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Director Primacy at the Lowell Milken Institute

Herewith the text of remarks I gave yesterday to a gathering at UCLAW's Lowell Milken Institute:

In the US, corporate governance traditionally has been board-centric. Section 141(a) of the Delaware General Corporation Law commands that “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” The drafters of the Model Business Corporation Act tell us that the corporation code of every state but one have some such formulation. I call this the director primacy model of corporate governance. Other call it the board-centric model. In retrospect, if I had it to do over again, I would too.

Why is director primacy almost universally enshrined in corporate statutes? Why not shareholder primacy, in which management power is vested in the shareholders, who own the corporation? Alternatively, why not managerialism, in which management authority is vested in the Chief Executive Officer (CEO) or an executive committee of top management?

Those are the questions to which the bulk of my scholarship has been devoted for the last 15 years or so.

I set out not to reform the statutory allocation of power, but simply to understand it. As it turned out, however, the analysis ended up having strong normative implications.

In particular, I’ve spent a considerable amount of time debating the merits of shareholder activism. As you likely know, shareholder activists have already achieved considerable results. Majority voting, say on pay, board declassifications, proxy expense reimbursement, and proxy access bylaws are just the most prominent legal changes they have affected.

Demands from the investor community for further shareholder empowerment, moreover, remain unrelenting. As such, the “most important trend in corporate governance today … is the move toward ‘shareholder empowerment.’” Iman Anabtawi & Lynn Stout, Fiduciary Duties for Activist Shareholders, 60 Stan. L. Rev. 1255, 1255 (2008).

The most important question in corporate governance today thus is finding the endpoint of the shareholder empowerment movement. Is there a balance that is both politically feasible and theoretically sound?

I am pleased to report that The Lowell Milken Institute has authorized me to organize a conference at UCLA Law in April 2014 that will bring together prominent corporate law scholars to discuss the central question of corporate governance; i.e., “who decides?” The focus will be on the changing dynamics in both law and practice that have significantly empowered shareholders.

I plan to invite scholars working in all three of the major models of corporate governance currently in widespread use in the corporate legal literature; namely, director primacy, team production, and shareholder primacy.

Director primacy is the model I have developed over the last ten years or so. It attempts to both explain and defend the broad grant of authority to boards of directors that is at the heart of American corporate law. It argues that this grant of authority is essential to ameliorating the informational demands a large corporation faces. The grant of authority, however, creates the potential for abuse of that authority, creating a need for accountability mechanisms to limit such abuses. The tradeoff between authority and accountability is at the heart of corporate law. I propose that a presumption should generally favor authority, and therefore I oppose most proposals to increase shareholder power.

Director primacy has been well received as a model of corporate governance. And I have been recognized as “the leading proponent of the director primacy view,” to quote J.W. Verret, Treasury, Inc.: How the Bailout Reshapes Corporate Theory and Practice, 27 Yale J. on Reg. 283, 321 (2010).

To be sure, director primacy has its critics. Some see it as normatively unattractive, while others see it as lacking descriptive power. A leading competitor to director primacy is the team production theory of Margaret Blair and Lynn Stout. Like director primacy, team production theory defends the broad grant of authority to boards. However, it draws upon a different theoretical framework in doing so. Although team production theorists agree with me on the desirability of granting significant authority to boards, they disagree on the proper ultimate aims of the board in exercising that authority. I believe boards should focus on maximizing the value of the corporation for shareholders. Team production theorists believe boards should focus on maximizing the net value created for all corporate constituents collectively.

More importantly, director primacy is strongly opposed by those scholars who adhere to shareholder primacy, with Lucian Bebchuk as the most prominent example. Shareholder primacy theorists contend not only that shareholders are the principals on whose behalf corporate governance is organized, but also that shareholders do (and should) exercise ultimate control of the corporate enterprise. Hence, for example, shareholder primacy assumes shareholder voting rights that are both exclusive and strong.

The debate between these models is widely recognized as having considerable importance for our understanding of corporate law and governance. Faith Stevelman, for example, notes that “[t]he competing claims of ‘shareholder primacy’ and ‘director primacy. go back to the early beginnings of corporate law.” Faith Stevelman, Globalization and Corporate Social Responsibility: Challenges for the Academy, Future Lawyers, and Corporate Law, 53 N.Y. L. Sch. L. Rev. 817, 841 (2008/2009).

The choice between shareholder and director primacy is most obvious relevant to proposals to empower shareholders, such as say on pay, proxy access, and majority voting. At present, as Gordon Smith notes, “[d]espite the recent moves facilitating shareholder empowerment with respect to director elections, both Delaware and the SEC continue to rely on ‘director primacy’ as a foundational principle of corporate governance.” D. Gordon Smith, Private Ordering With Shareholder Bylaws, 80 Fordham L. Rev. 125, 170 (2011). As advocates of shareholder empowerment continue to press their claims with respect to other legal issues, however, the pressure on Delaware and the SEC to chose between shareholder and director primacy will become even more intense.

The conference therefore will be devoted to using these models to explore the ongoing question of shareholder empowerment.

