Mark Roe on Leo Strine and the Big Picture: Is Short-Termism Really to Blame?

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

In his remarks at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s), Delaware Supreme Court Chief Justice Leo Strine argued that a major issue facing public corporations and capitalism today is that they are failing to work for the average person (a recurring theme in the Chief Justice’s recent writings).

Mark Roe, in reflecting on Strine’s work for the conference, identified another main narrative espoused by Strine: that “short-termism” is a deep problem which is damaging the U.S. economy. Indeed, the short-termism story is pointed to by many in the legal, political, and business realms as a major threat to economic prosperity. Commentators from Joe Biden to Warren Buffet and Jamie Dimon have argued that there is a problematic pressure on companies to prioritize short-term profits over long-term, sustained growth, in part due to more intense focus from activist investors.

Despite this widespread rhetoric, Roe argues that economy-wide data simply doesn’t provide clear support for the short-termism story. He identifies four main trends often put forth as evidence of the bad economic effects of stock market short-termism:

  1. cutbacks in capital expenditures;
  2. stock buybacks which starve firms of cash;
  3. reduced R&D investment resulting from the lack of cash (which, in turn, reduces employee welfare); and
  4. a U.S. stock market that does not support longer-term innovation.

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Chief Justice Leo Strine on Berle, Friedman, and Corporate Purpose

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.

Continue reading Chief Justice Leo Strine on Berle, Friedman, and Corporate Purpose