Moral Money Capitalism

Moral Money special: Leo Strine’s new deal for corporate America

Gillian Tett, Andrew Edgecliffe-Johnson, Patrick Temple-West and Billy Nauman

[OCTOBER 1, 2019]

As chief justice of the Delaware Supreme Court since 2014, Leo Strine has been one of the most influential judges in US corporate law. More than half of all publicly traded US companies are domiciled in Delaware, making the small state the epicentre of legal battles between shareholders and boards of directors.

Mr Strine is about to retire. But before he does, he is publishing a sweeping proposal for overhauling American capitalism. He outlines his ideas in this FT opinion column and you can read his proposal in full here. Later this week, Mr Strine will also present his ideas at a conference in Washington, details of which can be found here.

However, last week in his first interview since announcing his retirement, Mr Strine spoke with Moral Money, and what he said is likely to intensify the debate about how to build a sustainable business.

Some free-market thinkers may hate his ideas. Others may love them, particularly on the left. Either way, Mr Strine’s key point is this: rather than advance a Green New Deal, as liberal congresswoman Alexandria Ocasio-Cortez has proposed, he hopes to renew America’s commitment to former Democratic president Franklin Roosevelt’s original New Deal, focusing on worker rights.

Mr Strine’s “comprehensive proposal” calls on big companies to create board-level committees focused on employees’ interests; it urges asset managers to consider their beneficiaries’ investment horizons and “human interests” when voting; and it recommends changing the holding period for long-term capital gains from one year to five, establishing a financial transaction tax, and closing the carried interest tax loophole.

This is likely to spur discussion inside the Business Roundtable — and provide debate fodder for Joe Biden, Elizabeth Warren and other Democratic presidential contenders as they scramble to win back labour union voters who sided with President Donald Trump in 2016.

What follows is a transcript of the conversation edited for length and clarity.

FT: Are you a socialist? You are suggesting works councils

LS: I unapologetically support the approach to managing the economy that was begun in the New Deal and that is associated with European social democracy.

That was the approach to managing an economy that forged a way that defeated both fascism and communism, and that made market forces — in other words capitalism — work for the many. And so I unapologetically embrace the New Deal/social democratic approach to the capitalist economy.

I would note that virtually every rich person I know seems to buy their highest precision luxury goods such as automobiles and watches from nations that embrace that approach.

FT: Why did you decide you needed to put this out now?

LS: My entire reason for being a public servant is because I believe in the idea that self- governing societies can make things better for their entire citizenry.

(Winston) Churchill and (Franklin) Roosevelt, when they looked at the postwar era, realised that unless you have economic security . . . it is very difficult for you to enjoy life.

I have been working for a long time on trying to forge common ground between business and labour. And for us to remember that what we have in common is more important than what divides us.

And as we came into this [2020 election] cycle, some folks had asked me to take some of my thoughts over the years and put them in a more specific form. I bit the bullet and said, OK, if we were going to do something to make our corporate governance system and economy work better for the many and be aligned with sustainable economic growth, what would the changes be that we needed?

FT: You are particularly focused on the extra “E” in “EESG”. Why do you think investors should be paying as much attention to employees as to environmental, social and governance issues?

LS: Their investors’ economic wellbeing is mostly attributable to whether they have good jobs. These folks who control the capital, it is not their money, it is the money of working people and what you get to actually save, and put into the institutional investor is determined by your job.

For most of us what we get out of the capitalist system is what we get from our employment. And that is what matters most as an economic matter to most investors. We don’t have an approach to running our economy where we treat the people who create the profits — the workers — with due regard and give them good pay.

The election results in the US and the vote in Brexit are manifestations of what happens when there is economic insecurity.

The great triumph of Franklin Roosevelt and the west was to actually come up with an approach to capitalism that made it work for the many. We have allowed ourselves to be arbitraged against each other and it has not had good results. It is absolutely vital that working people come first.

I don’t apologise for being left-of-centre. When I am a judge I decide cases regardless of political bent, but I was never afraid of using the “liberal” word. But you can have what I call “the pour-over coffee left”: for European readers that means people who like coffee that is even more fancy than Starbucks. You can go to entire conferences where people will talk about sustainability, everything, and they will not mention how the company treats its workers.

FT: Do you think the Business Roundtable statement (in August) missed a trick by not talking more about workers?

LS: What I like about what they did is that they put down a marker. That alone creates some accountability. There is a lot of scepticism about whether it is just “woke talk”... or whether there is really going to be action behind it. I like to be optimistic and I think that they took a step forward.