A blog about law and social enterprise

Law professors Cass Brewer (Georgia State), Deborah Burand (Michigan), Haskell Murray (Regent), Alicia Plerhoples (Georgetown), Dana Brakman Reiser (Brooklyn), and a handful of practicing attorneys have joined social enterprise lawyer Kyle Westaway (who is also Lecturer on Law at Harvard Law School) at his SocEntLaw blog.  The blog covers issues and events related to social entrepreneurship and social enterprise law. 

Delaware moves into B-Corp market

Usha Rodrigues:

From the Harvard Law School Forum on Corporate Governance and Financial Regulation, via Allen M. Terrell, Jr. of Richards, Layton & Finger, comes a summary of proposed amendments to the Delaware General Corporation Law. I had heard about the elimination of the vote in second-step mergers, but the public benefit corporation was news to me.

It sounds a lot like the benefit corporation legislation that's been spreading across the country (see this chart by Haskell Murray.  At first blush I was surprised to see Delaware contemplating this kind of social enterprise legislation, since it's not really a stakeholders' rights kinda state.  But on further reflection I guess a "let a thousand flowers bloom" attitude makes sense for Delaware's let-the-market-decide, opt-in attitude.  Here's the description:

In general, under the proposed legislation, a public benefit corporation would be a corporation managed in a manner that balances the stockholders’ pecuniary interests, the interests of those materially affected by the corporation’s conduct, and one or more public benefits identified in its certificate of incorporation. To this last point, each public benefit corporation would be required, in its certificate of incorporation, to identify itself as a public benefit corporation and to state the public benefits it intends to promote. The proposed legislation generally defines “public benefits” as positive effects (or minimization of negative effects) on persons, entities, communities or interests, including those of an artistic, charitable, cultural, economic, educational, literary, medical, religious, scientific or technological nature. ...

I'm not surprised to see Delaware make this move and I think there's something other than "let the market decide" going on here. 

As the leader in corporate law, Delaware has always been quick to adopt new developments so as to preserve its market share. After all, franchise taxes from business organizations are arond 20% of delaware revenues, an income stream the state will do just about anything to maintain. When LLCs became popular, for example, Delaware agressively moved to capture the dominant share of large LLCs.

Thus, as Haskell Murray observed not too long ago (2 Am. U. Bus. L. Rev. 1):

Currently, it is not crystal clear whether Delaware corporate law is flexible enough to give comfort to the social entrepreneur, but as described above, there are a number of other options for the social entrepreneur. Additionally, the Delaware legislature is traditionally extremely responsive to the needs of the market, and one suggested solution in this Article is to have Delaware amend its corporate statute to explicitly provide social entrepreneurs with the flexibility they seek.

And so, once again, we see Delaware hedging its bets. Just as it positioned itself to lead the LLC phenomenon in case LLCs displaced corporations, it is positioning itself to lead the B Corp phenomenon in case it starts to make major inroads on the choice of form.

Does corporate social responsibility pay? The crunchy granola kind seems to.

Most efforts to measure the effect of corporate social responsibility look at outputs, mainly firm performance using various metrics. Another way of looking at the problem, however, is to focus on inputs; sepcifically, are your customers willing to pay more. As such, this paper is very interesting:

Many companies have made significant investments in socially responsible products. Environmentally safe cleaning products, fair trade coffee, and sustainable seafood are just a few examples. In this paper, we conduct a meta-analysis of eighty-three published and unpublished research papers across a large number of product categories and countries and using different data collection methodologies to better understand differences in willingness to pay for socially responsible products. We use two dependent variables: the percentage premium people are willing to pay and the proportion of respondents who are willing to pay a positive premium. We find that the mean premium is 17.3% and that this percentage is lower for durable than for non-durable goods and higher for goods where the behavior benefits humans (e.g., labor practices) than animals (e.g., bigger cages) or the environment. On average, 60% of respondents are willing to pay a positive premium and this does not vary by whether the good is durable. Further, along with products that benefit humans, products that benefit animals are shown to increase the number of people willing to pay a premium compared to environmentally friendly goods. Implications for retailers, manufacturers, and future research are discussed.

In other words, people will pay a premium for organic fair trade coffee beans but not for electric cars. Which might help explain why why Fisker Automotive is hovering on the edge of Chapter 11.

The paper also called to mind Rod Dreher's theory about crunchy conservatism. As his book, Crunchy Cons: How Birkenstocked Burkeans, gun-loving organic gardeners, evangelical free-range farmers, hip homeschooling mamas, right-wing nature ... America (or at least the Republican Party):

"Ewww, that's so lefty," Dreher's editor at his old National Review job sneered when Dreher said he was picking up some locally grown organic produce. And what's with the sandals I'm wearing, he then thought; am I going liberal? Not a bit, he concluded, though if associating with liberals could help him have healthy, flavorful food and a beautiful, durable home; be involved in his children's education; protect and nurture the environment and other species; and live with religious integrity, then associate, befriend, and work with liberals he would. That made him a crunchy con(servative), and since leaving NR and NY for Dallas, he has just become crunchier--and met scads of comrades, including literary patron saints G. K. Chesterton, Russell Kirk, E. F. Schumacher, and Wendell Berry and articulate representatives of the types recorded in his book's expansive subtitle.

Perhaps the reason that the paper's findings skew the way they do is that crunchy cons are willing to pay for select types of CSR, thereby increasing the target customer base for those types but not for others. But that, of course, is just rank speculation.

