ProfessorBainbridge.com

Sung Hui Kim asks Do Lawyers Make Good Gatekeepers?

My friend and UCLAW colleague Sung Hui Kim has posted an interesting new article to SSRN:

This Chapter, which will appear in The Cambridge Handbook of Investor Protection, ed. Arthur Laby (Cambridge University Press, 2021), argues that there is a strong case for imposing gatekeeping duties on lawyers and reviews the growing body of empirical studies in the accounting and finance journals that partially illumine whether lawyers will act in ways that ultimately inhibit managerial malfeasance and benefit public investors. This Chapter briefly describes the traditional gatekeeping theory, the key elements of a gatekeeper enforcement strategy, and the principal attributes commonly ascribed to gatekeepers. It explains why the designation of lawyers as gatekeepers has been so controversial and argues that the case for imposing gatekeeping obligations on both outside and in-house lawyers is strong in light of the economies of scope that can be exploited from adding gatekeeping to the tasks that lawyers already perform for their clients. It then specifically addresses the potential efficacy of in-house lawyers as gatekeepers.

On the issue of whether lawyers make effective gatekeepers, this Chapter finds that the empirical evidence is both complex and mixed, but that the weight of the evidence generally supports that general counsel are effective (albeit conflicted) gatekeepers, who appear willing to police material illegalities but who also tolerate a good deal of aggressive and perhaps unethical conduct. The more limited evidence about outside lawyers suggests that they may be less likely to press their client representatives to comply with the law, opting instead to perform their strictly advisory role as neutral risk-assessors. Nonetheless, their involvement in disclosure matters appears to generate some salutary, longer term effects, demonstrating perhaps a net benefit to public investors.

Finally, this Chapter reviews the findings of one study, which highlighted the promising gatekeeping potential of board members with legal backgrounds. It raises the possibility that appointing lawyers to the board may offer the best strategy for promoting compliance within the firm and deterring corporate malfeasance. It calls for further research to be conducted on the efficacy of these understudied legal gatekeepers.

Kim, Sung Hui, Do Lawyers Make Good Gatekeepers? (June 16, 2021). in The Cambridge Handbook of Investor Protection, edited by Arthur Laby (Cambridge University Press, forthcoming 2021), UCLA School of Law, Law-Econ Research Paper No. 21-07, Available at SSRN: https://ssrn.com/abstract=3868555

Jim Park on Los Angeles Law Firms Before and After Recessions

My friend and UCLAW colleague James park has an interesting new article posted to SSRN:

Major recessions often prompt significant changes at large law firms. This report studies Los Angeles firms over the past forty years to assess the impact of recessions on the Los Angeles legal market. It tracks the number of lawyers working in the Los Angeles offices of a sample of national law firms (half founded in Los Angeles and half founded outside of Los Angeles) over three recessions. It concludes that significant reductions in the attorneys employed by law firm offices after a recession largely reflect reversals of extraordinary growth prior to the recession. Because Los Angeles law firm offices were not expanding prior to 2020, the impact of the 2020 recession on the number of lawyers employed by national firms in Los Angeles may be modest.

Park, James J., Los Angeles Law Firms Before and After Recessions (May 2021). Lowell Milken Institute Report (May 2021), UCLA School of Law, Law-Econ Research Paper No. 21-06, Available at SSRN: https://ssrn.com/abstract=3841171

Steve Bank on Taxation’s Summer Blockbuster: A Review of Michael Keen & Joel Slemrod, Rebellion, Rascals, and Revenue: Tax Follies and Wisdom through the Ages

My friend and UCLA colleague Steve Bank has a new article posted to SSRN:

In Rebellion, Rascals, and Revenue, Michael Keen and Joel Slemrod have written a fantastic book that collects and loosely organizes a treasure trove of anecdotes about tax systems, trivia, and events around the world and throughout history. In many respects the book, which endeavors to include stories about any type of tax, in any type of tax system, in any period in history, is overly ambitious. Nevertheless, Keen and Mick identify several common themes that persist over time. More contextualization might have revealed an omitted theme – the effect of societal changes on the development and adaptation of tax systems – but the book’s main contribution is in taking readers on a raucous ride through tax history that will leave them convinced that taxation is not only important, but exciting as well.

