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CST and the Law Seminar: Notes and Questions on Centesimus Annus and the Law

Our seminar on Catholic Social Thought and the Law began by reading Pope Leo XIII’s 1891 encyclical Rerum Novarum(notes here).

In 1991, Saint Pope John Paul II (JPII) issued Centesimus Annus(literally “hundredth year”) to commemorate the centennial of Rerum Novarum.

This week we tackled Centesimus Annus.

Context

The historical context of Centesimus Annus is quite significant. It was promulgated by the first non-Italian Pope in over 400 years. It was written by a Pole who had lived under both Nazism and Communism and, moreover, who was widely regarded as having been influentialin inspiring the revolutions of 1989 that brought down the Berlin Wall and restored democracy to eastern Europe. As Centesimus Annus was being written, moreover, the Soviet Union—the first and long most important Communist state—was crumbling and, it briefly seemed, evolving towards a liberal democratic state. Democratic capitalism seemed to be triumphant. The concerns about issues such as socialism and class struggle that had preoccupied Leo XIII thus seemed to have gone by the wayside.

Accordingly, JPII invites the reader not only to reflect on the meaning and legacy of Rerum Novarum but also to consider “the ‘new things’ which surround us and in which we find ourselves caught up, very different from the ‘new things’ which characterized the final decade of the last century.” (3)

JPII begins by describing a process by which labor had been commodified, which began with the Industrial Revolution and accelerated throughout the 19^thCentury. By 1891, this process had produced an endemic conflict between capital and labor, which in turn had inspired such developments as revolutionary socialism.

Interestingly for us as lawyers, JPII several times emphasizes the failure of the law to mediate the conflict between capital and labor:

“… the prevailing political theory of the time sought to promote total economic freedom by appropriate laws, or, conversely, by a deliberate lack of any intervention.” (§ 4)

“Pope [Leo XIII] and the Church with him were confronted, as was the civil community, by a society which was torn by a conflict all the more harsh and inhumane because it knew no rule or regulation.” (§ 5)

Recurring Themes

Given that Centesimus Annus was intended to provide a cohesive summation of the century-long development of CST, we see a number of themes that have recurred throughout the course.  It will be useful to reflect on how these themes have evolved and, as a result of that evolution, how Centesimus Annus both restates but also revises the positions staked out in Rerum Novarum.

1. The Church’s right and duty to speak to social conditions. In this regard, consider especially § 43. If the Church has “no models to present,” what is the function of the social teaching?
   1. Note also the discussion in § 54 of the relationship between the Church’s social mission and its spiritual mission.
   2. I liked one of my student’s answers to this question: “the Church’s job is advocate for the rights of humans—most specifically the dignity of all endowed by God—and to hold out the teaching of Christ as law which must be followed by the governments of the world in whatever more particularized form they take.”
2. The Church’s “theory of the State.” How does JPII’s theory of the state differ from that of Leo XIII? What type of government does Leo XIII appear to believe is best? What types does JPII seem to think is best?
   1. In § 47, JPII raises a concern that democracies “seem at times to have lost the ability to make decisions aimed at the common good.” Is that true of American democracy today and, if so, how do we regain the ability to do so?
   2. Sadly, I think one of my students speaks for many: “Frankly I have as of late been feeling apathetic and untrusting of both sides of the aisle, pretty much all forms of media, and anything I can’t verify with my own eyes. (Which is very little).”
3. The importance of human dignity, especially with respect to workers.
   1. One of my students asked; “Is the argument because we look like God and his son embodied a human then we must have dignity?”
      1. Let’s define what we mean by human dignity. I think the Compendium § 133 captures it:
         1. “In no case, therefore, is the human person to be manipulated for ends that are foreign to his own development”
         2. “The person cannot be a means for carrying out economic, social or political projects”
      2. Kant’s second formulation of the categorical imperative also speaks to this point:
         1. “Act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end, but always at the same time as an end.”
      3. CST teaches that humanity is “the only creature willed by God for itself.” Humans have been endowed with unique human capacities. “These capacities are, in turn, typically understood to be exercised by acting morally, that is, to act in line with a morality that concerns what one does to oneself, to other humans, or to God.” (Cite)
   2. If human dignity is not something with which we are endowed by a Creator, what is the source and basis of it?
4. The right of private property.
5. Human rights more broadly. What is striking about the discussion (§§ 6-9) is the relative weighting given property rights versus the rights of workers.
6. The importance of work and the temptations of wealth. But note how the Church’s understanding of wealth and work evolved from the essentially agrarian vision that underlies Rerum Novarum to the industrialized vision that informs Centesimus Annus. (E.g., §§ 31-32)

CST, Capitalism, Socialism, and Culture

The morality of capitalism has been a recurring theme in CST. Michael Novak connects the historical context of Centesimus Annus to that debate by observing that:

By section 42, the Holy Father considers the consequences of that collapse and asks, “After the collapse of socialism, should we recommend capitalism to the bishops of the rest of the world?” Here again, the Holy Father says, “That depends on what you mean by capitalism,” and he makes a very astute separation between the political, the economic, and the moral/cultural components of the free society. He offers a unified vision of how the three relate to one another. He then proceeds to make a cultural critique of the existing order, and reveals an ecology of the free society–a moral ecology–which I think opens up the battle ground of the future.