God and the Profits: Is There Religious Liberty for Money-Makers?

Mark Rienzi, God and the Profits: Is There Religious Liberty for Money-Makers? (March 7, 2013). Available at SSRN: http://ssrn.com/abstract=2229632:

Abstract: Is there a religious way to pump gas, sell groceries, or advertise for a craft store? 

Litigation over the HHS contraceptive mandate has raised the question whether a for-profit business and its owner can engage in religious exercise under federal law. The federal government has argued, and some courts have found, that the activities of a profit-making business are ineligible for religious freedom protection. 

This article offers a comprehensive look at the relationship between profit-making and religious liberty, arguing that the act of earning money does not preclude profit-making businesses and their owners from engaging in protected religious exercise. 

Many religions impose, and at least some businesses follow, religious requirements for the conduct of profit-making businesses. Thus businesses can be observed to engage in actions that are obviously motivated by religious beliefs: from preparing food according to ancient Jewish religious laws, to seeking out loans that comply with Islamic legal requirements, to encouraging people to “know Jesus Christ as Lord and Savior.” These actions easily qualify as exercises of religion. 

It is widely accepted that religious freedom laws protect non-profit organizations. The argument for denying religious freedom in the for-profit context rests on a claimed categorical distinction between for-profit and non-profit entities. Yet a broad examination of how the law treats these entities in various contexts severely undermines the claimed categorical distinction. Viewed in this broader context, it is clear that denying religious liberty rights for profit-makers would actually require singling out religion for disfavored treatment in ways forbidden by the Free Exercise Clause and federal law.

If you don't want to read a 40 page law review article, here's a short summary.

Is Starbuck's support of marriage equality a breach of fiduciary duty to its shareholders?

Short answer: No.

Longer answer: Think Progress reports that:

Starbucks CEO Howard Schultz continued to defend his company’s support for marriage equality at a shareholders meeting Wednesday, pointing out that “not every decision is an economic decision.” Shareholder Tom Strobhar suggested that the company’s stock dipped a bit when the National Organization for Marriage launched a “Dump Starbucks” boycott last year, but Schultz expressed no concern about the company’s viability moving forward:

STROBHAR: In the first full quarter after this boycott was announced, our sales and our earnings — shall we say politely — were a bit disappointing.

SCHULTZ:If you feel, respectfully, that you can get a higher return than the 38 percent you got last year, it’s a free country. You can sell your shares of Starbucks and buy shares in another company. Thank you very much.

Let's say Strobhar sued, claiming that Starbucks' management and board was breaching their fiduciary duties to the shareholders by alienating some customers. Would Schultz et al. have to prove that there were corresponding benefits that outweighed any such losses, such that Starbucks was a net gainer? (After all, a high return is no defense if you could have gotten an even higher one.)

No, of course not. The business judgment rule would stop the suit dead. I am reminded here of Shlensky v. Wrigley, 237 N.E.2d 776 (Ill. App. 1968).

Shlensky challenged Philip Wrigley’s famous refusal to install lights in Wrigley Field. Shlensky was a minority shareholder in the corporation that owned the Chicago Cubs and operated Wrigley Field. Wrigley was the majority stockholder (owning 80% of the stock) and president of the company. In the relevant period, 1961-1965, the Cubs consistently lost money. Shlensky alleged that the losses were attributable to their poor home attendance. In turn, Shlensky alleged that the low attendance was attributable to Wrigley’s refusal to permit installation of lights and night baseball.

In the course of rejecting Shlensky's claim, the court noted that “the effect [of night baseball] on the surrounding neighborhood might well be considered by a director.” Likewise, the court asserted that “the long run interest” of the firm “might demand” consideration of the effect night baseball would have on the neighborhood. (At that time, the corporation owned not just the Cubs but also Wrigley Field and the land on which it stands.) But the court went on to explain that:

By these thoughts we do not mean to say that we have decided that the decision of the directors was a correct one. That is beyond our jurisdiction and ability. We are merely saying that the decision is one properly before directors and the motives alleged in the amended complaint showed no fraud, illegality or conflict of interest in their making of that decision.

Thus, Wrigley did not have to show that his decision was supported by some sort of cost-benefit analysis. 

Also on point is the case of Bayer v. Beran, 49 N.Y.S.2d 2, 6 (Sup. Ct. 1944), in which the corporation began sponsoring a opera radio program and hired the CEO's wife to sing on it (along with many others). The court explained that:

To encourage freedom of action on the part of directors, or to put it another way, to discourage interference with the exercise of their free and independent judgment, there has grown up what is known as the “business judgment rule.”  ...  “Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to their honest and unselfish decision, for their powers therein are without limitation and free from restraint, and the exercise of them for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.”  Pollitz v. Wabash R. Co., 207 N.Y. 113, 124, 100 N.E. 721, 724.  Indeed, although the concept of “responsibility” is firmly fixed in the law, it is only in a most unusual and extraordinary case that directors are held liable for negligence in the absence of fraud, or improper motive, or personal interest.

The court further explained that "It was for the directors to determine whether they would resort to radio advertising;  it was for them to conclude how much to spend;  it was for them to decide the kind of program they would use.  It would be an unwarranted act of interference for any court to attempt to substitute its judgment on these points for that of the directors, honestly arrived at."