Bank, Steven A., Taxation’s Summer Blockbuster: A Review of Michael Keen & Joel Slemrod, Rebellion, Rascals, and Revenue: Tax Follies and Wisdom through the Ages (May 3, 2021). UCLA School of Law, Law-Econ Research Paper No. 21-05, Available at SSRN: https://ssrn.com/abstract=3838933

 

Insider Trading Compliance Programs in The Cambridge Handbook of Compliance

The Cambridge Handbook of Compliance has just been released:

Compliance has become key to our contemporary markets, societies, and modes of governance across a variety of public and private domains. While this has stimulated a rich body of empirical and practical expertise on compliance, thus far, there has been no comprehensive understanding of what compliance is or how it influences various fields and sectors. The academic knowledge of compliance has remained siloed along different disciplinary domains, regulatory and legal spheres, and mechanisms and interventions. This handbook bridges these divides to provide the first one-stop overview of what compliance is, how we can best study it, and the core mechanisms that shape it. Written by leading experts, chapters offer perspectives from across law, regulatory studies, management science, criminology, economics, sociology, and psychology. This volume is the definitive and comprehensive account of compliance.

It includes 69 articles by leading experts on various aspects of compliance, both theoretical and practical. Among them is an article by yours truly on insider trading compliance programs.

Why do boards get to spend corporate money to fight off proxy contests?

A friend of mine who teaches constitutional law took an interest in more important matters when he read about the recent proxy fight at ExxonMobil. He asks:

Why is it legal for Exxon’s management or the majority of Exxon’s current board to spend shareholder dollars to tell shareholders not to vote for other candidates?

On level, the answer is "because the courts say so." As I explain in my book Corporate Law (Concepts and Insights):

In theory, incumbent directors do not have unbridled access to the corporate treasury. In practice, however, incumbents rarely pay their own expenses. Under state law, the board of directors may use corporate funds to pay for expenses incurred in opposing the insurgent, provided the amounts are reasonable and the contest involves policy questions rather than just a “purely personal power struggle.” [E.g., Rosenfeld v. Fairchild Engine & Airplane Corp., 128 N.E.2d 291 (N.Y.1955), reh’g denied, 130 N.E.2d 610 (N.Y.1955).] Only the most poorly advised of incumbents find it difficult to meet this standard. The board merely needs have its lawyers parse the insurgent’s proxy materials for policy questions on which they differ. Such a search is bound to be successful: if the insurgent agrees with all of management’s policies, why is it trying to oust them?

In contrast, insurgents initially must bear their own costs. Insurgents have no right to reimbursement out of corporate funds. Rather, an insurgent will be reimbursed only if an appropriate resolution is approved by a majority of both the board of directors and the shareholders. [E.g., Steinberg v. Adams, 90 F.Supp. 604 (S.D.N.Y.1950); Grodetsky v. McCrory Corp., 267 N.Y.S.2d 356 (Sup.Ct.1966).] If the incumbents prevail, of course, they are unlikely to look kindly on an insurgent’s request for reimbursement of expenses. In effect, the insurgent must win to have any hope of getting reimbursed.

On a deeper level, the question is why have the courts so held? The Rosenfeld court explained that:

If directors of a corporation may not in good faith incur reasonable and proper expenses in soliciting proxies in these days of giant corporations with vast numbers of stockholders, the corporate business might be seriously interfered with because of stockholder indifference and the difficulty of procuring a quorum, where there is no contest. In the event of a proxy contest, if the directors may not freely answer the challenges of outside groups and in good faith defend their actions with respect to corporate policy for the information of the stockholders, they and the corporation may be at the mercy of persons seeking to wrest control for their own purposes, so long as such persons have ample funds to conduct a proxy contest.

Id. at 293.

The Delaware Chancery Court similarly explains that:

The report of the case of Pell v. London & North Western Ry. Co., [1907] 1 Ch. Div. 5, contains discussions by the three Lord Justices who sat in the case, which very persuasively demonstrate that such expenditures are entirely proper. The underlying reason is given by them as this-that inasmuch as the stockholders are called upon to express their judgment upon the soundness of a questioned policy, it is in the interest of an intelligent decision by them that they should be advised by the responsible managers of the corporation who formulated the policy what were the considerations which induced their approval; and that it would be highly unreasonable to require that the directors should personally defray the expense incident to the performance of a duty which rested upon them to lay before the stockholders the information which is requisite for an informed decision in turn on their part. Where the question in one of a policy to be adopted, the judges in the English case just cited took the view, and very reasonably so, that the corporation was under a duty to advise the stockholders, whose approbation or disapproval was to be determinative, of the reasons for the policy's adoption, and that in such a case the directors are to be regarded as having that corporate duty laid upon them. Any expense incident and reasonably necessary to perform that duty, is an expense incurred in the interest of the corporation and therefore properly chargeable to it.