What is that unified vision?

In § 12, JPII opines that:

… the fundamental error of socialism is anthropological in nature. Socialism considers the individual person simply as an element, a molecule within the social organism, so that the good of the individual is completely subordinated to the functioning of the socio-economic mechanism. Socialism likewise maintains that the good of the individual can be realized without reference to his free choice, to the unique and exclusive responsibility which he exercises in the face of good or evil. Man is thus reduced to a series of social relationships, and the concept of the person as the autonomous subject of moral decision disappears, the very subject whose decisions build the social order. From this mistaken conception of the person there arise both a distortion of law, which defines the sphere of the exercise of freedom, and an opposition to private property. A person who is deprived of something he can call "his own", and of the possibility of earning a living through his own initiative, comes to depend on the social machine and on those who control it. This makes it much more difficult for him to recognize his dignity as a person, and hinders progress towards the building up of an authentic human community.

How might US democratic socialists such as Bernie Sanders or Alexandria Ocasio-Cortez respond to that critique?

JPII also observes (§ 14):

Quadragesimo anno… stated that "if the class struggle abstains from enmities and mutual hatred, it gradually changes into an honest discussion of differences founded on a desire for justice".

Can CST contribute to changing American politics into “an honest discussion of differences founded on a desire for justice"?

Subsidiarity and Solidarity

JPII posits that the state must simultaneously embrace the principles of subsidiarity and solidarity. (E.g., §§ 15-16) How do those principles relate to law and policy?

Legal Applications

Corporate Social Responsibility

Compare and contrast this famous passage from Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919):

A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.

with § 35 of Centesimus Annus:

The Church acknowledges the legitimate role of profit as an indication that a business is functioning well. When a firm makes a profit, this means that productive factors have been properly employed and corresponding human needs have been duly satisfied. But profitability is not the only indicator of a firm's condition. It is possible for the financial accounts to be in order, and yet for the people — who make up the firm's most valuable asset — to be humiliated and their dignity offended. Besides being morally inadmissible, this will eventually have negative repercussions on the firm's economic efficiency. In fact, the purpose of a business firm is not simply to make a profit, but is to be found in its very existence as a community of persons who in various ways are endeavoring to satisfy their basic needs, and who form a particular group at the service of the whole of society. Profit is a regulator of the life of a business, but it is not the only one; other human and moral factors must also be considered which, in the long term, are at least equally important for the life of a business.

Can these views be reconciled?

Blue Laws

In McGowan v. Maryland, 366 U.S. 420 (1961), the U.S. Supreme Court upheld “the constitutional validity of Maryland criminal statutes, commonly known as Sunday Closing Laws or Sunday Blue Laws.” The Court explained that:

Starting in 1650, the Plymouth Colony proscribed servile work, unnecessary travelling, sports, and the sale of alcoholic beverages on the Lord's day and enacted laws concerning church attendance. The Massachusetts Bay Colony and the Connecticut and New Haven Colonies enacted similar prohibitions, some even earlier in the seventeenth century. The religious orientation of the colonial statutes was equally apparent. …

But, despite the strongly religious origin of these laws, beginning before the eighteenth century, nonreligious arguments for Sunday closing began to be heard more distinctly and the statutes began to lose some of their totally religious flavor. …

The proponents of Sunday closing legislation are no longer exclusively representatives of religious interests. Recent New Jersey Sunday legislation was supported by labor groups and trade associations …; modern English Sunday legislation was promoted by the National Federation of Grocers and supported by the National Chamber of Trade, the Drapers' Chamber of Trade, and the National Union of Shop Assistants. …

Throughout this century and longer, both the federal and state governments have oriented their activities very largely toward improvement of the health, safety, recreation and general well-being of our citizens. Numerous laws affecting public health, safety factors in industry, laws affecting hours and conditions of labor of women and children, week-end diversion at parks and beaches, and cultural activities of various kinds, now point the way toward the good life for all. Sunday Closing Laws, like those before us, have become part and parcel of this great governmental concern wholly apart from their original purposes or connotations. The present purpose and effect of most of them is to provide a uniform day of rest for all citizens; the fact that this day is Sunday, a day of particular significance for the dominant Christian sects, does not bar the State from achieving its secular goals. To say that the States cannot prescribe Sunday as a day of rest for these purposes solely because centuries ago such laws had their genesis in religion would give a constitutional interpretation of hostility to the public welfare rather than one of mere separation of church and State.

