to drive economic progress
    rather than divisive policies like stakeholder primacy that
    would put American families last and special interest groups
    first.
        Dr. Rauh, do you think stakeholder primacy would lead to
    companies implementing private ESG scores for customers,
    similar to a credit score but instead of rating travel
    worthiness, rating a person's, a customer's so-called ESG risk?
        Dr. Rauh. Thank you very much for the question. That is an
    interesting idea. Just so I understand, are you referring to
    the idea that the companies would then rate their customers on
    alignment with certain values, and then would potentially
    exclude or discriminate against those customers.
        Representative Estes [continuing]. or avoid doing business
    with them at all if they did not match the score that may come
    back to reflect on them?
        Dr. Rauh. Well that is an interesting idea, and it would be
    certainly a very, very dangerous trend if that were to happen.
    The idea that a company would discriminate against an
    individual because of the political beliefs that they hold
    would be quite concerning.
        One place where you could imagine that happening at another
    level would be with suppliers. I am going to choose to buy only
    from companies that sign on to a certain statement of ethical
    values that I also agree with.
        I think this is all very detrimental to the forces that
    have made the United States' economy the strongest economy in
    the world, and one that has also delivered extremely broad-
    based growth to after-tax, after-transfer incomes for
    individuals. And it also would be extremely disturbing.
        Now I would wonder if such practices would actually be
    thought of as being legal--is the company allowed to
    discriminate against the customer? I do not know. I would have
    to turn to legal experts on that. And at least one thing that
    can potentially constrain companies is the law.
        Representative Estes. Do you think that the U.S. companies
    could use ESG to maybe discriminate against Americans in
    general for lack of political belief, or their affiliations?
        Dr. Rauh. It is not impossible. You know, certainly it
    seems that one could have a situation where companies could
    attempt to only work together with people who sign on to
    certain values that they hold on the front of the ESG. And if
    they did so, it would be quite a disturbing development.
        I will say, one constraint would be do companies really
    want to give up potential customers? Are they willing to hold
    on to these beliefs so badly that they are willing to give up
    potential customers? I do not know. One of the forces that has
    produced good ethics from companies in many setting is actually
    the force of knowing that they want their product to be bought
    by as many people as possible, and they want to have a good
    reputation among the American public in general. It is pretty
    costly to shut off your potential customer base by some pretty
    large percentage by shutting off people who do not agree with
    some of these principles. Which as I mentioned in my testimony,
    it seems to me that there are many of these inherited wisdom
    ESG principles that are not actually well supported in polling
    data.
        Representative Estes. Yes, I mean we have had a lot of
    discussion lately about banks and others that may not do
    business with certain companies, or certain industries.
        At the end of the day, stockholders own the company,
    whether their moms and dads or retirees, or pensions, and they
    deserve to be able to manage the productive use of their
    property. So thank you, and I yield back, Mr. Chairman.
        Representative Peters. Thank you. We will turn now to
    Senator Cruz.
        Senator Cruz. Thank you, Mr. Chairman. Welcome to each of
    the witnesses.
        Dr. Rauh, more and more we are seeing a dangerous shift in
    America where woke corporations are acting as the political
    enforcers for partisan Democrats. And we are seeing more and
    more CEOs weigh in on political matters, and use their
    corporate power to try to punish anyone who does not agree with
    a radical policy agenda.
        In your judgment, is it in the shareholders' interests for
    woke corporations and their CEOs to use their market power not
    to provide the goods and services the company is focused on,
    but instead to enforce a partisan political agenda?
        Dr. Rauh. Well I think this is a classic case of what we
    call in economics a principal-agent problem. The shareholders
    are the principals, and they hire the managers, CEOs, as their
    agents to act on their behalf. This is no different in a
    startup or a private company. People on the committee have
    business experience, of starting their own businesses. If you
    hire a manager, that manager is your agent and works on your
    behalf. And so when you have a situation where the manager, the
    CEO, the executive who does not own the company, who is an
    agent of the owners of the company, is taking actions to impose
    their own political agenda, then I think that is a major
    failure of governance and a major failure of accountability.
    And I think that that is actually quite a dangerous--quite a
    dangerous thing.
        Senator Cruz. Well I agree with you. And there is not only
    a principal agent problem with the shareholders versus their
    woke CEOs who are not actually focused on increasing
    shareholder value. But there is a principal agent problem with
    regard to the voters, because these CEOs are not accountable to
    the voters. And in my experience, most of them are profoundly
    ignorant about the topics they are trying to regulate, that
    they do so as a mild virtue signal without even doing the
    barest of due diligence.
        I can tell you major banks that try to legislate gun
    control by saying we are going to cut off financial services to
    companies either that do not sell firearms to people unless
    they are 21 and over--which is not the law--or that bans so-
    called assault weapons. I can tell you I had the senior
    leadership of a bank that insisted it was going to cut off
    capital to anyone selling assault weapons, and I asked the
    leadership, I actually asked the person who designed the
    policy, a simple question. What is an assault weapon? She had
    no idea. She told me it was a machine gun, which is not what an
    assault weapon is. And pause for a second to think that she is
    writing a policy without even knowing what the hell she is
    talking about.
        Likewise, there were numerous corporations that took
    political positions about election integrity laws in Georgia
    and Texas. The CEOs of one of those corporations sat in my
    office and I asked a very simple question: Name one provision
    in the bill that you denounce as racist, name one provision
    that is problematic? The CEO could not name a single provision
    and put out a public statement saying it was racist and had no
    idea what was in the bill.
        Dr. Rauh, do these CEOs, do these corporations have any
    meaningful expertise in political matters? Is there anything
    about the companies that actually reflect the Democratic wishes
    of the electorate?
