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Piercing the Corporate Veil in the United Kingdom

Robert Goddard reports:

Judgment was delivered today by the Supreme Court in Hurstwood Properties (A) Ltd & Ors v Rossendale Borough Council [2021] UKSC 16. The case provided the opportunity for the court - once more - to consider corporate veil piercing, against the background of its earlier decision in Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34.

...

Lords Briggs and Leggatt delivered the leading judgment (with whom Lords Reed, Hodge and Kitchen agreed) and observed:

[In Prest] Lord Walker of Gestingthorpe questioned whether “piercing the corporate veil” is a coherent principle or rule of law at all, as opposed to simply a label used to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a corporate body (para 106). Although this is not the occasion for reaching any final view, we are inclined to share Lord Walker’s doubts .... Even if there is an “evasion principle” which may in “a small residual category of cases” (per Lord Sumption) justify holding a company liable for breach of an obligation owed by its controlling shareholder, we are not ourselves convinced that there is any real scope for applying such a principle in the opposite direction so as hold a person who owns or controls a company liable for breach of an obligation which has only ever been undertaken by the company itself".

The Prest decision makes very interesting reading for those of us who have toiled in the PCV vineyard. 

"Piercing the corporate veil" is an expression rather indiscriminately used to describe a number of different things. Properly speaking, it means disregarding the separate personality of the company. There is a range of situations in which the law attributes the acts or property of a company to those who control it, without disregarding its separate legal personality. The controller may be personally liable, generally in addition to the company, for something that he has done as its agent or as a joint actor. Property legally vested in a company may belong beneficially to the controller, if the arrangements in relation to the property are such as to make the company its controller's nominee or trustee for that purpose. For specific statutory purposes, a company's legal responsibility may be engaged by the acts or business of an associated company. ... Equitable remedies, such as an injunction or specific performance may be available to compel the controller whose personal legal responsibility is engaged to exercise his control in a particular way. But when we speak of piercing the corporate veil, we are not (or should not be) speaking of any of these situations, but only of those cases which are true exceptions to the rule in Salomon v A Salomon and Co Ltd [1897] AC 22, i.e. where a person who owns and controls a company is said in certain circumstances to be identified with it in law by virtue of that ownership and control.

 

The question is heavily burdened by authority, much of it characterised by incautious dicta and inadequate reasoning.

No kidding. Indeed, yours truly has argued that veil piercing is such a badly broken doctrine that it should be abolished. 

 

Anyway, back to Prest. The opinion goes on to discuss a number of UK precedents, from which it concludes:

In my view, the principle that the court may be justified in piercing the corporate veil if a company's separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities. It is true that most of the statements of principle in the authorities are obiter, because the corporate veil was not pierced. It is also true that most cases in which the corporate veil was pierced could have been decided on other grounds. But the consensus that there are circumstances in which the court may pierce the corporate veil is impressive. I would not for my part be willing to explain that consensus out of existence.

...

 

The difficulty is to identify what is a relevant wrongdoing. References to a "facade" or "sham" beg too many questions to provide a satisfactory answer. It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the "facade", but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement.

As this analysis suggests to U.S. readers, veil piercing in the U.K. is quite different from that in the U.S. Todd Henderson and I discuss the differences between the two in our book Limited Liability: A Legal and Economic Analysis.

Although there are many reported cases, the reasoning is even more typically ad hoc than the American experience. Commentators attribute this approach to the fact that the English courts were reluctant to invent a new doctrine from whole cloth, preferring instead to use existing precedents from agency law or the law of trusts to fashion remedies for frustrated creditors. ...

The case of Adams v. Cape Industries plc (1990) is widely cited as the death of expansive enterprise liability and veil piercing in Britain. ... The end result has been that veil piercing is now “a rarity under English law,” especially in tort cases, “[e]ven where the case for applying the doctrine may seem strong, as in the undercapitalized one-person company.”

