Securing Our Nation’s Economic Future

Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent keynote address to the Fellows Colloquium of the American College of Governance Counsel, available here. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, by Leo E. Strine (discussed on the Forum here).

These days it has become fashionable to talk about a subject some of us have been addressing for some time: [1] whether the incentive system for the governance of American corporations optimally encourages long-term investment, sustainable policies, and therefore creates the most long-term economic and social benefit for American workers and investors. Many commentators have come to the conclusion that the answer to that question is no. They bemoan the pressures that can lead corporate managers to quick fixes like offshoring, which might give a balance sheet a short-term benefit, but cut our nation’s long-term prospects. They lament the relative tilt in corporate spending toward stock buybacks and away from spending on capital expenditures. They look at situations where corporations took environmental or other regulatory short-cuts, which ended up in disaster, and ask whether anyone is thinking about sustainable approaches. They rightly point to the accounting gimmickry involved in several high-profile debacles and ask what it has to do with the creation of long-term wealth for human investors.

As these commentators note, the investment horizon of the ultimate source of most equity capital—human beings who must give their money to institutional investors to save for retirement and college for their kids—is long. That horizon is much more aligned with what it takes to run a real business than that of the direct stockholders, who are money managers and are under strong pressure to deliver immediate returns at all times. Why can’t we, people ask, have corporations focus on the creation of sustainable wealth, by engaging in fundamentally sound and sustainable business investment and operations? And by doing that, create jobs that investors, their children, and grandchildren can have to live well. By that means, end user investors will have the main thing they really need, which is a good job. And they will also have a solid investment portfolio to provide for themselves in retirement and to pay for their kids’ education. Wouldn’t we all be a winner, they ask, with this sort of alignment?

But, too little of that talk is accompanied by a specific policy agenda to address that incentive system. Rather, it is more typical to hear moaning about the bad behavior of certain hedge funds, or the weaknesses of corporate directors who―don’t do the right thing. Very little is said about what is really needed to address the incentive system for all the relevant players so that it rationally promotes the alignment of interests that in fact exists between the investment horizon required to optimally run a business and that of ordinary investors seeking to save for retirement.

In the time I have with you this evening [October 30, 2015], I am going to set forth what a genuine, realistic agenda might be that would better promote a sustainable, long-term commitment to economic growth in the United States. This agenda, I will stress, is not one that should divide Americans along party lines. Indeed, most of the elements have substantial bipartisan support. Nor does this agenda involve freeing corporate managers from accountability to investors for delivering profitable returns. Rather, it makes all those who represent human investors more accountable, but for delivering on what most counts for ordinary investors, which is the creation of durable wealth by socially responsible means.

As with any serious policy agenda, it will threaten some vested interests. For those on the right who believe that any measure that might increase taxes on any interest is unthinkable, there will be elements to dislike. For those on the political left who are in the thrall of certain interests, too, such as hedge funds and activist pension funds and their trial lawyer allies, some of the measures proposed would require them to put the interests of the human being investors they represent ahead of moneyed interests who make large political expenditures. But none of what this agenda asks of any interest group would render those interests unable to make large profits or exercise fair influence in the corporate governance realm. It does, however, involve subjecting them to measures that deny them preferential benefits now unavailable to other Americans and changing their incentives so as to diminish the rents they can reap from speculation and skimming.

Because this agenda is serious, it does not duck the key issue of whether tax policy is important if we are going to promote the most long-term investment in American jobs and wealth. The answer to that question is for damn sure yes. For one thing, it is impossible to align the incentives of all those whose behavior is relevant without tax policy. As important, our nation has long-term economic challenges that must be addressed by public investment and incentives that can be implemented only if we have the funds to pay for them. Most notably, we have a huge infrastructure and basic research gap that is eroding our competitiveness and diminishing our quality of life. We also cannot be blind to the reality that we need to accelerate our efforts to address climate change and to set an example for the world. With real investments in basic research and infrastructure, we can create jobs in the United States, spark innovation, and enhance the long-term international competitiveness of American companies. At the same time, by good tax policy that addresses behavior we want to have less of, we can use the savings to reform approaches to corporate taxation that are out of line with the rest of the world and that create perverse incentives for American corporations to move operations offshore.