Hall v. Trans-Lux Daylight Picture Screen Corp., 171 A. 226, 227 (Del. Ch. 1934).

Professor Melvin Eisenberg offered a slightly different explanation:

In considering this problem two economic facts must be viewed in conjunction: (1) Proxy fights involve a lot of money ... and most of the expenses are probably incurred in connection with just those techniques that have the least informational content; (2) While corporate directorships are unquestionably valuable, in themselves they do not normally pay very much money. ... Putting these two facts together, most outside directors and many inside directors ordinarily could not be expected to defend a proxy fight out of their own pockets. Thus a rule which precluded management from using corporate resources for such campaigns might tend to drive corporate offices into the hands of those who are ready and able to pay for such campaigns. Management access to the corporate proxy machinery may therefore be justified, not because the election of directors is a board function — it is not; and not because typically the issues are policy issues and the expenses are incurred for the purpose of informing the shareholders on these issues — they are not; but because in the long run the shareholders and the entire economy might suffer if management had to choose between paying for proxy campaigns out of its own pocket or throwing in the towel.

Melvin Aron Eisenberg, Access to the Corporate Proxy Machinery, 83 Harv. L. Rev. 1489, 1499–500 (1970).

So take your pick:

1. Allowing the board to spend corporate funds allows them to defend the corporation from potential bad actors.
2. It ensures that shareholders are fully informed.
3. It allows persons of modest means to serve as directors.

Links to my Commentary on the Business Roundtable Statement on Corporate Purpose

In speaking to a panel on the social responsibility of business today, I promised to post links to my commentary on the BRT corporate purpose statement:

Blog Posts

The Business Roundtable and Corporate Purpose: My remarks at the AALS panel, available at https://www.professorbainbridge.com/professorbainbridgecom/2019/12/the-business-roundtable-and-corporate-purpose.html

Four Answers to "Why did the Business Roundtable Release its Statement on Corporate Purpose?", available at   https://www.professorbainbridge.com/professorbainbridgecom/2019/08/three-answers-to-why-did-the-business-roundtable-release-its-statement-on-corporate-purpose.html

In response to the Business Roundtable Statement on Corporate Purpose, Some Law Review Articles by Yours Truly that are Pertinent, available at https://www.professorbainbridge.com/professorbainbridgecom/2019/08/in-response-to-the-business-roundtable-statement-on-corporate-purpose-some-law-review-articles-by-yo.html

Law Review Article

Making Sense of the Business Roundtable’s Reversal on Corporate Purpose, 46 Journal of Corporation Law 285 (2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3664078

Podcast

Ipse Dixit: Stephen Bainbridge on Corporate Purpose, available at https://play.acast.com/s/ipse-dixit/stephen-bainbridge-on-corporate-purpose

Op-Ed Commentary

BRT, Stakeholders and Corporate Purpose, The Corporate Board, November/December 2019, at 6, available at https://www.corporateboard.com/ArtArchive.aspx, but behind a paywall

The Business Roundtable’s Statement on Corporate Purpose One Year Later, Directors & Boards, Fourth Quarter 2020, at 14, available at https://www.directorsandboards.com/articles/singlebusiness-roundtable’s-statement-corporate-purpose-one-year-later, but behind a paywall

 

Ninth Circuit holds shareholder has standing to challenge California board diversity quota law

Bloomberg reports:

An OSI Systems Inc. shareholder has standing to challenge a California law requiring public corporations headquartered in the state to have a minimum number of women on their boards of directors, the Ninth Circuit ruled Monday.

California Senate Bill 826 “requires or encourages” individual shareholders of public companies to vote for female board members, the U.S. Court of Appeals for the Ninth Circuit said. As an individual shareholder of California-based OSI, Creighton Meland has standing to argue that the law requires him to discriminate on the basis of sex in violation of the 14th Amendment, the court said.

