Resetting companies requires changing how we compensate workers. If we’re really serious about fighting economic inequality, then labor needs to get a greater share of corporate profits, distributed equitably. Paying low-wage workers more is also a direct way to address racial injustice, since people of color disproportionately find themselves in the lowest-paid group. 

Over the past 40 years, corporate boards have presided over a shocking divergence between the soaring pay for top executives and the stagnating wages of the working class. So a new proposal to focus board responsibility for the pay and treatment of the workforce deserves discussion—if directors were more directly held accountable, could that make a difference? 

Leo E. Strine Jr. and Kirby M. Smith, two lawyers at Wachtell, Lipton, Rosen & Katz, believe so, arguing in a forthcoming paper that board compensation committees should be overhauled to be workforce committees with responsibility not just for executive pay but the compensation and treatment of workers across a company. Strine is also the former chief justice and chancellor of Delaware.

Here is a transcript of my conversation with them this week, edited lightly for clarity.

What are the factors that you’re trying to address through this proposal?

Strine: For far too long, there’s been a decline in the share that American workers are getting from the gains that they create. And it’s been a huge contributor to growing inequality. It’s particularly hurt Black people because Black people are much more likely to be in the working and lower middle-class. So the decline in gainsharing has impeded their progress towards equity and they’ve actually gone backwards. We need to do better around those dimensions. The lack of the system working for the many has contributed to divisiveness and nativist appeals. So if we really want a sustainable market economy, we need to return to the New Deal principles that found a middle way to make a market economy work for the many. There has to be more of a voice for workers within the company.

We’re also practical people, and we want it to build on the valuable system that we have, and do something that was evolutionary and worked with it and fit  the American context. The idea of rounding out the responsibilities of the compensation committee and making it a full-blown workforce committee seemed to us to be a quite sensible use of managerial and board talent because it would center in one place responsibility, initially at the board level, for all the related human resources functions that are important to companies. It would allow you to use your human talent in the best way, by not just looking at the few people in the c-suite, but seeing how are we compensating and motivating the many employees and the contracted workers that we use to help our corporation succeed? Are we treating them fairly? Are we actually providing the appropriate incentives for them? And are we, frankly, situating executive pay within the context of a business-like plan that uses all of our human talent? We thought boards would actually do a much better job in setting executive pay than they do now, because they would have a broader prism within which to situate the c-suite pay.

We also thought it was efficient because frankly it matters whether a company is free from sexual harassment or racial discrimination. Why is there not a board committee that’s dealing with all the HR issues that provides an avenue for the people in the company who work on those issues to be reporting to the board level? It seemed to us that HR functions were too often bifurcated and put many times into an audit committee that has other things to do. So we also thought it was a logical allocation of talent in terms of focusing on all the important workplace issues in one committee. When you think about the light the pandemic has shone on inequality and the fact that the essential worker class was paid so less and was more likely to be Black, and that this is also a great place to focus on issues like racial and gender pay equity within the company’s workforce and on the unequal treatment of contracted workers. So we thought that was efficient.

Then there’s a third thing, which is there are proposals about co-determination and about workers having the ability to elect directors to boards. If you look at Europe, and where there’s co-determination, it’s not just a top-down system, it’s a ground-up system that involves works councils at the different facilities that are involved in key issues. We lack a trusting mechanism within the American corporate structure to potentially build out the capacity for more worker involvement in works councils, and maybe build towards a system of co-determination. A workforce committee comprised of directors who were responsible for that seem to us to be a good building block to potentially larger reform. We also thought that it fits with the larger focus on what we call EESG. We add E—we believe employees deserve their own letter. This is an example of how you would use the human talent on the board and management in a way to cover EESG and compliance in a more efficient way.

When you say that this could be a step towards further reform, do you mean that a board committee that’s focused on workforce-related issues could be a step towards having worker representatives?

Strine: Yes. One of the things we suggest is that if you focused legal responsibilities in this committee in a way where it’s clear that they have a duty to be equitable towards workers and have their best interests at heart, that you might allow them—as long as it’s not circumventing any union formation—to experiment with things like works councils to get more employee voice so that the boards are actually hearing from them. We are supporters of external labor law reform, and we think a living wage and something like the PRO Act that’s pending really would fit best with this to create a framework. But this could be a building block along with the PRO Act [a proposed bill that would give workers more rights] and the living wage to create fair conditions under which you could have more worker voice at all companies. 

