Boards Can Balance Profit & Social
By Eve Tahmincioglu
Influential corporate law judge Leo Strine discusses the role
directors, investors and executives can play in curtailing income
inequality and strengthening societal good.
The continued undervaluing of employees has brought corporate America
to a precipice, and in order to keep the economic system from
buckling, institutional investors, management and boards need to look
in the social-purpose mirror, says the nation’s most influential
corporate law judge.
The economic pie has grown considerably, says Delaware Supreme Court
Chief Justice Leo Strine, but the rank and file’s share is much less
than it was 30 years ago, which affects the community at large. That’s
led to more income inequality and less satisfaction, and is the result
of actions by large investors and corporate leaders.
“There is going to be a level of inequality where people are just not
going to take it. Frankly, they’re not going to trust business elites
and for a good reason,” explains Strine, who heads the high court in
Delaware, a state where two-thirds of Fortune 500 companies are
incorporated and whose corporate laws are often considered the de
facto law of the land.
To deal with the issue, he maintains, there are “a variety of sensible
things that can be done to invest in our economy to create better
jobs.” But he also believes that boards needs to give workers more
leverage and more pay, especially in the context of an increasing
number of employees becoming shareholders themselves through 401K
plans and mutual funds. “If this is supposed to be a shared system,
especially if we’re going to make workers be stockholders, then they
ought to see the returns in their paycheck.”
The following is a Q&A with Strine, who sat down with Directors &
Boards to share his thoughts on what directors can do within the
confines of the law to embrace the growing environmental, social and
governance movement. He offers his insights for our year-long “The
Character of the Corporation” series, which explores the very essence
of a company’s approach to generating a profit and how that impacts
all stakeholders, employees and communities, and not just
shareholders. Strine’s answers have been edited for length and
There are many directors who want to focus on environment, social and
governance issues (ESG), but what if their actions to bolster social
good end up impacting company profits?
Things like environmental shortcuts, product safety shortcuts,
treating workers unfairly tend to get caught out over the long term.
So some of the tensions really are resolved, and create a more
productive incentive structure for boards and the managers, if the
people who are voting the stock actually adopt the perspective of the
people whose capital they control.
A lot of my focus has been on what the obligations of institutional
investors are to align their behavior with the interests of the people
whose money they have. If you can get more of that thoughtful
thinking, then perhaps the incentive structure for boards is less
moment to moment.
All of us breathe air, all of us drink water. None of us wants any
particular company in our portfolio to get artificially rich by
poisoning us. Also, we pay for those externalities as investors and as
human beings, so those externalities are costs to us. We don’t really
want directors in any particular company violating the law. And by the
way, under Delaware law, they’re not allowed to do it.
Blackrock and Vanguard and others are starting to acknowledge their
responsibility to think about sustainability, to acknowledge that they
need to align their voting principles with their long-term investors.
I think that’s a healthy development, and hopefully sets us on a
better path where we can all begin to make the system work a little
bit better for everybody.
When you see someone like a Larry Fink, Blackrock’s CEO, put out a
statement last year on this issue of social purpose, a lot of what
he’s proposing puts the onus on the board. Is that justified?
We have a lot of unrealistic expectations for independent directors,
and I think it would be better to rebalance boards a little bit. We
need folks who are genuinely independent directors, but we also need
directors with expertise, and we need directors who were active in
business and who understand the industry. And some of the rules and
incentives can get so tight that we actually discourage people with
the right kind of qualities from serving on boards.
It doesn’t really matter if you’re independent if you don’t have
expertise. But can you be independent and also have the expertise and
the knowledge? I’m sure you can.
We just independent director-ized the world. We went from having a
bare majority of them to having a supermajority of them. We don’t
actually empower them. We take away their ability to think long term
because we put in place Say on Pay. We don’t do Say on Pay every four
years or five years, where you would really have a long-term pay plan,
we do it every year as a vote on generalized outrage.
Corporate management and employees are the most important thing to
corporate success, especially employees — who, frankly, boards of
directors, managers and institutional investors have undervalued for
30 years — which is part of why there are the tensions we have in
society right now.
But I think it’s been healthier to have Mr. Fink saying, “We hold
people’s money for the long term for long-term investors, and
companies behaving in a responsible way and creating wealth that’s
sustainable is important to our investors. And we understand that we
need to take that into account.” I viewed that as a very constructive
Is it this phenomenon of bringing in more independent directors that
may have inadvertently caused a lesser focus on doing the right thing
for employees and the community?
Independent directors are not like trustees at universities, who
usually have prior affiliations with the university and the community
in which it exists, and that they care deeply about. Independent
directors are weather vanes for the market. Not to denigrate them, but
let’s think about the definition of an independent director. They tend
to have no prior affiliation or current association with the company,
and thus they really have no reason to deeply care about it or any
aspect of it. Now you can say that’s independence, but it’s also a
There’s great competition to be an independent director. Independent
director pay has gone up. The typical pay just to be on one company
board is higher than my judges in our judiciary. If you’re on three
boards, you’re often making more than a half million dollars a year
just as a director.
