We recently celebrated the 50th anniversary of the publication by The NY Times of Nobel economics laureate Milton Friedman essay The Social Responsibility of Business Is to Increase Its Profits.
Corporate social responsibility raises two questions that often get bollixed up even 50 years later:
- Do corporations have a social responsibility, as a matter of law.
- Should corporations be socially responsible?
This is, of course, an example of the classic is/ought dichotomy. (Not, as you may have thought, the is-ought problem.)
Former Delaware Chief Justice Leo Strine has always been very clear on the "is" question: "Despite attempts to muddy the doctrinal waters, a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare." Leo E. Strine, Jr., The Dangers of Denial: The Need for A Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761, 768 (2015).
So some might be surprised by his recent NY Times op-ed (with Joey Zwillinger, who is the co-founder and co-C.E.O. of Allbirds), in which Strine has some very harsh words for Friedman and his seminal essay. (I'm going to be going back and forth between the Wake Forest and NYT articles. To avoid confusion, I am marking WFLR quotes in blue and the NYT quotes in red.)
Strine's oped strikes a left-of-center populist note:
In the past 50 years, instead of gains for stockholders and top management tracking gains for workers — as characterized by the period when Mr. Friedman wrote — the returns of our capitalist system have become skewed toward the haves.
(As I have written elsewhere, of course, this is a concern shared by right-of-center populists. See my essay Conservative Critiques of Capitalism.)
Strine also takes a left-of-center shot at the libertarian views of espoused by Friedman and his allies:
Mr. Friedman sought to weaken the rules of the game by opposing basic civil rights legislation, unions, the minimum wage and other measures that protected workers, Black people, and the environment.
Of course, some folks would call that a 20th Century version of classical liberalism, which advocates a limited role for government so as to promote maximal freedom and responsibility for everyone. But let's not get bogged down with who says what about whom.
Instead, I want to make a couple of points. First, although Strine's op-ed does not suggest a change in his views on the "is" question, it does suggest a shift in his views on the "ought question" In his earlier Wake Forest Law review article, Strine wrote that:
I am more than moderately sympathetic with those who argue that for-profit corporations should behave lawfully, responsibly, and ethically.
... It is more productive to take the legal rules and corporate power structure as it is, and to advance proposals that make sure that corporations operate in a way that encourages more responsible behavior and that maximizes long-term welfare, within the bounds of that structure.
As I have always read that passage, what Strine wanted was for the legislature to set regulatory bounds within which the corporation operates. Instead of asking directors to be socially responsible, he simply wanted to ask them to obey the law--albeit a much more aggressively regulatory body of law than he believes currently exists.
Now, however, it appears Strine has changed his mind and wants boards "embrace an affirmative duty to stakeholders and society."
By committing to goals of responsible citizenship, companies allow stakeholders, institutional investors and the public to hold them accountable to their inclusive ideals. In doing so, corporate leaders will also set an example that institutional investors should be required to follow in their own investing and voting policies.
This is pretty surprising. Let's go back to the Wake Forest article:
Under the current legal rules and power structures within corporate law, it is naïve to expect that corporations will not externalize costs when they can. It is naïve to think that they will treat workers the way we would want to be treated. It is naïve to think that corporations will not be tempted to sacrifice long-term value maximizing investments when powerful institutional investors prefer short-term corporate finance gimmicks. It is naïve to think that, over time, corporations will not tend to push against the boundaries of whatever limits the law sets, when mobilized capital focused on short-term returns is the only constituency with real power over who manages the corporations. And it is naïve to think that institutional investors themselves will behave differently if action is not taken to address the incentives that cause their interests to diverge from those people whose funds they invest.
One wonders what has changed so that it is no longer naive to "expect that corporations will not externalize costs when they can" and so on? One also wonders how Strine squares his view of what boards ought to do with his view of what the law allows boards to do. Back to WFLR: "Dodge v. Ford and eBay are hornbook law because they make clear that if a fiduciary admits that he is treating an interest other than stockholder wealth as an end in itself, rather than an instrument to stockholder wealth, he is committing a breach of fiduciary duty."
How do we square that blunt statement with Strine's current embrace of "a stakeholder-centric governance model"? Does he think directors can do the latter without breaching their fiduciary duties? If so, how?
I think Strine's evolution (assuming he is evolving--I would LOVE for him to do a guest post in reply to my comments, but I am not holding my breath) is being driven by his visceral loathing of the Citizens United decision. Strine has written 8 law review articles (by my count) in which Citizens United comes up and none of them have anything good to say about that decision. In particular, he has argued that Citizens United unleaded a flood of corporate money into politics (of course, it also unleashed a food of union money), which has had deleterious effects:
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 nonhuman corporate money with a monocular focus on profit will be important to electoral competitiveness.
Leo E. Strine, Jr. & Nicholas Walter, Conservative Collision Course?: The Tension Between Conservative Corporate Law Theory and Citizens United, 100 Cornell L. Rev. 335, 389 (2015).
Although Citizens United goes unnamed in the NYT op-ed, we see the same concerns:
Business leaders must ... stop using corporate funds to distort our nation’s political process. That means ending corporate political spending without shareholder consent, and not contributing to dark money or political party committees. It also means ensuring that spending plans recommended to shareholders only allow contributions to candidates whose views on issues like racial inequality, climate change and fairness to workers are consistent with the corporation’s stated values.
In response, I refer you to my essay Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker, from which I'll draw a few quick points.
As I have observed previously, “in the 2008 election cycle, the total amount spent on all political campaigns by all actors was, according to OpenSecrets.org, $5,285,680,883.” To put that figure in context, it is less than the amount Procter & Gamble alone spent on advertising in 2008. “As a society, we spend much more money selling stuff to wipe our bottoms with than we do deciding who should run the most powerful country in the world,” which perhaps suggests that the amounts at issue are not as unreasonable as Strine and Walter seem to think.
Instead, the more serious objection posed by Strine and Walter goes to the core of their argument; namely, that corporate political spending is deployed to erode regulations necessary to constrain the externalities inherent in corporate business activity… In fact, however, much corporate political spending is likely to be defensive. As The Economist recently observed:
When America was founded, there were only three specified federal crimes-- treason, counterfeiting and piracy. Now there are too many to count. In the most recent estimate, in the early 1990s, a law professor reckoned there were perhaps 300,000 regulatory statutes carrying criminal penalties--a number that can only have grown since then. For financial firms especially, there are now so many laws, and they are so complex (witness the thousands of pages of new rules resulting from the Dodd-Frank reforms), that enforcing them is becoming discretionary.
In this environment, it seems plausible that much corporate political spending goes to stave off additional regulation rather than to repealing existing laws. In the absence of 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. Strine and Walter offer no convincing evidence that corporate political spending in fact has the effect they posit.
Strine and Walter also fail to take into account the likelihood that much corporate political spending will simply cancel out spending by other corporations. It seems intuitively obvious that specific regulations rarely advantage all businesses. If so, spending by opponents of particular laws or rules likely will be countered by those who benefit from them. Accordingly, Citizens United’s alleged anti-regulatory effect will be self-minimizing.
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.
I go on to explore reasons why, even if Strine and Walker were right, I would still oppose corporate social responsibility. But that’s a story for another day (and, in any event, has been oft explored in these pages.)