In sum, the fact that shareholders don't like the positions on an issue of public import taken by a corporation states no grounds for legal intervention. Their choices are simple: (1) Try to persuade like-minded shareholders to elect new directors who will take a different position or (2) follow the Wall Street Rule (it is easier to switch than fight).

Marcia Narine on the Conflict Minerals Disclosure Regime

Narine, Marcia, From Kansas to the Congo: Why Naming and Shaming Corporations through Dodd-Frank's Corporate Governance Disclosure Won't Solve a Human Rights Crisis (March 5, 2013). Regent University Law Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2228737

The Securities and Exchange Commission serves to protect investors, maintain fair and efficient markets, and facilitate capital formation. With the passage of Dodd-Frank section 1502’s conflict minerals corporate governance disclosure provision, the agency has entered into the human rights arena. Any company regardless of size that files reports with the SEC must now ensure that is not funding rebel groups engaged in rape, torture, the use of child soldiers, exploitation of child labor or other activities that have, in part, led to one of the world’s largest and most protracted humanitarian crises. This “name and shame” law, which does not actually make it illegal to source minerals from the Congo aims to provide transparency to consumers and investors so that they can make informed choices about the companies with which they choose to do business. On the surface this makes sense in an era in which companies are hyper-vigilant about their reputations. Whether a corporation takes a shareholder or stakeholder-centric point of view, no firm can afford to be associated with conscription of child soldiers or the rape of women and children. This Article briefly outlines corporate motivations for social responsibility programs; the state of corporate liability for human rights abuses prior to Dodd-Frank; the level of sexual violence in the Congo which led to the legislation; the legislative history behind the conflict mineral rule including the involvement of civil society groups; the legal challenges to the rule; and some alternatives to the rule. The Article contends that in a well-intentioned effort to help the people of the Congo, the drafters of the law oversimplified the causes of the violence and failed to consider appropriate alternatives. Compounding the errors, the implementers of the law -- the SEC believing that it was hamstrung by Congressional requirements -- failed in its duty to consider costs and benefits or to appropriately use its discretion. Companies, however, will conduct their own cost benefit analyses as it relates to reputation and legal risk and some will likely pull out of the Congo causing a de facto boycott. Consumers and investors will ultimately determine whether name and shame really works in this instance. Nonetheless, they will continue to demand transparency in the supply chain regardless of the success of Dodd-Frank.  This Article ultimately concludes that conflict minerals rule is a poor choice for human rights legislation for corporations because the law’s flaws will lead to unintended and devastating consequences for the very beneficiaries it intends to help- the Congolese people.

Are for-profit corporations "persons" who "exercise religion"?

Kevin Walsh has a great post on whether corporations can exercise religion for purposes of the Religious Freedom Restoration Act.

A split panel of the Third Circuit recently joined the minority of federal courts that have denied preliminary injunctive relief to for-profit corporations and their owners in RFRA and Free Exercise challenges to the HHS Mandate. Both judges in the majority (Judge Rendell and Judge Garth) endorse the district court’s conclusions that “a secular, for-profit corporation . . . has no free exercise rights under the First Amendment, and is not a “person” under RFRA.” Writing in dissent, Judge Jordan contends (powerfully) that these conclusions rest on erroneous premises and merit further consideration by the court. If anything, Judge Jordan’s dissent understates the problems with the majority’s adoption of these conclusions because the standard of review did not require him to reach definitive conclusions. There is no legal basis for a judicial carve-out of “secular, for profit corporations” from RFRA’s protections.

RFRA provides that “[g]overnment shall not substantially burden a person’s exercise of religion” unless the government satisfies strict scrutiny. 42 U.S.C. § 2000bb-1(a) (emphasis added). In the U.S. Code, “person” ordinarily encompasses “corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals.” 1 U.S.C. § 1. Nothing in RFRA excludes corporations generally. To the contrary, it is plain that corporations can assert claims under RFRA. The only Supreme Court case applying RFRA against the federal government involved a claim asserted by a corporation, O Centro Espírita Beneficente União do Vegetal.

Rather than adopt the obviously incorrect interpretation of “person” to exclude corporations, courts have carved up the category of corporations into “religious corporations” and “secular, for-profit corporations.” But there is no textual basis for this distinction in the statutory term “person.”

Walsh concludes:

... some courts are incorrectly carving out certain corporations from RFRA’s blanket coverage. These judicial carve-outs are based on mistaken statutory interpretation, a mistaken understanding of the meaning of “exercise of religion,” and a mistaken understanding of corporate action.

It's an interesting and persuasive analysis of the issue, which is likely to end up before the Supreme Court.

The Law of Corporate Purpose

I just finished reading Professor David G. Yosifon's new article, The Law of Corporate Purpose (September 28, 2012), which is available at SSRN: http://ssrn.com/abstract=2154031. The abstract follows:

Delaware corporate law requires directors to manage firms for the benefit of the firm’s shareholders, and not for any other constituency. Delaware jurists have been clear about this is in their case law, and they are not coy about it in extra-judicial settings, such as in speeches directed at law students and practicing members of the corporate bar. Nevertheless, the reader of leading corporate law scholarship is continually exposed to the scholarly assertion that the law is ambiguous or ambivalent on this point, or even that case law affirmatively empowers directors to pursue non-shareholder interests. It is shocking, and troubling, for corporate law scholarship to evince such confusion about the most important black letter matter in the field. While I am a critic of the “shareholder primacy norm” in corporate governance, I am nevertheless convinced that shareholder primacy is the law. In fact, the critical vantage and reformative program that I have pursued in other writing presupposes that shareholder primacy is currently the law. This article is therefore dedicated both to providing doctrinal clarification on the law of corporate purpose, and to vindicating a key presumption in a broader normative agenda.

