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Bold Economic Reform That Both Parties Can Support

Nov. 5, 2020, 9:00 AM

There is a bipartisan, market-based legal reform that, if adopted by Congress, would put business to work addressing the country’s most urgent crises, from the Covid-19 pandemic recovery to the shortage of quality jobs, systemic racism, climate change, and beyond. It’s called “benefit governance.”

Outlined in a recent report released by our organization, B Lab, benefit governance makes businesses and financial institutions legally accountable to look beyond their own financial returns and take responsibility for the impact of their practices on workers, customers, communities, and the environment.

This reform would provide a much-needed upgrade to the current legal and cultural framework of “shareholder primacy,” which obligates investors and the companies they invest in to maximize individual company financial returns above all else.

The obligation is embedded in the corporate statutes of many states and the current interpretation of federal laws, including the Employee Retirement Income Security Act of 1974 and the Securities Exchange Act of 1934. It applies even when profits stem from business practices that fuel inequality, environmental damage, and social fragmentation.

These same rules cause investment managers to focus on the wrong thing, too—maximizing the value of individual companies in their portfolios, even when those companies create harmful costs for other companies in their portfolios, or for the job quality and communities of individual shareholders they represent.

The consequences of this failed model can be seen everywhere today. In the midst of the Covid-19 pandemic, one Fortune 500 company, Marriott International, paid out $150 million to shareholders just weeks after furloughing tens of thousands of employees.

In the retail sector, front-line workers at companies owned by some of the richest people in the world have long relied on public assistance to get by; only after months of advocacy were they able to get modest pay increases and protective gear.

And it’s bigger than the current economic crisis: Shareholder primacy incentivizes aggressive marketing of opioids, racial discrimination in the banking industry, and carbon-intensive manufacturing, all at the expense of workers, communities, and the environment.

Growing Momentum for Change

Benefit governance has already been embraced by conservative Republicans and progressive Democrats alike in the more than three-dozen states that have passed “benefit corporation” statutes.

It has the support of a Nobel Laureate in economics and a former chief justice of the Supreme Court of Delaware, the most important business jurisdiction in the country.

It also has already been adopted by thousands of profitable businesses that earn their profits in ways that also take care of their workers, improve the quality of life in their communities, and protect our natural resources for our children and their children.

And it has growing momentum on both sides of the aisle at the federal level. Last year, Sen. Marco Rubio (R-Fla.) released a detailed report outlining how the private sector’s limited focus on shareholder returns has drained the U.S. economy of dynamism, productivity, and investment needed for long-term growth. And earlier this year, Democratic presidential nominee Joe Biden explicitly called “to put an end to the era of shareholder capitalism,” stressing that companies have a responsibility to protect their employees and lift the economy as a whole.

Some of the most influential corporate leaders and investors also have changed their tone. Last year, the Business Roundtable publicly rejected this model of profits at any cost and vowed to serve all stakeholders.

Voluntary Actions Are Not Enough

But evidence of putting these principles into practice shows that market pressure and the laws of fiduciary duty will continue to overcome well-intentioned individual attempts at change.

A recent report revealed that among companies publicly proclaiming a commitment to stakeholder capitalism, only 13% of stakeholders in these companies experienced the companies’ actions as consistent with their statements.

In other words, relying on voluntary actions by individual companies will not be sufficient to solve a systemic problem. Capitalism needs an operating system upgrade and benefit governance provides it.

Importantly, mandating benefit governance does not impose government control over the way companies do business. Nor does it permit CEOs to waste company resources on feel-good pet projects.

Benefit governance leaves in place the market relationship between investors and companies by aligning their fiduciary interests so that they are accountable—in a way they are not today—to the workers whose labor and savings fuel a prosperous economy overall.

There is no one-shot solution to the economic, racial justice, environmental, and public health crises gripping America today. But by upgrading corporate and capital markets governance to make companies and institutional investors accountable for their impact on their stakeholders and the system as a whole, Congress has a clear opportunity to level the economic playing field so that it puts people and communities first.

This fundamental market-based reset will ensure that our capitalist system, and our country, meet their promise to create a just, inclusive, and prosperous future for all.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Andrew Kassoy is CEO of B Lab Global, and Anthea Kelsick is co-CEO of B Lab U.S. & Canada. B Lab is a network of organizations transforming the global economy to benefit all people, communities, and the planet.