        Dr. Rauh. Well on the first point, if I might say, at the
    Stanford Graduate School of Business we do attempt to give them
    a broad education.
        Now on some of the specific matters at hand, and also what
    Americans believe, I think you really there identified one of
    the main problems, which is that I suspect that part of the
    reason that gun laws in America are not different from what
    they are now is that in the latest Gallup Poll from 2022, 41
    percent of Americans were satisfied with U.S. gun policy, and
    13 percent were dissatisfied but wanted less strict laws. So
    that is 54 percent of people who want either the same degree of
    strictness or less strict gun laws.
        So, plus, you know, given the Second Amendment of the
    United States Constitution----
        Senator Cruz. So let me ask you briefly, just because time
    is expiring, what can Congress do, or what can Federal
    regulators do to ensure a robust system of shareholder
    capitalism in which shareholders can expect executives to
    actually focus on the bottom line, rather than engaging in
    political adventurism and pursuing their own partisan agenda at
    the expense of shareholder values?
        Dr. Rauh. I would say two things. First of all, you know,
    step back from mandating ESG type of regulations, or trying to
    regulate that sector in a do-no-harm kind of way. But secondly,
    the government should also be considering actions that could
    protect shareholders from their agents, you know, owners of
    index mutual funds, from their agents voting against
    shareholder maximization without the explicit permission of the
    shareholders.
        And I will tell you, there are many shareholders out there,
    or just regular owners of 401(k) funds, who are relying on
    index funds, the performance of the U.S. stock market for their
    retirement. They are not interested in CEOs pushing their
    personal political agendas. They are interested in getting a
    fair return on their investments.
        Senator Cruz. Well thank you. And I think those are good
    and helpful suggestions.
        Chairman Beyer [presiding]. Senator, thank you very much.
    Now we will begin a second round of questioning. Forgive my
    absence, since I had to go vote for myself and four other
    members by proxy, people affected by COVID.
        Let me go to Mr. Alexander. You had written that the
    assumption of the interest of shareholders in the economy are
    best served by using the financial returns of the company as a
    sole measure of success. Why is that not the sole measure of
    success?
        Mr. Alexander. Thanks for that question. The reason it is
    not the sole--and again, I differ from some of the other
    witnesses here today in that I actually do not have an issue
    with running a company for the benefit of shareholders. I just
    would say shareholders are not benefited--shareholders with a
    broad portfolio are not benefited when each company within that
    portfolio struggles to increase its own bottom line without
    regard to the effect of doing so. It is just a category error.
        If you want to have a portfolio that performs the best, you
    do not want each individual company within that portfolio
    trying to be the best because they will interfere with one
    another.
        There is an economist, Thomas Schelling, who won a Nobel
    Prize for this idea--the ecology micromotives. It is just like
    when you drive. If everybody in the city wants to get to their
    destination as soon as possible, you do not just put them all
    out in their cars on the street and say, ``go get there as soon
    as possible.'' You establish rules of the road, and stop signs,
    and stop lights, and all those sorts of things. And it is the
    same thing.
        If a company, attempts to maximize its value, by paying its
    workers significantly less than a living wage, and that leads
    to poverty and, poor social determinants of health and things
    like that; it is going to drag the economy down and when you
    drag down the economy, you drag down the performance of
    portfolios because the performance of a diversified portfolio
    relates directly to the performance of the economy.
        And what I would also say is I have heard some questions
    today that sort of talk about putting handcuffs on
    corporations. Let me just say that what I would like to do is
    remove the handcuffs from shareholders.
        Currently, disclosure from the SEC is built around one
    idea: let's look at the ESG matters, social and environmental
    matters. Will social and environmental matters affect the
    performance of the company? But how about the SEC giving
    shareholders information about how a company's social and
    environmental performance affects the economy, and thus the
    other companies within that economy? Swiss Re estimates that if
    we stay on the carbon trajectory we are on, rather than a
    Paris-aligned trajectory, then global GDP will be 10 percent
    less in 2050 than it would otherwise be.
        Swiss Re. This is not a radical institution: It is one of
    the largest reinsurers in the world. Well, if GDP is 10 percent
    less in 2050, then all the young teachers today who are in
    retirement plans that have diversified portfolios are going to
    have 10 percent less for their retirement.
        So that is what I am talking about when I say from the
    shareholders' perspective you cannot just look at individual
    company enterprise value. You have to ask the question how will
    my company's performance affect the economy? And right now, and
    it is not just disclosure rules by the way, it is fiduciary
    duties-particularly at the company level but also at the
    trustee level--that make trustees and directors feel as if all
    they can focus on is enterprise value. And there is a lot of
    work that could be done to clarify those rules to make it clear
    that acting in the interest of shareholders, or acting in the
    interest of pension fund beneficiaries, incorporates this
    broader idea of what shareholder value is.
        Chairman Beyer. Thank you. Dr. Palladino, I actually do not
    remember ESG being in the title of the sharing, but certainly
    shareholder primacy was.
        What has been the tradeoff in terms of corporate investment
    and research and development over the last 10 or 20 years with
    the rise of shareholder primacy?
        Dr. Palladino. It is a great question. We know overall that
    there is opportunity cost when corporations are focusing their
    financial assets and their energies on raising share prices. We
    know that CEOs today, many of themselves say that they feel
    hamstrung by the need to constantly appease outside activist
    investors who are demanding constantly higher share prices.
        They would rather be focusing on the types of innovations
    that their companies are best able to achieve. So I will just
    give you a quick example.
        GE is a prismatic example from the 20th century of an
    innovative company. It is personal to me because it is where my
    grandfather worked. He was a prisoner of war who then returned
    to work as a--in aviation at GE in Massachusetts. He never had
    a chance to go to college but had a good job in which he was
    part of the process of innovation at his firm.