It's a very effective critique of arguments made by scholars like Einer Elhauge and Lynn Stout that, as the latter put it, “The notion that corporate law requires directors . . . to maximize shareholder wealth simply isn’t true.” Of course, unlike Yosifon, I am not a critic of the shareholder wealth maximization norm. To the contrary, I argued at length in The New Corporate Governance in Theory and Practice that shareholder wealth maximization both is and ought to be the law.

CSR at the Glom

The Conglomerate is having an interesting discussion of the Chick-fil-A case and corporate social responsibility.

CSR bleeding hearts hoist by own petard by Chick-Fil-A

I am a bit late mentioning this, but last week an Economist blogger used the Chick-Fil-A controversy to offer some vital critiques of corporate social responsibility:

Though several local "kiss-ins" were granted cursory coverage, for balance, the sight of lines of conservative Houstonians snaking around area Chick-fil-A franchises had our local news squads almost frothing with excitement. One elderly woman was captured on camera declaring Dan Cathy, Chick-fil-A's president, "my hero" for making a stand against same-sex marriage. Waiting in wilting heat to uphold family values and honour a hero by eating a chicken sandwich was really the least she could do. 

It's my view that this sort of skirmish in the culture wars is an inevitable consequence of trends in "ethical consumption" and "corporate social responsibility". Conservatives sceptical of the corporate social responsibility (CSR) movement have often charged that CSR is a stalking horse for liberal causes that have failed to get traction through ordinary political channels. This charge finds some support, I think, in the fact that few in the media seem to see Chick-fil-A's Christian-influenced culture and business practices as an example of CSR, though obviously it is. Doesn't the demand that corporations act responsibly in the interests of society, in ways other than profit-seeking, directly imply that corporate leaders who find same-sex marriage socially irresponsible should do something or other to discourage it? ...

Matters of moral truth aside, what's the difference between buying a little social justice with your coffee and buying a little Christian traditionalism with your chicken? There is no difference. Which speaks to my proposition that CSR, when married to norms of ethical consumption, will inevitably incite bouts of culture-war strife. CSR with honest moral content, as opposed to anodyne public-relations campaigns about "values", is a recipe for the politicisation of production and sales. But if we also promote politicised consumption, we're asking consumers to punish companies whose ideas about social responsibility clash with our own. ...

I'd suggest the best arena for moral disagreement is not the marketplace, but our intellectual and democratic institutions. 

Go read the whole thing, please.

The point strikes me as irrefutable. It exposes the inherently value-laden content of the CSR movement, which implicitly equates social responsibility with left-liberal values. Given the left's propensity for protest and boycotts, CSR has also gone hand in hand with related movements like efforts to keep big box chain stores out of progressive strongholds like Berkeley or Madison. And all was well.

But now perhaps the gander is sampling the goose's sauce. The Chick-fil-A case may finally wake conservatives up to the potentiality for demanding socially responsible action by corporations that advance our values.

How about using Rule 14a-8 to put forward a shareholder proposal at drug companies that make abortifacients (or, for us true pro-lifers, drugs or equipment used to effect the death penalty)? How about insisting that corporations not fund left leaning activist groups? After all, do not "progressive" CSR types want corporation to stop funding the American Legislative Exchange Council? How about shareholder proposals at movie companies asking the board of directors to assess the social impact of violant and sexual images?

The bottom line is that CSR has always been about advancing the left-liberal political and social agenda. Anything departing from that agenda is demonized as "irresponsible" and companies pursuing such policies find themselves being vilified by the left and their media allies, just as Chick-Fil-A did.

The Economist's blogger worries that the culture wars will now come to consumer purchasing decisions, as consumers seek to push corporations to behave in ways they believe to be socially responsible. My point herein is that that shipped sailed a long time ago, but the fight so far has been one-sided. Only the left has been using CSR to advance its agenda. But in doing so, they have created a template for those of us on the right to turn their own tools against them.

If I had my druthers as a corporate law policy guru, I would require corporations to live by Milton Friedman's command that their sole social responsibility is to increase profits.

If we're going to live in a CSR world, however, I would prefer that corporations recognize that their social responsibility is to defend economic freedom. As I wrote in Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship:

As a societal decision-making norm, the economic freedom to pursue wealth does more than just expand the economic pie. A legal system that pursues wealth maximization necessarily must allow individuals freedom to pursue the accumulation of wealth. Economic liberty, in turn, is a necessary concomitant of personal liberty—the two have almost always marched hand in hand.  The pursuit of wealth has been a major factor in destroying arbitrary class distinctions, moreover, by enhancing personal and social mobility.  At the same time, the manifest failure of socialist systems to deliver reasonable standards of living has undermined their viability as an alternative to democratic capitalist societies in which wealth maximization is a paramount societal goal.  Accordingly, it seems fair to argue that the economic liberty to pursue wealth is an effective means for achieving a variety of moral ends.

