Editor’s Note: This post is part of an ongoing multi-part series covering the Millstein Center’s March 1, 2019 conference, “Corporate Governance ‘Counter-narratives’: On Corporate Purpose and Shareholder Value(s).”
By Brea Hinricks
Much has changed in the U.S. since Adolf Berle made his case for shareholder primacy in the early 1930s, and since the Friedman Doctrine rose to power thirty years later. Starting in Berle’s time, robust protections for employees came about as a result of the New Deal (passed thanks in part to Berle’s participation) and the rise of labor unions. Employees had enough bargaining power to ensure that they were treated fairly by their employers and were still protected in an environment that extolled the sole pursuit of profits.
Today, says Chief Justice Leo Strine of the Delaware Supreme Court, the Friedman Doctrine and the sole pursuit of profits within the “rules of the game” seems extreme. But in the context of Friedman’s day, where these substantial worker protections were in place and the “rules” were quite robust, it made sense for enterprise to “stick to its knitting” and leave social protections for the realm of government and regulation.
Chief Justice Strine made these observations at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s). (You can find an audio recording of his full remarks here.) He highlighted a vastly different reality facing today’s workers. Globalization, he points out, has given companies the ability to outsource labor to lower-paid and worse-protected workers abroad, and has allowed companies to forego providing benefits to their employees (if they are considered “employees” at all). Workers have worse job security today than they once did, especially due to automation-related layoffs. Companies create fewer jobs in the communities in which they operate, weakening their social ties and the informal expectation that companies should “give back” at the local level. Today, only a relatively minuscule number of private sector workers belong to labor unions. The “rules of the game” look very different than they did in Friedman’s day.
There has also been a “re-aggregation” of capital into the hands of large institutional investors and asset managers, shrinking the agency costs that result from the separation between ownership and control. At the same time, Supreme Court cases like Citizens United and Hobby Lobby have increased corporate power and limited the government’s ability to expand the social safety net by allowing companies to spend for political purposes and by blurring the line between a corporation’s identity and the identities of its managers and shareholders (and, therefore, their political and moral beliefs).
Together, these developments have created an environment where the power of shareholders and corporations relative to workers has increased significantly, and it is clear to many that the time has come to reevaluate the shareholder primacy that Berle and Friedman espoused. However, Chief Justice Strine argues that while corporate governance changes to remedy this imbalance are important, corporate governance alone cannot be the solution. Calls for corporations to “do the right thing” and serve a broader social purpose could distract from what Strine sees as the key solution—changes to law and regulation (including taxation) that expand the social safety net, address income inequality, and protect workers. Even if corporate governance reforms are implemented in a manner that binds corporations (such as Colin Mayer’s proposal to require companies to commit to a defined purpose in their charters or articles of association), the fact remains that under Delaware corporate law shareholders are the only constituency that wields voting power and can truly hold company management accountable. In corporate governance, then, shareholder primacy is all but inevitable.
Instead of focusing mainly on corporate law changes, Strine argues, we as a society should be asking ourselves other questions: How can we change taxation to address income inequality? How do we give breathing room to asset managers to think long term? How should we address these issues outside the U.S., particularly in developing countries?
These questions, including the role of corporate governance in within them, are difficult to answer, but we at the Millstein Center are committed to continuing to explore them as part of our Counter-Narratives Project.