As a U.S. court noted, there is a “key distinction in English law between using the corporate form to evade or conceal existing legal obligations or wrongs on the one hand, and using it to insulate oneself from future or contingent liabilities on the other.” In re Tyson, 433 B.R. 68, 94 (S.D.N.Y. 2010). Only the former could justify veil piercing.

As a result, we concluded that "British courts are more reluctant to pierce the veil or combine a corporate group than American courts." 

I'm inclined to think it would be fun to revisit this issue and compare US and UK law in more detail.

The chapter from which I'm drawing, by the way, has discussion of veil piercing in the law of most major economies around the world.

For more on veil piercing in the UK, I suggest tracking down Marc Moore, "A temple built on faulty foundations": piercing the corporate veil and the legacy of Salomon v Salomon, J.B.L. 2006, Mar, 180-203. It's on Westlaw under International Materials.

Greenwood: "The goal of liberalism should not be individual self-determination but the freedom to live together in peace, prosperity and justice"

I really enjoyed reading Daniel Greenwood's new article, which sits at an interesting intersection of political theory, Jewish law, and partnership law:

Liberal political theory has long relied on a metaphor of contract: autonomous adults coming together to agree, by unanimous consent, on the basic structure of a just society. But contract is a strange metaphor with which to explain society. Contract law is based on a morality of strangers acting at arms-length. In contrast, decent societies and the governments they set for themselves must be based on a commitment of mutual responsibility. What makes us fellow citizens—fellows of any variety—is accepting that we are all in this together.

Jewish legal and midrashic traditions can be a useful corrective to the atomistic metaphors underlying most liberal political theory. The Jewish tradition has never had the luxury of imagining self-sufficiency, that government itself is the primary source of unjust power, or that individuals could be free in a state of nature. We too can no longer ignore that a solitary human being is a dead human being, that we need government to make spaces in which we can be free from want, resist oppression by non-governmental power, reverse the destruction of the natural commons on which we depend, and engage in the communal activities that make life meaningful.

The partnership metaphor, I argue, can make visible the mutual concern and collective effort that must characterize decent and just governments in an age of economic challenges and ecological crises. The goal of liberalism should not be individual self-determination but the freedom to live together in peace, prosperity and justice.

Greenwood, Daniel J.H., Partnership, Democracy, and Self-Rule in Jewish Law (May 3, 2021). Touro Law Review, Vol. 36, No. 959, 2021, Available at SSRN: https://ssrn.com/abstract=3838904

SEC Chairman Gary Gensler is not being serious about what investors want

Bloomberg reports:

The SEC is preparing a plan for companies to report more information about their employees as it eyes new environmental, social, and governance disclosures, Chairman Gary Gensler said.

Gensler didn’t give specifics about the ESG proposal in remarks he made at a financial market regulation conference Thursday. But he said earlier this year that the agency is considering what investors want in areas such as workplace diversity.

The best data on what investors really want comes not from surveys (as evidenced by the disastrous performance of the polling industry in recent years, which has cast doubt "on all types of survey research"), but from what people actually do when given the opportunity to vote on shareholder proposals relating to ESG issues.

In 2018, Angelo Martinez of Equilar reported on the low rate of support: 

In 2020, according to a Gibson Dunn report, only two shareholder proposals relating to employment workplace diversity actually passes. The average vote was only 32% in favor. 

To be clear, my point is not that workplace diversity is undesirable. My point is only that the SEC's claim that the new disclosure mandates in the works are responsive to investor demand is simply false.

Properly understood, corporate law can't do squat about sustainability

The European Commission review of company law mentioned in the previous post prompted European corporate law scholars Florian Möslein and Karsten Engsig Sørensen to argue that "Company law can be designed in ways to address the climate change problem, as sustainability and company law interact closely with one other."

Although they argue they are carving out a "middle ground," which relies on "nudging," I remain deeply skeptical.

