Responding to the COVID-19 Crisis, Public Policy and Corporate Governance Implications, Challenge Magazine, June 1, 2020 – Read on Challenge Magazine
Our societal response to the COVID19 crisis should be guided by basic moral principles and economic common sense. This essay will explore five essential steps or programs that suggest how we might navigate forward while we reckon with the root causes of this crisis, some of which can be found in nature and others in our flawed but reformable social and economic institutions.
The first principle which should largely be delegated to journalists, scientists, lawyers and the courts is justice. We must determine who is at fault for this crisis, and the extent to which it was preventable or could have been better mitigated. While stressing the priority of prevention against further, imminent crises that lay ahead, we must also reckon with responsibility for what has transpired. We must establish who has been damaged and how they can be best helped. We must prioritize how health can be restored and maintained, how families can be protected and how schools, police, fire and other public services can be safely restored. We must then turn to how we can provide rational assistance to economic institutions, to businesses and organizations, small and large, for-profit and nonprofit, public and private.
A second principle that must be applied to recovery from the COVID-19 crisis is fairness. We need solutions that protect the least resourced of our citizens, those most in need. Those middle- and upper-class members of American society most secure in knowledge and wealth will get by though their knowledge or through their wealth. Government should prioritize the most vulnerable of our citizens in need and work its way up over time toward providing assistance to working-and middle-class citizens.1
Large Business Organizations – Publicly Traded
Large organizations with highly skilled leadership and work forces backed by sophisticated advisors and wealthy owners that find themselves in need of government backed support should be held accountable and must be changed by this COVID-19 crisis. Corporate governance in particular should be changed and shareholders should suffer the market’s accounting for the lack of ability of their existing Boards, managers and advisors to be able to foresee or better react to this crisis. Our larger, publicly traded companies at risk of bankruptcy will only be improved if government relief is conditioned upon structural changes in equity ownership and governing control.
The primary structural change these companies should implement will involve the creation of long-term allocations to enterprise level profit sharing trusts. Those trusts should target a significant percentage of stock of each company, estimated to be between 10–30% of outstanding stock, and be held in perpetuity for its employees. Perpetuity should be created through mechanisms that replenish future redeemed shares to maintain a minimum significant stake for its US citizen employees.2 Accompanying the creation of those trusts, new, expert and independent Board representation should also be installed. The choice of new Board representatives should take place in consultation with employees in affected companies and independent advisors.
United States Sovereign Wealth Fund
Government invested funds of large publicly traded companies in excess of the 10–30% value of outstanding stock, allocated to employees, should be contributed to a newly designed United States Sovereign Wealth Fund (SWF). Examples of such funds include the Government Pension Fund of Norway or the Alaskan Permanent Fund.3 A new American SWF should be a federally chartered institution whose sole fiduciary duty would be to promote the financial welfare of US citizens.4 No distributions of principal out of the SWF would be allowed. The asset base of such an SWF would be maintained in perpetuity for future generations. Citizens would receive an annual check consisting solely of dividends, earned interest and rents derived from the assets held by the SWF.5
In addition to the SWF being the repository of asset holdings accumulated through the extension of government credit during the COVID-19 crisis, a new American SWF should also become the repository of the financial value of assets that comprise the American natural resource commons. Examples of assets that would comprise the commons post the Covid-19 pandemic could include fees, rents and royalties for use of publicly owned lands, water contained in federally owned lakes, rivers and aquifers and coastal properties bordering our oceans. Other commons assets could include carbon credits for clean air, certain patents and copyrights on knowledge produced by government funded research, the market value of electro-magnetic spectrum that enables wireless technology and air, sea and automotive traffic control. Earnings from the use of those assets held by the SWF would be distributed annually on an equal basis to all United States citizens.6
Small Privately Held Companies
The needs of smaller privately held companies of less than 500 employees are the most acute in the American economy. These firms have a lower institutional value than larger public firms, with less in-depth management and a larger base of employees with little or no accumulated wealth. The pandemic caused unemployment in this sector creates large and unsustainable unemployment benefit liabilities for local and state governments. These companies provide 50 plus percent of American jobs and most of American job growth. They also supply most of our country’s technological innovation and are the incubators of America’s future economic potential.
Loans to these firms should be underwritten on an expected company enterprise value based upon their pre pandemic financial performance. Loans should have equity components but this equity should be directed into a profit and wealth sharing trust for the benefit of their employees’ retirement savings. These trusts should hold stock targeted at a minimum of 30 percent of the outstanding stock of these companies. That stock can be supplied either through new issues of stock from company treasury’s or through the purchase of stock from existing owners.
Taking into account particular circumstances effecting smaller firms, accompanying the creation of those profit sharing trusts, new, expert and independent Board representation should be installed. The choice of new Board representatives should take place in consultation with the affected company’s employees and outside advisors.7 Employees should receive mandated profit and wealth sharing payments to maintain the target 30 percent ownership interest from rescued businesses on an annual basis in addition to upon leaving or retirement.