The old concern was that directors had to be popular with management
to stay on boards, but now you have to stay popular with the
institutional investor community and with the proxy advisers, and
therefore these directors are highly responsive to market sentiment.
Are you saying that the democratization of the governance process,
which also includes having more independent directors, inadvertently
created an incentive that went against the greater community?
There’s been a big increase in the power of mobilized capital over the
last 30 years, which has put more and more demands on companies to be
responsive to the stockholders. We didn’t globalize the protections
for labor, for the environment. We globalized it for capital.
Those companies have naturally looked to downsize — to frankly change
— the gain-sharing with the stockholders in labor. Perversely more of
us have been forced to become stockholders in order to save. It’s not
clear that this so-called benefit for the stockholders has really
benefited most of us, because most of us owe most of our wealth to our
job and our continued access to a job. And I also think the
frustration for directors and for managers is that the marketplace
oscillates pretty wildly by the moment, and that’s not how you can
really run a business if you want it to be successful over time.
The struggle is to align the powerful input that the market provides
with the interest of those people it’s supposed to serve. That’s
where I think folks like Larry Fink are starting to have a
conversation about this. Vanguard is very healthy because no one
thinks you should manage companies quarter to quarter, but no one
denies that there are huge pressures on companies to be attentive to
their short-term results and they spend a lot of time doing that.
Companies have become more subject to the immediate pressures of the
market. The easiest way to respond to that is to put downward pressure
on the pay of working people. It also puts pressure on companies to
perhaps take shortcuts on compliance in a way that’s unhealthy. I
don’t think ultimately that serves investors because it’s probably not
a sustainable way to make increased wealth over time for a society.
And so if we can rebalance things a little bit where we give companies
some breathing room, hold them accountable, but recognize that they’ve
got to make money in the old fashioned way by selling good products or
delivering quality services — and that there isn’t a gimmicky way to
get around that — then I think we’ll be all for the better.
What would you tell an independent director who wants to balance that?
Should there be a list of priorities when they sit down and discuss
this in the boardroom?
I don’t think you have to think about it that way. For all independent
directors, the best way to do your job well and stay out of trouble is
to think like you do in your day job, and to think of the company as
if it’s your asset.
Think about how in five years, if you want this company to be
productive, what kind of workforce you need and if it’s really
sustainable for the company to thrive if you’re not giving the workers
solid increases when they deserve it. I’ve always done this test, and
I’d like directors to think more about this. The CEO is worried
because he’s now at the 72nd percentile of CEO pay and he wants a $5
million bonus. I’m not really that good at math, but I think $5
million is five thousand $1,000 bonuses.
What would be the comparatively best thing for the corporation? For
that CEO to get $5 million on top of his already $12 million a year,
or to say to your 5,000 employees, “We’ve had a really good year. Each
one of you has $1,000, please take your spouse or your kids or your
family and have a nice long weekend on the company. We really
appreciate what you do.” My sense is 5,000 people will be juiced up
because you appreciate them. Plus, about 2,000 of those people
probably have a really important bill that they can pay off.
Do you have to make a profit to be a for-profit company over the long
run? You do. But there’s a responsible amount of gain sharing that’s
supposed to go on with the workers whose capital is contributed every
day. And that this really matters to businesses and it matters to our
society. That’s, to my mind, where boards of directors and managers
have really fallen short in this country over the last 25 years.
I do think we’ve made it a lot less attractive to be a CEO of a public
company. You’ve seen companies give pay raises of 4% or 5% to workers
and then the institutional investors are outraged, when institutional
money managers are a federally subsidized industry. What other
industry actually gets mountains of money flow into it every week by
virtue of federal tax policy? So if you’re a CEO now, you’re not
looked at the same in your community as you would have been 40 years
ago. Right? You’re seen as a person who downsized operations,
offshored them. I think some of the pay disparity is compensatory,
like “You pay me to do icky things, so I’m going to get more. Also, if
you don’t pay me in cash, I’m going to get more of this stuff that’s a
proxy for cash.”
I’d love to see two forms of compensation, really solid cash
compensation and some form of restricted stock and then a requirement
that when you have too much restricted stock you have to sell, so that
nobody gets too much of a share in the particular company. But we have
all these exotic pay plans that are impossible for people to
understand. We’ve extended them to boards of directors. We’ve made
some simple things pretty, pretty hard.
So how do boards move forward on dealing with ESG?