Because one of the problems right now is you have about 9% or 10% private-sector union density. If you’re at a union company, there’s a lot of worker voice. But if you’re at a non-union company, it’s basically zero and we need to end that binary choice. I think that there’s actually elements of the labor movement themselves who recognize that. There are groups like United for Respect that are working to give more voice to workers in industries where unionization is not prevalent and where companies have been adamantly against unions. This could provide a building block for them to move towards greater recognition of the workers in those spaces’ views about their working conditions and pay.

What is the outcome that you are aiming for? Is it narrowing the gap between executive and median worker pay?

Strine: We tend to focus on the c-suite. It’s also the share of corporate profits that go to the stockholder class, as opposed to the worker class. Worker power has gone way down and stock market and institutional investor power has gone way up. Not surprisingly, the split therefore has changed way in favor of stockholders. Even with 401ks and other things, stockholders are overwhelmingly on average, more prosperous than ordinary working Americans. As I said about Black workers and struggling white workers, those are the folks who need fair wages to build wealth, to actually be able to invest in a 401k. It means much more to most people that there are fair wages in society in terms of building wealth, than that the stock price is as high as it could be.

In terms of both racial equity and overall economic security, restoring  fair gainsharing—so that the many who were responsible for capitalist gains are sharing the blessing—is the most valuable thing we can do to create a good society and to heal the racial divide. That’s the primary thing.

Smith: I think in the short term we know that boards right now aren’t really considering these workforce issues. If you look at their committee charters and things like that, the compensation committee is generally focused on the top level executives. The SEC just amended Reg S-K to force these companies to disclose more about how they’re treating their human capital, especially in the 21st century where how they’re developing and maintaining and compensating their human capital is more and more important. An initial positive impact of this [proposal] will be  increased awareness at the board level, and then hopefully increased visibility for investors around how companies are thinking about these issues. You raised the idea of the comparison of the median salary of workers to the CEO—that gets a lot of attention from people. More information will get more attention from other people and hopefully push boards in the right direction.

We think just seeing this information will likely push them in the right direction to understand that an extra million dollars to the CEO could provide lots of bonuses or pay raises to line workers. Making those comparisons is apt, but they’re not doing that right now. At the end of the day, investors are clamoring for more of this information. The SEC recognized they’re clamoring for more of this information. So I think the next incremental step will align what investors and the SEC are requiring with a committee that’s actually overseeing what that disclosure has to look like. And then investors can take it from there.

Why are you focused specifically on the compensation committee?

Strine: You already have a deployment of talent that focuses on pay. But you don’t want to have a compensation committee that just deals with the c-suite. And  why are we  now allocating related  worker equity issues like discrimination in hiring and in promotion equity issues or fair pay to some other board committee? That’s just inefficient. It’s just really important to get this right. We think a lot of boards don’t know a lot of things they should know about how they treat the people who work for them and their contracted workers. A lot of essential workers are people who clean hospitals and clean things. Many of them don’t work directly for the hospital chain. The people who clean a lot of these companies that have kept open—what do they get paid? They basically are there five days a week. There’s no ownership of that at the board level. What we’re saying is there’s an increasing demand for that. And we think they’ll make better decisions as a board. This is a model, a way of thinking about EESG and compliance generally that we think is very powerful. Boards are struggling with where to situate these demands. What we’re saying is you look at related functions, you put them together, and you align your reporting relationships in a sensible way. That’s just business-like thinking.

You said in your report that you could call this a human capital committee, but you don’t like the term human capital….

Smith: We’d rather think of people as people than as widgets you put into a function to produce something. Something like a ‘workforce committee’ would work.

Strine: We’re probably more comfortable with ‘workforce committee’ than ‘human capital.’ But we also think there’s a very pro-worker reason to use the word compensation too. Because you can’t be a good company unless you pay your workers fairly, you can’t be good to society. We think it’s no coincidence that a board level committee focused on compensation has been associated with rising CEO pay. Maybe if they would  focus on compensation of the many, then pay for the many will go up. We didn’t want to lose the insight of that word, that other people could use the compensation even more than the c-suite.