One notable exception to the tendency toward generalities in talking about so-called long-termism was the Overcoming Short-Termism report, put out by the Aspen Institute’s Business and Society Program and its Corporate Values Strategy Group in 2009. In that short paper, an impressive number of CEOs, leading corporate lawyers, and nonprofit and foundation leaders embraced an agenda to promote America’s long-term economic growth. That well-thought out agenda was designed to promote the nation’s long-term growth. The Aspen agenda was based on several key principles: (1) creating market incentives to encourage patient capital; (2) clarifying, enhancing, and rigorously enforcing the fiduciary duties of financial intermediaries to better align the interests of the intermediaries and the long-term interests of investors; and (3) giving investors greater and more timely information about the interests of activists who sought to influence corporate policies. [2]

Perhaps because of the inability of Congress to do anything moderately difficult during the period since that paper issued, the Aspen Overcoming Short-Termism paper has sat gathering dust. But the increase in rhetoric reflecting support for policies to make sure our society can meet the challenges of the future suggests that a new Administration of either party might, if it had intestinal fortitude and political skill, be able to forge a sensible bipartisan agenda to create jobs, tackle climate change, and ensure America’s economic pre-eminence. Indeed, the question is not whether our nation has the capacity to do this. The question is whether we have the will. If we believe, as I do, that our nation retains the capacity to do great things, then the real question is whether we will muster the maturity and courage to realize that nothing comes easy that is worth having. With minor sacrifices in comparison to prior generations like those who fought a war to end slavery or to defeat fascist aggression, we can secure the American dream for generations to come.

Now, of course, it is my duty to deliver what I have criticized others for failing to do. What are the specifics of an agenda to enhance the long-term competitiveness of the United States for the benefit of American workers and investors, and their children and grandchildren? What will align the mutual interests of ordinary investors and corporate managers in business strategies that involve substantial investment and socially responsible and sustainable practices?

In my view, such an agenda requires focusing on the fundamental issues identified in the 2009 Aspen report, but with more policy specificity. As I frame things, these are some of the critical elements of any genuine strategy to promote long-term American competitiveness. [3]

The complete publication is available here.

Endnotes:

[1] This lecture draws together ideas from a prior series of writings, including: Leo E. Strine, Jr., Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance, 33 J. Corp. L. 1 (2007); Leo E. Strine, Jr., Human Freedom and Two Friedmen: Musings on the Implications of Globalization for the Effective Regulation of Corporate Behaviour, 58 Toronto L. J. 241 (2008); Leo E. Strine, Jr., Toward a True Corporate Republic: A Traditionalist Response to Bebchuk’s Solution For Improving Corporate America, 119 Harv. L. Rev. 1759 (2006); Leo E. Strine, Jr., Breaking the Corporate Governance Logjam in Washington: Some Constructive Thoughts on a Responsible Path Forward, 63 Bus. Law. 1079, (2008); Leo E. Strine, Jr., Can We Do Better By Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 Colum. L. Rev. 449 (2014); and Leo E. Strine, Jr., Making it Easier for Directors to “Do the Right Thing”?, 4 Harv. Bus. Law. Rev. 235 (2014); Leo E. Strine, Jr., Our Continuing Struggle With the Idea That For-Profit Corporations Seek Profit, 47 Wake Forest L. Rev. 135 (2012); Leo E. Strine, Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, forthcoming Wake Forest L. Rev. (2015).
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[2] The Aspen Institute, Overcoming Short-Termism: A Call for a More Responsible Approach to Investment And Business Management 3 (2009) [hereinafter Overcoming Short-Termism].
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[3] Tonight, I do not address another key competitiveness risk, which is the failure of our nation to overcome its history of racial discrimination and to promote greater educational and economic opportunity for all its citizens. A long-term risk for our nation is growing divisiveness from unequal outcomes and continuing black poverty. A national strategy to establish, among other things: i) universal pre-kindergarten; ii) full day kindergarten; iii) a 210–220 day school year, schools that are open until 5:30 and that require after-school activities; iv) strategies to support working parents with better work and home balance, such as stable working hour regimens, better quality childcare, and parental leave; and v) a genuine national health care system that does not require American employers to bear costs their OECD competitors do not, is essential. American children cannot expect to outcompete their international counterparts with less time on-task. And children with educational deficits and socioeconomic deficits cannot overcome them without more effort. Sweat cannot be avoided.
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