        GE turned toward Wall Street, turned toward maximizing
    shareholder value, as its main focus in the 1980s. And I think
    probably may people know the story from there. The focus on
    share prices caused the innovative potential that was there
    within the company to decline. Ultimately we know that GE lost
    $400 billion in market value over the--over a decade, since
    2000, leading to 2010, and we know that that focus on
    shareholder value ultimately took them away from what they
    should have been doing, because it focused on producing more
    innovative products over time.
        Chairman Beyer. Dr. Palladino, is it fair to link the
    dismal productivity increase rate of the last 10 years, 2010 to
    2020, with the share buyback and the supremacy of stockholder
    value?
        Dr. Palladino. Absolutely. I think that while there are of
    course many factors because the economy is complicated, I think
    that the fact that we have not seen investment in the
    workforce, in the American people who actually produce the
    goods and services that our leading companies make, that
    investment is what will increase productivity over time. We
    know that from history. We know that empirically. And that lack
    of investment is, in my view, the most important opportunity
    cost of shareholder primacy.
        Chairman Beyer. Thank you very much. Ms. Samuelson, you
    wrote that--and I think this is a really important point,
    because I want to suggest that corporations are not inherently
    evil. You know, it sounds like we are bashing them for rebuying
    of stock, repurchases and the like, but let me say. You said
    corporations are amoral. There are the rules and protocols in
    the Senate that drive behavior, and we license corporations to
    create goods and services.
        Deeper than that, and I know you are a student of this, the
    creation of the corporation was to limit the liability of the
    people that were investing in it. There were all kinds of
    benefits that flowed from the rule of law around the
    corporation that implied a tradeoff between their special
    status, their special protection, and their responsibility to
    society at large.
        Can you talk about those rules and protocols?
        Ms. Samuelson. Well the most dominant one I spoke about a
    little bit earlier, I cannot remember whether you were in the
    room or out of the room when I did, but it is really about how
    were tethered CEOs pay to the stock price. So the dominant
    measure today that is used in the market is TSR, Total
    Shareholder Return, and it is basically made up of two things,
    dividends. And then these share buybacks. The repurchase of
    shares, which means some shareholders exit, and the ones who
    are left it pops up the stock price by reducing the number of
    shares outstanding. The valuation is still the same, but the
    ones who are still there glean a lot of the gain. And that is
    what these investors want.
        I think the tricky part about this is not--the public
    company is in massive decline. I think we have 50 percent as
    many public companies as we did, something like 10 or 15 years
    ago. And they are in decline not because of kind of ESG
    investors, so-called ESG investors, but it is really just this
    heightened moment now where investors of all kinds are starting
    to raise fundamental questions about risk and expressing, if
    you will, their desire for kind of clarity about what they are
    investing in. What is it actually realizing? And is it
    addressing, are these companies addressing the kinds of
    concerns that people have as investors, as well as citizens.
        I just think this question takes us back to who will hold
    the system accountable? Corporations, as you said, corporations
    were created initially to do the kinds of things you cannot do
    with just your family's resources, or those of your best
    friend. It is essentially a way of kind of a bundle of
    contracts, or it is a way to hold together relationships. And
    yes, ultimately they were also given limited liability so that
    they are not vulnerable to the same kinds of demands as
    executives would have been otherwise.
        And so we are back to the question of kind of really who
    holds these powerful institutions accountable? I am a big
    believer in business. I truly do not believe that we can solve
    our most complex problems without business at the table.
        I believe in what Mr. Alexander has been talking about in
    terms of the need of a whole market to work well, not just
    creating the space where individual companies excel. But I
    think it gets back to the question of who is really holding the
    system accountable. And frankly investors are not going to do
    it. Investors are very, very inclined toward, you know, price
    and convenience, just like, you know, just like the consumer
    is. They want it both ways. And I think today what is
    interesting, what is the most interesting thing on the kind of
    horizon is the degree to which employees have become a force
    here. Where they are actually raising their voice and asking
    questions about what are we actually in the business to do? Are
    we doing it well? What does it look like? And what is my piece
    of this kind of puzzle?
        An so I think it is an interesting time to be having this
    conversation, and we are hopeful that some of these questions
    that we are asking today will start to kind of align with the
    questions that executives themselves are asking about what job
    they have, you know, as well as the investors, the questions
    the investors are asking and employees themselves are asking.
        Chairman Beyer. Thank you. Dr. Rauh, in your testimony you
    talked about the surge in average household income since 1950,
    or whatever. And then you followed it up with the increase, the
    percentage increase in the average income for the lowest
    quintile or the lowest quartile. I am sort of impressed with
    numbers.
        How do you reconcile that with the alternative reality that
    our income and wealth and inequality has not been this great in
    100 years? And that many, many sociologists and others suggest
    that the deep divides in our country, this country today is
    driven more by income and wealth inequality than anything else?
        Dr. Rauh. Thank you for the question. So I think that
    income inequality is often overstated by academics. I trust
    people who have direct access to all the data in government.
    Auten and Splinter, Auten at the Office of OTA, U.S. Treasury,
    and Splinter at the Joint Committee on Taxation, JCT, right
    here. And so when you incorporate additional assumptions like
    changing marriage rates, and also various alternative sources
    of income, including transfers from the government, the top one
    percent share of pre-tax income has only increased 3 percent
    since 1962. So primarily I believe it is not an accurate
    narrative, and these are also figures from the CBO. It is
    actually interesting that most of the studies that show that
    income inequality has not increased that much actually comes
    from government sources, whereas the ones that say it has
    increased by a lot more are coming from academics. So that is
    how I would reconcile those things.
        Chairman Beyer. Okay, thank you. It is certainly an
    interesting lone voice, but thank you.