What we have to see from them is, are there tangible steps they are willing to take that show their commitment is more than just of the moment.

FT: Your proposals look pretty close to European works councils. Is that essentially what you think the BRT and American corporations should be adopting?

LS: Sen [Elizabeth] Warren has a really interesting and provocative proposal [the Accountable Capitalism Act] where she essentially calls for that. I call for something that gives workers more leverage, but that fits within the American context more. What I am calling for in the first instance ... is a requirement that at the very least you have a workforce committee of the board that is focused on the best interests of the employees of the company and also has to take into account the best interests of the people who work as contractors of the company. It is short of co-determination, but it would require the board itself to focus on these issues.

FT: You are asking for sacrifices from those who wield economic power. What makes you think they will give up any of what they have?

LS: I have heard institutional investors talk about sustainability, but when you talk about [a financial transactions tax], where are they? Do you know what the definition of a long- term capital gain is in the US? One year. That is an oxymoron.

The question is are we going to recognise that we have a duty as citizens to the whole that [with] everybody engaging in some reasonable compromise we can move forward very positively for everybody. The investments that can be made if you actually raise sufficient revenues will make everybody more prosperous.

The chance to get some stuff done may be enhanced because people are starting to see what happens when you don’t address these concerns. Whatever your perspective on Brexit, it is having a paralysing effect on the British people and their economy.

The only thing we can do is keep pushing for common ground to encourage people to say, look, we are not asking you not to be a billionaire. But maybe you could pay a bit more of that wealth in taxes.

FT: In a world where your ideas are adopted, what is the mechanism that forces change?

LS: Elections and leadership. And focus. [In the 2016 US election], one of the candidates focused intensely on economic insecurity and the other candidate did not. The candidate who did won. There is a lesson there.

FT: Who would you say is your audience for this plan?

LS: I hope it is business people, labour people and all Americans who care about whether our economic system works for the many. I also hope it has an international appeal. I do not think we can do things in isolation any more. I do hope we are having a cross-border conversation. My proposal around workforce committees was very much influenced by the good work that has been done in the UK around these issues.

FT: Do you need cross-border co-operation because otherwise we get into a competition where companies move to the lowest tax states and shares are traded in Singapore to avoid the financial transaction tax?

LS: Exactly. We have allowed competition on dimensions that we had determined were not socially acceptable within our own borders. We outlawed child labour, we outlawed excessive hours. We said working people should be able to form a union.

How do any of our productive economies benefit from tax havens? We do not. If we did something like a financial transaction tax and a carbon tax across the scope of the OECD we could raise needed revenues for all of our societies and try to squeeze out these tax havens. If we can make sure that we give workers protection in the world economy then we will not have our workers played off each other.

I don’t underestimate the challenges. But if we do not step up with positive answers then we know the nativist, negative answers will come to the fore.

FT: Are there other disclosure proposals you would like to see and that someone like SEC chairman Jay Clayton and right-of-centre individuals could agree on?

LS: I think very highly of Mr Clayton and I think he is doing an excellent job. We need to focus on coming up with common disclosures that are in the “good” range. But make sure they are common. Give the SEC the authority to oversee it but give them the time to consult with other policymakers about what would be most important. And frankly have that apply to all corporations that are societally important.

One of the things I liked about Elizabeth Warren’s bill is that she did not focus just on public companies. She focused on the size of the company.

FT: What more do institutional investors such as BlackRock and Vanguard need to be doing?

LS: I have encouraged the index-fund complexes to step up. I have been at them about it for about 20 years because I think they are particularly well-aligned with the way companies should be run and with the interest of their workers and their investors. They are stepping up and I applaud that.

They need to hold themselves accountable as complexes. They need to make sure that their index funds and socially responsible funds vote on everything in accordance with their objectives. They need to speak up and say there are too many votes that they cannot keep track of and to create a more patient approach to voting that is more thoughtful.

It is insane that we have say-on-pay votes at every company every year.

There is no way we want chief executives paid on year-to-year contracts and there is no way that institutional investors can vote thoughtfully on that many votes every year.

There is a big blind spot that [asset managers] have on political spending. They do not exercise any constraint.

FT: What’s next for you and this report?

LS: A lot of us believe there is more common ground among the business community and working people in the US than there are issues that divide them. It is time that we built on that sense of shared purpose and had an agenda that allows us to go forward as vigorously as we need to do to address climate change.

To the extent that I have a small part in this, it is part of a shared spirit with a lot of other people that we are losing sight of the things we share and letting the marginal issues that are far less central divide us. As a nation going into 2020 and 2021 can we do some constructive things? That is the goal.