The coronavirus crisis reveals deep fissures that have long existed in our country. “Economic Dignity,” a new book by Gene Sperling, a former national economic advisor to Presidents Bill Clinton and Barack Obama, provides important insight into some of those chasms related to economic inequality. In a vivid and timely way, Sperling’s book highlights the “dissonance between our nation’s labeling of workers as ‘essential’ and ‘heroes’ and their limited wages, benefits and ability to organize.”
The numbers Sperling presents tell some of this story. Almost half of nurses and home health care workers don’t have a single day of paid sick leave, and a million health care workers lack health care coverage themselves. Nurses and orderlies, including those treating Covid-19 patients, are risking their lives every day for an average hourly wage of $14.25. Home health care workers are paid much less, averaging only $11.63.
The concept of dignity is an essential element of the modern human rights landscape. The core international human rights document, the Universal Declaration of Human Rights, adopted by the United Nations in 1948 under Eleanor Roosevelt’s bold leadership, starts with “recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family” as the “foundation of freedom, justice and peace in the world.” Though not an explicit part of the U.S. constitutional tradition, human dignity has been invoked as central to our conception of rights by several Supreme Court Justices in the modern era, including William Brennan and Anthony Kennedy.
Sperling’s test for economic dignity rests on three common sense pillars. First, the ability to care for one’s family without economic deprivation or desperation. Second, the opportunity to pursue one’s potential with a sense of purpose and meaning. Third, the ability for each of us to contribute and participate in the economy with respect, free from domination or humiliation. This third pillar, in particular, deserves much greater attention in our world, where economic inequality has become the order of the day.
Many forces contribute to the significant gap between rich and poor. Automation, for example, has displaced millions of mid- and low-wage workers here and abroad. The outsourcing of labor is also a major driver, both in this country and through ever-expanding global supply chains. While both strategies yield significant cost savings to companies and consumers, and can offer jobs to workers around the world, businesses often fail to dedicate sufficient attention and resources to offsetting the negative consequences. Limited government oversight and regulation has contributed to the wealth gap as well. And so has the gospel of shareholder primacy.
Shareholder primacy holds that the central purpose of any business is to maximize shareholder value. Though it now drives investment and business decision-making, shareholder primacy didn’t dominate until the 1970s, when Milton Friedman and his colleagues at the University of Chicago asserted its centrality as a part of the Chicago School’s broader free-market economic ideology. They premised their arguments generally on the belief that markets are fundamentally efficient and, to the extent they fail to maximize broader social welfare, these are problems for governments to solve. Over the last 50 years, shareholder primacy has become the organizing principle of American business, codified in laws that effectively impose on corporate officers and directors a fiduciary duty to maximize shareholder returns.
While prioritizing shareholders’ interests may make sense in theory, the coronavirus pandemic should lay to rest any doubts about the inadequacies of Friedman’s mantra in practice. The pandemic has shown us that some of our most valuable workers are also our most vulnerable and least compensated. This is partly because the principal drivers of our financial system are not individual investors but huge institutional intermediaries, like the major investment firms and public pension funds. Many individual investors, for example retirees, would favor long-term, socially valuable business practices. But too often institutional investors focus on the more readily measurable dimensions of corporate performance, such as quarterly earnings, which may also serve their own shorter-term investment priorities. The current economic crisis presents an opportunity to address this disconnect and rethink the role of corporations in our society.
This shift was already beginning—at least rhetorically—before the pandemic decimated our economy. In August 2019, the Business Roundtable, a group of 180 CEOs of the largest corporations, called for a “modern standard of corporate responsibility” reflecting “a fundamental commitment to all of our stakeholders,” not just shareholders. Before that, investor Warren Buffett and Jamie Dimon, the Chairman and CEO of J.P. Morgan Chase, rejected what they termed “an unhealthy focus on short-term profits at the expense of long-term strategy, growth, and sustainability.” In 2017, the International Business Council of the World Economic Forum wrote that “society is best served by corporations that have aligned their goals to serve the long-term goals of society.” And Leo E. Strine Jr., the former Chief Justice of the Delaware Supreme Court, has advocated for a more nuanced understanding of shareholder interests and responsibilities than Friedman’s doctrine has come to represent. According to Strine, “to foster sustainable economic growth, stockholders themselves must act like genuine investors, who are interested in the creation and preservation of long-term wealth, not short-term movements of stock price.”
For all of this to change, law and policy must shift. Legally, corporations must be protected from lawsuits when they pursue the long-term interests of the company, its workers, and society, even at a cost to near-term shareholder returns. As Sperling suggests, making decisions “for the welfare of the workers and surrounding community” should not be “damning evidence in a lawsuit” charging a violation of fiduciary duty to shareholders. As he rightly observes, the current structure guarantees that “virtue will not go unpunished.” Instead, virtue must be valued.
To that end, institutional investors will need to be more ambitious in how they evaluate companies and represent the diverse interests of the individuals whose money they invest. So-called ESG strategies that seek to integrate a broader set of environmental, social, and governance concerns offer a promising approach. But the social category needs to be fundamentally re-conceptualized to better measure companies’ efforts to address economic inequality.
In the midst of this horrible health crisis, we have a golden opportunity to reassess our market systems and usher in a new era of longer-term stakeholder capitalism. We owe nothing less to those on the lower end of the economic scale, including our heroic essential workers.
I am the Jerome Kohlberg professor of ethics and finance at NYU Stern School of Business and director of the Center for Business and Human Rights. I served in the Obama Administration from September 2009 until March 2013, as the assistant secretary of state for democracy, human rights and labor. Prior to that I was the longtime executive director and president of Human Rights First, a U.S.-based human rights advocacy organization. I also was a visiting lecturer at Yale and Columbia law schools. I played a major role in shaping U.S. policy from inside and outside of government on issues ranging from refugee and asylum law and policy, to national security and human rights, to Internet freedom, and most recently on a range of business and human rights issues. I chair the board of the Fair Labor Association, which addresses supply chain labor issues in the apparel, athletic footwear and agriculture sectors.