USING CORPORATE GOVERNANCE TO PREPARE FOR THE NEXT CRISIS
THE DISTANT PAST IS PRELUDE
The biblical Joseph saved his adopted nation of Egypt by warehousing grain—the biggest industry in the world’s most powerful empire—during good times in order to prepare for seven lean years. It is a particularly salient lesson given that today’s most powerful country seems almost unable to weather seven lean weeks, with 30+ million hitting the unemployment rolls, 3.4 million new mortgages in arrears and food shortages predicted imminently.
As Congress scrambles to create help for failing companies, it should follow Joseph’s model and establish a framework for business that effectively accounts for the future. Corporate governance is a critical element of such a framework because it establishes the priorities that corporate managers follow in allocating resources throughout our economy. Companies receiving assistance from the government should be required to adopt governance that prioritizes the future health of our social and environmental systems, so that we can better prepare for future crises. In the US, the structure best suited to accomplish that goal is the benefit corporation.
In the past we have used this space to discuss the failure of our financial system to address climate risk, inequality, human rights and other social and environmental concerns. One word that captures all of these issues is “resilience.” While our economy is brilliant at building things and providing services in the immediate here and now, its failure to attend to the long-term health of fundamental environmental systems and social institutions destabilizes our nation and planet, while reducing our ability to withstand the very change and shocks that this instability engenders.
In particular, we have called out shareholder primacy—the doctrine of measuring corporate success by each company’s individual financial return—as the root cause of the growing risk of social and environmental catastrophe. The pandemic demonstrates the problem: there is a direct line from shareholder primacy to the depth of the economic hole in which COVID-19 has put us.
By emphasizing financial return at each individual company, investors and managers have optimized individual profits while eroding collective resiliency— corporate coffers are empty, workers live check-to-check and supply chains deliver just in time from the lowest wage jurisdiction: thus, in a crisis, we find our storehouses are bare. These margin-enhancing “efficiencies” create a brittle value chain that is highly vulnerable. If these companies had instead been operating in a fashion that built strength throughout our system, they would not have found themselves immediately at the precipice— and perhaps we would have been able to make more of the supplies we need to fight the pandemic. The front page of today’s Wall Street Journal illustrates this fatal trade-off with the following quote in a story about current shortages: “The problem is a medical supply chain and a healthcare system that we have built to be economically efficient… in exchange for resiliency.”
LET’S NOT REBUILD WITH THE SAME FAULTY PARTS
The actions we take to rebuild our economy must eliminate shareholder primacy at its roots, so that we can better maintain and regenerate critical systems and thereby become more resistant to shocks and change.
We can start by ensuring that companies receiving aid agree not to prioritize financial return over social and environmental resiliency. This can be done by requiring that any large company that receives assistance must also adopt benefit governance, which modifies the traditional fiduciary duties that apply to corporate directors. Over the decade, thirty-eight states have adopted legislation authorizing benefit governance and thousands of benefit corporations have been created, raising billions of dollars from investors.
Benefit corporations operate just like any other corporation—shareholders elect a board of directors and the directors hire a CEO to manage the enterprise under their direction. The important difference is that directors of a benefit corporation are required to consider the interests of stakeholders, including employees, customers and communities, as ends in themselves, not just for the purpose of making money. In contrast, directors of traditional corporations are not required to consider any interests other than those of shareholders and may even seek profit at their stakeholders’ expense. But that is a bad model for crises: a sole focus on self-interest does not work to solve common resource needs, such as preparedness; as today’s WSJ article concludes, “each part of the medical-industrial equation acted in its own interest, and didn’t set aside resources that might have better prepared America for the coronavirus crisis.”
At some level, it seems obvious that if a company is propped up by money coming from the US taxpayers, then it ought not make a profit at the American people’s expense. But requiring benefit corporation governance is not simply a matter of fairness (although it is partially one). It is also a matter of creating a stronger economy by eliminating moral hazard and aligning the interests of business with the interests of citizens.
If we provide assistance that saves shareholders from financial downside but leaves them all of the upside (which is what happens in a traditional corporation), we are incentivizing investors and companies to externalize risks to the entire economy, society and environment. In contrast, benefit corporations are designed to seek out profit only after ensuring that they are not causing harm to the very systems upon which we all rely.
By using governance to induce better behavior, we can create an economy that withstands shocks (and hopefully avoids some of them). As a practical matter, corporations with a clear stakeholder mandate will be more likely to adopt robust risk management and formal foresight practices and to use controls that ensure the integrity deep into their supply chains.
In time, we can seek to require (or persuade) all corporations to operate this way, so that our business community is fully aligned behind solving problems like climate change, inequality and corruption, in order to create lasting, shared and resilient value for everyone.
The Book of Exodus begins by telling us that a new pharaoh arose who knew not Joseph: the government of Egypt forgot his wisdom. You may remember what that got him: ten plagues. Our current plague is a reminder to our government—and the rest of us—about Joseph’s plan for resiliency.
Join us in calling on Congress to require that any large company receiving federal financial assistance adopt benefit corporation governance.
From The Shareholder Common’s April 2020 Newsletter. Sign up for our newsletter here to get more updates from TSC on our work, research, and opportunities for action.