        Mr. Alexander, having come out of corporate law and for all
    that time, one of the things that we have talked about was the
    notion that the SEC for years and years and years had regulated
    whether a corporation could use its excess capital for stock
    buybacks. And some years ago, my history is not good enough to
    tell you, it was early 1990s, whenever, that rule was changed
    and thrown out so that corporations were given essentially a
    free decision to own buybacks.
        Does it make any sense, would it help us at all to restate
    that SEC regulation?
        Mr. Alexander. Thanks for the question. I am not going to
    guess at the year because there is a real expert on stock order
    buybacks on the panel, so I do not want to be embarrassed. We
    can yield to her. But I will say absolutely, you know, here is
    the way I express the problem of the buyback, and again I will
    put this in the terms of thinking about the shareholder as a
    single company versus thinking about the fact that shareholders
    are actually diversified and what they care about is how a
    company's decisions affect the entire market.
        And if you think about companies that value only the
    enterprise it is easy to just return cash to your shareholders
    because they get 100 percent of the cash, and they can do what
    they want with it. Whereas, if you reinvest in your workforce,
    in R&D, in new drugs, in electric vehicles, whatever, your
    shareholders benefit from that, but so does the economy. It is
    what economists call spillover effect, and some people say,
    two-thirds of the benefit of reinvesting goes to spillover
    effect.
        So it is harder for a company to do that. And I think, as
    regulators, as policymakers, you have to be cognizant of that
    risk. For my part, I think a lot of this can be solved by
    changing--and this is what I have been talking about today--
    changing the rules to make investors and shareholders think
    more broadly and not sort of allow them to just focus on single
    companies, or at least to give them the tools to not just focus
    on single companies, because that is kind of what they are
    forced to do today. And that will help with the buyback issue.
    But I would also just say, because of the natural tendency of a
    company to do a buyback because 100 percent of the value flows
    to that single company, it is important for all the policies,
    be it tax, securities regulation, to be very cognizant of that
    issue, as well as--and this is a different issue but also an
    important issue, the potential for corporate insiders to
    manipulate the market because they may know when the buyback is
    coming and they have lots and lots of stock and they can sort
    of play games.
        Chairman Beyer. Great. Thank you. Dr. Palladino, among the
    many things written about shareholder primacy is the idea that
    CEOs and C-suite folks are rewarded in their pay plans. I think
    you actually write that one of the ways that shareholder
    primacy is maximized is to make sure that top management's pay
    is driven by shareholder price.
        And Elizabeth Warren has an interesting bill, one she
    introduced it in this session, that would postpone the ability
    of top management to cash out their options until they had left
    the corporation by three years, five years, something like
    that. So essentially they were not dependent on stock price
    buyback today, a share price surge tomorrow, and divesting of
    their stock the day after.
        Is this meaningful? Is this fair? Is this good policy?
        Dr. Palladino. Absolutely. Thank you for the question. So
    just on the point of stock buybacks, you know, one of the harms
    that they pose is that they do create disincentives
    structurally for corporate insiders to personally profit, as
    you have said and as Rick said.
        And I think that the broader story that we have seen over
    the last several decades of executives being rewarded by stock.
    And then the stock sort of compensation becoming more and more
    complex, and more and more able therefore to be manipulated by
    different types of corporate financing the nippers. It is a
    huge problem. And I do think that it is important to reiterate,
    this is a type of problem that can be easily solved by rules.
        Corporate executives are not, you know, this is not a story
    of one single sort of greedy executive over here. This a
    problem that we have created through, for example, Rule
    10(b)(18), which is the Securities and Exchange Commission rule
    that was passed in November 1982, that essentially allows stock
    buybacks to happen at essentially an unlimited rate because the
    SEC does not collect the type of data that would allow them to
    actually know if companies are staying inside what they have
    constructed as a safe harbor. And it does not presume any
    liability for stock buybacks outside of that safe harbor, in
    any case.
        Before 1982, stock buybacks did not happen that much
    because they were presumptively understood as manipulating the
    stock price of the company, which we would see as reasonably
    problematic in securities markets that we want to be operating
    and efficient.
        So I think this disincentives that stock buybacks have
    created for corporate executives to be able to, and
    incentivized to really use short-term choices, or directions of
    corporate fund in order to reward themselves has turned us
    again away from innovation, which I think should be our North
    Star. And I also think that the rules that govern stock
    buybacks, I am really happy to see the Securities and Exchange
    Commission propose Rule SR, which will be a good first step
    toward disclosure of stock buybacks. And I really encourage
    them and the Congress deciding to go further and join other
    advanced capital markets around the world, and have common
    sense rules in place because of this fundamental risk of market
    manipulation and incentives for management.
        Chairman Beyer. Thank you very much. I think this question
    is for Ms. Samuelson, but if you want to defer, we had a
    hearing some time ago, or maybe it was a conversation with one
    of our many, many terrific economists, that essentially the
    seven people that ran the seven largest Index Funds--think
    Fidelity, Vanguard, or the like--were running our country, that
    they had an enormous number of the stocks under their direct
    control.
        Clearly they may be the people that have a responsibility
    to maximize shareholder price, or not. How can we change the
    incentive system for them? Or is the incentive system right for
    them? Are they part of the solution?
        Ms. Samuelson. I think I would address first the assumption
    of what are they actually doing with this incredible market
    power that they have. I think the number that is usually tossed
    around that Black Rock, which is the largest of the large, they
    own something like 7 or 8 percent of virtually every publicly
    traded security. They are the ultimate universal investor. They
    cannot exit. They have to own the market.
