Jamie Gamble spent most of his career as a partner at the law firm Simpson Thacher & Bartlett, which counts virtually every major company in the United States — including Facebook, General Motors, Google and JPMorgan Chase — among its clients. ...
Mr. Gamble has had an epiphany since retiring nearly a decade ago that is so damning of his former life that it is likely to give his ex-partners a case of agita.
He has concluded that corporate executives — the people who hired him and that his firm sought to protect — “are legally obligated to act like sociopaths.” ...
in the world of corporate lawyers — and the board governance experts among whom it is quietly getting attention — Mr. Gamble’s essay may be a watershed.
First, there is nothing here--nada, zilch, zip--that is new or novel. Coming up with the same bad ideas as thousands of other equally misguided folks hardly counts as an epiphany or as something that will keep any of us who work in corporate governance up nights.
For example, people have been calling corporations "sociopaths" for a long time. See, e.g., Joel Bakan, The Corporation: The Pathological Pursuit of Profit and Power (Free Press 2004) (arguing that the psychological definition of a sociopath applies to the corporation). But this argument is patently absurd. The corporation is a legal fiction. To paraphrase the first Baron Thurlow, who observed that the corporation has neither a soul to be damned nor a body to be kicked, the corporation has neither a mind to be psychoanalyzed not a brain to be diseased. Corporations are run by people, so if "they" act like sociopaths, it must be because they are run by sociopaths. It is estimated that psychopaths make up at most 1% of the population, so are we to believe they are disproportionately located in corporate C-suites?
Second, both Gamble and Sorkin grossly misstate the law. Sorkin writes:
It may be an oversimplification, but if they veer from seeking profits in the name of other stakeholders, shareholders may have a legal case against them.
That is not an oversimplification; it is a gross oversimplification. Absent proof that the directors were engaged in a breach of the duty of loyalty or certain takeover situations, the business judgment rule would preclude courts from reviewing director decisions. To be sure, that is not the purpose of the business judgment rule, but that is its effect. (For a discussion of the relationship between the business judgment rule and the shareholder wealth maximization, see this post.)
But Sorkin and Gamble don't just want directors to have discretion to consider long-term consequences of their actions. They want to force directors to consider the interests of all corporate stakeholders in all corporate decisions. Had Sorkin consulted the NY Times' own archives, however, he would have found my essay explaining why that would be a terrible idea:
There are many reasons why the law requires corporate directors and managers to pursue long-term, sustainable shareholder wealth maximization in preference to the interests of other stakeholders or society at large, but the most basic one is that managers who are responsible for everyone are responsible to no one.
Suppose the board of directors of a company is considering closing an obsolete plant. The closing will harm the plant’s workers and the local community, but it will benefit shareholders, creditors and new employees (and their surrounding community) at a more modern plant to which the work is transferred. Let's further assume that the latter groups (the shareholders, creditors and new employees) cannot gain except at the former employees' expense.
By what standard should the board make the decision to close or keep the obsolete plant? Shareholder wealth maximization provides a clear answer — close the plant.
If directors were allowed to deviate from shareholder wealth maximization, they would inevitably turn to indeterminate balancing standards, which provide no accountability. As a result, directors could be tempted to pursue their own self-interest. If closing the plant would benefit directors, they could point to shareholder interests to justify their decision. But if, on the other hand, keeping it open would benefit directors, they could just as easily point to concerns for employees.
...
Accordingly, corporate law has been skeptical about corporate social responsibility claims, due to the concern that director discretion — when purportedly directed toward social responsibility concerns — could just be used to camouflage self-interest.
One wonders why Sorkin and Gamble are so enthusiastic about insulating managerial and director self-ineterst?
One also wonders why Sorkin and Gamble are so enthusiastic about mandating these ideas when people can opt into benefit corporations? A benefit corporation would have most of the legal structures Gamble proposes, so why not just let private ordering have an opportunity to work?