Businesses and consumers have criticized blue laws as infringements on their economic rights. Likewise, certain religious groups that observe a different Sabbath than Sunday have objected to blue laws as an infringement on their religious rights.

Using JPII’s analysis of workers’ rights as a basis, discuss whether workers should have a statutory right to at least one day a week of rest. Should we include law firm associates among the workers having such a right? That may seem like a facetious question, but take a moment to consider seriously whether the discussion of work at, for example, § 32 speaks to what your impending careers as lawyers. 

The Preferential Option for the Poor

What is the preferential option for the poor? (§ 11) What role does JPII assign the state in promoting it? How does JPII think the state should empower the poor? To what extent does the right of property (see Part IV) limit the state’s ability to advance the preferential option for the poor?

Consider the relevance of the preferential option and the right to property to current legal debates such as tax policy.

Slate magazine reports that:

One of Sen. Elizabeth Warren’s first proposals upon joining the 2020 presidential field was a wealth tax. Warren would impose an annual tax of 2 percent on family assets in excess of $50 million, which would increase to 3 percent for assets above $1 billion. Overall, this tax would hit 75,000 families in the country, who make up 0.01 percent of the population but hold 10 percent of the nation’s wealth.

Vox reports that:

In an interview that aired Sunday on 60 Minutes, America’s most widely covered new House member Alexandria Ocasio-Cortez (D-NY) floated the idea of a top marginal income tax rate as high as 70 percent as part of a plan to finance a “Green New Deal” that would aim to drastically curb America’s carbon dioxide emissions.

You are legislative counsel to a Catholic member of Congress. She asks for your advice as to whether CST as articulated by JPII suggests that she should support or oppose these proposals.

War

JPII write in § 52:

I myself, on the occasion of the recent tragic war in the Persian Gulf, repeated the cry: "Never again war!". No, never again war, which destroys the lives of innocent people, teaches how to kill, throws into upheaval even the lives of those who do the killing and leaves behind a trail of resentment and hatred, thus making it all the more difficult to find a just solution of the very problems which provoked the war.

Which calls to my mind this scene from Gandhi. How do you think JPII would answer the question of whether you can stop someone like Hitler without resorting to state violence?

Populism and Citizens United

I'm working on a project about corporate purpose and populism. I originally planned for it to include a section on Citizens United, but have decided that section needs to go. But having a place to publish work that has no where else to go has long been one of my main reasons for having a blog.

In my view, the case for Delaware’s rule of shareholder wealth maximization becomes even stronger when right-wing populists have significant political power. The populist contribution is not providing new theoretical constructs in the intellectual debate, but rather opening new political possibilities. As we shall see, one of the principle arguments in favor of Delaware’s rule is that the acknowledged externalities of corporate behavior are best addressed through general welfare legislation rather than via the fiduciary obligations of corporate directors.[1] Delaware Chief Justice Leo Strine and his coauthor Nicholas Walter contend that the U.S. Supreme Court’s Citizens United decision undermined that argument by changing the political dynamics in ways that strengthened corporate power.[2] Even if one accepts their argument,[3] however, a resurgent right-wing populism may provide alternative constraints on corporate political power sufficient to revitalize the argument for leaving regulation of corporate externalities to general welfare legislation.

A standard move in the corporate social responsibility debate by defenders of the shareholder wealth maximization norm is the claim that the legislative and “regulatory process [is] an adequate safeguard against corporate overreaching for non-stockholder constituencies and society generally.”[4] Various commentators, notably including Delaware Supreme Court Chief Justice Leo Strine, contend that a wave of corporate political spending unleashed by the controversial Citizens Uniteddecision[5]undermines that argument:

Because corporate wealth far exceeds that held directly by human beings, if corporations are able to act directly to influence who is elected to office, the laws and regulations in our society will increasingly tend to tolerate the imposition of greater externalities, because they will be enacted by politicians who have been elected in an expensive process in which money matters, and in which securing the support of non-human corporate money with a monocular focus on profit will be important to electoral competitiveness.[6]

I have elsewhere disagreed with their argument on several grounds. First, “much corporate political spending is likely to be defensive,”[7]being aimed at staving off additional regulation rather than eroding existing regulations.[8] Absent “a showing that the benefits of foregone regulations exceed their costs, there is no reason to assume that corporate political spending increases the extent to which corporations can externalize costs.”[9]

