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

Business Lawyer, Vol. 76 (forthcoming Spring 2021).

U of Penn, Inst for Law & Econ Research Paper No. 21-03

Columbia Law and Economics Working Paper No. 637

Harvard Law School Program on Corporate Governance Working Paper No. 2020-10

71 Pages Posted: 16 Dec 2020 Last revised: 5 Jan 2021

See all articles by Leo Strine

Leo Strine

University of Pennsylvania Carey Law School; Wachtell, Lipton, Rosen & Katz; Columbia Law School - Ira M. Millstein Center for Global Markets and Corporate Ownership

Date Written: December 15, 2020

Abstract

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. This reply supports Professor Rock’s depiction of the current state of corporate law in the United States. It also accepts 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 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 the 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to the work of advocates and scholars who have long been trying to restore fairness to our economy by updating an outdated mid-twentieth century corporate governance system to address evolving market and political developments, like concentrated institutional investor power and a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. Because corporate power has been employed to decrease the ability of the political process to protect corporate stakeholders, the power and purpose dynamics within corporate governance itself must be updated to align with the outcomes we desire for society.

Taking a more positive view than Professor Rock, I argue that the most promising corporate governance reform proposals do not involve a revolution, but a restoration. 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 wide spread prosperity. The real danger now for the U.S. is inaction and failing to recognize that our current model of corporate law does not function fairly and is tearing away our social fabric.

The article by Edward Rock to which this article responds is available on SSRN at: http://ssrn.com/abstract=3589951

Keywords: labor, gainsharing, sustainability, corporate governance, corporate governance reform, inequality, institutional investors, corporations, long-term investment, reform, corporate social responsibility, stakeholder capitalism, stakeholder governance, fair economy, sustainable economy, corporate law, t

JEL Classification: G10, G30, G38, H10, H20, J38, J88, K20, K22, K34

Suggested Citation

Strine, Leo, Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy - A Reply to Professor Rock (December 15, 2020). Business Lawyer, Vol. 76 (forthcoming Spring 2021)., U of Penn, Inst for Law & Econ Research Paper No. 21-03, Columbia Law and Economics Working Paper No. 637, Harvard Law School Program on Corporate Governance Working Paper No. 2020-10, Available at SSRN: https://ssrn.com/abstract=3749654

Leo Strine (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

Wachtell, Lipton, Rosen & Katz ( email )

51 W 52nd St
New York, NY 10019
United States
212-403-1178 (Phone)

Columbia Law School - Ira M. Millstein Center for Global Markets and Corporate Ownership ( email )

435 West 116th Street
New York, 10027
United States

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