I think remains the definitive work on this issue remains Gordon Smith's essay The Dystopian Potential of Corporate Law, available at SSRN: https://ssrn.com/abstract=976742. As Gordon's abstract explained:

The community of corporate law scholars in the United States is fragmented. One group, heavily influenced by economic analysis of corporations, is exploring the merits of increasing shareholder power vis-a-vis directors. Another group, animated by concern for social justice, is challenging the traditional, shareholder-centric view of corporate law, arguing instead for a model of stakeholder governance. The current disagreement within corporate law is as fundamental as in any area of law, and the debate is more heated than at any time since the New Deal. 

This paper is part of a debate on the audacious question, Can Corporate Law Save the World? In the first part of the debate, Professor Kent Greenfield builds on his book, THE FAILURE OF CORPORATE LAW: FUNDAMENTAL FLAWS AND PROGRESSIVE POSSIBILITIES, offering a provocative critique of the status quo and arguing that corporate law matters to issues like the environment, human rights, and the labor question. 

In response, Professor Smith contends that corporate law does not matter in the way Professor Greenfield claims. Corporate law is the set of rules that defines the decision making structure of corporations, and reformers like Professor Greenfield have only two options for changing corporate decision making: changing the decision maker or changing the decision rule. More specifically, he focuses on board composition and shareholder primacy. Professor Smith argues that changes in corporate law cannot eradicate poverty or materially change existing distributions of wealth, except by impairing the creation of wealth. Changes in corporate law will not clean the environment. And changes in corporate law will not solve the labor question. Indeed, the only changes in corporate law that will have a substantial effect on such issues are changes that make the world worse, not better.

I remain convinced that Gordon's essay was the (not a, but the) drop the mic moment in this debate.

Scholars Call for Reflection on Sustainable Corporate Governance

Prominent corporate law experts Alex Edmans, Luca Enriques, Jesse Fried, Mark Roe, and Steen Thomsen have issued a short response to "the European Commission’s efforts to ensure that companies create long-term social value," which was signed by a slew of prominent scholars. I find myself in agreement with almost the whole thing and recommend reading it.

Some key takeaways:

• "Solving one problem may not require addressing the second. For example, lengthening a company’s horizon need not require overturning shareholder primacy;"
• "Solving one problem may exacerbate the second. For example, tying pay to stakeholder targets may lead to short-term behaviour to hit the targets;"
• "The policy debate has typically assumed a “fixed pie”, that shareholder value is at the expense of stakeholder value and so the former must be reduced for the latter to be increased. However, improvements to stakeholder value typically increase (long-term) shareholder value."
  • This is true, of course, but the interesting (and difficult) cases are the ones where a firm is faced with a true zero-sum problem in which either shareholders or stakeholders must lose.
  • I am proud to say that this point is now known as the "Bainbridge Hypothetical."
• "The bigger danger for stakeholder value is not shareholder capitalism but “managerial capitalism”, where unaccountable managers shrink the pie for both shareholders and stakeholders."

Revisiting the Contractarian Theory of the Firm

Three British scholars recently tackled the nexus of contracts a.k.a. contractarian theory of the corporation. I'm using it as a excuse to revisit some of my own work on contractarianism.

Gibbs, David and Gindis, David and Whayman, Derek, Not by Contract Alone: The Contractarian Theory of the Corporation and the Paradox of Implied Terms (January 22, 2021). European Business Organization Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3771451 or http://dx.doi.org/10.2139/ssrn.3771451

Specifically, we show that this role does not sit comfortably with the ‘strong form contractarian’ position, which demands a literal interpretation of the claim that the corporation is a nexus of contracts.

In contrast, I have argued that:

In a more important sense, ... the corporation has a nexus. After all, to say that the firm is a nexus is to imply the existence of a core or kernel capable of contracting. But kernels do not contract--people do. In other words, it does us no good to avoid reifying the firm by reifying the nexus at the center of the firm.