In addition, Strine and Walter fail to explore the implications of the fact that large corporations dominate corporate campaign spending. First, spending by such corporations is highly constrained by reputational considerations due to “the seriousness with which large corporations treat any potential threats to their goodwill arising from ... negative publicity” generated by unpopular contributions. Second, and more important, while Strine and Walter assume corporations use political spending exclusively to externalize the negative costs of their activities, the reality is that large corporations frequently support regulations that force corporations to internalize social costs. They do so because such regulation can create significant costs for smaller competitors and barriers to entry for startups. Because regulatory costs frequently do not scale, they are often borne disproportionately by small businesses and startups. This observation is not offered as a defense of corporate political spending, but solely as a critique of Strine and Walter’s assumption that corporate political spending is inevitably anti-regulation.[10]

The rise of right-wing populism as a viable political force strengthens the case against Strine and Walker’s Citizens United argument. Although the early Tea Party activists tended towards libertarian views on economic issues and regulation,[11] the right of center populist movement is evolving towards an increasingly anti-business stance. This sentiment may well find expression in a regulatory agenda analogous to the Southern Agrarian program. If so, the risk that Citizens United will permit corporations to externalize more costs will be further mitigated.

Memo to Cardinal Cupich and Archbishop Chaput--The Metropolitan Model is a Very Bad Idea

In February 2019, the Vatican held a Meeting on the Protection of Minors in the Church, which was a global gathering of Church leaders to discuss the sex abuse scandals.[1]The summit was never intended to be a legislative event that would result in specific reforms, but rather was described by Pope Francis as “a ‘catechesis’ on the problem of abuse aimed at bishops who do not understand the issue or what they should do in response to abuse.”[2]Not surprisingly, no new regulations or prohibitions emerged from the Meeting. Instead, Pope Francis’s concluding address announced that the Church would begin developing new legislation guided by eight principles.[3]The fifth of these principles is the one most pertinent for purposes of this article:

Strengthening and reviewing guidelines by Episcopal Conferences. In other words, reaffirming the need for bishops to be united in the application of parameters that serve as rules and not simply indications. Rules, not simply indications. No abuse should ever be covered up (as was often the case in the past) or not taken sufficiently seriously, since the covering up of abuses favours [sic] the spread of evil and adds a further level of scandal. Also and in particular, developing new and effective approaches for prevention in all institutions and in every sphere of ecclesial activity.[4]

This statement appears to have two implications of particular significant for present purposes. First, it suggests the Vatican may allow individual national conferences to develop their own rules as befits their local situation. Second, it also suggests that none of the proposals advanced herein—including those relating to discipline of bishops—has been foreclosed.

As the Meeting’s title suggests, the Pope and Vatican leaders appear to be focused exclusively on the problem of sexual abuse of minors. There was no discussion of the closely related problems of sexual abuse of vulnerable adults and consensual sexual relationships by priests with adults, both of which this article argues also must be addressed. On the other hand, nothing emerged from the Meeting to preclude national conferences from addressing that problem and the recommendations made herein with regard to them are therefore still valid.

Looking forward, one reform model likely to get serious consideration by the USCCB is the “Metropolitan Model” proposed by Cardinal Blase Cupich, Archbishop of Chicago, who is widely regarded as a close ally of Pope Francis.[5]The likelihood that the Metropolitan Model will end up being the official USCCB position is substantial, particularly because it is also supported by Archbishop Charles Chaput of Philadelphia, who is generally regarded as being a leader of the more conservative members of the Conference.[6]

The Metropolitan Model was presented to the by Cardinal Cupich, in remarks setting forth a number of principles that he believed should guide the Church as it reforms.[7]Of special relevance to the agenda proposed by this Article, Cardinal Cupich affirmed “that every member of the Church has an essential role in helping the Church to eliminate the horrific reality of clergy sexual abuse.”[8]The Cardinal’s Metropolitan Model therefore includes a role for the laity in all accountability processes,[9]which is consistent with the proposals made herein.

Of at least equal importance, Cardinal Cupich recognized “the systematic failures in holding clerics of all rank responsible” and the resulting need for “accountability within the college of bishops.”[10]He therefore proposed several specific reforms aimed directly at holding bishops accountable. In many respects, those proposals are consistent with the recommendations made by this article. For example, Cardinal Cupich proposed a prohibition of retaliation against the person reporting such an allegation should be adopted,[11]which would permit the sort of whistle blower protections proposed herein.

Cardinal Cupich’s proposed accountability mechanism, however, differs in some critical respects from the proposals made by this article. First, his proposals are limited to developing new mechanisms for holding bishops accountable.[12]This is a necessary but not sufficient reform. Instead, as this article suggests, the Church should undertake major reforms of the rules governing sexual misconduct at all levels and by all Church personnel.