The full text of the opinion is here. The summary explains:

Plaintiff alleged that Senate Bill 826 (SB 826) requires shareholders to discriminate on the basis of sex when exercising their corporate voting rights, in violation of the Fourteenth Amendment. The panel held that plaintiff plausibly alleged that SB 826 requires or encourages him to discriminate based on sex. Plaintiff therefore adequately alleged an injury in fact, the only Article III standing element at issue, and thus had Article III standing to challenge SB 826.

The opinion summarizes the relevant legal rule as follows:

... we have long held that “[a] person required by the government to discriminate by ethnicity or sex against others has standing to challenge the validity of the requirement, even though the government does not discriminate against him.” Monterey Mech., 125 F.3d at 707. ...

We have subsequently relied on Monterey Mechanical’s determination that a person required or encouraged to discriminate on the basis of a protected class, “even if the beneficiaries [of the discrimination] are members of groups whose fortunes we would like to advance,” id. at 708, has suffered a direct personal injury sufficient to confer standing.

California objected that the bill affects only corporations; not shareholders. But the 9th Circuit rejected that argument:

Here, corporate shareholders are an object of SB 826. As a general rule, shareholders are responsible for electing directors at their annual meetings. E.g., Cal. Corp. Code §§ 301(a), 600(b). OSI is no exception. Thus, the only way a person can be elected to OSI’s board is if a plurality of shareholders vote in favor of the nominee at an annual shareholder meeting. OSI itself has no authority to elect its own board members. For SB 826 to hasten the achievement of gender parity—or indeed, for SB 826 to have any effect at all—it must therefore compel shareholders to act. Accordingly, the California Legislature necessarily intended for SB 826 to require (or at least encourage) shareholders to vote in a manner that would achieve this goal.

California also argued that shareholders will not be forced to vote for female directors, but the 9th Circuit rejected that argument as well:

A reasonable shareholder deciding how to vote could not assume that other shareholders would vote to elect the requisite number of female board members. Therefore, each shareholder would understand that a failure to vote for a female would contribute to the risk of putting the corporation in violation of state law and exposing it to sanctions. At a minimum, therefore, SB 826 would encourage a reasonable shareholder to vote in a way that would support corporate compliance with legal requirements. Indeed, the California Legislature must have concluded that SB 826 would have such an effect on individual shareholders; otherwise, if each individual shareholder felt free to vote for a male board member, SB 826 could not achieve its goal of reaching gender parity. ...

California’s argument that SB 826 does not require a shareholder to discriminate, because the law does not impose monetary sanctions directly on shareholders, also fails. A law may require or encourage action whether or not it imposes a monetary sanction for noncompliance.

All of this is way outside my wheelhouse, of course. My own view remains limited to the issue of whether the law is constitutional under the internal affairs doctrine. As regular readers will recall, I believe the law is not constitutional thereunder. 

Keith Paul Bishop comments:

Although I agree with the Court of Appeal's conclusion, the opinion begins with an erroneous description of the law, stating that SB 826 "requires all corporations headquartered in California to have a minimum number of females on their boards of directors".  The law applies only to "publicly held domestic or foreign corporations", not all corporations. 

Kevin LaCroix has a very detailed review of the case and issues. He points out that:

The appellate court’s action has implications both for the board gender diversity statute and the more recently adopted board racial diversity statute, which has also been challenged in court. ...

The appellate court’s ruling that Meland has standing means only that the lawsuit now goes back to the district court for further proceedings. The appellate court’s ruling does not mean Meland’s claims are meritorious, or that the statute is unconstitutional. ...

A complete review of the picture surrounding the legal challenges to SB 826 also requires a discussion of the separate state court challenge to the California board gender diversity statute.

Go read the whole thing.

A Critique of the Insider Trading Prohibition Act of 2021 is circulating to the law reviews and available on SSRN

I have a new article on the Insider Trading Prohibition Act of 2021, which is now circulating to online law reviews (I'm hoping for publication this summer so as to impact Senate consideration of the bill) and is available at SSRN.

Abstract: The Insider Trading Prohibition Act of 2021 has been passed by the House of Representatives and, as of this writing, is awaiting action in the Senate. The Act’s proponents claim that it simply codifies and clarifies existing law. In fact, the Act does neither. It likely will expand the scope of insider trading in undesirable ways and introduce new ambiguities into the law.

