A few days ago, I directed your attention to a short article by Professor Eric Orts at the CLS Blue Sky Law Blog, in which he criticized the corporate objective provision of the forthcoming Restatement of the Law of Corporate Governance. (Go read Orts' article and come back.) As I noted, the article is thoughtful, as is typical of Professor Orts' work, for which I have considerable respect, but I disagreed with a couple of points (as is often the case because we have rather different normative priors).
I've decided to do an article on the Restatement provision and in working on it today, I realized I had a couple of other thoughts about Professor Orts' article. In this post, I address his criticism of the framing of the Restatement's approach whether directors may depart from shareholder value maximization norm.
The ALI's 1994 Principles of Corporate Governance § 2.01(b) obliged the corporation to obey the law, allowed it to consider appropriate ethical concerns, and allowed to engage in philanthropic activities, in all cases even if doing do did not promote shareholder value or corporate profit. In contrast, in Restatement § 2.01, engaging in philanthropic activities is the only action expressly permitted “whether or not doing so enhances the economic value of the corporation.”[1] The framing by the Restatement’s drafters led Professor Orts to object that:
Allowing only an “economic objective” forces out any ethical or environmental consideration that does not technically qualify as a long-term economic rationalization. The Restatement’s § 2.01 departs from the recognition in the Principles that ethical considerations may conflict with the economic objective, and that directors and officers may nevertheless follow their consciences in these situations. (Principles, § 2.01 & cmt. h.) Even Milton Friedman, a famous (or infamous) champion of the economic objective in business corporations, conceded that profit-seeking must “conform[] to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” To employ an updated example, doing the right thing with respect to the climate emergency may require a particular firm (such as a big oil company) to sacrifice some profits even as calculated over the long term. The Restatement’s § 2.01 seems instead to require big oil companies to maximize their long-term profits even it means burning our planet beyond all recognition. It seems also to require a corporation adopting an anti-racist personnel policy to justify it with an economic or “business case” rationale rather than an appeal to an ethics of mutual respect and equal treatment.[2]
It seems unlikely, however, that the drafters intended thereby to effect any substantive change vis-à-vis the Principles. Comment e to § 2.01, for example, states without limitation to specific jurisdictional types that “corporations may take into account their effects on the environment, as well as the social impact of their operations.”[3] Comment e also states that “the economic objective does not imply that the corporation must extract the last penny of profit out of every transaction in which it is involved.” Illustration 6 states that in all jurisdictions it would be licit for a corporation to adopt a mission statement committing the company “to creating a sustainable, low-carbon future, advancing equality and diversity, and fostering employee success.”[4] Illustrations 27 and 28 both involve hypothetical oil companies that voluntarily reduce oil production claiming that doing so will both save the planet and be profitable in the long term.[5] In both, the drafters conclude that § 2.01 is not violated.[6] Given that the business judgment rule almost certainly would protect an informed decision by the board that the reduction would produce sustainable, long-term profits,[7] Professor Orts’ concern seems misplaced.
[1] Restatement § 2.01.
[2] Eric W. Orts, The ALI’s Restatement of the Corporate Objective Is Flawed, The CLS Blue Sky Blog (June 6, 2022), https://clsbluesky.law.columbia.edu/2022/06/06/the-alis-restatement-of-the-corporate-objective-is-seriously-flawed.
[3] Restatement § 2.01 cmt. e.
[4] Id., cmt. e, illus. 6.
[5] Id., cmt. h, illus. 27-28.
[6] Id.
[7] See id., § 4.02 (setting out the business judgment rule’s requirements and explaining that, unless plaintiff proves they were not met, a court shall defer to the judgment of the directors or officers).