Second, the Cardinal suggests that allegations of misconduct against a bishop be referred to the metropolitan of the accused bishop,[13]rather than to a national review board of the sort contemplated herein. The metropolitan’s powers also would be far more limited than those this article proposes granting to the national review board. The metropolitan would require approval from the Vatican before initiating an investigation.[14]Upon completion of the investigation, the metropolitan would forward his findings to the Vatican.[15]The final decision of whether to take disciplinary action and the nature of that discipline would rest with the Vatican.

Cardinal Cupich’s Metropolitan Model thus has a number of disadvantages when compared to the national review board proposed herein. First, in modern times the role of a metropolitan has been reduced to a virtual irrelevancy.[16]It therefore seems likely that many Church members are unfamiliar with the role and function of a metropolitan. The metropolitan model therefore may not do much to restore confidence in the Church.

Second, although the metropolitan model purportedly contemplates lay participation, it appears to contemplate the laity’s role being limited to experts who will act as assistants to the metropolitan.[17]The laity thus will continue to be denied a decision-making role in the accountability process. Instead, Cardinal Cupich’s proposal leaves decision-making power in the hands of those authorities that Church members trust least; namely, the bishops and the Vatican hierarchy.

Assigning primary responsibility for investigated claims against a bishop to that bishop’s metropolitan is especially problematic, because “metropolitan archbishops often have a lot of say in who becomes bishops in their province.”[18]Church members likely will lack confidence in the metropolitan’s ability to be objective with respect to someone who likely will be regarded as a protégé, friend, or ally of the metropolitan.[19]

The relationship between a metropolitan and his suffragan bishops becomes even more problematic when it is the metropolitan himself who is the accused. Recall that now defrocked Cardinal Theodore McCarrick served as a metropolitan twice, as Archbishop of Newark and then of Washington.[20]If Cardinal Cupich’s proposal had been in effect, one of McCarrick’s victims would have had to go outside the archdiocese and file a report with the senior suffragan bishop in the province, who would then be responsible for conducting the investigation. During much of the time McCarrick was Archbishop of Newark, the senior suffragan bishop for that province was Bishop Frank Rodimer of Paterson.[21]Rodimer reportedly shared a summer house with Father Peter Osinski, who was later convicted of having molested a young boy at that house over a seven-year period in the 1980s.[22]A civil suit alleged that Rodimer was negligent in failing to recognize the abuse, but the suit was settled.^[23]Rodimer apologized and also admitted to having mishandled other abuse cases in his diocese.^[24]Yet, it would have been Rodimer who would have been responsible for conducting any investigation of McCarrick.

Obviously not every senior suffragan bishop is as compromised as Rodimer would have been, but the mere possibility of such cases calls into question the validity of the Metropolitan Model. And even if the suffragan bishop is not compromised by himself being an abuser or enabler, why would the laity trust anyone who is a subordinate and likely protégé of the metropolitan to conduct a fair and impartial investigation? In the corporate world, after all, we don’t ask a Vice President to investigate allegations against the CEO. Instead, we ask the board of directors to do so.

In sum, as Charles Collins observes:

The biggest problem facing the [proposal] is the lack of trust people have in the bishops right now. The national review panel originally proposed by the U.S. bishops was an acknowledgement of this fact. The “metropolitan model” is, in effect, the bishops saying, “Don’t worry. You can trust us.”[25]

As Ronald Reagan famously observed, however, “trust but verify.” The proposals made in this article provide the necessary verification by taking the investigatory and disciplinary processes out of the hands of local bishops and assigning them to a national panel with lay members and are thus far more likely to restore confidence in the Church.

My latest column on reforming the Catholic Church's approach to sex abuse cases

My column Lay Review With Teeth: What (Didn’t) Happen at the Vatican’s Sexual Abuse Summit is up at Public Discourse. Here's the very short version:

The Vatican’s recent Meeting on the Protection of Minors in the Church failed to produce any new reforms. Cardinal Cupich’s proposal would leave decision-making power in the hands of those authorities that Church members trust least: the bishops and the Vatican hierarchy. Instead, the Church needs to take investigatory and disciplinary processes out of the hands of local bishops and assign them to a national panel with lay members.

But please go read the whole thing.

Individual shareholder proposal proponents are bad for your portfolio - So why doesn't the SEC limit the number of companies a gadfly can target per year?