The ways in which the Act likely will expand the insider trading prohibition, coupled with the new ambiguities it introduces, threatens the central policy on which the insider trading prohibition rests. The Supreme Court has recognized that the work of market analysts and other investment professionals inherently entails seeking information advantages. In turn, as the Court also recognized, that work is an essential part of maintaining efficient stock markets. By increasing the risk of liability, especially in light of the Draconian penalties associated with insider trading, the Act likely will chill this vital activity, to the detriment of all investors.

When a very similar bill passed the House in the 116th Congress, the legislation died in the Senate. The Insider Trading Prohibition Act of 2021 now awaits Senate action. The Senate would be well advised to let this bill die as well. 

Bainbridge, Stephen Mark, A Critique of the Insider Trading Prohibition Act of 2021 (June 17, 2021). UCLA School of Law, Law-Econ Research Paper No. 21-08, Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3869222 

Morel Mushrooms in Cream Sauce on Pappardelle

• 2 tablespoons butter, divided
• 1 tablespoon olive oil
• 8 ounces dried pappardelle pasta
• 8 ounces fresh morel mushrooms (I got mine from Oregon Mushrooms, a very reliable source)
• 1 shallot, minced
• 1 garlic clove, minced
• ¼ teaspoon dried thyme leaves
• 1 tablespoon dry sherry
• 2 tablespoons crème fraîche
• ½ cup heavy cream
• 1 tablespoon fresh chives, chopped into ¼  pieces
• freshly grated parmesan to taste (use a good imported Italian cheese)

Cook pappardelle according to package directions, stopping one minute before it reaches the al dente stage. Reserve 1 cup pasta water. Drain but do not rinse pasta.

Melt one tablespoon of butter in a 12-inch skillet over medium heat. When the butter stops foaming, add olive oil. Add the mushrooms and thyme leaves to the pan. Season with salt and pepper. Sauté for about 6 minutes. Push the mushrooms out to the outer edges of the pan and add the shallots and garlic to the center of pan. Cook 1-2 minutes (do not let garlic brown). Mix mushrooms and aromatics thoroughly. 

Add sherry. Allow the sherry to reduce to a glaze. Add crème fraîche. Remove pan from heat and stir in the heavy cream. Mix well. Add pasta and cook 1 minute. Add other tablespoon of butter and mix well. If sauce is too thick, dilute it will small additions of the reserved pasta water.

Garnish with chives and parmesan.

Serve with a Chardonnay or, better yet, a Central Coast Viognier.

Shareholder gadflies annoyed because SEC required them to have some skin in the game in order to use the shareholder proposal rule file suit to eviscerate long overdue reforms

Bloomberg reports:

A recent change to an SEC rule governing shareholder proposals “guts” the process in return for “minuscule and largely hypothetical cost savings,” a group of institutional investors say in a federal complaint filed Tuesday in Washington.

The amendments to the Securities and Exchange Commission’s Rule 14a-8 “dramatically increase” how much stock shareholders must own to submit a proposal, and the agency’s “purported justifications for the amendments were flawed at every turn,” according to the complaint filed in the U.S. District Court for the District of Columbia.

Shareholder advocate James McRitchie, the Interfaith Center on Corporate Responsibility—a coalition of more than 300 institutional investors—and corporate engagement and shareholder advocacy nonprofit As You Sow filed the lawsuit challenging the rule.

We're dealing here with groups who dump masses of "social justice" proposals onto company proxy statements, presumably because they have nothing better to do with their time.

As I wrote last year, the changes to SEC Rule 14a-8 were minor and long overdue reforms intended to preserve legitimate use of the shareholder proposal rule while requiring the sort of hobbyists who filed this suit to have a little more skin in the game.

It used to be that a shareholder needed to own a mere $2,000 for just one year in order to make use of Rule 14a-8. A shareholder now must demonstrate continuous ownership of at least:

• $2,000 of the company’s securities entitled to vote on the proposal for at least three years;
• $15,000 of the company’s securities entitled to vote on the proposal for at least two years; or
• $25,000 of the company’s securities entitled to vote on the proposal for at least one year.
• Aggregation of holdings for purposes of meeting the ownership requirements will no longer be permitted.

These tweaks ought to be unobjectionable. The previous $2,000 limit was adopted in 1998 and has never been adjusted for inflation:

Under the new rule, as long as the shareholder is a long-term investor, you actually need a smaller investment—in real dollars—than you did in 1998.

In addition, the new thresholds are still set so low that owners of minuscule percentage of a company's stock get to force a vote on their pet proposal:

Are the hobbyists so broke that they can't afford to hold the very modest amount of stock the rule requires?

