Shareholder Primacy and How It Squeezes America's Workers

Once upon a time, when I was circulating the proposal for my book, The Big Squeeze,  several publishers asked me , "Who are the potential audiences for my book?" Among the target audiences I mentioned were not just classes in labor relations and sociology, but also classes in ethics, business ethics, human resources.

In several of his recent posts, Matt Bodie made me think that list should have  also included law school classes in Corporations. In his post "Causes of the Big Squeeze" and in his post "The Big Squeeze and the Uncorporation," Professor Bodie discusses the notion of "shareholder primacy" and in doing so, he examines an underlying theme in my book.

In The Big Squeeze, Tough Times for the American Worker, I examines a significant problem within corporate America: the way that many corporations and corporate executives place such overwhelming emphasis on their No. 1 goal -- serving their shareholders (by maximizing share price and profits) -- that they often shortchange and sometimes cheat their employees on wages and benefits. (And too many corporations cut costs by failing to operate safe workplaces.)

Several line managers I wrote about detailed how they faced such huge pressures to minimize payroll costs to help maximize profits that they felt considerable pressure to keep wages at a minimum and even to break the law at times, by, for instance, pressuring employees to work off the clock. One Wal-Mart store manager told me of a strategy that she used to minimize payroll costs: force out older workers who earned $9.50 an hour and replace them with new hires earning $6 an hour. (One way to squeeze out older workers was to transfer them to the midnight shift unloading trucks.)

Professor Bodie is right that some inefficiencies had crept into the system during the golden era of the social contract when workers were taken care of by management. But those inefficiencies were often understandable and none too burdensome because, at the time, American companies were not yet facing huge pressures from competitors in Asia and Europe. But now with pressures from globalization and imports (as well as pressures from Wall Street to maximize share price),  it seems that many corporations have been so aggressive wringing out inefficiencies and costs that they have gone overboard. Many companies give their employees paltry raises that do not keep up with inflation, offer health plans that many workers can't afford and shed thousands and thousands of workers in wave after wave of downsizing.

This helps explain why more and more people (including some law professors) are saying there's a need to replace or reform the American model of shareholder primacy -- a primacy that is often at the expense of not just workers and their families, but also whole communities.

Professor Bodie raises the idea of the uncorporation, and that notion raises some intriguing possibilities.  Uncorporations sometimes take the form of private partnerships or LLC's that can be more specifically tailored to the parties' preferences -- like advancing social responsibility.
 
My book explores how CEOs in publicly traded corporations face huge pressures to maximize share price and profits (and minimize costs and payroll) because CEOs know  that Wall Street may demand their heads if they don't deliver. In my chapter on model companies -- model because they treat their employees so well -- I note that when Fortune Magazine first published its list of the 100 best companies to work for in 1998, 71 of those companies were publicly traded, while by 2006 just 50 were.

In my chapter, Taking the High Road (p. 158), I detail the philosophies and practices of several companies that do the right thing. I discuss Costco, Patagonia and the hotel-casinos of Las Vegas.  It's no coincidence that Patagonia, which I describe as being wonderful to work for, is not publicly traded. Each year Patagonia pays for 40 of its employees to take two-month leaves of absence to volunteer for the environmental organization of their choice. Patagonia gives eight weeks paid maternity leave and paternity leave as well as eight weeks paid leave when an employee adopts a child. As Patagonia's owner and chairman noted, it would be extremely hard for him to do these things if his company were publicly traded. Accountants and shareholders would probably throw a fit. 

I also write about Cooperative Home Care Associates, a homecare agency in the Bronx that treats its low-paid workers extremely well. Cooperative Home Care might be another species of uncorporation worth studying -- it's a worker-owned cooperative.

As Professor Bodie writes, some business entities might adopt the uncorporate form because it could make it easier for them to eschew social responsibility by, for example, treating their workers poorly. By becoming uncorporations, business entities do not have to hold shareholder meetings--meetings that critics often use to confront (and berate) executives who run companies  known for stinginess or worker mistreatment.  And uncorporations don't have to make nearly as many public filings, which often contain information that companies would prefer to hide. The Service Employees International Union has launched a campaign that is devoted solely to pressure -- and hold accountable -- private-equity firms (are they a species of uncorporation?) because some of their far-flung subsidiaries treat their workers poorly. 

For those so inclined, forming an uncorporation makes it easier to treat workers generously,  but evidently, for those otherwise inclined, forming an uncoporation can  also make it easier to treat workers ungenerously. I'm looking forward to reading the brilliant law review articles that professors and law students write someday about the advantages and disadvantages (and the generosity and stinginess) of uncorporations.