I am reading with interest Nickolay Gantchev and Mariassunta Giannetti, The Costs and Benefits of Shareholder Democracy (March 1, 2019). Available at SSRN: https://ssrn.com/abstract=3269378

There's a lot here to unpack. But for me the most interesting finding is this:

As shareholders with a minimal investment in a company are allowed to submit proposals to be voted on at the company’s annual meeting, unskilled or uninformed shareholders are able to post a large number of proposals to many different companies.3As a result, a small number of individuals and other sponsors, such as associations and unions, submit an unusually large number of proposals every year. In contrast, investment companies submit very few proposals. Since the most active sponsors are unlikely to have organizational capabilities to analyze dozens of companies, many proposals fail to address the specific firm and its particular context, instead spreading the most recent corporate governance fads, such as the elimination of staggered boards (Cremers, Litov, and Sepe, 2017).

We show that the proposals submitted by the most active individual sponsors produce negative abnormal returns if they pass with a majority vote in the shareholder meeting. These proposals are also less likely to be implemented by management and, if implemented, produce negative long-term abnormal returns. Importantly, the remaining proposals appear to generate positive short- and long-term abnormal returns, especially if they are submitted by individual sponsors, indicating that low-cost shareholder activism may be beneficial because it reaches firms that are unlikely to be targeted by hedge fund activists.

The findings make a certain amount of sense. They suggest that proposals made by persons who are better informed have a more positive impact. In contrast, gadflies who use a fire hose to submit countless proposals every season have a negative impact.

Here's the top ten individual proponents:

And here's the effect they have on those unfortunate to hold stock in the targeted companies:

Panel A of Table 4 provides clear evidence that proposals submitted by the top 10 individual sponsors generate negative short- and long-term abnormal returns. Proposals submitted by other individual sponsors generate strongly positive abnormal returns both in the short- and the long-run, possibly because these sponsors target firms that are less likely to be targeted by hedge fund activism. In contrast, there is no evidence that the top 10 institutional sponsors generate short-term returns different from zero, even though non-top 10 institutional sponsors appear to generate negative long-term returns.

At present, Rule 14a-8 allows a proponent to submit only one proposal per company per year. But the rule allows a proponent to submit a proposal to an unlimited number of companies per year. As a result, gadflies can submit proposals to dozens of companies per year. Given the evidence that gadflies are hurting rather than harming the corporations they target, it's about time the SEC looked at capping the number of proposals folks like John Chevedden can make in a year.

Democracy is not an appropriate metaphor for corporate governance

There is an interesting new paper on shareholder proposals, about which I will have more to say in future posts. At the moment , however, this passage caught my eye:

Corporations are often compared to democracies (Gompers, Ishii, and Metrick, 2003), in which the ultimate authority rests with voters (shareholders). An advantage of well-working democracies is that virtually anyone can make proposals to change policies.

Gantchev, Nickolay and Giannetti, Mariassunta, The Costs and Benefits of Shareholder Democracy (March 1, 2019). SMU Cox School of Business Research Paper No. 18-35; Swedish House of Finance Research Paper No. 18-15; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 586/2018. Available at SSRN: https://ssrn.com/abstract=3269378 or http://dx.doi.org/10.2139/ssrn.3269378

To which I would respond:

Just as a large city cannot be run as a New England town meeting, a large corporation is a poor candidate for direct democracy. There simply are too many widely dispersed shareholders who have varying degrees of information about the company, differing goals and investment time horizons, and competing ideas about optimal business practices for their preferences to be aggregated efficiently. Accordingly, state corporate law traditionally has given primary decision-making authority to the board and the managers to whom the board properly delegates authority. As the Delaware General Corporation Law puts it, the “business and affairs” of a corporation “shall be managed by or under the direction of a board of directors.”

Stephen M. Bainbridge, Revitalizing SEC Rule 14a-8's Ordinary Business Exclusion: Preventing Shareholder Micromanagement by Proposal, 85 Fordham L. Rev. 705, 707–08 (2016).

Should shareholders be allowed to use Rule 14a-8 proposals to harm the company's business?

Kosmas Papadopoulos reports on early 2019 trends in shareholder proposals. As usual, left wing activists (including some who run funds that are supposed to be profit maximizing) are submitting reams of environmental and social proposals. One caught my eye:

The increasing costs of medication in the U.S. have raised concerns amongst consumers, politicians, and some shareholder proponents over many years, and the issue has been the focus of public debate and political discourse. In previous years, shareholder proposals seeking reporting and oversight on drug price increases either received low support levels (with median support of approximately 5 percent of votes cast) or received no-action letters by the SEC and were omitted from ballots. Shareholder proponents took a new approach in 2018, whereby five proposals asked companies to report on how they integrate risks related to public concerns about drug pricing in their executive compensation programs. The five 2018 proposals received a healthy median support level of 23 percent of votes cast, and proponents have filed at least nine such proposals so far in 2019.

