Employee Layoffs and Shareholder Dividends During the COVID-19 Pandemic

By John P. Leemhuis, Esquire

Many US corporations are responding to the economic pressures of the coronavirus by laying off employees while at the same time issuing dividends and distributions to their shareholders. An article by “The Washington Post” published last week observed that many of these same corporations espoused the virtues of treating workers on par with shareholders just this past summer. Not surprisingly, there has been a hue and cry about the hypocrisy of these companies, the shortsightedness of their actions, and how they have “sold out” from their promises of the recent past.

I, for one, don’t find their actions surprising at all.

Under US corporate law (the laws of the states where US companies are formed and doing business), the board of directors have a duty of loyalty to the corporation. If a board is faced with a decision to either furlough employees or declare dividends, is it any wonder that the board would vote to declare dividends? After all, the purpose of corporations is to enhance shareholder value, so to vote otherwise would invite a shareholder lawsuit against the directors for a breach of their fiduciary duty.

But this isn’t the board’s fault. They’re just doing their job. If this type of action…laying off employees and declaring dividends during a pandemic is “unfair” as the author of the Washington Post notes many critics argue, then the solution is to change the rules of the game. Until there is a revision to the governance documents of these corporations to place employees on equal footing with shareholders, then any talk of businesses having a purpose other than shareholder primacy is just that – talk.

Fortunately, the tools to solve this problem are available. Benefit company legislation…laws that put not only employees, but other constituents such as the community where corporations do business, the corporations’ suppliers, the local and global environment, as well as the shareholders…exists in a majority of our states. All businesses need to do is opt into this law, and then these decisions become much different. I’m not saying they would be easier, but at least then all of the constituents of the corporation would receive equal consideration when decisions are made.

If you’d like to learn more about how to align your company’s governance with a vision of treating its constituents equally, please contact me at john@leemhuislegal.com