On The Case

As Strine prepares to leave bench, a call for institutional investors to push for change

(Reuters) - For the last few years of his 20-year career on the bench, Delaware Chief Justice Leo Strine has invoked the power and responsibility of institutional investors, calling on these massive funds to use their votes to hold corporations accountable. Now, as he prepares to retire, the chief justice has sharpened his pitch. In a sweeping manifesto published in conjunction with a corporate governance conference at New York University, Chief Justice Strine is urging investors to push a progressive agenda in which corporations focus on long-term sustainability, workers, consumers and the environment.

Strine’s paper, “Toward a Fair and Sustainable Capitalism,” reads a lot like a political policy paper. The chief justice calls for sweeping reforms from the Securities and Exchange Commission and other federal regulators. He wants, among other things, new reporting rules that would require all companies, public and private, with more than $1 billion in sales to disclose information about their impact on workers, communities and the environment; new accounting rules to treat corporate investments in their workforce as capital expenditures; and beefed-up disclosure requirements for so-called activist investors to disclose substantial stakes in public companies.

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Strine proposed a revised tax system that would make it hard for investors to claim preferential treatment under the capital gains tax and would impose a “financial transaction tax” on all securities trades, including mutual fund purchases and sales. The trillion-dollar revenue from such a tax, Strine said, should be earmarked for a new trust fund dedicated to “basic research and development; revitalizing our nation’s infrastructure in an environmentally responsible way that helps us redress climate change; and workplace training.”

Oh, and in case that’s not sufficiently ambitious, the Strine proposal would also have lawmakers and regulators take on the U.S. Supreme Court’s rulings on corporate campaign finance, mandatory arbitration and labor unions. Only undoing the effects of these rulings, the chief justice said, can balance be restored to workers and consumers.

Many of Chief Justice Strine’s ideas depend on political will that doesn’t exist at the moment. Under President Donald Trump and Senate Majority Leader Mitch McConnell, there is pretty much no chance of such sweeping reforms emerging from Congress or federal agencies. What about corporations themselves? The chief justice mentioned the Business Roundtable’s recent announcement of a new corporate paradigm that accounts for workers, communities and global environmental concerns, but added, “Skepticism exists about whether that statement is just talk.”

Realistically, there’s only one operating lever right now for Strine’s goals: institutional investors. Institutional investors, the chief justice explained, wield more than 75 percent of shareholder voting power. And institutional investors represent the interests of all of the American workers whose retirement, pension and healthcare money is entrusted to them. So according to Strine, it’s time for institutional investors to step up and push a progressive agenda.

I should note that Strine has been focused on the responsibility of institutional investors for at least a few years. A 2016 paper presaging his new article argued that investment funds should refocus on long-term corporate sustainability. The chief justice also talked this summer with my Reuters colleague Tom Hals about why institutional investors, including funds like Vanguard and Fidelity, ought to be leading the fight for American workers and against corporate political spending.

But the new paper is particularly pointed about the role institutional investors have played in encouraging short-term, market-oriented corporate strategies – and the role that such investors should play in promoting good corporate governance. And Strine’s admonishments come after the Council of Institutional Investors stirred up some controversy by declining to endorse the Business Roundtable announcement that corporations should now consider stakeholder interests as well as shareholder goals.

The chief justice said in the new paper that institutional investors bear a lot of responsibility for the current state of corporate governance, in which workers’ interests are subordinated to those of shareholders. In part, Strine acknowledged, that’s because pension and retirement funds have their own fiduciary obligations to maximize investors’ returns. So he wants funds, including index funds, to be required to modify their duties “to consider their ultimate beneficiaries’ economic and human interest in having companies create quality jobs and act ethically and responsibly toward their consumers and the environment.”

But institutional investors can start to effect change, the paper suggested, by beginning to vote in a way that reflects whose money they control: “human beings saving for retirement and their children’s college education (and) human beings who most of all need American corporations to pay good wages and create good jobs,” Strine said. The imbalance between shareholder and stakeholder interests, he said, won’t be corrected unless these investment funds vote for worker-friendly proposals and directors.

For a gut-check on Strine’s thoughts about funds’ obligations, I spoke to Kenneth Bertsch, executive director of the Council of Institutional Investors. Bertsch told me that on the broadest level, he agrees with the chief justice that funds can do more to encourage corporate sustainability and stakeholder interest. “Investors are not thinking enough, and concretely enough” about issues like environmental impact and jobs, he said.

Strine is right, he said, that institutional investors should be more rigorous about voting down corporate directors at companies with corporate governance red flags. Bertsch said he backs the chief justice’s call for standardized disclosures on environmental, labor and social issues – but added that investors aren’t sure precisely what information should be disclosed, especially about the impact of corporate decisions on companies’ workforces.

Bertsch said the council doesn’t agree with all of Strine’s specific recommendations, such as requiring corporate boards to establish committees dedicated to workers’ interests or changing tax laws. He also said that ultimately, Strine’s ideas will require political change, not just rejiggered priorities for institutional investors.

Nevertheless, he said, Chief Justice Strine has the right idea: “Institutional investors,” Bertsch said, “can help push things in the right direction.”