Basically these so-called "investors" want the companies in which they typically have trivial investments to cut prices, reducing profits, and lowering all shareholders' returns. Why do we put up with this nonsense?

The basic problem is that the SEC and the courts have gutted the exemption under Rule 14a-8(i)(7) that allows exclusion of proposals that relate to ordinary business.

Is there a more ordinary business decision than deciding what price to charge for your goods?

And this new tactic of asking for a "report on how they integrate risks related to public concerns about drug pricing in their executive compensation programs" ought to be a nonstarter. As the Third Circuit made clear in Trinity Wall Street, proposal drafters are not allowed "to evade Rule 14a–8(i)(7)’s reach by styling their proposals as requesting board oversight or review.” Trinity Wall St. v. Wal-Mart Stores, Inc., 792 F.3d 323, 344 (3rd Cir.), cert. dismissed, 136 S. Ct. 499 (2015).

For more on the underlying problem and a proposed solution see my article Revitalizing SEC Rule 14a-8's Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal (March 29, 2016). Available at SSRN: https://ssrn.com/abstract=2750153

GMU's Antonin Scalia Law School gets transformative gift

Press release:

George Mason University’s Antonin Scalia Law School has received a gift of more than $50 million to support 13 new faculty chairs of approximately $4 million each. The bequest from the estate of the late Judge Allison M. Rouse and Mrs. Dorothy B. Rouse is the largest gift received in Mason’s history and will create a permanent endowment—the Allison and Dorothy Rouse Endowment.

To quote Brian Leiter, "Wow! And double wow!"

Recommended Reading on "Rogue Corporations"

I really liked this article by Justin Pace:

On February 28, 2018, Dick’s Sporting Goods announced that it would no longer sell long guns to 18- to 20-year-olds. On March 8, 2018, Dick’s was sued for violating the Michigan Elliott-Larsen Civil Rights Act, which prohibits discrimination on the basis of age in public accommodations. Dick’s and Walmart were also sued for violating Oregon’s ban on age discrimination. In addition to corporate liability under various state civil rights acts, directors of Dick’s and Walmart face the threat of suit for breaching their fiduciary duties—suits that may be much harder to defend than the more usual breach of fiduciary duty suit.

Delaware corporation law appears to have an underappreciated per se doctrine where the board directs the corporation to violate the law. A knowing violation of positive law is bad faith, which falls under the duty of loyalty. The business judgment rule will not apply and exculpation will not be available under Section 102(b)(7). The shareholders may not even need to show harm.

This paper examines the relevant legal doctrine but also takes a step back to consider what the rule should be from an ethical and a moral standpoint. To do so, rather than apply traditional corporate governance arguments, this paper considers broader moral theories. In addition to the utilitarian calculus that is so ubiquitous in corporate governance scholarship via the law and economics movement, this paper considers the liberalism of both John Rawls and Robert Nozick. But liberalism may seem less persuasive given the rise of illiberalism politically on both the American right and left. Given that, this paper also considers two non-liberal models: one a populist modification of Charles Taylor’s democratic communitarianism and the other Catholic Social Thought.

Unsurprisingly, the proper rule depends on which moral theory is applied. If that theory is liberalism (of either form covered), then a per se approach is troubling. Harm to the corporation must be shown, and either the Delaware legislature or the corporate players, depending on the form of liberalism, must acquiesce to a per se rule. Counterintuitively, it is the per se rule that runs counter to basic democratic norms. It gives the power to litigate in response to harm not to the party harmed but to a third party. Given the divergent results from applying different moral theories, and given the democratic difficulty, the Delaware legislature should clarify the standard. It will likely find that a harsh, per se standard is unjustified.

Pace, H. Justin, Rogue Corporations: Unlawful Corporate Conduct and Fiduciary Duty (February 11, 2019). Available at SSRN: https://ssrn.com/abstract=3332667 or http://dx.doi.org/10.2139/ssrn.3332667

Getting law students to think like their future business clients

Marcia Narine Weldon has some interesting ideas:

