A few days ago the hyper-connected and truly thoughtful Andrew Ross Sorkin of The New York Times included, verbatim, a letter I summarize below in his daily e-news.
On the strong suspicion that there are some corporate lawyers in the audience with an interest in governance issues, I thought few topics could be more timely than a powerful, and deeply moral, essay on where we may have gone wrong in this area over the last few decades–and how the consequences of our choices and “policy” preferences are playing out now in the lives of millions and millions of Americans in a pernicious way.
The lead author is a name many of you will recognize:
Before stepping down last year, Mr. Strine was the chief justice of the Delaware Supreme Court, which oversees more U.S. businesses than any other […] He is now an adjunct professor at the Penn and Harvard Law Schools. He wrote this essay with Dorothy Lund, an assistant professor at the University of Southern California Gould School of Law.
Dealbook identifies him as “perhaps the most influential judge in corporate America over the past decade,” and I’m sure many of you would agree with me that he’s just that.
How to restore strength and fairness to our economy
By Leo E. Strine Jr. and Dorothy S. Lund
When we cautiously return to normalcy, there will be a natural tendency to play the blame game about the reality that our economic system was not well positioned to absorb the effects of the pandemic without an enormous corporate bailout. […] Are Americans well served by a corporate governance system that has encouraged all sectors of the economy to run their businesses on fumes?
[…] But our corporate governance system must accept substantial responsibility for the slant against workers and in favor of stockholders. Powerful institutional investors have arisen to pressure companies to reduce the share of corporate profits that goes into workers’ paychecks and tilt companies toward riskier balance sheets. […] What does it say about whether rhetoric [coming out of the Business Roundtable and elsewhere] is enough that, in the national emergency we are facing, American workers and taxpayers, not institutional investors or top corporate managers, are bearing the brunt of the harm? […]
For too long, the stock market’s power over our economy has grown at the expense of other stakeholders, particularly workers.
Finally, we must acknowledge this fact: Waiting until a dark economic moment to give workers Band-Aids in a bailout bill is a poor substitute for giving them what they deserve in the first place.
The Dealbook essay is a highly condensed and updated (in the light of Covid-19) version of a paper Strine published last September which laid the blame for workers’ accelerating disenfranchisement squarely with institutional investors whose short-term profit-maximization goals are squarely at odds with the American families and individuals who provide their funding through 401(k) and other plans (emphasis in what follows mine).
When looking for the causes of growing inequality and a corporate governance system that
does not work for all, the usual subjects of criticism are the CEOs and boards of large
companies, but very little is said about those who wield over 75% of shareholder voting
power: institutional investors. Most stock today is owned not by mom-and-pop investors
who directly hold stock in individual companies, but by institutional investors who control
human investors’ capital. The majority of middle-class Americans fortunate enough to be
invested in the stock market are in a real way forced capitalists. These worker-investors
must save for retirement through 401(k) and other tax-advantaged investments that require
workers to turn over a portion of every paycheck to a family of mutual funds chosen by
their employer. The institutional investors, not these worker-investors, get to vote the
public company stock that mutual funds buy with human investors’ capital.
Corporations will not give more thoughtful consideration to their employees and social
responsibility—that is, our corporate governance system and economy will not change—
unless the institutional investors who elect corporate boards also support doing so.
Institutional investors have the most influence on corporations, and the imbalance in our
corporate governance system can be fixed only by aligning institutional investors’
incentives with the interests of their end investors: human beings saving for retirement and
their children’s college education. Even more important, human beings who most of all
need American corporations to pay good wages and create good jobs.
The investment horizon of the ultimate source of most companies’ funding—human beings
saving for retirement and education—is long. That long-term horizon is much more
aligned with what it takes to run a real business than the horizon of companies’ direct
shareholders, who are money managers under strong pressure to deliver immediate returns
at all times. As diversified investors whose holdings track the overall economy, human
investors do not benefit when companies offload the costs of their activities, such as carbon
emissions and other pollution, onto others. And as human beings who breathe air, consume
products, and depend on a good job for most of their income, human investors suffer as
citizens when companies take shortcuts that harm the environment, defraud or injure
consumers, or offshore jobs to countries with low wages and few worker protections.
Human investors owe most of their wealth to their job. This is true not only for the poorer
half of Americans; it is true of 99% of Americans. On average, Americans get 64% of
their income from wages and another 15% from either retirement payments or other
transfer payments. For the middle and upper-middle class, jobs are even more important,
with wages comprising 70% or more of income. But the importance of work does not stop
there. Those in the 80th to 90th percentiles get 75% of their income from working, and
those in the 95th to 99th percentiles still get over 60% from their labor. As a result, human
investors need companies to do business in a way that provides Americans with access to
good jobs, sustainable wage growth, and a fair share of the wealth that businesses generate.
In short, human investors benefit from sustainable, long-term economic growth and
gainsharing between shareholders and workers, but companies have increasingly failed to
deliver on that promise. For about two and a half decades starting in the late 1940s, workers
and investors shared in the wealth generated by a strong, growing economy. In the early
1970s, accelerating in the 1980s, and continuing since, that social compact has frayed.
Since then, worker productivity has risen by about 70%, but hourly pay has grown by only
12%. Meanwhile, corporate profits have hit record highs. In other words, American
workers are more educated than ever, more skilled, and doing more to create corporate
profits than ever, but they have shared far less in the fruits of that labor.
It’s a truism of history that wars and severe economic dislocations (both) can change the established order much faster and far more decisively than letting matters play out in the ordinary course.
Not to press the analogy too far, but I imagine we could all agree that feudalism with its masses of downtrodden vassals could not have survived as the dominant economic system in Europe forever, but the Black Death of the 14th C. put a quick end to it. (Labor went from being fungible and for practical purposes inexhaustible to being scarce and therefore valuable; all of a sudden the serfs had bargaining power, and they knew how to use it.)
So endeth this excursion into, yes, a moral dimension.