In turn, the modern public corporation has turned out to be a powerful engine for focusing the efforts of individuals to maintain the requisite sphere of economic liberty. Those whose livelihood depends on corporate enterprise cannot be neutral about political systems. Only democratic capitalist societies permit voluntary formation of private corporations and allot them a sphere of economic liberty within which to function, which gives those who value such enterprises a powerful incentive to resist both statism and socialism.  Because tyranny is far more likely to come from the public sector than the private, those who for selfish reasons strive to maintain both a democratic capitalist society and, of particular relevance to the present argument, a substantial sphere of economic liberty therein serve the public interest.  As Michael Novak observes, private property and freedom of contract were “indispensable if private business corporations were to come into existence.”  In turn, the corporation gives “liberty economic substance over and against the state.” 

Defending those propositions strikes me as the most socially responsible thing a corporation can do today.

An Indian Scrooge dismisses Corporate Social responsibility as "Humbug" ... and he's right, of course

Sundeep Khanna:

Corporate social responsibility (CSR), one of the great claptraps of contemporary Indian corporate life, and a concept that defies all laws of economics and business, will soon be codified and institutionalized. ...

Effectively if a suitably-sized company makes any real profits, it better set aside 2% of that to do what the government should be doing anyway using the tax payers money. And if it doesn’t, it better give a good reason why it didn’t. ...

Is the provision aimed at forcing companies into more socially responsible behavior? Or is it meant to force funds into developmental activities? If the first, then it is a laughable initiative. Why would a company behave any more responsibly just because it has to account for 2% of its profits on socially-oriented activities? ... The elaborate charade of “doing good”, is often no more than routine corporate activities, a phenomenon dubbed “greenwashing”.

If the government’s objective is to force companies to contribute to national development, ... there is no conceivable reason why a company that makes electric bulbs should do a good job of running a primary school. As Harvard economist Theodore Levitt put it succinctly, ‘government’s job is not business, and business’s job is not government’.

It's a highly cogent argument. Please go read the whole thing.

Why Capitalism is Good for the Soul

Today's moral lesson:

The pursuit of profit thus results in higher living standards for workers, as well as cheaper and more plentiful goods and services for consumers.

The way this has enhanced people’s capacity to lead a good life can be seen in the spectacular reduction in levels of global poverty, brought about by the spread of capitalism on a world scale. In 1820, 85% of the world’s population lived on today’s equivalent of less than a dollar per day. By 1950, this proportion had fallen to 50%. Today it is down to 20%. World poverty has fallen more in the last fifty years than it did in the previous five hundred.(11) This dramatic reduction in human misery and despair owes nothing to aging rockstars demanding that we ‘make poverty history.’ It is due to the spread of global capitalism.

Capitalism has also made it possible for many more people to live on Earth and to survive for longer than ever before. In 1900, the average life expectancy in the ‘less developed countries’ was just thirty years. By 1960, this had risen to forty-six years. By 1998, it was sixty-five years. To put this extraordinary achievement into perspective, the average life expectancy in the poorest countries at the end of the twentieth century was fifteen years longer than the average life expectancy in the richest country in the world—Britain—at the start of that century.

By perpetually raising productivity, capitalism has not only driven down poverty rates and raised life expectancy, it has also released much of humanity from the crushing burden of physical labour, freeing us to pursue ‘higher’ objectives instead.

via theeconomics.wordpress.com

Please do go read the whole thing

Corporate political spending is good for shareholders

The WSJ opined this morning that:

Liberals have been trying to persuade CEOs and corporate boards to stop spending money on politics by claiming that it doesn't pay. But according to a new study by the cofounder of the Democratic-leaning Progressive Policy Institute, corporate participation in politics works for the companies and their shareholders.

In a report to be released Tuesday by the Manhattan Institute, economist (and former senior Clinton Administration official) Rob Shapiro and co-author Douglas Dowson sort through the academic literature and find that "corporate political efforts generally have positive effects on a firm's market value and its shareholder returns."

The relationship between business and government is complex, but Messrs. Shapiro and Dowson find that "most firms, like most individuals, behave rationally and strategically in their spending decisions on campaigns and lobbying, devoting resources in ways that, they have reason to expect, will benefit the corporations themselves and their shareholders."

The Manhattan Institute report is available here. The executive summary states:

Since the Supreme Court’s 2010 Citizens United decision held that corporate political expenditures are free speech under the First Amendment, various groups and individuals have advocated imposing new limits on corporate political activity. These efforts include calls on shareholders to demand that corporations refrain from involvement in the political process. Such demands have been buttressed by an emergent academic literature which, in contrast to what had been an established perspective, has questioned whether corporate financial contributions and even lobbying are actually in the interest of corporate shareholders. This paper reviews this new literature, contrasts it with previous work on this subject, and determines that the new studies ultimately fail to establish that corporate political activity adversely affects shareholder returns. ...

The dominant academic view for the last 20 years is that companies undertake political activity to secure advantages for themselves, based on a combination of opportunity and necessity. Their incentives to do so are clear, given that modern governments influence national economies in ways that affect the sales and returns of particular industries and companies.