Do you think that one logical outcome of this is that executive compensation is moderated?

Smith: It’s a potential outcome. It would be interesting to see what impact having more information about relative compensation throughout the company would have. How are you compensating the vast variety of your workers, at different percentiles relative to your highest level-executives? How are you compensating your people relative to their peers? That’s something that is often done in the compensation committee. They hire consultants to figure out how is our senior leadership paid relative to our peers. No company wants to say, ‘Oh, well, ours aren’t as good as the other guys, so they’re going to get paid 25th percentile.’ No, everyone’s thinking about 75th-percentile pay. And so I think an outgrowth of that thinking is if you want to motivate the best workforce, if you want to be able to retain people, attract people, promote people and all those things, you’re going to have to start thinking about how you pay them relative to your peers. That necessarily also means you have to think about how are you compensating them relative to your senior leadership and who’s driving the most value. That’s not to say CEOs and CFOs and COOs aren’t very valuable—obviously they are. But there is some refined relativism that needs to happen and it may lead to that of course.

Strine: We also encourage this committee to think about—if you’re going to take EESG seriously—how components of managerial compensation need to not be just tied to total stock return. The committee would be thinking about how to fairly reward good behavior that’s societally important and important to sustainable growth. CEO pay has gone up so much in part because the [CEO] jobs got ickier and they’ve been basically told to govern focused on total stock return or you just get rid of them and we’ve focused on equity-based compensation. One of the things that the [compensation] committee might decide to do is give a little bit more guaranteed pay to CEOs to simplify it. But frankly make their jobs a bit more fulfilling, where they can walk around the community feeling better because the company’s behaving in a way that’s societally responsible and that—because you’re publishing metrics about how you’re treating your workforce and your contracted labor, and you’re doing it in a good way—the public feels good about you.

Why do you think it’s worth focusing on compensation committees as opposed to government initiatives to support and protect labor?

Strine: You can’t consider this proposal in isolation—it’s not to the exclusion of other action to protect workers. I want to be clear about that. This will not work without living wage legislation, without labor law reform.  But because we have allowed—through decisions like Citizens United—enormous amounts of corporate money into the political process, much of which has been used to prevent legislation to protect the environment, to protect workers, and consumers, many people have concluded that the time when you can just leave the power allocation within the corporation alone and rely on external regulation has come and gone. Unless you constrain corporate power and deal with the power structure within, as part of that solution, you won’t get back to having an externality regulation like you should. And the current system puts the better companies under unfair pressure to keep up with the worst.

If you could restrict corporate political spending and require that to be subject to super majority stockholder approval and limit the influence of corporate power on the political process, then you would have more of a chance to pass that kind of external legislation. A step towards that is changing attitudes within the boardroom. You’re starting to see that, and information matters. Having data out there and having someone accountable for fair pay to workers, and whether you’re doing it or not. Directors are going to be fairly uncomfortable if they’re not doing it, they’re already uncomfortable with executive comp. This actually puts them under the Klieg lights over something that’s even more societally important. So is it the complete answer? No, in no way. But is it a useful step as part of an overall system? Yeah, we think so.

Companies that signed the Business Roundtable (BRT) statement last year committing to prioritize interests beyond shareholders, such as employees, were the same or worse at looking after their workers when the pandemic hit. That suggests that meaningful change won’t happen if companies are left to look after fairness to employees on their own.

Strine: Disclosure by all companies is really helpful in terms of making sure everybody’s accountable.

Smith: I sit back and say, look, recently the SEC has changed how Regulation SK works so it’s going to require principles-based disclosure around human capital. That’s great. But two of the SEC commissioners dissented from that. I think their critique is valid, saying if you don’t publish comparable data then company A discloses X, company B discloses Y, and X and Y are incomparable. So investors, the public, and journalists aren’t able to really understand what’s going on. That’s super important. As the signatories of the BRT and other companies have during the pandemic not always lived up to the values they espouse, we’ve also seen investors be increasingly vocal about this issue.