        And so they have actually limited ability to influence
    corporations directly because they have thousands--you know,
    they have probably hundreds of annual meetings during the
    season every day, and they have a limited number of staff who
    are really detailed to kind of directly engage with
    corporations. So I think in some respects they mostly--Black
    Rock is one that would have been criticized. But it mostly just
    dealt with management. They vote what whatever management wants
    on proxy votes.
        They have started to step back from that on some issues
    that, you know, kind are critically important. Climate change
    being one of them. But it is not obvious what they can do as an
    indexer. And so I think it takes us back to kind of saying what
    are the expectations of investors?
        And it takes me back also to this other question about how
    we pay executives, and what the expectations there are,
    because, you know, Elizabeth Warren's proposal would suggest
    that it is just a matter of timeframe, and that loading up
    executives with stock, which in some respects the Black Rocks
    of the world like, right? Because that means that their, in
    theory that those CEOs are very, very attuned to pumping up the
    stock price. And of course there is an awful lot of that going
    on. But if you are a Black Rock or a Vanguard, you want the
    whole portfolio to do well. It does not really do this good
    just as Rick said, playing it out to kind of focus in on one
    stock or the other.
        If I were writing that law, I would be pulling back, not
    that Congress necessarily has the power to do this, by the way,
    there is more power that resides within executives to fix their
    own stuff, maybe than Congress doing it directly. We have
    learned this from past experience.
        But I pulled back from the emphasis on stock. I do not
    think it is doing us any good. When you hire these executives,
    they are people that have to exercise extraordinary judgment.
    They do not need incentives to take seriously the kind of risks
    that they are facing in this remarkably complicated day, and
    remarkably complicated market. And I do not know why we have to
    kind of load them up with stock in order to head them in the
    right direction. They care ultimately about the health of their
    enterprise, as they should, and they should care about, if not
    everything that one might call a stakeholder--I do not
    particularly like that term. They have to get the formula
    right. They have got to manage their enterprise to the long
    haul, and that means being very attuned to what is the input
    that matters the most if I am in Intel? Or what is the input
    that matters the most if I am Chevron, or Exxon. Those are
    going to come up with different answers, and what we want is
    executives who actually are well compensated, that is fine, but
    who have kind of the sense of where they fit into the larger
    market, not doubling down, tripling down, quadrupling down, to
    have them just focused on the stocks.
        Chairman Beyer. Thank you. Let me ask one more question,
    and I think it is for Mr. Alexander from your corporate legal
    background. I am a big fan of Thomas Philippon who wrote The
    Great Reversal, which is the best damning indictment I have
    seen yet of the corporate concentration, which I think Ms.
    Samuelson mentioned earlier. Hasn't the stock buybacks,
    dampened corporate concentration? Would it not be worse if
    corporations were forced to hold their capital and simply buy
    other smaller companies with it? Or how do those interact? Or
    is it too complicated to talk about?
        Mr. Alexander. I think I am going to say that I am probably
    not a good person to answer that question. I would love to talk
    a little bit about Black Rock, but you are the Chair, so I----
        Chairman Beyer. Dr. Palladino, any insight into the
    interaction between shareholder primacy and the failure of
    antitrust since Milton Friedman?
        Dr. Palladino. Absolutely. I think, you know, we could have
    a whole other hearing on this question and maybe we should. I
    think that within the theory that says that we need competitive
    markets, we have forgotten that--you know, I teach introductory
    micro economics, probably Dr. Rauh does sometimes too--we have
    to talk about questions of market power. We have to talk about
    questions of externalities. These are the assumptions that we
    wave our hands and say do not exist when we are coming to this
    point of believing that perfect market clearing will simply
    occur.
        I think that the rules that have been set in place that
    have enabled shareholder primacy are fundamentally related to
    the same drivers that have increased corporate concentration,
    the same interests that have driven us away from a focus on
    innovation, and has made some of our largest companies focus as
    well on maintaining market power through the exact types of
    practices that our antitrust laws were first set up to take on.
    So while there is a lot of difference in terms of the
    regulatory structures that govern State corporate governance
    law and Federal antitrust law, I believe it is really in the
    interest of the American people for regulators and those of us,
    scholars and others on the panel, to think more about the right
    balance between innovation and really constrain the types of
    anticompetitive behaviors that our largest corporations have
    unfortunately too often been practicing.
        Chairman Beyer. Thank you very much. They have called the
    second vote over in the House. I want to thank you for letting
    me ask rounds two, three, four and five. I sort of like this.
    In any way case, thank you all very much for being here. And I
    want to thank you for joining me in this vital conversation
    about the economic cost of shareholder primacy.
        As was discussed today, increased corporate focus on short-
    term value prices is a recent development. Given the right
    model of corporate governance to put shareholders before
    workers and innovation in the climate. And this recent pursuit
    of short-term gains has eroded the voice of the workers, many
    of whom have seen their earnings as a share of GDP diminish
    over the years, while also exacerbating income, wealth, racial
    and geographic inequality at least with respect to Dr. Rauh,
    and according to many economists. Focused on stock buybacks and
    the executive compensation, companies are investing less per
    dollar of profit in long-term growth and sustainability than
    they did in the past. And this is along with the
    competitiveness and overall productivity of our economy, even
    the average investor is left worse off.
        The good news is that this is not the only way to do
    business. Hearing from these experts today, I am confident that
    we can once again prioritize investment that drives inclusive
    economic growth and address complex existential challenges like
    the threat posed by climate change.
        We can do this by strengthening the bargaining power of
    workers, and realigning the incentives to reward long-term pro-
    growth investments that generate society and economy-wide
    returns. And we can do this together.
        So thank you to each of our panelists for your
    contributions in this timely ongoing discussion. As we do this
    important work, we rely on your expertise and good faith. And
    thank you to my colleagues who came and went about their
    business for being part of this discussion and sharing their
    wisdom.
