For good governance, focus beyond equity growth, U.S. judge tells investors

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Globalization has stripped away meaningful connections between corporate management and shareholders, says Delaware Supreme Court Chief Justice Leo E. Strine Jr., putting so much focus on equity growth that other stakeholders lose out.

"People forget about the importance of geography," the outspoken judge told a crowd of institutional investors at the annual meeting of the Canadian Coalition for Good Governance in Toronto Tuesday. "People used to have genuine geographic ties to corporations... When the corporations grew and created jobs, they tended to be in that community. There were spillover benefits to the hospitals, to the charitable institutions, the places where people lived in the community – there were ties that bound."

Companies should take into account a stakeholder-focused model of governance that broadens the beneficiaries of corporate wealth beyond management and shareholders, perhaps to include employees and broader society, he told the crowd of institutional investors. It's a subject he has written about before, citing corporate law European countries such as Germany, France and the Netherlands as positive examples.

But with less stakeholder-focused corporate law in North America, it's an issue that's hard for a judge to force. "I tend to believe as a normative matter that corporations should have a broader responsibility than simply to their equity holders," he said. "That's not really the design of our law in Delaware."

The coalition's institutional-investment members have more than $3-trillion in assets under management. Chief Justice Strine was this year's special guest at its annual meeting, which has previously hosted guest speakers such as Caisse de dépôt et placement du Québec head Michael Sabia and former Ontario Securities Commission chair Howard Wetston, now a Senator.

The acerbic and openly left-wing Delaware judge – who on Tuesday peppered his conversation with asides on the public perception of Kim Kardashian West and the rise of Germany as a global role model – was an outspoken departure for a guest speaker, leaving some of his audience chattering about the surprise when he finished. But he's also one of the most quietly powerful voices in U.S. business, with more than two-thirds of all publicly traded American companies legally based in his state.

In a interview with The Globe and Mail after his "fireside" chat with coalition executive director Stephen Erlichman, Chief Justice Strine said that institutional investors must look beyond short-term equity gains when enacting corporate change.

"Long term investors don't have an interest in bubbles," he said. "If you're going to represent human investors, hold companies accountable for running high-quality, profitable businesses, but in the right kind of way. You don't want businesses to take ethical shortcuts. You don't want them to offshore jobs just because they immediately [need to save costs]. You want businesses that create wealth over time."

But there are numerous structural problems investors face in making that happen. Throughout his 80-minute presentation, Chief Justice Strine spoke out against the role of independent directors – "someone who has no possible reason to really care about the company" – and the need for too many corporate "referendums" that slow down companies and focus too much on immediate shareholder gain. "Whenever you spend time on something you have to spend less time on something else," he said.

He also spoke out against "majority voting" policies that allow shareholders to vote against director nominees – which the coalition gas long been supportive of. The TSX has made such policies a listing requirement, and the federal government has introduced legislation favouring the model. But Chief Justice Strine believes this just helps shareholders cast votes of "generalized outrage" versus U.S. style proxy access, an alternative to proxy contests that helps shareholders nominate directors.

Institutions that want to uphold environmental, social and governance (ESG) criteria for their investments, the chief justice said, must avoid looking like the Irish band U2, whose frontman Bono preaches numerous progressive causes, but whose business affairs is now partially run out of Holland to lessen the band's tax burden.

These kinds of inconsistencies, he said, have helped encourage the protectionist wave that's currently rippling over the U.S. thanks to jobs lost to economic dislocation. "We globalized all the forces of capitalism and of markets," Chief Justice Strine said. "We did not globalize labour protection, we did not globalize environmental protection. We did not enforce the other values that we have [that are] shared."

He regularly returned to the notion of compensation – "institutional investors created executive overcompensation, plan and simple" – while suggesting both that reviewing executive pay less regularly would lessen the burden of investors, and that transferring wealth to the workers has its own obvious returns.

"If 1,000 people came to work and there was a $1,000 cheque on each of their desks," he said, ... what kind of productivity gain are you going to get out of that?"