Stephen M. Bainbridge, The Board of Directors As Nexus of Contracts, 88 Iowa L. Rev. 1, 17 (2002). As I argue therein, "If the corporation has a nexus, however, where is it located? The Delaware code, like the corporate law of every other state, gives us a clear answer: the corporation's 'business and affairs . . . shall be managed by or under the direction of a board of directors.' Put simply, the board is the nexus." Id. at 25.

In any case, back to Gibbs et al.:

Strong-form contractarians (to whom we shall refer to simply as ‘contractarians’ in what follows) reject the suggestion that their use of the term ‘contract’ is too loose to correspond to the legal understanding of an actual, legally enforceable reciprocal promise or agreement, and claim that the contracts involved in corporate ventures are ‘real contracts’6 consisting of express or implied terms struck by real parties. When courts are called upon to imply missing contractual terms, contractarians argue, they do so with a wealth-maximization objective in mind. We show that a considerable extension of standard contract doctrine is necessary for this account to work and contend that courts will refuse to extend it as contractarians require, with the consequence that many gaps either cannot be filled or can only be filled by non-contractual doctrines.

Gibbs et al. thus assert that contractarians claim "that features of ‘corporateness’ have been, and therefore can be, ‘created by contract, supplemented perhaps by other common law devices such as trusts or agency.’" 

In contrast, I have staked out what I suppose might be called a weak nexus of contracts theory:

Many commentators have criticized the contractarian model on the ground, inter alia, that it is an incomplete theory of how people relate to one another within a firm.  If contractarianism claimed to be a valid description of economic reality, this argument might have some traction. In my view, however, contractarianism claims only to offer a richer metaphor than do traditional entity-based theories and, therefore, a more useful heuristic for understanding corporations. Put another way, I tell my classes that the nexus of contracts model is properly viewed as a metaphor rather than as a positive account of economic reality. I analogize contractarianism to Newtonian physics, which no longer credibly claims to be true, but still provides a simple model that adequately explains a large and important set of physical phenomena.

Contractarianism in the Business Associations Classroom: Kovacik v. Reed and the Allocation of Capital Losses in Service Partnerships, 34 Ga. L. Rev. 631, 644 (2000). As a result, I am dubious of strong claims that you could create a corporation purely by contract. To the contrary, I agree with Vice Chancellor Travis Laster, who observed that "that notwithstanding scholarly approaches such as the widely embraced view of the corporation as a nexus of contracts ..., the DGCL rests on a concept of the corporation that is grounded in a sovereign exercise of state authority: the chartering of a 'body corporate' that comes into existence on the date on which a certificate of incorporation becomes effective." Juul Labs, Inc. v. Grove, 238 A.3d 904, 914 n.7 (Del. Ch. 2020). Strikingly, however, VC Laster observes that he that he nevertheless regards the nexus of contracts model "as a helpful metaphor." Id. As, of course, do I.

Gibbs et al. further argue that:

The problem can be roughly stated as follows. Given that contracts are incomplete, whenever courts adjudicate contractual disputes, they attempt to fill the gaps using the doctrine of implied terms in order to enforce mutually agreed obligations. But giving effect to obligations by implication comes with the risk that the implied term may not have been truly consented to. This undermines the very basis of contractual liability, namely consent, and conflicts with the courts’ practical imperatives to maintain legal certainty and deter excessive litigation. Courts, as a result, will more often than not refrain from implying terms, even when this runs the risk of not holding parties to their bargains. While the imperative to hold parties to their bargains is rooted in consent, so is the imperative to refuse to imply terms. We call this antinomy the ‘paradox of implied terms’.

As the number of parties increases, the effects of this paradox multiply, inherently limiting contract law’s reach beyond two parties. This constraint limits the courts’ ability to build a nexus by implying third-party obligations by inferring, for example, a contract between its existing members and a putative new member. It follows that the vehicle of contract cannot create the complex set of multi-party obligations which constitute the corporate form. Conversely, in a true corporation, parties can be added to (or removed from) the nexus without the express or implied consent of all other parties in the nexus, and without affecting their liabilities. This is only possible because non-contractual doctrines, that is, doctrines that are not rooted in consent, are involved. This poses a significant challenge to contractarianism.