        The record will remain open for three days. The hearing is
    now adjourned.
        [Whereupon, at 4 p.m., Wednesday, March 16, 2022, the
    hearing was adjourned.]

                           SUBMISSIONS FOR THE RECORD

             Prepared statement of Hon. Donald Beyer Jr., Chairman,
                            Joint Economic Committee
                                  recognitions
        This hearing will come to order. I would like to welcome everyone
    to the Joint Economic Committee's hearing ``Examining the Impact of
    Shareholder Primacy: What it Means to Put Stock Prices First.''
        I want to thank each of our distinguished witnesses for sharing
    their expertise today. We have an exceptional panel of experts, and I'm
    looking forward to hearing from them.
                               opening statement
        This hearing will examine how the shareholder primacy model of
    corporate governance has impacted the economy and how Congress can help
    address the problems it has created.
        Shareholder primacy is a corporate model that focuses mainly or
    exclusively on increasing stock prices to generate value for its
    shareholders.
        This approach, which gained favor in just the last few decades,
    encourages corporations and their executives to spend a larger share of
    profits on stock buybacks to reward investors in the short-term.
        Who are the winners when corporations put stock prices first?
        In the United States, shareholders are a relatively small group:
    The top 1 percent owns roughly 50 percent of all corporate equities,
    and only about half of U.S. households own any stock at all.
        As a result, the singular focus on stock prices concentrates wealth
    at the very top, while leaving less for companies to re-invest in their
    workers, in innovative technologies and in long-term growth.
        For example, the seven largest publicly traded oil corporations
    recently announced a near-record $41 billion dollar stock buyback
    program on top of $50 billion dollars in shareholder dividends.
        While everyday American workers and families bear the burden of
    higher gas prices, Big Oil is raking in record profits and prioritizing
    padding the pockets of their wealthy shareholders.
        But it has not always been this way. From the 1930s to the mid-
    1970s, American corporations largely followed a ``retain and reinvest''
    strategy that focused on long-term innovation and job security for
    workers.
        Workers were seen as an asset and a long-term investment, not a
    liability. Managers viewed well-paid, cared-for workers as vital to
    their success and primarily used profits to pay workers, provide
    benefits and make productive investments. Shareholders received the
    residual after companies paid workers, invested for the future and paid
    down debt.
        During this time, economic growth was strong and broad-based: As
    the economy grew, workers saw their wages rise and, on the whole, were
    more financially secure. They had access to pensions and pathways to
    the middle class.
        Since the 1970s, however, as shareholder primacy has become more
    dominant, boards have put shareholders at the front of the line for
    corporate profits, leaving everyone else behind.
        While CEOs and executives at the top have seen their incomes go up
    940 percent over the last 40 years, the bottom half of earners have
    seen their wages virtually flatline.
        Across the board, the share of Gross Domestic Product going to
    employee wages and benefits has been declining for decades. The
    increased corporate focus on raising stock prices has driven this
    trend, which in turn has deprived workers of the gains from economic
    growth.
        Because the corporate executives and shareholders who benefit from
    this model are overwhelmingly and disproportionately wealthy and white,
    this further reinforces the widening wealth disparities across income
    and racial groups. By 2019, the top 10 percent of American households
    held 70 percent of all U.S. wealth, and the total wealth owned by the
    entire bottom half of Americans dropped to just 2 percent.
        The impact of shareholder primacy goes beyond the widening
    differences between winners and losers; it is impacting our economy at
    almost every level.
        Short-sighted decisions to help companies hit short-term earnings
    targets can help explain the ``just-in-time'' inventory and staffing
    approaches that left U.S. supply chains vulnerable to pandemic-related
    disruptions.
        Shareholder primacy also hinders investments in innovation and
    sustainability that drive inclusive economic growth and are necessary
    to address threats like climate change.
        For example, despite growing risks from climate change,
    corporations have continued to make decisions that prioritize short-run
    profitability at the expense of broad sustainability and climate
    resilience.
        Surprisingly, investors themselves also lose under shareholder
    primacy. Families investing money in diversified stock portfolios for
    college or retirement suffer when individual companies put their short-
    term profits over long-term investments.
        It's no coincidence that widening economic inequality in this
    country, which began in the 1970s, coincides with the increased
    dominance of shareholder primacy.
        It has helped concentrate economic power among a privileged few.
        But this is not how we, as a Nation, have always done things. There
    are other paths forward that maintain firm profitability and promote
    economic growth that is stronger, stable and more broadly shared.
        For example, incentivizing business to invest in innovation,
    sustainability and enhanced productivity would boost competition,
    workers' wages and economy-wide returns.
        Legislative proposals that place limits and tax share buybacks
    would help realign corporate incentives away from short-term stock
    prices and toward long-term, pro-growth investments.
        Legislation that strengthens collective bargaining and raises
    wages, like the PRO Act and the Raise the Wage Act, would ensure
    workers take home a larger share of the gains that public companies and
    their executives have been keeping for themselves.
                          turn it over to senator lee
        As we dive deeper into these issues, I look forward to the
    testimonies of our expert witnesses. Now I would like to turn it over
    to Senator Lee for his opening statement.
                                   __________
              Prepared statement of Hon. Mike Lee, Ranking Member,
                            Joint Economic Committee
        Last week, we learned that inflation reached a new 40-year high of
    7.9 percent. This means that inflation is costing the average American
    household $435 more each month for the things they ordinarily buy.
        Given this new economic reality, I hope we keep in mind the severe
    price increases facing American families right now as we hear about
    foisting environmental and other political goals onto private
    businesses. Americans are hurting. Poor and middle-class Americans are
    the ones who will pay the price for uprooting our market economy in
    favor of a woke political agenda. This agenda will only compound
    inflation--making Americans poorer and our businesses less dynamic.