There is a robust academic literature, both theoretical and empirical, on campaign contributions to candidates, especially those provided through corporate political action committees (PACs). The most common explanation for these PAC contributions is that they help corporations and other interests secure greater access to legislators and other public officials. Empirical studies also have shown that corporate PAC activities are positively related to a corporation’s size, concentration, level of regulation, and sales to the government. This research clearly suggests that cost-benefit considerations influence corporate decisions to form and use PACs.

The academic research on lobbying has stressed the role that corporate lobbying plays in providing information to legislators and other public officials, or, in one variation, providing political intelligence and connections. Further, various recent studies have shown that lobbying generates positive economic returns. A 2009 study published in the American Journal of Political Science, for example, found that for the average firm lobbying Congress, across industries and various measures of financial performance, each additional $1 spent on lobbying was associated with $6-to-$20 in new tax benefits. Similarly, a 2010 working paper by Hui Chen and two co-authors found that $1 spent on lobbying was associated with an additional $24–to-$44 in corporate income. The same study further found that those firms which lobbied most intensively—defined as lobbying expenditures as a share of assets, sales, and market capitalization—outperformed their benchmarks by 5.5 percent to 6.7 percent per year, for the three years following their intense lobbying.

Other studies have demonstrated the value of corporate political connections, measured through PAC contributions, and found additional, positive contributions from corporate political activity. These studies include, for example, event studies examining the effects on the value of politically-active firms of the sudden death of Senator Henry “Scoop” Jackson (D-WA) in 1983 and the surprise defection of Senator James Jeffords (R-VT) from the Republican Party in 2001. Further, a 2010 study published in The Journal of Finance suggests that the economic benefits of a corporation’s political connections are also evident over the long term. The authors reported that a one-standard-deviation increase in the number of candidates supported by a firm over the previous five years was associated with excess abnormal returns of 2.6 percent.

Extensive analysis and evidence, then, support the view that corporate participation in the political process yields generally positive returns for firms and their shareholders.

Confused by Strine's take on my take on a corporation's social responsibility

In eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010), then-Delaware Chancellor William Chandler opined that “Directors for a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization--at least not consistently with the directors' fiduciary duty under Delaware law.” 

In a recent Wake Forest law review article, current Delaware Chancellor Leo Strine opined that Chandler's holding "drew fire from both ends of our corporate law political spectrum, if there be such a thing." Passing over Strine's analysis of the corporate law left, we come to the following:

From a different political perspective come those who seem to take umbrage at plain statements like the Chancellor's for unmasking the face of capitalism. These commentators seem dismayed when anyone starkly recognizes that as a matter of corporate law, the object of the corporation is to produce profits for the stockholders and that the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation. Maxwell Kennerly, in his review of the eBay decision, noted what he perceived to be a triad of conservative academic commentators who were unhappy with Senator Al Franken's statement that “it is literally malfeasance for a corporation not to do everything it legally can to maximize its profits”--a statement, that in Kennerly's view, encapsulates a material portion of the holding in the eBay opinion. [FN48]

One suspects that this vein of commentary does not fear the unmasking because these commentators believe that courts would actually prevent corporations from pursuing profit in an enlightened manner. [FN49] To the contrary, one senses that they may be uncomfortable with a plain acknowledgment that corporate managers' primary duty is to seek as much profit as can be achieved within the limits of the law, precisely because to do so emphasizes the importance of the law in channeling corporate behavior. Preferable is suggesting that corporate managers themselves while seeking to maximize corporate profits will take care of the public interest, and that government should leave it to corporate managers. 

[FN48]. Kennerly, supra note 44. As recounted by Kennerly, Professor Todd Henderson argued that although “the duty to maximize shareholder value may be a useful shorthand for a corporate manager to think about how to act on a day-to-day basis, this is not legally required or enforceable.” Id. (quoting Todd Henderson, The Shareholder Wealth Maximization Myth, Truth on the Market (July 27, 2010), http://truthonthemarket.com/2010/07/27/the-shareholder-wealth-maximization-myth/). Professor Stephen Bainbridge agreed, positing that “[t]he fact that corporate law does not intend to promote corporate social responsibility, but merely allows it to exist behind the shield of the business judgment rule, becomes rather significant in--and is confirmed by--cases where the business judgment rule does not apply.” Stephen Bainbridge, Al Franken, Shareholder Wealth Maximization, and the Business Judgment Rule, ProfessorBainbridge.com (July 27, 2010), http:// www.professorbainbridge.com/professorbainbridgecom/2010/07/shareholder-wealth-maximization-and-the-business-judgment-rule.html#tp. Finally, Professor Larry Ribstein was also quick to contest Franken's comment: “The Franken misconception is widely espoused by those in the radical anti-corporate camp....This is why the corporate social responsibility debate is largely empty. While many corporate social responsibility proponents argue for giving managers more legal freedom to serve society's needs, managers already have that freedom.” Larry Ribstein, The Shareholder Maximization Canard, Truth on the Market (July 28, 2010), http://truthonthemarket.com/2010/07/28/the-shareholder-maximization-canard/. Kennerly attributed this dismissal of Franken's views to an underappreciation of what he describes as a legal requirement that corporations, even if allowed to engage in certain philanthropic efforts, undertake to maximize profits. See Kennerly, supra note 44 (“[T]he duty to maximize profits isn't, as Henderson said, a ‘canard.’ It's an enforceable...legal doctrine, and it was just enforced against craigslist.”).

