Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock

Leo E. Strine, Jr., the former Chief Justice of the Delaware Supreme Court, is a Senior Fellow at the Harvard Law School Program on Corporate Governance; Ira M. Millstein Distinguished Senior Fellow at the Ira M. Millstein Center for Global Markets and Corporate Governance at Columbia Law School; Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School; and Of Counsel at Wachtell, Lipton, Rosen & Katz. This post is based on his recent paper. Related research from the Program on Corporate Governance includes Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr. (discussed on the Forum here); Purpose With Meaning: A Practical Way Forward by Robert Eccles, Leo E. Strine, Jr., and Timothy Youmans (discussed on the Forum here)The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

In his excellent article, For Whom is the Corporation Managed in 2020?: The Debate Over Corporate Purpose, Professor Edward Rock articulates his understanding of the debate over corporate purpose and surfaces four separate, but related, questions that views as central to that debate:

First, what is the best theory of the legal form we call “the corporation”? Second, how should academic finance understand the properties of the legal form when building models or engaging in empirical research? Third, what are good management strategies for building valuable firms? And, finally, what are the social roles and obligations of large publicly traded firms?

Professor Rock argues that “populist pressures” have led contestants to the debate to confuse the separate questions he highlights. He finishes by fearing that these populist pressures could bring about changes to long-standing principles of American corporate governance that would result in more harm than benefit.

In Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy, I reply to and echo Professor Rock’s depiction of the current state of corporate law in the United States, applauding his willingness to be accurate about the actual state of affairs in a debate where all too many obscure the state of the law. I also accept Professor Rock’s contention that finance and law and economics professors tend to equate the value of corporations to society solely with the value of their equity. But, I employ a less academic lens on the current debate about corporate purpose, and am more optimistic about proposals to change our corporate governance system so that it better supports a fair and sustainable economy.

By contrast to Professor Rock, I do not trace the debate pushing society toward a more stakeholder-, and less stockholder-, focused conception of corporate purpose to recent statements by business elites belatedly recognizing that our corporate governance system has failed to work for the many and contributed to growing inequality. Rather, I source this debate to the work of advocates and scholars who have long been trying to restore fairness to our economy by updating an outdated mid-twentieth century corporate governance system to address evolving market and political developments, like concentrated institutional investor power and a corresponding decline in the leverage of workers. These developments have created a profoundly different twenty-first century economy that has outgrown our current corporation governance model’s ability to promote our nation’s best interests.

For forty years, a strain of economic thinking, typically embraced by those who believe that society is best served when corporations focus solely on shareholder profit, has increased the power of economic elites and gone to war against the regulatory state and the protections put in place by the New Deal and Great Society to protect workers, consumers, and the environment. What has resulted is wage stagnation, growing inequality, climate change that threatens humanity, repeated bailouts by the many of the few, consumer exploitation, increased insecurity, social division, and racial and economic inequality. The late recognition of business elites that a corporate governance system contributing to such results needs reform was not the start of this debate; it was a signal that they knew that a long-standing debate threatened to come to a head and produce outcomes that they could not control.

The questions being asked in this debate are therefore more fundamental than those posed by Professor Rock and involve this: Isn’t it time for all societally important business entities—not just public companies, but large private companies and money management firms as well—to have to use their power in a socially responsible manner? And if the current power allocation lets economic elites use corporate power to decrease the effectiveness of the political process to protect corporate stakeholders, isn’t it necessary to address the power and purpose dynamics within corporate governance itself so that they align better with the outcomes we want for our society’s well-being and equity? In my view, the answer to both questions is yes.

Taking a more positive view than Professor Rock, I further argue that the most promising corporate governance reform proposals—such as the public benefit corporation model requiring all stakeholders to be treated with respect; calls for both institutional investors and companies to give greater weight to Employee, Environmental, Social and Governance (“EESG”) factors, help reduce income and racial inequality, and avoid harmful externalities; and restrictions on corporate political spending—do not involve a revolution, but a restoration of the balance that existed when America’s economy was functioning most effectively. They build on traditional corporate law techniques, and restore the balance among stakeholders that characterized governance in the period when the U.S. economy worked best.

Requiring all large companies and institutional investors to act in a socially responsible way that respects all stakeholders would bring our system into greater harmony with other high-functioning market economies like Germany and those in Scandinavia that compete effectively in the global market while producing widespread prosperity. The real danger now for the U.S. is inaction and failure to recognize that our current model of corporate law does not function fairly, and is, as a result, tearing away our social fabric.

The complete paper is available here.

The paper by Edward Rock to which this paper responds is available on SSRN here.

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