First, I don't find the issue of consent all that troubling, as explained in my Georgia article:

In the nexus of contracts model, partnership statutes and decisions can be thought of as a standard form contract voluntarily adopted—perhaps with modifications—by the partners. The point of a standard form contract, of course, is to reduce bargaining costs. Parties for whom the default rules are a good fit can take the default rules off the rack, without having to bargain over them. Parties for whom the default rules are inappropriate, in contrast, are free to bargain out of the default rules. I illustrate this point by telling my class the following parable: A while back I flew into LAX and schlepped out to a car rental lot. There was a huge line growing at least as fast as it was being served, so there were many impatient travelers behind me by the time I got to the front. The agent handed me a long and detailed standard form agreement. Did I bargain over the agreement’s terms? No, of course not. Did I even read the agreement? No, of course not. In this context, relying on a standard form contract significantly reduced the transaction costs that would have been associated with bargaining. 34 Geo. L. Rev. at 646.

And, as I have observed elsewhere:

Is a standard form contract any less of a contract just because it is offered on a take-it-or-leave-it basis, however? If the market is competitive, a party making a take-it-or-leave-it offer will set price and other terms that will lead to sales despite the absence of particularized negotiations.

Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U.L. Rev. 547, 589 (2003).

Second, I take issue with Gibbs et al.'s explication of hypothetical bargaining and gap filling. I don't think courts use the hypothetical bargain to supply party-specific rules to fill a specific gap in a specific corporation. Instead, I think they use it to come up with default rules applicable to all corporations. See, e.g., id. at 577 (arguing that "a shareholder wealth maximization norm [would] emerge from the bargain as the majoritarian default?").

Third, I note that in the US (by which, of course, I mean in Delaware) courts at least claim they're engaged in facilitating private ordering:

• "The DGCL is intentionally designed to provide directors and stockholders with flexible authority, permitting great discretion for private ordering and adaptation." Hollinger Intern., Inc. v. Black, 844 A.2d 1022, 1078 (Del. Ch. 2004), judgment entered, (Del. Ch. 2004), and aff'd, 872 A.2d 559 (Del. 2005).
• The DGCL is “an enabling statute that provides great flexibility for creating the capital structure of a Delaware corporation.” Shintom Co. v. Audiovox Corp., 888 A.2d 225, 227 (Del.2005)
• The DGCL is “a broadly enabling statute." In re Topps Co. S'holders Litig., 924 A.2d 951, 958 (Del. Ch.2007)
• The DGCL is “is widely regarded as the most flexible in the nation because it leaves the parties to the corporate contract (managers and stockholders) with great leeway to structure their relations, subject to relatively loose statutory constraints.” Jones Apparel Gp., Inc. v. Maxwell Shoe Co., 883 A.2d 837, 845 (Del.Ch.2004)
• “Unlike the corporation law of the nineteenth century, modern corporation law contains few mandatory terms; it is largely enabling in character.” Matter of Appraisal of Ford Hldgs., Inc. Preferred Stock, 698 A.2d 973, 976 (Del. Ch.1997).

Finally, I note with interest that the earliest reference to "nexus of contracts" I could find in Westlaw's law review database was Ronald J. Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 Stan. L. Rev. 819 (1981). It says something about the merits of contractarian theory that we're still arguing about it 40 years later.

Recommended Reading: Amanda Rose on ESG Disclosure

Rose, Amanda M., A Response to Calls for SEC-Mandated ESG Disclosure (March 16, 2021). Washington University Law Review, Vol. 98, forthcoming 2021, Available at SSRN: https://ssrn.com/abstract=3805814

This Article responds to recent proposals calling for the SEC to adopt a mandatory ESG-disclosure framework. It illustrates how the breadth and vagueness of these proposals obscures the important—and controversial—policy questions that would need to be addressed before the SEC could move forward on the proposals in a principled way. The questions raised include some of the most contested in the field of corporate and securities law—such as the value of interjurisdictional competition for corporate charters, the right way to conceptualize the purpose of the corporation, the proper allocation of managerial power as between the board and shareholders, and the social desirability of fraud-on-the-market class actions.

