In October 2019, Leo Strine, Jr. stepped down as the chief justice of the Delaware Supreme Court. During his almost five-year tenure in that role, he was deemed by many in the business community to be the judge with the greatest influence on corporate America.
Before leaving the court, the chief justice wrote Toward Fair and Sustainable Capitalism, a treatise that calls for sweeping corporate reform, including the role that institutional investors play in corporate governance.
In his interview, Strine — now Of Counsel in the Corporate Department at Wachtell, Lipton, Rosen & Katz — extols the virtues of incorporating as a Public Benefit Corporation, advocates for adding another “E” to the Environmental, Social, and Corporate Governance (ESG) criteria to represent Employees, and questions the benefits to workers of the gig economy.
Rose Ors: The Business Roundtable’s 2019 “Statement on the Purpose of a Corporation” expanded that purpose to include bringing benefit to — in addition to shareholders — customers, employees, suppliers, communities, and the environment. In April of this year, you co-wrote a piece in The New York Times that offers a way to give teeth to the Roundtable’s position: the Public Benefit Corporation (PBC). How is the business community reacting to this solution?
Leo Strine: There have been several positive market developments. A key development was the passage earlier this year of several amendments to the Delaware General Corporation Law. Now a conventional Delaware corporation can become a PBC with only a majority stockholder vote rather than a super-majority vote. The super-majority requirement was a formidable barrier because management proposals requiring this level of support rarely pass.
There is also a growing interest amongst IPO candidates to convert to a PBC, pre-IPO. In 2020, two Delaware PBC’s have gone public — Lemonade and Vital Farms — joining Laureate Education, which went public in 2017. I believe you will have more IPOs by PBCs because the idea of doing-well-by-doing-good appeals to the new generation of entrepreneurs.
Larger companies, too, are beginning to show a greater interest in the PBC governance form and have PBC subsidiaries. An example is Danone North America, a subsidiary of Danone S.A., which in 2017 converted to a PBC. Not only that, Danone itself just became the French equivalent of a public benefit corporation. Notably, the prices of its ADRs [American depositary receipts] in the U.S. did not suffer, and the IPOs of Lemonade and Vital Farms were priced very favorably, indicating that investors understand that good companies can deliver solid returns for stockholders while committing to being fair to all their stakeholders.
Also, there are public companies considering converting. But the power to make it happen falls squarely on institutional investors like Blackrock, State Street, and Vanguard. They must decide to turn their rhetoric on the importance of sustainability into votes for conversion. But it will take more conversation and education before we will see this happen.
Leo Strine,Of Counsel, Wachtell, Lipton, Rosen & Katz
Rose Ors: Who is taking the lead in that educational process?
Leo Strine: B Lab and its founders, Andrew Kassoy, Jay Gilbert, and Bart Houlahan, deserve a great deal of credit. B Lab has been a chief innovator in this movement. They have long and patiently worked on educating the business community on the importance of choosing a governance structure that not only maximizes shareholder value, but creates value for all of society.
Rose Ors: Do you view the PBC as a way to embed a culture of “corporate integrity” in the boardroom and management?
Leo Strine: I do. There is a big difference between a statute that says you “may” do XYZ and a statute that says you “shall” do XYZ. The “shall” creates a duty. The PBC governance form puts the “shall” front and center.
Most companies want to be viewed as good corporate citizens. A main reason why some fall short of that model is that they take shortcuts, often driven by stock market pressures that do not take into account other stakeholders. Choosing to become a PBC embeds a duty that is not market driven, but values driven. These companies have chosen to be responsible for both shareholders and other constituencies.
One point U.S. investors need to more fully understand is that a stakeholder orientation works for shareholders. To find evidence of this fact, they just need to look at how several high-performing market economies have a stakeholder mentality. A stakeholder orientation brings the United States more in alignment with the rest of the capitalist world.
Rose Ors: You have rung the clarion call for corporations to treat their employees better, arguing for adding another “E” in ESG, to stand for Employees. What would be the practical impact of adding the “E”?
Leo Strine: Under the ESG banner, employees are hidden as a factor. Indeed, they’re so hidden that you can attend most conferences on ESG and never hear a word about employees. But how can a company proclaim it is a good corporate citizen if its employees and contractors are not paid a living wage or if the days and number of hours they work is constantly changing?
The resulting feelings of economic insecurity, the undeniable rise in inequality requires that we take a worker-first approach. An “E” that stands for workers will focus our attention to their needs.
Rose Ors: Can you reconcile the protection of workers with the growing gig economy?
Leo Strine: I am skeptical about the benefit of the gig economy for workers. How many gig workers earn a living wage? How many have affordable healthcare? Lack of either is a significant stressor. If the gig economy is here to stay, change, like universal healthcare, needs to happen.
Rose Ors: You view it as an “evolutionary step” for companies to have a corporate director represent and protect the interests of the workforce. Why?
Leo Strine: I believe the majority of corporate boards do not have a firm grasp of their workforce beyond the C-Suite. A corporate director who represents the interests of workers would bring the voice of the worker into the boardroom.
If corporate America wants to ensure that it treats workers fairly, then a board-level focus on worker welfare is a meaningful step in the right direction. So, too, would broadening the scope of the board’s compensation committee to include all workers. Neither of these steps is a substitute for paying living wages and restoring the ability of people to join a union. But they can be a very powerful part of the solution.
Rose Ors: What is the greatest risk to our democracy if Corporate America continues to fail to take care of its workers?
Leo Strine: The social compact that was Franklin Roosevelt’s New Deal helped the U.S. defend itself from communism and fascism by allowing for capitalism to work for the many. Today, capitalism is far removed from the New Deal and social democratic approach. We need to get back to sharing the gains of the capitalist system more fairly or face an increasingly disgruntled, anxious, and angry workforce — and one that’s open to anti-democracy rhetoric.