It’s fundamentally important, but without comparable disclosure they won’t be able to figure out who are the good actors, who are the bad actors. Who’s really thinking strategically about how they pay, incentivize, promote their workers and who isn’t. Indeed, in a recent report from the GAO—who interviewed institutional investors—this was a constant complaint about all of these EESG frameworks, which is if they’re not comparable these folks have limited amount of time and capacity and they’re invested in hundreds of companies and it makes their job even more difficult. Although I think it’s commendable that the SEC is going to require this additional disclosure and it will be interesting to see how companies respond to that, fundamentally without some sort of comparability. We’ll see what happens with a new administration.

Strine: That comparability should also extend to institutional investors in the sense that, like you mentioned about the BRT, there’s also been concern that some institutional investors have talked a better game than they voted, and that they’ve been in terms of stewardship. So we actually favor complementary institutional investor disclosure about how they take EESG into account in their stewardship and also in a comparable way. So that you have all the powerful interests—frankly, American consumers and workers are subject to the institutional investors who really control these companies and the company themselves—putting out good data. The company by company information being comparable provides a rich data source for people to begin moving toward the socially optimal rather than competing within a weaker framework where there’s more potential for societal harm from externalities.

We also think it’s internationally efficient, by the way, because we think the SEC has done a good job over the years of trying to harmonize internationally. This is one where with a new administration that actually is institutionalist and understands that we have a global economy, and that  works with our OECD allies, we can create harmonious standards which are pretty powerful and which frankly create opportunities for us to go forward without arbitrage against our own workers and consumers and the environment. For example, in the area of workforce, the EU has long been ahead of us in terms of issues like safety and other things. There’s probably a lot of multinationals in the United States who already report information about key workforce issues  in the EU and  if we learn from those experiences and open our minds and hearts to them, then we can  promote something that’s  efficient for businesses, and more powerful.

Does the composition of the compensation committee need to change to take on these responsibilities?

Strine: Do we need to have boards that have a broader gauge than they currently do? Yes. If you spread the function of the board more broadly to deal with issues that are important to society, you can  increase the effectiveness of boards. You’ll  create more diversity in terms of the sources of talent, which means it will be easier to include Black people and women. 

I’ll use an example a little bit out of this space, but Dr. Fauci could not serve on the key compliance committee of many pharmaceutical companies and many food companies. You know why? Because they put it in the audit committee. And Dr. Fauci is expert at public health and science, but he may not feel that equipped as an accounting expert. But we don’t care that we have accounting experts and CFOs dealing with issues like sexual harassment, immigration, inclusion, or in the science area, things like pharmaceutical compliance or food-safety compliance. 

By the way, we’re lining it up in a way that goes with the management, the way they do business at the management level—where  they don’t have their accountants do their HR compliance. I at least hope they don’t. I don’t think they have their accountants do their pharmaceutical science compliance. But it’s very common still to be jamming all the hard work of the board on the audit committee. And everybody on the audit committee is supposed to be certified basically as some form of a financial expert. 

What we’re saying is complex companies have a variety of things, things like cyber risk, and that if you actually thoughtfully attend to the committee structure, you’re going to be able to seat board members who have the talent to match up with the managerial talent. You’ll be able to cross fertilize that expertise and you’ll do a better job of anticipating risks and, and addressing them in a timely and effective way.

Shouldn’t boards be doing what you’re saying already?

Strine: Yes. But remember boards are often very driven by mandates. And no one has really, for too long, thought about the board itself as a business organization. What we’re saying is bring businesslike thinking to the board and—with the board struggling over where to situate EESG—this is a great opportunity for them to think about that when people are talking about improving the inclusion of Black people on boards and women on boards, this is a great time to think about how you can employ talent that’s relevant to what you’re doing from diverse sources. So it’s a great opportunity. And if we think about what Kirby was talking about with disclosure, by having a good committee structure, it also allows you to attend to your disclosure that you’re making, use it as a business tool to measure progress, and to compare yourself to others and to do better. Also, to stop breaking up related functions. We’re going to have a different board committee to do the environmental compliance than does the E in ESG? That doesn’t make any sense.

You were working on this idea before the virus broke out, but does a pandemic change the context for this?

Smith: If anything, it has only heightened the need for it. We see that in how investors are reacting to that, in how executives are rethinking EESG. We see that in how the pandemic has affected Black people. And we see that in the fact that chief justice Strine and I are sitting at home working for a law firm when our essential workers are out there making far less and having to go to work every day. If anything, it’s just heightened the issue in all of our imaginations and should weigh on our consciences.

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