The bottom line is you’re a fiduciary. You have the duty and the
discretion to weigh all the factors that have to be balanced in
helping to manage a business. Do you have to try to do the best thing
for the stockholders over the long term? Sure you do. But that doesn’t
mean — and there’s no court that said you can’t give workers nice pay
— that you shouldn’t be considering “ Are you using plants off shore
where they use child labor, or where the working conditions are not
safe, or where the suicide rates are extreme? Which is an indicator
that the working conditions are not safe? Do you know about those
things? And is that OK?”
Those are some of the questions that are starting to be asked. I think
it’s a good thing.
Does this end up in court? That’s the issue.
I believe, for example, that the Congress of the United States can
create national parks and they can protect the environment and they
can support the arts. That doesn’t mean we have a multi-constituency
U.S. Constitution where the trees and musical notes and literature are
equal to human beings, right? It means that human beings can have
values that are different than money or other things, right? Well, who
are ‘we the people’ in the corporation? The only folks who vote are
the stockholders. They’re the ones who get to sue, they get the vote
on the transactions, they get the vote on the board of directors.
So ultimately, if you’re talking about the purpose of a for-profit
corporation, many American states have laws that say the directors can
consider the interest of all the constituencies. But those
corporations don’t behave really differently than those in states that
have different laws. Why? Because all of them have boards of directors
that are entirely elected by one constituency, the stockholders.
Ultimately, it’s unrealistic to expect boards of directors to give
greater weight to the interest of other constituencies than their
stockholders really will allow them to do.
There’s no case — there’s absolutely no case — that bars a company
from saying, “You know, in the 1970s when we went through an economic
recovery, or the 1960s, or the ’80s, we used to share a substantial
amount of the upside of that recovery with our workers, because we
knew during the tough times we wouldn’t give them raises. We would lay
them off. We’re going to commit to the same level of gain-sharing that
we used to give, and we’re going to do right by our stockholders. When
we do better, our stockholders are going to do better. But we think
it’s important that the workers actually share that, like they used
to.” There is no Delaware case that would ever prohibit boards from
We want our economy to produce good jobs. When we work hard and our
enterprise succeeds, we would like to think we get a fair reward for
that and we would think that our fellow workers at other companies
should as well. In addition, we breathe air, we would like it to be
clean. We drink water, we would like it to be safe. We use products,
we would like them not to harm us. We use services, we’d like to not
be defrauded by them.
We invest in a lot of companies and if one of them does something
wrong, we as taxpayers and citizens have to make up for it. So we
don’t really have an interest in any of them acting in a particularly
skeevy way. We want them all to try to do their best in a responsible
way. If the people who control our capital would assume that same
attitude and vote in a way that accords with that perspective, then
that gives the people who are running these businesses day to day —
and the boards of directors who were helping the people who run the
business — more breathing room to take into account the actual things
that matter to making a society one you want to live in.
So to swing the pendulum, do you think that we need some major sea
change, like new legislation to bolster long-term thinking and ESG?
I don’t think there’s any one thing. I want to be very positive toward
what the index funds are stepping up to the plate to do. I think they
need to do more. I think their abstention on the political spending
question is tragically misguided and inconsistent with their whole
focus on ESG, but let’s give them a chance to get there.
Do I think there needs to be a major rebalancing to make sure that the
system works better for everyone? Yeah, I do. We really risk losing
what we most value if we don’t understand that we got to the place
where we defeated fascism and found a different way than communism by
recognizing that the market system has to work for everybody.
It’s not working as well for everyone as it used to, and if that
doesn’t change, you’re going to either have the more optimistic
vision, which is the Bernie Sanders ‘Let’s try to return to a stronger
form of a New Deal kind of economy.’ Or you can have the more
nihilistic ‘Brexit, tariff, get-behind-our-walls’ approach. I think
the latter would be disastrous.
I think the people who manage companies, though, need to look at where
the median wage is. The pie has grown considerably, but if the share
of the pie that goes to the many — the people who go to work every day
— were the same as it was 30 years ago, then there’d be a
substantially less amount of inequality, and there’d be a lot more
satisfaction. If the folks who are running businesses don’t want to
see legislation passed, then they’re going to have to do something
about that. No one ordered them to cut the returns to their workers.
Anybody who thinks the gig economy is the answer, I’ve yet to hear
that from any of them who work in it. There’s nothing new about
undermining well-paying jobs. I don’t see that as progress. Progress
to me is that we find a way to include the folks that we’ve
discriminated against in the blessings of our prosperity, the people
who are willing to go to work and want economic security. That was the
vision that Roosevelt had. That was the vision that was embraced by
our Allies. And that’s the one that is at risk. When people feel
insecure, they get scared. And one of the historical ways people have
exploited insecurity is to blame the other. And you know, I think we
need to get away from that.
You’re seeing in the business community and the investor community a
recognition that we do need to improve. And if the investor community
will really do its part, that will allow the directors and the
managers to strike a better balance.
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