They would indeed invest it, but they would demand dividends be paid in natura. There would be a type of business where, you invest 5%, you become a director there. With free use of a yacht, private plane, car (these businesses come in all sizes, you essentially get 5% from what would be dividends to be spent as you wish as long as accounting can make it work), a hotel/travel budget, ... all these would no longer be personal expenditures, but business expenses.

In actuality these businesses exist (even much more dirty: in practice, bank employees on occasion demand they be offered this, in trade for not sabotaging a loan. This is pretty common practice). But even "fairly", with actual investments, these businesses exist.

And no, this is not illegal, nor do you want to make this illegal.

I do want to make it illegal, if you get a company car it is considered a benefit and you will be taxed on the value (either lump sum or by accrued value depending on things) and I believe this is fair and correct.

These sorts of soft benefits should be taxed at their value as their value is being incorporated into the decision to purchase or continue to hold. And, bonus thing, most people at the lower end of the income scale have no access to these soft benefits so excluding them from taxation is a regressive policy.

It'd be nice if everyone came to the realization that the easiest way to exchange a gained/earned asset would be money and then companies just rented out use of a yacht at the market appropriate price. This can cause a bit of craziness for things like "family discounts" but those, again, are discretionary benefits which are being offered to tip the ideal price point, and things of that class come with the added benefit that they usually will fall foul of discrimination laws under any casual examination.

Okay, now explain how cars that are necessary (such as for a director, that needs to meet with partners, customers, ...) should be taxed. Or how about for a cleaning company that sends out cleaners in cars, there's a lot of those. Would you seriously tax the poor cleaner for the value of the car ? How should Elon Musk be taxed if he bought a bed for sleeping at his megafactory ?

How about the office in which you work ? Should you be taxed on the value of the office building in which you work ? How about the value of the machines ? How about the coffee machine (which you may or may not use) ? How do you intend to check this ?

Even that is the very tip of the iceberg in terms of problems with this policy. Will you be able to catch abuses at the extreme ? Sure. Will you be able to prevent this from becoming a widespread alternative to paying out dividends using policy ? No.

Doesn't the IRS require reporting and tax payment for these non-cash fringe benefits?

Sure but they're never 100% fringe benefits. A director "has" to drive around meeting people. Customers/partners, hell even IRS representatives. So the car is taxed at 10%, because only 10% is used privately.

Even that doesn't help because "taxed" in this case is a big word for "taken out of what the company pays the person". Which means the company pays in situations where the person controls the company, for obvious reasons.