Putative "ESG" funds hold portfolio firms with worse track records for compliance with labor and environmental laws relative to portfolio firms held by non-ESG funds

Raghunandan, Aneesh and Rajgopal, Shivaram, Do ESG Funds Make Stakeholder-Friendly Investments? (April 14, 2021). Available at SSRN: https://ssrn.com/abstract=3826357 or http://dx.doi.org/10.2139/ssrn.3826357

Investment funds that claim to focus on socially responsible stocks have proliferated in recent times. In this paper, we verify whether ESG mutual funds actually invest in firms that have stakeholder-friendly track records. Using a comprehensive sample of self-labelled ESG mutual funds in the US from 2010 to 2018, we find that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years. Relative to other funds offered by the same asset managers in the same years, ESG funds hold stocks that are more likely to voluntarily disclose carbon emissions performance but also stocks with higher carbon emissions per unit of revenue. We find no evidence that these funds are buying firms based on expectations of future improvement and that increased monitoring by ESG funds does not correlate with any improvement in portfolio firms’ future compliance with stakeholder-centric regulations. Finally, ESG funds appear to underperform financially relative to other funds within the same asset manager and year and charge higher fees. Our findings suggest that socially responsible funds do not appear to follow through on proclamations of concerns for stakeholders.

Greenwashing. It's a thing.

My Advanced Corporation Law casebook gets an endorsement

One of the things I’ve enjoyed this semester: teaching a new course on Advanced Corporate Law to a wonderful group of @EmoryLaw students & using Stephen Bainbridge’s (@PrawfBainbridge @UCLA_Law) new Advanced Corporation Law textbook. Deep, balanced, current & highly recommended. pic.twitter.com/cMBItRdqLA

— George S. Georgiev (@GeorgievLaw) April 16, 2021

Recommended reading: Paul and Julia Mahoney Ask Will ESG Disclosure Enhance the Conflict of Interest Between Asset Managers and Clients?

Peter and Julia Mahoney have a new paper that raises the titular question:

ESG disclosure mandates that go beyond current requirements to disclose known company-specific material risks are unlikely to help, and may harm, the Main Street investors who are the SEC’s primary constituency. ... While the separation of ownership and control between corporate managers and shareholders has generated an enormous body of literature, the “new” separation of ownership and control between institutional investors and their beneficiaries has received less attention.

...

Proponents of ESG mandates might argue that the magnitude of the social problems justifies institutional investor activism even at some cost to beneficiaries. This is a corporate social responsibility argument once removed. In other words, it expresses the view that corporate managers owe a duty to act in socially responsible ways and therefore asset managers should pressure their portfolio companies to do so.

The argument against delegating the solutions to social problems to asset managers rather than the political process turns on issues of competence, legitimacy, and conflicts of interest. Shareholder primacy is in large measure a rule about the allocation of responsibility in a market-oriented democratic society. Law and regulation impose constraints on corporate and asset managers, permitting them to act, within the constraints, as faithful agents of their principals while still serving society’s interests as mediated through the political process. Asset managers are not selected on the same basis as political leaders and have neither the skills nor democratic legitimacy to make the sensitive tradeoffs necessary to craft public policy. In practice, managers’ appeals to the interests of other constituencies have often been self-interested.

I think the Mahoneys are right in suggesting that the conflict between asset managers and their customers is an important and understudied one. As I briefly noted in my book Corporate Governance after the Financial Crisis:

If the separation of ownership and control is a problem in search of a solution, encouraging institutional investors to take an active corporate governance role simply moves the problem back a step: it does not solve it.