1. Teach students that business people care about tax implications, levels of control, mitigating risk,  and  legal liability, regardless of business type or size. Students must be able to advise through that lens or associate with others with appropriate specialties (such as tax) when needed. 
2. Add more compliance coursework that includes skills-based work. The GC who spoke indicated that it’s a number one concern for US public companies. Private companies and those considering an IPO also have significant compliance obligations. 
3. Encourage students to take courses in the business school. Sitting with business students will provide an entirely different perspective. Similarly, open more law school classes to business school students. 
4. Weave in risk management issues into the curriculum. 
5. Have as many business people speak to students as possible. Students will quickly learn how much the theory they learn does not correlate to the work that real-world clients face.  
6. Add more business clinics. This allows students to meet with budding entrepreneurs. Their readings on entity selection will come to life. 
7. Ensure that students have at least one course that deals with international issues. The business world is global and even the smallest businesses are often part of a global supply chain. 
8. Have panels at the law school with in house lawyers, lobbyists, and  lawyers who don’t work for firms so that students can get another perspective on practicing law. Have them focus specifically on the realities of dealing with business clients. 
9. Consider short courses on negotiation for business clients. Even better, have a full course on business negotiation. Most law schools focus on litigation, leaving students who want to practice transactional law underprepared. 
10. I know that law students are focused on ABA requirements and bar passage rates, but encourage students to take coursework on employment law, tax, cybesecurity/data protection,  intellectual property, and administrative law.  Even if students take short courses in these topics, they will have an enormous advantage when starting out. 
11. Ensure that transactional drafting courses include real world examples of risk allocation when discussing representations, warranties, and indemnities. 
12. Encourage students to read comment letters on regulations. That will show students what business people really care about when laws and regulations are in the drafting stage. 
13. Teach about emotional intelligence, resiliency, and grit. Lawyers aren’t usually known for their EQ but it’s important, especially when dealing with business owners. 

Diversity, Disclosure, and Self-Identification

Ann Lipton reports that "the Improving Corporate Governance Through Diversity Act of 2019 [has been] introduced by Representative Meeks in the House and Senator Menendez in the Senate:

These identical bills would require public companies to disclose “Data, based on voluntary self-identification, on the racial, ethnic, and gender composition of the board of directors of the issuer;  nominees for the board of directors of the issuer; and the executive officers of the issuer.”  The bills would also require disclosure of veteran status, and any policies for promoting diversity among boards of directors and corporate executive officers.  And then, oddly, the bills would require the Commission’s Director of the Office of Minority and Women Inclusion to publish “best practices with respect to compliance with this subsection,” in consultation with a newly established advisory council of issuers and investors (I say “oddly” because – they want to publish best practices for disclosing diversity information?  I’m guessing that’s not what they’re going for, but that’s how it’s drafted.)

In any event, these bills represent something of a challenge to the efficient markets hypothesis because in most (if not all) cases, the racial, gender, etc characteristics of board members, board nominees, and top officers is readily available to investors.  What may not be available, of course, are policies for promoting diversity, absent a rule requiring disclosure – which it turns out, we already have, at least with respect to director nominations.  See 17 CFR § 229.407(c)(2)(vi); see also Developments on Public Company Disclosures Regarding Board and Executive Diversity.

Of course, the reality is these “disclosure” rules are not about disclosure at all; they’re about substantively pressuring companies to diversify their management teams – which explains, I assume, the bit about “best practices”; the goal is to craft guidelines for best practices in hiring, not best practices in disclosure. 

I am not a fan of the existing diversity disclosure rule, but let's set that aside for a minute. Note that the proposal requires disclosure of diversity status based on "voluntary self-identification." So if I suddenly announce that I self-identify as a gay disabled Afro-Cuban female veteran is that what the company will report? I realize that the prevailing politically correct viewpoint is that identity is fluid and a social construct (or whatever) but I'm not sure the securities laws are an ideal place for it.

Updated version of Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies

I have had an updated version of my article posted: Bainbridge, Stephen Mark, Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies. UCLA School of Law, Public Law Research Paper No. 18-32. Available at SSRN: https://ssrn.com/abstract=3249236 or http://dx.doi.org/10.2139/ssrn.3249236

Events of the Summer 2018 brought the long running sexual abuse crisis in the Roman Catholic Church back onto the front pages, highlighting the role of diocesan bishops in covering up the scandal and enabling abusers. In response to these developments, the Church is again considering reforms to protect victims and punish abusers and enablers. This article proposes that the Church create a system for laity to anonymously report allegations, enact strong protections for whistleblowers, and impose a mandatory whistleblowing requirement on priests. As a 2018 Pennsylvania grand jury report demonstrates, however, the laity was reporting the abuse to the Church but the hierarchy buried those reports in secret files. The ultimate problem thus is not so much the lack of reporting, as it was the lack of action after the report. Accordingly, the article’s principal proposal is the creation of both diocesan and national disciplinary bodies led by expert lay members as the ultimate authorities in sex abuse cases. The proposal draws an analogy between these bodies and corporate audit committees and argues that a number of aspects of how audit committees function can be usefully adapted to the proposed review bodies.

This version of the article has been revised to take into account developments at the February 2019 Vatican summit on the sex abuse scandal. Those developments do not change the recommendations made herein.

Keywords: Roman Catholic Church, corporate governance, compliance, law and economics, credence good