Alan Palmiter has a wonderful new paper out, which I liked immensely. Corporate Governance as Moral Psychology (May 6, 2017). Washington and Lee Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2964250:
This essay — part of a Washington & Lee symposium on Corporate Law, Governance, and Purpose — advances a simple thesis: corporate governance is best seen not as a subset of economics or even law, but instead as a subset of moral psychology.
Recent research in the nascent field of moral psychology suggests that we humans are not rational beings, particularly when we act in social and political settings. Our decisions (moral judgments) arise instantly and instinctively in our subconscious, out of conscious view. We rationalize our moral decisions — whether to feel compassion toward another who is harmed, to desire freedom in the face of coercion, or to honor those matters we consider sacred — after we have made the decision. We layer on a veneer of rationality, to reassure ourselves of our own moral integrity and to signal our moral values to like-minded others in our group. This is particularly so when we operate in the “super-organism” that is the corporation, where specialized roles have led to almost unparalleled human cooperation.
Thus, the decision-making and actions that arise from the shareholder-management relationship are best understood as the product not of rational economic incentives or prescriptive legal norms, but instead moral values. On questions of right and wrong in the corporation, the decisions by shareholders and managers, like those of other human actors, are essentially emotive and instinctive. The justifications offered for their choices — whether resting on shareholder primacy, team production, board primacy, or even corporate social responsibility — are after-the-fact rationalizations, not reasoned thinking.
In the spirit of the symposium honoring the work of David Millon and Lyman Johnson, the Essay seeks to apply these insights to a stylized corporate morality tale — namely, whether corporate directors should move a company’s possibly unhealthful manufacturing offshore. The story exposes a full range of moral values: compassion, fairness, freedom, loyalty, order, and sanctity. And, extrapolating the moral vectors implicit in their recent writings on corporate governance, the Essay identifies David as a “progressive corporate scholar” (with some libertarian leanings) and Lyman as a “conservative corporate scholar.”
Here's the hypothetical:
Management of a large multinational corporation recommends to the company’s board of directors that the board approve a move of the company’s manufacturing facilities from the United States to Ruranesia. Management has learned of preliminary medical studies suggesting that a chemical used in the company’s manufacturing process is a carcinogen. To avoid potential trouble with OSHA and liability to exposed workers, management says that the company can take advantage of the more lax workplace standards of Ruranesia. Manufacturing costs will also be lower in Ruranesia. The directors approve the move, citing corporate profits as their reason.
This hypothetical wonderfully captures for me the difference between corporate governance and corporate law.
I am using corporate governance here as a shorthand way of expressing the question: What should the directors of the "large multinational corporation" (let's call it LMC hereinafter) do?
I am using corporate law here as a shorthand way of asking whether shareholders should be able to successfully prosecute a lawsuit for breach of fiduciary duty against the directors. (At the outset, let's agree that this is a pure duty of care case. There appears to be no self-dealing or other forms of disloyalty here, nor does there appear to be any bad faith.)
If I were a director of LMC, I would have voted to keep the US plant open and spend the necessary funds to ensure that the plant can be operated safely.
According to Alan,"studies and experiments have revealed that our moral judgments and discourse arise from moral matrices that mix and match at least six fundamental moral alues that can be expressed as opposites, each along a separate axis:"
- care / harm
- fairness / cheating
- liberty / oppression
- loyalty / betrayal
- authority / subversion
- sanctity / degradation
He continues:
If I were asked what's the right thing to do in this hypothetical, the values that would drive that decision are solidarity with labor (believe it or not) and solidarity with my fellow Americans (believe it or not). Accordingly, keep the work in the USA and make it safe. I'll leave it to Alan to figure out where a nationalist populism informed by Catholic social thought falls in the various matrices.
But now let's turn to the question of what the law ought to be. Regular readers will know by now what I think the law ought to be, of course:
- The legal standard of conduct is that directors are to sustainably maximize shareholder wealth over such time period as the directors select in the exercise of their business judgment.
- In the absence of fraud, waste, disloyalty, or bad faith, however, the business judgment rule should preclude courts from reviewing the merits of board decisions. So in Alan's hypothetical, I don't care whether the board decides to move the plant and leave it unsafe, move the plant and sacrifice some profit to make it safe, keep it in the USA and do nothing (which would sacrifice some profit), or keep the plant in the USA and sacrifice a fair bit of profit to make it safe. In any of those cases, the business judgment rule should preclude judicial review. A shareholder suit challenging any of those decisions should eb bounced out of court on a motion to dismiss and, maybe, with Rule 11 sanctions thrown in for good measure.
For a relatively brief summation of the argument for proposition #1, go here. Also, for the argument that making corporate social responsibility the law won't work, go here. For a brief summation of the argument for proposition # 2, go here. For a selected bibliography of law review articles by yours truly on the law of corporate social responsibility, go here.
If forced to choose between them, I'd pick # 2.
Why?
In thinking about corporate law, I'm not persuaded that my own thinking is premised on moral psychology or, perhaps more precisely, I'm not persuaded it fits neatly into Alan's 6 opposing pairs.
My thinking starts with two things I tell my students every year:
I tell my students about Nicholas Murray Butler, president of Columbia University and winner of the Nobel Peace Prize, who wrote that: “The limited liability corporation is the greatest single discovery of modern times. Even steam and electricity are less important than the limited liability company.”
I tell them about journalists John Micklethwait and Adrian Wooldridge, whose magnificent history, The Company, contends that the corporation is “the basis of the prosperity of the West and the best hope for the future of the rest of the world.”
I firmly believe that what makes this wonderful thing we call the corporation work is the primacy of the board of directors.
And I firmly believe that judicial deference to the board as expressed in the business judgment rule is an essential element of director primacy.
In sum, corporations promote wealth and liberty (not all of them and not all of the time, but on balance and as compared to every other means of organizing economic production man has tried). Those are good things. Director primacy makes corporations work better, thereby producing more wealth and greater freedom. Therefore director primacy is a good thing.
Is that moral psychology, economics, politics, or religion? Obviously, it slots into the liberty value but where does wealth fit?