See also my article, Stephen M. Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLA L. Rev. 601, 636 n.89 (2006):

The analysis to this point suggests that the costs of institutional investor activism likely outweigh any benefits such activism may confer with respect to redressing the principal-agent problem. Even if one assumes that the cost-benefit analysis comes out the other way, however, it should be noted that institutional investor activism does not solve the principal-agent problem but rather merely relocates its locus.

The vast majority of large institutional investors manage the pooled savings of small individual investors. From a governance perspective, there is little to distinguish such institutions from corporations. The holders of investment company shares, for example, have no more control over the election of company trustees than they do over the election of corporate directors. Accordingly, fund shareholders exhibit the same rational apathy as corporate shareholders. Kathryn McGrath, a former SEC mutual fund regulator, observes: “A lot of shareholders take ye olde proxy and throw it in the trash.” Karen Blumental, Fidelity Sets Vote on Scope of Investments, Wall St. J., Dec. 8, 1994, at C1. The proxy system thus “costs shareholders money for rights they don't seem interested in exercising.” Id. Indeed, “Ms. McGrath concedes that she herself often tosses a proxy for a personal investment onto a ‘to-do pile’ where ‘I don't get around to reading it, or when I do, the deadline has passed.”’ Id. Nor do the holders of such shares have any greater access to information about their holdings, or ability to monitor those who manage their holdings, than do corporate shareholders. Worse yet, although an individual investor can always abide by the “Wall Street” Rule with respect to corporate stock, he cannot do so with respect to such investments as an involuntary, contributory pension plan.

For beneficiaries of union and state and local government employee pension funds, the problem is particularly pronounced. As we have seen, those who manage such funds may often put their personal or political agendas ahead of the interests of the fund's beneficiaries. Accordingly, it is not particularly surprising that pension funds subject to direct political control tend to have poor financial results. Romano, supra note 75, at 825.

Their article goes into much greater depth, of course.

Does Religiosity Affect Corporate Governance?

An interesting new paper finds:

Religious directors or directors with a higher sense of purpose hold a longer-term perspective on CEO performance evaluation: Compared with their non-religious counterparts, religious monitoring-intensive directors are significantly less likely to change their company’s CEO based on the company’s performance over a period of one year. However, for the more extended period of 2 years, this difference in likelihood of CEO turnover significantly switches direction, consistent with the “higher purpose, incentives, and economic performance” theory by Thakor and Quinn (2020), suggesting that believers in higher purpose will tend to hold a longer-term perspective.

Religious directors or directors with a higher sense of purpose also improve the typical benefits of intense board oversight, especially when they have more power and influence on the board: We also find that religious monitoring-intensive directors further reduce earnings management, on average, all else being equal. Similar evidence that they tend to reduce excess total CEO compensation further, though ordinarily not as strong, becomes highly significant when the lead independent director or a majority of the principal monitoring committee chairs are also religious, consistent with Wabara (2021).

Independent directors’ religiosity or sense of higher purpose seems to matter more than that of CEOs for firms’ earnings quality: We also find that the monitoring-intensive directors’ religiosity is more economically significant than the CEOs’ for the quality of the earnings information in firms’ financial reports.

Why did CEOs wake?

In April 2021, Yale Management School Dean Jeffrey Sonnenfeld convened 90 CEOs of prominent US corporations to create a common front against newly enacted voting legislation in Georgia and proposed similar legislation in Texas and elsewhere. Dean Sonnenfeld characterized the gathering as the start of a new “spiritual awakening,” akin to the historic Great Awakenings, although critics might suggest this awakening embraces progressive politics rather than the Gospel as holy writ.

As Dean Sonnenfeld pointed out, this is not the first time CEOs of large corporations have intervened in political controversies in recent years. There was the North Carolina “bathroom bill” brawl in 2016, opposition to various Trump actions on immigration and climate change, the Parkland shooting in 2018, and so on. Although some of the participating CEOs protest that their actions were nonpartisan, critics have pointed out that in every case the CEOs came down on the progressive side of the dispute.