        For centuries, Americans have reaped the benefits of free markets
    and competition. It is this free market system that has lifted
    Americans to the highest standard of living ever achieved by a major
    economy.
        Yet today, the free market system that enables American prosperity
    is under attack by bureaucrats, politicians, and regulators who seek to
    impose their personal political goals on private businesses. They seek
    to override the competitive forces that grow workers' wages and keep
    prices low. They seek to make private companies beholden to
    politicians, rather than to the shareholders who invest in companies in
    the first place.
        When we hear the word shareholder, we don't usually think of the
    average American. But that's exactly who they are. Shareholders are the
    more than 180 million Americans who live in a household with a 401(k),
    pension, or other stock holdings. Shareholders are an ever-growing
    majority of households who invest in the economy and use the return on
    that investment to save for retirement, buy a home, or send their kids
    to college.
        When the government tells companies not to listen to shareholders,
    it is really telling companies not to listen to the American people.
    When the government tells companies to divert their hard-earned
    resources into woke policy goals like environmental and social justice,
    the government is taking power and wealth out of the hands of the
    people and consolidating it in Washington.
        When the government interferes with the private sector, businesses
    stop serving their workers and customers, and instead serve the
    bureaucrats who set the rules.
        We already see this happening. President Biden recently directed
    his administration to assess companies' progress on environmental and
    social justice goals--a step toward requiring them to abandon their
    core responsibilities to the school teachers, firefighters, and
    everyday Americans who invest in them and buy their products. These
    actions ignore centuries of evidence that the free market system is the
    best way to create prosperity for workers, families, and communities.
        America has always been a place where the most effective common
    action occurs in the space between the individual and the State. A
    Federal Government that attempts to replace free enterprise is a
    Federal Government that has overstepped its bounds.
        We ought to ensure that businesses are free to serve their
    communities by remaining at the forefront of innovation and creating
    value for the American families who invest in and are served by them.
    In today's environment of surging inflation, we can afford nothing
    less.
        Thank you.
        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Response from Mr. Frederick Alexander to Question for the Record
                         submitted by Senator Klobuchar
        Mr. Alexander, in your testimony you stated that ``the laws and
    regulations that support shareholder primacy'' should encourage
    companies to ``appropriately prioritize the impact they have on the
    social and environmental systems that undergird the economy.''

          How does this recommendation relate to actions the
    Federal Government is currently taking to encourage investment in
    domestic manufacturing and spur investments to mitigate climate change?

        The laws and regulations referred to in the question include
    current interpretations of (1) the fiduciary laws that govern
    corporations and investment fiduciaries (such as pension trustees) and
    (2) the laws that require companies to make certain disclosures to
    investors. These interpretations focus on the enterprise value of each
    individual company and assume that the primary role of fiduciaries is
    to ensure that investors' capital is managed in a manner that optimizes
    the value of each company.
        My testimony details the good reasons to provide that that the
    primary loyalty of corporate directors and investment fund trustees
    runs to the investors who provide capital. However, it also points out
    that most investors are broadly diversified, and that they are best
    served when individual companies refrain from behavior that threatens
    the long-term health of our economy. Thus, it is better for most
    shareholders if individual companies make choices that preserve and
    improve vital social and environmental systems, even if doing so does
    not maximize financial return at the individual company.
        Encouraging private industry and the financial industry to adopt
    this broader notion of shareholder primacy--one that puts the
    collective success of our economy at its center--is key to the success
    of Federal policies encouraging investment in domestic industry and
    climate change mitigation.
        Both of these objectives have the potential to improve the
    performance of the Nation's economy over long times frames, by creating
    a resilient economy, reducing inequality, and preserving the value of
    the ecosystem services that undergird the economy.
        However, if companies' primary focus remains on increasing their
    own future cash flows to shareholders, there will be a great temptation
    to manipulate these programs in a manner that makes them profitable for
    companies, while not addressing the underlying policy concern.
        For example, a company operating under the current interpretation
    of shareholder primacy might use tax credits to increase its domestic
    manufacturing capability but nevertheless seek to increase margins by
    outsourcing critical components, defeating the resiliency goals of the
    program. If the company were operating under an expanded understanding
    of shareholder primacy, it would be more likely to account for the fact
    that using the credits to create a dependable, authentically domestic
    supply chain would protect the economy, and thus the portfolios of its
    diversified shareholders.
        Similar concerns would apply to programs that encourage investment
    in climate mitigation. The mitigation technologies that are most likely
    to reduce overall carbon concentration may not be the technologies that
    are most likely to increase cash flow at an individual corporation;
    policies that encourage a more expansive view of shareholder primacy
    would make it more likely for companies to adopt the former, because
    their decision could account for the positive ``spillover'' effects of
    adopting the technology that is best for the planet.
                                   __________

          Response from Dr. Joshua D. Rauh to Questions for the Record
                            submitted by Senator Lee

          Q1: What effects do stock buybacks have on innovation and
    other economic outcomes?

        The purpose of a stock buyback is to take a company's cash on-hand,
    which its management determines does not have a productive outlet
    (otherwise it would be invested), and to put it in the hands of
    shareholders, who will in turn invest the cash from the sale of shares
    into other investments, including in more innovative companies with a
    demand for investment capital. So, while it is certainly true that
    repurchases have become more common in the last decade or so, with $4.2
    trillion in stocks bought by S&P 500 corporations between 2007 and
    2016, this ignores that much of the buyback is reinvested in the same
    group of companies, with $3.1 trillion in new shares issued by S&P 500
    companies in the same time period,\1\ and a further $250 billion
    flowing into non-S&P 500 companies annually between 2009 and 2019.\2\
    Other investor proceeds from buybacks likely flow into private equity
    markets or venture capital, whose assets under management have grown
    substantially. In short, investors are using their buybacks to finance
    corporations that have legitimately productive ideas, which desperately
    need new investors. If anything, advocates of innovation ought to be
    encouraging buybacks as a means of getting cash in the hands of
    innovative firms.