In my humble opinion, this suit not only deserves to be tossed for failure to state a claim but slapped with Rule 11 sanctions. 

The ExxonMobil Proxy Fight Was Not a Triumph for Woke Capitalism

Some have pointed to the 2021 proxy fight at ExxonMobil as evidence that shareholders are willing to put environmental concerns ahead of profit. Engine No. 1 is a small hedge fund that purports to be focused on advancing EZSG issues, especially with respect to climate change. Engine No. 1 nominated a short slate—four director candidates—in opposition  to the candidate slate put forward by the incumbent board. Three of Engine No. 1’s candidates were elected, which the New York Times proclaimed as a “major triumph” for climate activists. Matt Phillips, Exxon’s Board Defeat Signals the Rise of Social-Good Activists , N.Y. Times, (June 9, 2021), https://www.nytimes.com/2021/06/09/business/exxon-mobil-engine-no1-activist.html.

On closer examination, however, the ExxonMobil result actually supports the hypothesis that today’s investors remain focused on profit. Two of the successful three Engine No.1 were longtime oil industry executives. Engine No.1’s arguments were focused on ExxonMobil’s subpar financial performance, emphasizing that over the preceding ten years ExxonMobil had lost money while stock market indices had tripled. ExxonMobil was persistently investing in expensive projects that could only pay off if oil prices increased substantially and on a sustainable basis. Finally, Engine No.1 highlighted ExxonMobil CEO Darren Woods $75 million pay over the preceding four tears. In sum, the “fight wasn’t about being woke, it was about capitalists holding other capitalists responsible for results.” David Nicklaus, Exxon Board Fight, St. Louis Dispatch (June 6, 2021), https://www.stltoday.com/business/subscriber/article_53207bb5-a365-5642-b347-39ff623c030a.html (behind a paywall).

More evidence that ESG is mainly about greenwashing

A recent study found that ESG investment fund portfolio companies had significantly more labor and environmental violations than non-ESG funds portfolio company. Aneesh Raghunandan & Shivaram Rajgopal, Do ESG Funds Make Stakeholder-Friendly Investments?, Harvard Law School Forum on Corporate Governance (May 15, 2021), https://corpgov.law.harvard.edu/2021/05/15/do-esg-funds-make-stakeholder-friendly-investments/. The supposedly ESG friendly portfolio companies also paid higher fines for those violations than the non-ESG fund portfolio companies. Id. The former also exhibited worse performance on carbon emissions. The authors conclude that their “results undermine such funds’ claims that they are picking socially responsible stocks for inclusion and suggest substantial greenwashing on the part of ESG funds.” Id. Noting that “ESG funds (i) obtain lower stock returns but (ii) charge higher management fees, the authors posit that “ESG funds may simply represent a way for asset managers to command higher management fees in what has increasingly become a low-fee industry.” Id. 

Guest Post: Russell Powell responds to my comments on his new paper Spirit of the Corporation

I am delighted that Russell Powell offered a guest post responding to my recent comments on his paper Spirit of the Corporation. His comments follow:

Thanks to Professor Bainbridge for taking an interest in and recommending my article “Spirit of the Corporation,” which was presented at the recent Berle Symposium (this year focused on religion and corporate law). His question, whether considering spirit as opposed to corporate culture does any significant work, is one that was raised at the symposium, and I acknowledge that the ideas are overlapping. I do not object to readers choosing to consider my formulation of corporate spirit a variation of corporate culture discourse. That said, in this work I am attempting to seriously engage theological traditions in their own contexts (Catholicism and broader Christianity, in particular). In my symposium presentation, I explained that I was attempting to use Rawlsian method regarding public discourse by presenting my private, religiously-based reasons along with parallel, secular reasons. Professor David Skeel appeared to take a similar approach with his very interesting paper “The Corporation as Trinity.”

