Lowell Milken Institute Program on Should Boards Have Duties to Stakeholders? Lessons from the COVID-19 Crisis

The Lowell Milken Institute for Business Law and Policy at the UCLA School of Law is sponsoring a Zoom stayconference on CSR during the pandemic today. I'll be speaking, along with David A. Katz, who is a partner at Wachtell, Lipton, Rosen & Katz, and Professor Jeffrey M. Lipshaw of the Suffolk University Law School. Regular readers will recall that Jeff and I have dueling papers on the Business Roundtable's August 2019 statement on corporate purpose:

Bainbridge, Making Sense of the Business Roundtable’s Reversal on Corporate Purpose

Lipshaw, The False Dichotomy of Corporate Governance Platitudes

The moderators (my colleagues Iman Anabtawi and Jim Park) circulated a list of questions, which I'm reposting below along with notes I've prepared to use in answering them:

Question: Let’s begin by having each of the panelists describe their position on the question of whether boards should owe duties to corporate stakeholders other than shareholders.

• There is no such duty under current law and the law should not create one.
• You don’t have to take my word for it. Former Delaware Chief Justice Leo Strine has always been very clear this question: "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."[1]

Question: The Business Roundtable issued a statement last year expressing “a fundamental commitment” to corporate stakeholders. Was the corporate response to the pandemic consistent with that statement?

• The BRT statement is just woke-washing. It signaled the CEOs’ advocacy for stakeholders but didn’t change much.
• Lucian Bebchuk and Roberto Tallarita found that the vast majority of signatory CEOs had not gotten board approval to sign it. “Even “imperial” CEOs tend to push major decisions through the board rather than disregard it. … The most plausible explanation for the lack of board approval is that CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders.”
• There’s evidence that the CEOs in fact do not walk the walk.
  • Anecdotally, WSJ reported in late August that: “A day after Salesforce.com posted record quarterly sales, the business-software company notified its 54,000-person workforce that 1,000 would lose their jobs later this year.”
    • I don't think even Scrooge would have told his employees that in a few months down the road 2% of them would be fired, leaving them to twist slowly in the wind for months while worrying whether they'll be among those who get fired.
    • What makes all of this especially pertinent is that Saleforce CEOMarc Benioff is one of the leading social justice warrior CEOs, constantly bragging about what a great human being he is.
  • There’s a study by a pair of economists, entitled “Do the Socially Responsible Walk the Talk?,” which found “that Business Roundtable signatories exhibit worse records with respect to labor and the environment than their peers.”

Question: Recently a group of 322 long-term institutional investors with $9.2 trillion in assets under management issued an “Investor Statement on Coronavirus Response” asking corporations to take a variety of steps including providing paid leave to employees, taking measures to maintain employment and exhibiting financial prudence by suspending share buybacks. If shareholders themselves are pushing for greater attention to employee interests, shouldn’t boards respond ?

• The question is whether you think those investors will change their behavior or whether you think this is just more woke washing. I believe that the emphasis on ESG investing that we’re seeing from BlackRock, Vanguard, and State Street is mostly advertising. There is survey data that millennials apparently prefer to work for and purchase from companies that are perceived as socially and environmentally responsible. Accordingly, there is an increasingly widely held view in the investment community that to attract Millennial and Generation Z customers, companies must project an image as social justice activists.
• But none of the Big Three have lived up to their commitments. They devote relatively few personnel and resources to monitoring ESG issues at their portfolio companies. Despite the fact that the Big Three collectively own enough shares to determine the outcome of the vote on pro-ESG proposals made by other shareholders,  they rarely vote in favor of such proposals.

Question: Our health care system was initially overwhelmed during the pandemic because sufficient supplies had not been stockpiled and much of our manufacturing is now offshore. Is this failure evidence that a focus on increasing shareholder wealth is problematic from a public policy perspective?

• It’s not a business’ responsibility to anticipate unknown and unpredictable events that will widely affect society.
  • What incentive does a for-profit business have to invest in a drug that may never be needed?
• It was a series of failures of government policy over a two-decade period:
  • We’ve known about zoonotic diseases at least since the AIDS epidemic began. Ebola looked like a nightmare waiting to happen.
  • There have been many proposals to prepare for pandemics. But the proposals were either never funded, underfunded, or defunded.

Question: In Marchand v. Barnhill, the Delaware Supreme Court held that the failure of the board of Blue Bell Creameries to adopt a monitoring and reporting system that would ensure it was informed about food safety issues could support aCaremark It observed that Blue Bell could “only thrive if its consumers enjoyed its product and were confident that its products were safe to eat.” Does this case recognize that the board must be attentive to the interests of stakeholders such as consumers?

• Marchand was decided by Chief Justice Leo Strine. Strine has explained that “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.”
• The cause of action was a derivative shareholder suit brought to enforce the duty of loyalty owed shareholders. The claim is based on the losses the shareholders suffered as a result of the product recall, shutdown of production, lawsuits, and a dilutive private equity offering necessary to keep the company afloat.

Question: How should the board consider situations where the interests of stakeholders conflict? For example, during the pandemic, keeping businesses operating may benefit consumers while risking the health of employees?

• Obviously, one size will not fit all.
• Boards need discretion to decide what is in the company’s best interest in these unusual circumstances.
• The business judgment rule exists precisely so as to ensure that directors can exercise that discretion without fear of liability.
• What directors should not do is to make tradeoffs between the interests of shareholders and stakeholders.
• The core problem of corporate social responsibility is that directors who are responsible to everyone are responsible to no one.

[1] 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).