    ---------------------------------------------------------------------------
        \1\ Jesse Fried & Charles Wang, Are Buybacks Really Shortchanging
    Investment?, Harv. L. Sch. Forum Corp. Gov. (Mar. 19, 2018), https://
    corpgov.law.harvard.edu/2018/03/19/are-buybacks-really shortchanging-
    investment/.
        \2\ Greg Milano and Michael Chew, Save the Buyback, Save Jobs, 31
    J. Applied Corp. Fin. 126, 127 (2019).
    ---------------------------------------------------------------------------
        This innovation has wide-reaching implications for the rest of the
    economy, too. For one, it means that private enterprise invests more in
    R&D. Since 2001, R&D investment has grown at an annual rate of nearly
    4.9 percent every year,\3\ far outpacing annual GDP growth in the same
    period. Given that businesses make over 70 percent of total R&D
    expenditures in the United States,\4\ policies that incentivize this
    sort of investment impact the rest of the country in a significant way.
    When corporations increase their productivity through research
    investment, their workers become now more valuable to the corporation
    than they were previously. These firms must then compete in labor
    markets for these more lucrative workers with other firms, raising
    wages. Research has demonstrated that this is no different for the
    investment that comes from buybacks. A 2022 study found that the 1983
    rule change by the Reagan administration making buybacks easier to
    execute directly led to a 5.9 percent increase in labor wages.\5\
    Critics would like to argue that buybacks are a zero-sum game between
    employees and shareholders, but this simply is not the case. When the
    market directs investment toward opportunities which are legitimately
    productive, it turns out that everyone can benefit.
    ---------------------------------------------------------------------------
        \3\ Business Enterprise Research Development Survey (BERD), U.S.
    Census Bureau, 2000-2019.
        \4\ John Sargent, U.S. Research and Development Funding and
    Performance: Fact Sheet, CONG. RSCH. SERVICE, 2021.
        \5\ Ricardo De La O, The Effect of Buybacks on Capital Allocation
    34 (Mar. 3, 2022) (working paper) (on file with author)

          Q2: What does academic research find about the effects of
    ---------------------------------------------------------------------------
    capitalism and shareholder activism on productivity and innovation?

        A shareholder engages in activist behavior when they put pressure
    on the officers of the firm to change their management practices, often
    in the name of increasing returns. Despite the derision from critics of
    shareholder capitalism, in reality, shareholder activism increases the
    efficiency of a firm, and ultimately makes it more productive in the
    long run. For example, although it is true that shareholder activism
    can reduce investment in research, this is often a reduction
    ineffective investment. Subsequent to a shareholder activist event, the
    number of patents filed by a target firm increases by 15.1 percent, and
    the citations those patents garnered increases by 15.5 percent.\6\ The
    type of research investment encouraged by shareholder activism thus not
    only increases volume of research, but also increases the usefulness of
    research being produced. This has systemic effects on the rest of the
    firm, too. The labor productivity of the firm's employees increases, on
    average, by 8.4 percent to 9.2 percent.\7\ The evidence, therefore,
    points toward shareholder capitalism encouraging firms to be more
    productive in the deployment of their limited resources.
    ---------------------------------------------------------------------------
        \6\ Alon Brav et al., How Does Hedge Fund Activism Reshape
    Corporate Innovation?, 130 J. Fin. Econ. 237, 244-245 (2018).
        \7\ Alon Brav et al., The Real Effects of Hedge Fund Activism:
    Productivity, Asset Allocation, and Labor Outcomes, 28 Rev. Fin. Stud.
    2723, 2749 (2015).
    ---------------------------------------------------------------------------
        The link between shareholder capitalism, and the activism it
    engenders by investors, is strongly linked to rising productivity and
    innovation in the economy. In the last forty years of American history,
    a period in which shareholder capitalism has been the guiding principle
    of corporate governance, the economy has increased its productivity by
    nearly 118 percent, meaning that the average worker today is more than
    twice as productive as his or her counterpart in 1979. \8\ This
    increased productivity, in turn, makes workers more competitive in
    labor markets, raising wages. Since 1979, the Congressional Budget
    Office estimates that the post-tax, post-transfer median income of the
    average American has risen by nearly 91 percent,\9\ demonstrating that
    the benefits of such increased productivity are not just felt by the
    wealthiest Americans. Rather, by incentivizing the sort of investments
    that increase long-term efficiency, shareholder capitalism creates a
    more vibrant and productive economy, the rewards of which are felt by
    investors and workers alike.
    ---------------------------------------------------------------------------
        \8\ Nonfarm Business Sector: Labor Productivity (Output per Hour)
    for All Employed Persons, Fed. Res. Econ. Data (FRED), https://
    fred.stlouisfed.org/series/OPHNFB (last visited Mar. 18, 2022).
        \9\ The Distribution of Household Income, 2018, Cong. Budget Office
    (CBO) (Aug. 2021), https://www.cbo.gov/publication/57404.
    ---------------------------------------------------------------------------
                                   __________

                Question for the Record for Dr. Lenore Palladino
                         submitted by Senator Klobuchar

        Dr. Palladino, you testified that innovation depends upon ``both
    resource development and utilization'' and discussed the need to bridge
    the divide between academic innovation and commercialization.

          In your view, what is the proper role of academic
    research in driving innovation?

                                      [all]