The American Law Institute has just published the first tentative draft of its new Restatement of the Law of Corporate Governance. Tentative Draft Number 1 is incomplete, but includes a foundational statement on corporate purpose. Section 2.01 is entitled "The Objective of a Corporation" and states that:
(a) The objective of a corporation is to enhance the economic value of the corporation, within the boundaries of the law;
(1) in common-law jurisdictions: for the benefit of the corporation’s shareholders. In doing so, a corporation may consider:
(a) the interests of the corporation’s employees;
(b) the desirability of fostering the corporation’s business relationships with suppliers, customers, and others;
(c) the impact of the corporation’s operations on the community and the environment; and
(d) ethical considerations related to the responsible conduct of business;
(2) in stakeholder jurisdictions: for the benefit of the corporation’s shareholders and/or, to the extent permitted by state law, for the benefit of employees, suppliers, customers, communities, or any other constituencies.
(b) A corporation, in the conduct of its business, may devote a reasonable amount of resources to public-welfare, humanitarian, educational, and philanthropic purposes, whether or not doing so enhances the economic value of the corporation.
As regular readers know, I have been working a lot on corporate purpose over the last two years, so I will have much more to say about the ALI draft as we go forward. Today, I want to direct your attention to a short article by Professor Eric Orts at the CLS Blue Sky Law Blog. (Go read it and come back.) The article is thoughtful, as is typical of Professor Orts' work, for which I have considerable respect, but I disagree with at least a couple of points (as is often the case because we have rather different normative priors).
First, I am far less certain than he that it is possible for corporations to opt out of the shareholder value maximization principle via the articles of incorporation. In fact, that question has been the subject of considerable debate. See, e.g., Joan MacLeod Heminway, Shareholder Wealth Maximization As A Function of Statutes, Decisional Law, and Organic Documents, 74 Wash. & Lee L. Rev. 939, 957 (2017) (arguing that “a charter provision that is inconsistent with the shareholder wealth maximization norm should be valid”); Stefan J. Padfield, The Role of Corporate Personality Theory in Opting Out of Shareholder Wealth Maximization, 19 Transactions: Tenn. J. Bus. L. 415, 439 (2017) (suggesting that “Chancellor Chandler’s comments in the eBay decision suggest that” efforts to opt out of shareholder value maximization may be unavailing). My own view at one time was that “state law arguably does not permit corporate organic documents to redefine the directors’ fiduciary duties.” Stephen M. Bainbridge, Interpreting Nonshareholder Constituency Statutes, 19 Pepp. L. Rev. 971, 985 (1992). Today, however, my view is that it is a question that has been essentially mooted by the availability of the public benefit corporation (PBC) option.
The benefit corporation point leads to my second disagreement. As I read Professor Orts’ analysis, he suggests that we should understand the widespread adoption of PBC statutes as being pertinent to understanding the duties of directors and officers of business corporations incorporated under a state’s general business corporation law. If so, I disagree.
Although it has not done so to date, the widespread availability of PBCs as an alternative to the traditional business corporation could alleviate the growing pressure on the latter to pursue ESG, since they provide an alternative by which social justice activists can pursue their ESG goals while still making a profit. In any case, the widespread adoption of PBC statutes confirms that shareholder value maximization—i.e., Dodge v. Ford Motor Co.—is corporate law’s general rule. After all, if Dodge were not the law, PBCs would be unnecessary. Boards of business corporations would be free to pursue public benefits without violating their fiduciary duties. The perceived need for PBC statutes suggests that boards are not free to do so absent the statute.
The drafters of the California PBC statute presumably had such an argument in mind when they including the following qualification in the statute: “The existence of a provision of this part shall not of itself create any implication that a contrary or different rule of law is or would be applicable to a business corporation that is not a benefit corporation.” Cal. Corp. Code § 14600 (b).
