Two of the wisest, most experienced, and most influential people in corporate governance, Ira Millstein and former Chief Justice and Chancellor of Delaware, Leo E. Strine, Jr. had a conversation moderated by Columbia professor Eric Talley. It is published in the current issue of the American Bar Association’s Business Law Journal. Some highlights:
On what to tell CEOs on the issue of stakeholders:
Millstein: Hey, look, shareholder and stakeholder interests are now coming together, and you had better pay attention. The future of your corporation and the future of your relationship with shareholders is on the line.” Too many CEOs may be harking back to the good old days when they ran the show and did not have to worry about anybody else. That is not the case anymore. They have to worry about ev- erybody else—not just shareholders, but stakeholders. Why? Because there is tremendous pressure on them to do so. What I worry about most is that they are not listening. That is why I have turned, and I hope lawyers will turn their attention, to something called moral psychology, because I think somehow we have to get through to CEOs that this is real.
Strine: I have been teaching corporate law for at least a quarter of a century now, and I have never before witnessed such a moment of inflection. There have always been skeptics of the Friedman Doctrine, even before ESG was a “thing.” But those skeptics now have grown in ranks, and they have been joined by their traditional adversaries, such as the Business Roundtable. Why are people like Senator Elizabeth Warren seemingly locking elbows with the Business Roundtable and man- agement on stakeholder responsibility?
[T]he share of productivity growth that has been distributed to workers and their pay have gone far down in com- parison to the share that has gone in the pockets of top management and shareholders. Another difference is in who the shareholders are. They are intermediaries who have other people’s money. What we are observing from the Business Roundtable is a recognition that business leaders need to make the system work for everybody. They are under pressure to balance interests in a way that is very difficult for them when they are getting significant pressure from one constituency and there is not en- ough protection for others. So there is a convergence around rebalancing our system, and that is where you see some of these forces coming together.
On what has changed:
Strine: [I]t would be a real mistake if we lost sight of the underlying causes and only addressed the symptoms. For example, lack of corporate resiliency. If you think about it, companies should have been at their strongest in confronting the pandemic.
We had ten years of economic recovery. The federal government gave a huge corporate tax cut. But we had companies that had to lay off workers in the first month. We are stiffing landlords. Why? Because institutional investors had pushed companies to run on fumes with minimal reserves.
Additionally, as Ira mentioned, there are the distributional effects. It turns out that the workers most essential to our economy—the people who keep us up and running— were making much less than average. That class of workers was much more likely to be comprised of Black people. Black people were much more likely to be in the essential worker class with direct exposure to the virus and lower pay. They were also more likely to be unemployed.
So Black people again took it on the chin and working-class and lower-middle-class people did, too. They were left more vulnerable to inequity, including because the changes in gainsharing have impaired workers’ ability to build wealth.
One piece of context we have overlooked is that Friedman wrote at a very ironic time. Europe, the United States, and our allies were experiencing unprecedented, widespread prosperity. Black people in the United States were making strides toward economic equality because they had only been given labor rights in ‘64, ‘65. We Reaganized the economy, and since then, wages have stagnated. By the way, there is a big canard we have to address. American workers have never been more educated, more skilled, more ca- pable of retraining. If you look at the educational standards imposed upon professionals in society—for example, for nurses and therapists—they far exceed what would have been in place forty years ago. And their real pay has gone down.
So it is just total bunk that the share workers are getting is because they are less skilled or less educated. It is that the take at the top has grown. As Ira said, that is unsustainable. Unless we address those power dynamics within corporate governance, we are going to be back at the same place.
Also, I think we have to talk about the stockholder class and how profoundly different it is now from 1970. There is a new segment of power in our economy: institutional investors, who have not been regulated in ways to channel their influence in a more socially produc- tive way. We are either going to regulate institutional investors in the near term or we are going to be having this conversation again in five or six years.