In the preceding post, I discussed at length why I reject the tenets of the corporate social responsibility canard. Really, however, even a post of that length cannot do the subject justice. For more detailed analyses of the problem by yours truly, see:
In Defense of the Shareholder Wealth Maximization Norm
This essay, "In Defense of the Shareholder Wealth Maximization Norm, appeared in the Symposium on New Directions in Corporate Law published in volume 50 of the Washington & Lee Law Review. This essay was written as a reply to an article in the same symposium by Professor Ronald M. Green - "Shareholders as Stakeholders: Changing Metaphors of Corporate Governance," 50 Wash. & Lee. L. Rev. 1409 (1993) - in which Professor Green criticized the dominant view of corporate governance, according to which directors have a fiduciary duty to maximize shareholder wealth. In sharp contrast, this essay argues that the principle of shareholder wealth maximization is both a valid positive account of corporate law and also a legitimate normative proposition.
The essay is grounded in a contractarian approach to corporate governance. The essay begins by observing that in the nexus of contracts theory the concept of ownership goes out the window, along with its associated economic and ethical baggage. Consequently, the traditional justification for shareholder wealth maximization - i.e., that shareholders own the corporation - is unavailing. There is a considerable difference between showing that the traditional private property model is inadequate, however, and showing that we should adopt a new decisionmaking norm to which corporate officers and directors must conform their behavior.
The essay then identifies and critiques the two principal normative arguments running through Professor Green's article. First, Green treats the limited liability rule as a privilege conferred by society, in return for which society can demand socially responsible corporate behavior. My essay points out that this is little more than a revival of the long-dead concession theory of corporate governance. Second, Green contends that limited liability is a mechanism through which shareholders harm nonshareholders by externalizing certain costs onto them. Although this is a more substantial argument, my essay contends that it is not persuasive. Although limited liability does permit such externalities, Green's proposed solution - i.e., allowing/requiring directors to consider the effects of their decisions on nonshareholder constituencies of the corporation - is highly flawed. Such a multi-constituency fiduciary duty would be unworkable, at best, and would significantly increase the agency costs inherent in the separation of ownership and control.
Much Ado about Little? Directors' Fiduciary Duties in the Vicinity of Insolvency
Where the contract between a corporation and one of its creditors is silent on some question, should the law invoke fiduciary duties as a gap filler? In general, the law has declined to do so. There is some precedent, however, for the proposition that directors of a corporation owe fiduciary duties to bondholders and other creditors once the firm is in the vicinity of insolvency.
Courts embracing the zone of insolvency doctrine have characterized the duties of directors as running to the corporate entity rather than any individual constituency. This approach is incoherent in practice and insupportable in theory. Courts should focus on whether the board has an obligation to give sole concern to the interests of a specific constituency of the corporation.
Concern that shareholders will gamble with the creditors' money is the principal argument for imposing a duty on the board running to creditors when the corporation is in the vicinity of insolvency. On close examination, however, this argument proves unpersuasive. It is director and manager opportunism, rather than strategic behavior by shareholders that is the real concern. Because bondholders and other creditors are better able to protect themselves against that risk than are shareholders, there is no justification for imposing such a duty.
This article also argues that the zone debate is much ado about very little. The only cases in which the zone of insolvency debate matters are those to which the business judgment rule does not apply, shareholder and creditor interests conflict, and a recovery could go to directly to those who have standing to sue. In those cases, as this Article explains, there is a strong policy argument that creditors should be limited to whatever rights the contract provides or might be inferred from the implied covenant of good faith.
Catholic Social Thought and the Corporation
This brief essay explores Catholic social thought on corporate governance. Human dignity and freedom are central principles of Catholic social thought. This essay argues that preserving the economic freedom of corporations to pursue wealth is an essential part of effective means for achieving human freedom. To the extent prudential judgments about corporate regulation are required, the Church and civil society should strive towards a nuanced balancing of freedom and virtue.
The Bishops and the Corporate Stakeholder Debate
Prepared for a conference on faith-based investing practices, this essay critiques Catholic social teaching on corporate social responsibility. Specifically, the essay focuses on one of the policy recommendations made by the U.S. Bishops in their pastoral letter on economic justice, Economic Justice for All: Pastoral Letter on Catholic Social Teaching and the U.S. Economy. In that letter, the Bishops addressed the so-called stakeholder debate; i.e., whether decisionmaking by directors of public corporations should take into account the interests of corporate constituencies other than shareholders. This essay focuses on the Bishops' position as matter of public policy rather than as a matter of theology. The essay evaluates three ways in which the Bishops' position might be translated into public policy: (1) directors could be given nonreviewable discretion to make trade-offs between shareholder and stakeholder interests; (2) directors could be given reviewable discretion to make such trade-offs; or (3) directors could be required to make such trade-offs subject to judicial (or regulatory) oversight. None of these approaches is an improvement on current law; to the contrary, all are worse. The first approach would be toothless, the second would increase agency costs, and the third would either prove unworkable or pose an unwarranted threat to economic liberty (or both).
Interpreting Nonshareholder Constituency Statutes
Nonshareholder constituency statutes permit directors to consider the effects of their decisions on a variety of nonshareholder interests, such as employees, customers, suppliers, and local communities. Although highly controversial within the corporate law academy, such statutes are on the books in well over half the states and are likely to remain so for the foreseeable future. Because the statutes offer surprisingly little guidance to directors faced with corporate decisions or to courts faced with reviewing those decisions, however, courts urgently need a coherent interpretation of the statutes. But coherence alone is not enough; courts must also be faithful to the legislative intent behind the statutes. Courts cannot ignore the statutes, wish them away, or fairly interpret them as having no meaning or impact. This article therefore proposes an interpretation of nonshareholder constituency statutes that is faithful to the apparent legislative intent while also maintaining continuity with well-established principles of director fiduciary duties. The proposed approach distinguishes between two basic categories of director decisions: (i) operational issues, such as plant closings; and (ii) structural decisions, such as takeovers. The latter pose a much more serious conflict of interest for directors than do the former and therefore demand closer scrutiny. Accordingly, while arguing that director decisions with respect to operational matters should be conducted under the business judgment rule, the article argues that director decisions in the structural setting should be reviewed under a variant of the conditional business judgment rule developed by the Delaware supreme court in Unocal Corp. v. Mesa Petroleum Co.
The Shared Interests of Managers and Labor in Corporate Governance: A Comment on Strine
In his essay, Toward Common Sense and Common Ground?, Delaware Vice Chancellor Leo Strine seeks to identify common concerns of corporate management, labor, and shareholders. In so doing, Strine endorses a vision of the corporation as "a social institution that, albeit having the ultimate goal of producing profits for stockholders, also durably serves and exemplifies other societal values." Accordingly, he directs our attention to the prospects of creating "a corporate governance structure that better fosters [the corporation's stakeholders'] mutual interest in sustainable economic growth."
There is much that is admirable in Strine's analysis of what ails corporate governance and his proposals for reform, as well as much that is debatable. In this brief comment, I identify three aspects of Strine's analysis that strike me as underdeveloped. First, what do we mean when we call the corporation "a social institution"? Second, do managers and laborers really have common interests threatened by shareholders? Finally, even if Strine's search for common ground is a worthwhile project, is corporate law and governance the appropriate arena in which to find it? Taken together, these issues raise serious questions about the viability of Strine's project.