To be sure, business and politics have been intertwined in the USA since the Founding. Two hundred years ago the mere act of forming a corporation required the legislature to pass a statute creating that corporation’s charter, which generated much corruption. In the subsequent decades, businesses routinely lobbied government for special favors. Today, annual business lobbying expenditures approaches $3 billion.

So what makes CEO activism different? Traditional business engagement with government was typically directed at the company’s bottom line. It sought a contract to provide the government with goods or services, to obtain tax breaks, or to derail costly regulation.

In contrast, woke CEO activism typically is unrelated to the company’s bottom line. Indeed, it often negatively impacts the bottom line. As The Economist recently reported, when Walmart banned sales of certain types of ammunition in response to a mass shooting, “footfall in Walmart stores in Republican districts fell more sharply as a result than it rose in Democratic ones.”

So why are CEOs plunging into social activism? Some claim that CEOs are responding to perceived consumer and labor demand. In particular, millennials apparently prefer to work for and purchase from companies that are perceived as socially and environmentally responsible. Accordingly, there is an increasingly widely held view in the business community that to attract Millennial and Generation Z workers and customers, companies must project an image as social justice activists. Nike’s embrace of Colin Kaepernick is but the most obvious example of this phenomenon.

Alternatively, some argue that the CEOs may be trying to head off regulation by progressive politicians. As Wall Street Journal columnist David Benoit observed, “Democratic presidential candidate Elizabeth Warren has argued that the primacy of shareholder returns has worsened economic inequality, enriching wealthy investors at the expense of workers.” With the mainstream of the Democratic Party seemingly moving in Warren’s direction on business and finance issues, CEOs may hope that a voluntary embrace of corporate social responsibility platitudes would help them fend off more intrusive regulation.

Both of those factors likely explain at least part of what’s going on, but there is another explanation that suggests a much more profound—and potentially permanent—change taking place.

What we’re seeing is the culmination of what Christopher Lasch called The Revolt of the Elites. In his 1995 classic, Lasch identified an emergent split between what he called the New Elites and the rest of society. The changes Lasch spotted became trends that accelerated in subsequent years. In particular, Lasch explained that “the new elites . . . regard the masses with mingled scorn and apprehension.”  They dismissed the masses’ values as “mindless patriotism, religious fundamentalism, racism, homophobia, and retrograde views of women.”  This tension was perhaps nowhere more pronounced than with respect to religion. When Lasch wrote over two decades ago, he opined that “[a] skeptical, iconoclastic state of mind is one of the distinguishing characteristics of the knowledge classes. . . .  The elites’ attitude to religion ranges from indifference to active hostility.”

If anything, today’s elites have become even more hostile to religious values. As Samuel Gregg observes, the Davos Man’s moral creed is “a mélange of social liberalism, environmentalism, and a new order of a borderless world. . . . [R]eligion is considered the refuge of fanatics and anyone stupid enough to be skeptical of gender ideology and techno-utopianism.”

A quarter-century later, Lasch’s new elites have risen to the top of corporate hierarchies. They brought their values into the C-suite. CEOs increasingly reflect the values of the Blue state coastal bubbles in which they are embedded, especially on environmental and social issues. No Fortune 100 CEOs contributed to Donald Trump’s 2016 presidential campaign, for example, but eleven gave to Hillary Clinton. More generally, “liberal groups accounted for eight of the top ten ideological causes of the ultra-rich, and seven of the ten congressional candidates most dependent on money from such people were Democrats.” Even one of the progressive movement’s favorite whipping boys—David Koch—publicly self-identifies as “a social liberal.”

As a result, as a Slate essay observed, “Fortune 500 companies today are socially liberal, especially on areas surrounding diversity, gay rights, and immigration; they are unabashedly in favor of free trade and globalization, express concern about climate change, and embrace renewable energy.” In doing so, they are simply reflecting the changing values of their CEOs.

All of which suggests that the elites who control America’s largest corporations are likely to remain some the primary culprits in the assault on America’s national and cultural identity.