I am comfortable with the range of definitions for spirit in the paper, but I do not focus on corporate culture explicitly. There is obviously a rich and diverse body of literature on corporate culture from a variety of fields over the past fifty years. Many of those descriptive and normative approaches would be consistent with my characterization of corporate spirit. However, I would argue that there are distinctions, even from a purely secular perspective. Definitionally, I am uncomfortable completely conflating spirit with culture. Is the spirit of the law (its essence or ideal) completely synonymous with legal culture or the culture of law? I think of corporate culture as the granular social facts that shape the tacit values, customs, traditions, and meanings within a particular business organization. In much of the business literature, there is an emphasis on internal mechanisms, policies and incentives, while legal scholars tend to emphasize the role of external rules. Corporate spirit might be considered a broader, inclusive category which focuses on the orientation of the entity toward particular goods, rather than the myriad mechanisms that contribute to that orientation. Although changing internal structures and external incentives can impact corporate culture, I wonder whether religious traditions that emphasize the need for internal transformation may contribute a helpful insight regarding the necessity for internal transformation as an important predicate for institutional reform.

Like Professor Bainbridge, I do not attribute to corporations a soul. From a Christian scriptural perspective, the soul may be distinguished from the spirit (e.g., I Thessalonians 5:23 and Hebrews 4:12). Though undoubtedly an oversimplification, I would argue from a Christian perspective that soul consists of mind, emotions, and will (aspects not easily attributable to institutions), while spirit reflects a person’s orientation toward the divine (or more generally, the good). Scholars of structural sin might identify a “spirit of violence” or a “spirit of joy” within a human institution. However, even in a Christian theological context, this does not mean that separate ethereal entities are created by human-institutional interactions, and that is not my contention. Furthermore, I am not arguing that there is something eternal about the spirit of Nike or McDonalds. Corporations wind up, sell their assets, are purchased or merged in ways that dissolve the entity or radically transform internal culture as well as their essential orientation toward particular goods. Think, for example, of the purchase of Whole Foods by Amazon and the macro and micro changes in management that followed.

My paper is not meant as an endorsement of any specific contemporary approach to corporate decisionmaking or purpose (though I note several); instead, it is primarily a reflection on Berle’s essay “Corporate Capitalism and the City of God,” wrestling with the question whether corporate managers ought to consider the common good along with or as part of their obligation to act in the best interests of the corporation. To that end, I wanted to bring theological perspectives to the discourse, and I am heartened that the piece has generated some fruitful cross-discipline interest and dialogue.

Yours truly will be a speaker on the Acton Institute University Panel on Corporate Social Responsibility June 23

See this discussion of the panel and my fellow panelists.

An abridged case against making it easier for shareholders to sue woke CEOs

As regular readers know, I am not a fan of woke capitalism--particularly when committed by social justice warrior CEOs. But what should we do about it, if anything?

I've heard some folks suggest a federal law making it easier for shareholders to bring derivative suits against directors or officers who inject their corporation into woke politics. I'm sympathetic to the goal, but skeptical of the means.

First, it would represent a further step towards the federalization of corporate law. I address the arguments against expanding the federal role in corporate governance in my book, Corporate Governance After the Financial Crisis at 261-70. The supremacy of federal law and the uniform opposition of Congress and the SEC to private ordering eliminates opportunities for experimentation with alternative solutions to the many difficult regulatory problems that arise in corporate law. As Justice Brandeis pointed out many years ago, “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of country.” New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting). So long as state legislation is limited to regulation of firms incorporated within the state, as it generally is, there is no risk of conflicting rules applying to the same corporation. Experimentation thus does not result in confusion, but instead may lead to more efficient corporate law rules.

In contrast, the uniformity imposed by federal law precludes experimentation with differing modes of regulation. As such, there will be no opportunity for new and better regulatory ideas to be developed—no “laboratory” of federalism. Likewise, the persistent refusal to accommodate private ordering eliminates solutions from emerging from competition in the market. Instead, the federalization of corporate governance has resulted in rules that were wrong from the outset or may quickly become obsolete, but are effectively carved into stone with little prospect for change.

I would also draw the reader's attention to an older article, The Creeping Federalization of Corporate Law, Regulation, Spring 2033, at 26. In it, I explain that:

The corporation is a creature of the state “whose very existence and attributes are a product of state law.” States have an interest in overseeing the firms they create. States also have an interest in protecting the shareholders of their corporations. Finally, as the Court noted in CTS v. Dynamics, a state has a legitimate “interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs.” In other words, state regulation not only protects shareholders, but also protects investor and entrepreneurial confidence in the fairness and effectiveness of the state corporation law.

According to the Supreme Court’s CTS decision, the country as a whole benefits from state regulation in this area. As Justice Powell explained, the markets that facilitate national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that corporations generally are organized under, and governed by, the law of the state of their incorporation. . . .

