Boards Can Balance Profit & Social Purpose: Influential corporate law judge Leo Strine discusses the role directors, investors and executives can play in curtailing income inequality and strengthening societal good.

• Author: Tahmincioglu, Eve
• Position: THE CHARACTER OF THE CORPORATION - Cover story

The continued undervaluing of employees has brought corporate America to a precipice, and in order to keep the economic system from buckling, institutional investors, management and boards need to look in the social-purpose mirror, says the nation's most influential corporate law judge.

The economic pie has grown considerably, says Delaware Supreme Court Chief Justice Leo Strine, but the rank and file's share is much less than it was 30 years ago, which affects the community at large. That's led to more income inequality and less satisfaction, and is the result of actions by large investors and corporate leaders.

"There is going to be a level of inequality where people are just not going to take it. Frankly, they're not going to trust business elites and for a good reason," explains Strine, who heads the high court in Delaware, a state where two-thirds of Fortune 500 companies are incorporated and whose corporate laws are often considered the de facto law of the land.

To deal with the issue, he maintains, there are "a variety of sensible things that can be done to invest in our economy to create better jobs." But he also believes that boards needs to give workers more leverage and more pay, especially in the context of an increasing number of employees becoming shareholders themselves through 401K plans and mutual funds. "If this is supposed to be a shared system, especially if we're going to make workers be stockholders, then they ought to see the returns in their paycheck."

The following is a Q&A with Strine, who sat down with Directors & Boards to share his thoughts on what directors can do within the confines of the law to embrace the growing environmental, social and governance movement. He offers his insights for our year-long "The Character of the Corporation" series, which explores the very essence of a company's approach to generating a profit and how that impacts all stakeholders, employees and communities, and not just shareholders. Strine's answers have been edited for length and clarity. See the box later in this article if you'd like to view the unedited interview.

There are many directors who want to focus on environment, social and governance issues (ESG), but what if their actions to bolster social good end up impacting company profits?

Things like environmental shortcuts, product safety shortcuts, treating workers unfairly tend to get caught out over the long term. So some of the tensions really are resolved, and create a more productive incentive structure for boards and the managers, if the people who are voting the stock actually adopt the perspective of the people whose capital they control.

A lot of my focus has been on what the obligations of institutional investors are to align their behavior with the interests of the people whose money they have. If you can get more of that thoughtful thinking, then perhaps the incentive structure for boards is less moment to moment.

All of us breathe air, all of us drink water. None of us wants any particular company in our portfolio to get artificially rich by poisoning us. Also, we pay for those externalities as investors and as human beings, so those externalities are costs to us. We don't really want directors in any particular company violating the law. And by the way, under Delaware law, they're not allowed to do it.

Blackrock and Vanguard and others are starting to acknowledge their responsibility to think about sustainability, to acknowledge that they need to align their voting principles with their long-term investors. I think that's a healthy development, and hopefully sets us on a better path where we can all begin to make the system work a little bit better for everybody.

When you see someone like a Larry Fink, Blackrock's CEO, put out a statement last year on this issue of social purpose, a lot of what he's proposing puts the onus on the board. Is that justified?

We have a lot of unrealistic expectations for independent directors, and I think it would be better to rebalance boards a little bit. We need folks who are genuinely independent directors, but we also need directors with expertise, and we need directors who were active in business and who understand the industry. And some of the rules and incentives can get so tight that we actually discourage people with the right kind of qualities from serving on boards.

It doesn't really matter if you're independent if you don't have expertise. But can you be independent and also have the expertise and the knowledge? I'm sure you can.

We just independent director-ized the world. We went from having a bare majority of them to having a supermajority of them. We don't actually empower them. We take away their ability to think long term because we put in place Say on...