[FN49]. This sense comes from the conservative response discussed supra in note 48, in which the commentators appear to argue that corporations already enjoy the prerogative to pursue philanthropic ends to the extent that those who would argue, as Al Franken does, that corporations are legally required to maximize profits, underemphasize the wide latitude managers already enjoy under the business judgment rule.

I've read this passage several times and remain puzzled. In contrast to Strine's usual clarity, this passage is convoluted and challenging to parse. If I've ultimately interpreted him correctly, however, he's attributed to me views that I demonstrably do not hold.

I addressed the law governing corporate social responsibility in, inter alia, Corporation Law and Economics 410-414 (2002). As I have consistently done elsewhere, I made two basic points in that passage: (1) The relevant legal rule can be succinctly stated as “It is the obligation of directors to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders.” (413, quoting Katz v. Oak Indus., Inc., 508 A.2d 873, 879 (Del. Ch. 1986).) Why then would I be dismayed when a judge "starkly recognizes that as a matter of corporate law, the object of the corporation is to produce profits for the stockholders and that the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation"? To the contrary, would you not expect me to congratulate the judge for his perspicacity?

In any event, while I have said little about Chandler's eBay opinion, it would be hard to find any hint of dismay in this post or this one.

(2) While the governing legal norm is one of shareholder wealth maximization, I believe the case law also teaches that directors who consider nonshareholder interests in making corporate decisions, like directors who do not, will be insulated from liability by the business judgment rule. Any fair reading of my post on Al Franken (among which I do not count Kennerly's critique) would recognize that this was the focus of my point. Franken insinuated that directors who pursue "profit in an enlightened manner" would face liability. As my post discussed, however, directors simply do not face any realistic prospect of liability outside the narrow class of cases subject to the so-called Revlon duties. Put another way, Strine is correct to the extent that he characterizes my critique of Franken's position as one based on Franken's "underemphasi[s] [of] the wide latitude managers already enjoy under the business judgment rule."

Turning from what I have said, let us now consider things I have not said but am apparently neverthelss charged with believing.

Apparently, I am "uncomfortable with a plain acknowledgment that corporate managers' primary duty is to seek as much profit as can be achieved within the limits of the law." Untrue. I discuss the relevant policy issues at pages 418-429 of Corporation Law and Economics. In the course of that analysis, I flatly state--or, if you prefer, plainly acknowledge--that: "Society therefore appropriately adopts the shareholder wealth maximization norm as a governing principle—it is the majoritarian default that emerges from the hypothetical bargain."

My supposed lack of comfort with such an acknowlegdement is ascribed to a purported reluctance to "emphasize[] the importance of the law in channeling corporate behavior." I really still don't fully grasp the point Strine is trying to make in this specific claim. But just to set the record straight, I have never denied "the importance of the law in channeling corporate behavior." Indeed, why would I do so? If that were true, it would sort of moot the 20-plus years I've spent studying how law affects corporate behavior!

Granted, I have opined that "General welfare laws designed to deter corporate conduct through criminal and civil sanctions imposed on the corporation, its directors, and its senior officers are more efficient than stakeholderist tweaking of director fiduciary duties." (429) But how does that amount to a denial of "the importance of the law in channeling corporate behavior." 

To the contrary, I have squarely stated that:

Because the shareholder wealth maximization norm is central to director socialization, the norm provides a forceful reminder of where the director’s loyalty lies. Even if the business judgment rule renders its rhetoric largely unenforceable, the shareholder wealth maximization norm is an ever present goad. 

Does not that passage explicitly recognize "the importance of the law in channeling corporate behavior"?

(To be sure, I have sometimes taken into account the role that social norms can play in affecting behavior, including cases in which norms may outweigh the law in determining behavior, but not to my recollection in a context relevant to the present discussion.)

Next, do I believe that "corporate managers themselves while seeking to maximize corporate profits will take care of the public interest"? Well, I certainly share Adam Smith's view that “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."

But I have also stated that:

Corporate conduct doubtless generates negative externalities.  In appropriate cases, such externalities should be constrained through general welfare legislation, tort litigation, and other forms of regulation. The question here is whether the law should also seek to constrain them through the fiduciary duties of corporate directors. (425) 

So, on the one hand, contra Strine, I have recognized that corporate directors and officers will not necessarily "take care of the public interest." On the other hand, also contra Strine, my argument that "targeted legislative approaches are a preferable solution to the externalities created by corporate conduct" (429) does not rest on a claim "that government should leave it to corporate managers." For one thing, as the passage from page 425 confirms, I don't think government should leave the problem of externalities to management (where government intervention is the efficient solution). For another, my preference for target solutions rests not on a laizze-faire "leave it to management" argument. Instead, my preference rests on the claim that "By virtue of their inherent ambiguity, fiduciary duties are a blunt instrument. There can be no assurance that specific social ills will be addressed by the boards of the specific corporations that are creating the problematic externalities." (429)

In sum, it remains unclear to me what work Strine intends to accomplish in this portion of his article. What is clear is that I don't hold most of the views ascribed to me therein.