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The Law Favors A C-Suite Awakening

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Business leaders have been steadily waking up to the need for a new business paradigm: one that continues to reward shareholders fairly without ignoring other stakeholders whose interests are just as crucial to general prosperity. Companies are steadily shaking off the manacles of shareholder primacy to find better paths toward sustainable success and social well-being. At the moment, these early adopters of enlightened leadership are role models. What they are doing needs to become the norm

The tide is turning though. Recently, the Business Roundtable announced that shareholder primacy has become a destructive business model and that the private sector needs to find a new and more inclusive sense of purpose. 

And now, a new voice, from another direction, has joined the rising chorus, one of the most influential judges in US corporate law, Leo Strine, chief justice of the Delaware Supreme Court. The courts clearly influence the future rules of the game, so it’s encouraging to see a thought leader among the judiciary take this kind of stance on corporate governance. 

Recently Financial Times published Strine’s overview of his vision and, additionally, posted an interview with him on the subject. In both pieces, Strine demonstrated that he sees our quandary perfectly. Private enterprise needs to put the welfare of workers at the center of its mission: give workers the best life it can so that they will pass along the favor to customers. All of which results in responsible, sustainable profit. 

As he points out, since the early 70s productivity has risen 70 per cent, while hourly pay has grown by only 12 per cent. Profits are rising dramatically, but are siphoned off by shareholders. “US workers are more educated, more skilled and do more to create corporate profits, but they share far less in the fruits of that labour,” he says. 

His call to action is solid: 

  • Appoint board committees focused on fair treatment of company employees and those who work for its subcontractors. 
  • Institutional investors should add another E to ESG, to become guardians of employee interests and encourage companies to give workers equity and/or profit sharing. 
  • Alter tax and accounting rules to discourage speculative buying and selling of stock, rapid portfolio turnover. Change the holding period for capital gains from one year to five. Tax financial transactions. Close the loophole for carried interest. 

Strine believes institutional investors and government can pressure corporations to focus on the well-being of the average employee and increase compensation. His logic is good: when companies pay their people more, those workers are more likely to be able to save and will put that money into the hands of institutional investors of one sort or another. So those institutions have good reason to nudge companies toward higher compensation. 

Strine also believes that—given his preference for the European social model—higher income taxes on the wealthy are a key way to create more economic balance and reduce income inequality. And he told the Financial Times that a focus on the slow-motion crisis of economic inequality will become the crucial factor in future presidential elections: 

“ [In the 2016 US election], one of the candidates focused intensely on economic insecurity and the other candidate did not. The candidate who did won. There is a lesson there.”

Higher taxes might be a minor lever to rebalance income and wealth, but its influence would be slight. Today’s reality where the top 400 income earners in the U.S. pay a lower tax rate than the bottom 50 percent of Americans is clearly absurd. While some changes in public policy may help around the edges, a change of paradigm in the C suite is faster and more effective. We need a great awakening among private sector leadership, something already underway as scores of companies refocus themselves on the well-being of employees rather than short-term shareholder primacy. If a devotion to multiple stakeholders were to become the norm in American business, the economy would correct itself, without government intervention. 

And guess what? Eventually, profits would soar. Costco, Starbucks, Delta, IKEA, Whole Foods, Publix, Toyota and many others have outperformed their peers by adopting exactly the sort of employee-centric focus that Strine advocates. The irony is that, by putting short-term profit aside as the central motivation, they are becoming far more profitable in the long run. Strine doesn’t discern any of this in his vision of socially-conscious leadership. Yet, as the book, Firms of Endearment pointed out, the most highly successful companies now are putting short-term profit on the back burner and focusing on purpose-driven behavior, employee training, reducing employee turnover, creating nurturing work environments, and instilling a passion for customer delight. These companies consider corporate culture to be their greatest product. As a result, these companies focus on offering greater-than-average employee compensation in wages, equity or both. 

The future Strine wants, regardless of whether or not he understands exactly how to get there, represents the greatest win-win imaginable both for the private sector and for the population as a whole. But let’s put the spotlight on CEOs, boards of directors, and other in the C suite: they are the ones who can choose to change the world. For a better tomorrow, they simply need to recognize that imperative today.

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