Competitive federalism promotes liberty as well as shareholder wealth. When firms may freely select among multiple competing regulators, oppressive regulation becomes impractical. If one regulator overreaches, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when there is but a single regulator, exit is no longer an option and an essential check on excessive regulation is lost.

Second, we know that much derivative litigation is meritless. Unless the legislation is extremely narrowly focused, changes intended to “increase stockholder plaintiff’s chances of making it pass the pleading stage” will simply increase the settlement value of such suits. Suppose, for example, in the wake of a tragic mass shooting Walmart decides to stop selling firearms. Do we really want some plaintiff lawyer filing suit against Walmart in that instance? Especially since trial lawyer political contributions primarily go to Democrats?

Third, unless the legislation is extremely narrowly drafted, it will likely involve delegating substantial discretion to a Democrat-dominated SEC.

Fourth, it takes a procedural approach to a substantive problem. A derivative suit is a procedural device mainly used to allow shareholders to bring suit against the firm’s directors and officers for breaching a fiduciary duty owed to the corporation. At present, the sort of woke decisions to which I object almost certainly would be insulated from judicial review by the business judgment rule. See my post Can Tim Cook Ignore ROI When Deciding How to Design an iPhone? So the law would have to create an underlying cause of action.  Which would make the intrusion on state corporate law even greater.

Finally, such proposals are just slapping a Band-Aid on a deep systemic problem. I address the underlying problem in my article Corporate Purpose in a Populist Era at pages 568-577. In short,  I think the rise of CEO social justice warriors resulted from a combination of virtue signaling, the business world equivalent of the Linda Greenhouse effect, and the Ivy League/Upper East Side bubble most of them live in. Most large corporation CEOs these days live in families and social circles where social conservatism is regarded as moronic, retrograde, trailer trash, flyover country nonsense. Acting out as SJWs keeps their spouses and kids off their backs, ensures that the NY Times will say nice things about them, gets their pictures on the society pages, and gets them invited to all the best parties. It lets them hobnob with Hollywood elites and hang out with at Clinton Foundation functions. And it differentiates them from the proles in the GOP base. Tinkering with corporate law at the margins is unlikely to do much until the dynamics of the underlying social phenomena change.

At somewhat greater length, I suggest that what we’re seeing is the culmination of what Christopher Lasch called The Revolt of the Elites. In his 1995 classic, Lasch identified an emergent split between what he called the New Elites and the rest of society. The changes Lasch spotted became trends that accelerated in subsequent years. In particular, Lasch explained that “the new elites . . . regard the masses with mingled scorn and apprehension.”  They dismissed the masses’ values as “mindless patriotism, religious fundamentalism, racism, homophobia, and retrograde views of women.”  This tension was perhaps nowhere more pronounced than with respect to religion. When Lasch wrote over two decades ago, he opined that “[a] skeptical, iconoclastic state of mind is one of the distinguishing characteristics of the knowledge classes. . . .  The elites’ attitude to religion ranges from indifference to active hostility.”

If anything, today’s elites have become even more hostile to religious values. As Samuel Gregg observes, the Davos Man’s moral creed is “a mélange of social liberalism, environmentalism, and a new order of a borderless world. . . . [R]eligion is considered the refuge of fanatics and anyone stupid enough to be skeptical of gender ideology and techno-utopianism.”

A quarter-century later, Lasch’s new elites have risen to the top of corporate hierarchies. They brought their values into the C-suite. CEOs increasingly reflect the values of the Blue state coastal bubbles in which they are embedded, especially on environmental and social issues. No Fortune 100 CEOs contributed to Donald Trump’s 2016 presidential campaign, for example, but eleven gave to Hillary Clinton. More generally, “liberal groups accounted for eight of the top ten ideological causes of the ultra-rich, and seven of the ten congressional candidates most dependent on money from such people were Democrats.” Even one of the progressive movement’s favorite whipping boys—David Koch—publicly self-identifies as “a social liberal.”

As a result, as a Slate essay observed, “Fortune 500 companies today are socially liberal, especially on areas surrounding diversity, gay rights, and immigration; they are unabashedly in favor of free trade and globalization, express concern about climate change, and embrace renewable energy.” In doing so, they are simply reflecting the changing values of their CEOs.

Tinkering with corporate law at the margins is unlikely to do much until the dynamics of the underlying social phenomena change.