Yesterday, I had the pleasure of being on a panel with my friend Elizabeth Pollman (Penn) moderated by my friend/coauthor Todd Henderson (Chicago) on the topic Corporate Social Responsibility Revisited, which was part of the Federalist Society’s 23rd Annual Faculty Conference. It was a lot of fun and I think we did a good job of respectfully engaging across differences of opinion.
Herewith my opening remarks:
I know it’s a cliché, but I’ll start with Milton Friedman anyway. As I’m sure you all know, he famously argued that: “The Social Responsibility of Business is to Increase Its Profits.” Friedman’s argument long has been controversial, but it is under especially potent attack these days. From Occupy Wall Street to Senator Elizabeth Warren to Larry Fink, CSR has growing numbers of prominent advocates.
One of the advantages of the shareholder wealth maximization is that it gives clear answers to otherwise difficult questions. Suppose that the board of directors is considering closing an obsolete plant. The closing will harm the plant's workers and the local community, but will benefit shareholders, creditors, employees at a more modern plant to which the work previously performed at the old plant is transferred, and communities around the modern plant. Assume that the latter groups cannot gain except at the former groups' expense. By what standard should the board make the decision? Shareholder wealth maximization provides a clear answer—close the plant.
Once the directors are allowed—or, required—to deviate from shareholder wealth maximization, however, they must inevitably turn to indeterminate standards balancing the interests of multiple parties.
Standards that require the directors to balance the interests of multiple constituencies, shading between them from case to case, deprive directors of the critical ability to determine ex ante whether their behavior comports with the law's demands, raising the transaction costs of corporate governance. The conflict of interest rules governing the legal profession provide a useful analogy. Despite many years of refinement, these rules are still widely viewed as inadequate, vague, and inconsistent—hardly the stuff of which certainty and predictability are made.
Absent clear standards, moreover, directors will be tempted to pursue their own self-interest. Directors who are responsible to everyone are accountable to no one. In the foregoing hypothetical, for example, if the board's interests favor keeping the plant open, we can expect the board to at least lean in that direction. The plant likely will stay open, with the decision being justified by reference to the impact of a closing on the plant's workers and the local community. In contrast, if directors' interests are served by closing the plant, the plant will likely close, with the decision being justified by concern for the firm's shareholders, creditors, and other benefited constituencies.
The business community used to widely acknowledge that their obligations ultimately run solely to shareholders. In recent years, however, we have seen the rise of woke capitalism. Most notably, of course, is the Business Roundtable’s 2019 statement on corporate purpose.
What do we make of that statement a year and half later?
Some of the signatories are themselves social justice warriors. Oligarchs like Salesforce.com CEO Marc Benioff, for example, promote “social activism among American chief executives.” A woke CEO who puts his or her personal policy preferences ahead of shareholder wealth ought to be slammed by the markets or their boards, but so far they seem to have gotten away with it.
Some contend that the BRT leaders were 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, but even such heartland companies as Walmart are embracing socially progressive stances, despite the risk of alienating their Red State customer base.
There is no doubt that a few very powerful investors, especially the big three institutional investors, have embraced woke capitalism. Institutional investors long have offered funds that focus on corporations perceived as socially responsible, which generally has been understood to mean companies pursuing progressive goals. A growing number of major institutional investors, however, have embraced social activism in support of progressive goals with respect to all of the funds they manage. BlackRock, for example, encourages companies to pursue excellence in environmental and social, as well as governance, areas. BlackRock CEO Laurence Fink sent a letter in 2018 to CEOs of the firm’s portfolio companies, in which he posited that companies need to be responsive to stakeholders, including consumers and communities, as well as investors, and pursue environmental, social, and governance goals to achieve “sustainable growth.” But this simply pushes the question further up the corporate finance food chain, since it fails to explain why investment fund managers like Fink are pursuing that agenda.
Some speculated that the BRT might have been trying to head off regulation by progressive politicians. As Wall Street Journal columnist David Benoit has observed back during the 2020 primaries, “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, the BRT’s members may have hoped that a voluntary—and perhaps intentionally ambiguous—embrace of corporate social responsibility platitudes would help them fend off more intrusive regulation in the event of a Democratic presidential victory in 2020. If so, it was a good bet, since they now have to deal with Democrats running both ends of Pennsylvania Avenue.
In sum, somewhere Milton Friedman is spinning in his grave.
. As I've often said, I love the VSI series. It's filling in all the gaps in my education. The book description for this 144 page text reports that:
, the problem is that inherent authority is so formless that it could gradually swallow the entire area of authority. The Restatement (Third) dropped the phrase “inherent agency power.” Instead, it offers a revised and broader version of apparent authority, making clear that conduct such as placing an agent in a position of authority can create apparent authority to do what is customary. To deal with cases like Watteau, the Restatement adopts a new concept called “estoppel of an undisclosed principal.”
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