Loan underwriting requirements and the design of each profit and wealth sharing trust can be driven off each company’s audited financials, tax returns and payroll tax filings. In order to not delay the immediate deployment of funds, a provision in the government loan agreements should require that these profit-sharing trusts be set up and contributed to within one year of the loan’s funding. Government loans to this sector should include a loan forgiveness set aside to cover the costs of establishing these proposed profit-sharing trusts.
United States Federal Revenue Sharing
Most if not all state, county, city, town and village governments will be facing immediate funding needs because of diminished sales and property taxes and large unemployment consequences of the Covid-19 pandemic. Because the Federal government is the most efficient source of immediate capital with unlimited borrowing capacity, taxing authority and the technical capacity to evaluate need, it should immediately reinstitute the Nixon-era Federal Revenue Sharing program for the benefit of these critically important State and local government agencies.
Revenue sharing should be considered as part of the citizens share and Sovereign Wealth Fund ideas previously described. Revenue sharing should be instituted before economic damage caused by COVID-19 is visited upon to these essential governmental entities. Without immediate action, this need will cascade into a total municipal local state, county, city and village bond meltdown effecting the essential services of police, fire, water, waste removal, schools and parks that these government agencies provide to all US citizens. It must be instituted as soon as is practically possible.
Citizens Reconstruction Corporation
The federal government should establish a Citizen’s Reconstruction Corporation (CRC) to help absorb the surge in unemployment that will follow from the COVID-19 crisis and its aftershock which will be historic and perhaps long term.
The CRC should provide immediate living wage employment opportunities. It should be administered through a two-year employment and service initiative organized as a public/private effort across all states. Specific projects that would be serviced by a CRC would include:
Military and National Guard support as needed
AmeriCorps – service to lower income communities including teaching
HealthCorps – providing future doctors nurses medical school credit
ConservationCorps – in conjunction with larger climate remediation projects such as a Green New Deal, restoring and in some cases building new parks and recreational centers in, cities, rural towns
TradeCorps – Job and skill training and apprenticeship work in building trades and service careers organized as a public/private cooperative
Participants completing two-year service requirements in the above CRC programs would be entitled a two-year education and training grant to pay tuition, books and living expenses at qualifying universities, collages and trades training schools. Federal resources directed to CRC projects will fully subsidize the cost of tuition, books and housing for public, community college and related training institutions. Graduates of these programs will secure a first claim on new employment offered by businesses receiving government support for up to ten years.
The COVID-19 crisis has prompted the federal government of the United States to provide a lifeline to private sector employers ranging from our largest publicly-traded firms, to firms financed by private equity, to the modestly sized firms of Main Street. Intervention at each of these levels is warranted but should be carried out with discretion and only after an examination of the underlying strengths of each firm. Government assistance should be tethered to a quid pro quo that begins to change the underlying dynamics of corporate governance and wealth sharing through ownership in the United States. Rather than resort to government ownership and the suggestions of socialism that would inevitably accompany that path, we argue that employees should be the primary holders and beneficiaries of government extended funds. It is the employees, serving at all levels of a workplace from the shopfloor, to technical workers to senior management that should serve as proxies for the public interest, the public funds being extended in this emergency to help rescue our economy. The scale of this crisis is unprecedented and extends beyond our private sector. For this reason we also urge a revival of ideas selected from both a conservative heritage; the Federal Revenue Sharing models first considered during the Nixon administration and a progressive heritage, a Citizens Reconstruction Corporation that can promote nationwide, large scale employment and training efforts animated by the aspirations of a Green New Deal.
1 Further moral and historical arguments in support of these ideas can be found in an essay Toward an Economic Democracy, published by Christopher Mackin in The New Republic magazine March 25, 2020.
2 It should be noted that many publicly traded US companies have substantial non-US citizen shareholders who should not be beneficiaries of recovery efforts initiated by the US government.
3 Information here describing the Government Pension Fund of Norway. Information here describing the Alaskan Permanent Fund.
4 Eric Lonergan and Mark Blyth provide a useful sketch for such a fund in a March 2020 discussion paper for the Institute for Public Policy Research in the UK. The title of this paper is Beyond Buyouts.
5 An alternative structure to the Sovereign Wealth Fund (SWF) design worthy of further consideration would involve the creation of a new National Recovery Board of the federal government structured along the lines of the Federal Reserve Board but with a mandate to focus on private sector recovery initiatives.
6 Peter Barnes has made a compelling case for a natural resource “commons” based Fund in his 2014 book With Liberty and Dividends for All: How to Save Our Middle Class When Our Jobs Don’t Pay Enough
7 Private firms with under 100 employees would be encouraged to establish Boards of Directors with independent outside members in consultation with employees and outside experts. These firms may prefer the use of Cooperative legal structures. Private firms with over 100 employees should establish Boards of Directors with independent and expert representation selected in consultation with employees and outside advisors.