Toward Fair and Sustainable Capitalism
August 13, 2020
By Leo E. Strine, Jr.
The American corporate governance system has failed to encourage long-term investment, sustainable business practices, and fair pay for workers. We have made public companies more responsive to the stock market’s desires. Declines in gainsharing of corporate profits with workers, a large increase in stock buybacks, skyrocketing CEO pay, and growing inequality have resulted.
Despite the fact that our current corporate governance system is short-term oriented and does not work for all, the investment horizon of the ultimate source of most companies’ funding—human beings saving for retirement and education—is long. That long-term horizon is much more aligned with what it takes to run a real business than the horizon of companies’ direct stockholders, money managers under strong pressure to deliver immediate returns at all times. As diversified investors whose holdings track the overall economy, human investors do not benefit when companies offload the costs of their activities, such as carbon emissions and other pollution, onto others. And as people who breathe air, consume products, and depend on a job, human investors suffer when companies harm the environment, defraud or injure consumers, or offshore jobs to countries with low wages and few worker protections.
Human investors owe their wealth to their jobs. This is true not only for the poorer half of Americans; it is true for 99% of Americans. Human investors need companies to do business in a way that provides Americans with access to good jobs, sustainable wage growth, and a fair share of the wealth that businesses generate.
But, companies have increasingly failed to deliver on that promise. For about two and a half decades starting in the late 1940s, workers and investors shared in the wealth generated by a strong, growing economy. Since the 1970s, that social compact has frayed. Worker productivity has risen by about 70%, but hourly pay has grown by only 12%. Meanwhile, corporate profits have hit record highs. American workers are more educated, more skilled, and are creating more corporate profits than ever, but have shared far less in the fruits of their labor.
And the COVID-19 pandemic only makes fairness and economic security for American workers a more urgent concern. The expenditures to address the pandemic have done nothing to address the deep inequities in our economy. We cannot allow the pandemic to postpone the reforms and investment needed to overcome them; we must instead pursue an even bolder agenda to better prepare for future shocks and make our economy operate on a fairer and more inclusive and sustainable basis. Those most important to making a fair capitalist economy function—its workers—must be at the forefront of that positive agenda for change.