[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
          
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        Available via the World Wide Web: http://www.govinfo.gov
        
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                    U.S. GOVERNMENT PUBLISHING OFFICE                    
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                        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?
  

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