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Another Comment on Eric Orts' Comment on the ALI's Restatement of Corporate Purpose: Can Directors Act Ethically Without Regard to Profit?

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.

 

Delaware Vice Chancellor Travis Laster versus Corwin Cleansing

Corwin cleansing is a corporate law doctrine providing that:

the “business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.”¹³ The Corwin doctrine is premised on the view that, “[w]hen the real parties in interest—the disinterested equity owners—can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them.”¹⁴ The same is true of stockholders deciding whether to tender their shares, and the Corwin doctrine has been extended to these circumstances.

Morrison v. Berry, 191 A.3d 268, 274 (Del. 2018).

I was reading a new opinion by Delaware Vice Chancellor Travis Laster today (Goldstein v. Denner, CA No 2020-1061-JTL (May 26, 2022), in which VC Laster held that defendants were not entitled to Corwin cleansing. 

As I was reading, it occurred to me that I could not remember a Laster opinion finding that defendants were entitled to Corwin cleansing. Having a little time on my hands, I did a Westlaw search. I found 4 other cases in which Laster addresses Corwin cleansing defenses.

1. In re Columbia Pipeline Group, Inc., CV 2018-0484-JTL, 2021 WL 772562, at *36 (Del. Ch. Mar. 1, 2021)
2. Firefighters' Pension System of City of Kansas City, Missouri Tr. v. Presidio, Inc., 251 A.3d 212, 263 (Del. Ch. 2021)
3. In re PLX Tech. Inc. Stockholders Litig., CV 9880-VCL, 2018 WL 5018535, at *39 (Del. Ch. Oct. 16, 2018), aff'd, 211 A.3d 137 (Del. 2019)
4. Voigt v. Metcalf, CV 2018-0828-JTL, 2020 WL 614999, at *10 (Del. Ch. Feb. 10, 2020)

In every one of them, he found that defendants were not entitled to Corwin cleansing.

In sum, defendants are 0-5 in VC Laster's court on Corwin cleansing. Granted, it's a small sample. But I still find it rather curious.

One possible explanation is that cases in which Corwin cleansing is available are easier to dispose of and end up getting dismissed using oral bench opinions. In which case, the sample is simply a selection bias issue.

Congratulations to new Delaware Vice Chancellor Nathan A Cook

Chancery Daily announced:

The Chancery Daily notes that on Friday, June 3, 2022, Delaware Governor John Carney nominated Nathan A. Cook to serve as Vice Chancellor on the Delaware Court of Chancery. Governor Carney Announces Judicial Nominations. Mr. Cook graduated from the University of Virginia Law School, clerked for Vice Chancellor Noble, and spent his subsequent legal career focused on Delaware corporate litigation. Mr. Cook will fill a vacancy left by Vice Chancellor Joseph R. Slights III, who announced his intent to retire in January 2022 (TCD offers the retiring Vice Chancellor gratitude for his service and best wishes as he embarks on new adventures). 

Kudos.

Do we really need a Restatement of Corporate Governance?

Either the Restatement of Corporate Governance will restate Delaware law (in which case who needs it) or it will not restate the law but rather propose changes (in which case it will be ignored). But I'll be waiting. pic.twitter.com/XXCuzWgMhF

— Steve Bainbridge (@PrawfBainbridge) May 17, 2022

Actually, I already weighed in: The American Law Institute is going to try writing a Restatement of Corporate Governance. Again. Oh joy. https://t.co/YZfbMnmnkU

— Steve Bainbridge (@PrawfBainbridge) May 18, 2022

California trial court strikes down gender quota statute (SB 826)

The WSJ reports and provides a link to the opinion. The decision is entirely based on equal protection considerations. No discussion of the internal affairs issue.

Director independence inquiries vary by context

In Sciabacucchi v. Liberty Broadband Corp.,[1] Delaware Vice Chancellor Glasscock explained that the independence inquiry varies by context:

Where the independence inquiry relates to special litigation committees, it requires a showing of independence by the special litigation committee, having displaced the common-law presumption of director independence. . . .

The independence inquiry as it relates to demand futility arises in the context where the challenged directors are not themselves interested in the question posed in the demand, but are alleged not to be independent of those who are. Where the latter are fellow directors, the required demonstration appears to be the easiest for a plaintiff to clear, given the natural reluctance of directors to take the action demanded—ultimately, choosing to sue fellow directors. If . . . the difficulty of impartially assessing a demand to sue fellow board members (or to sue business associates, friends, family, etc.), is high, it follows that a plaintiff would find it easier to impugn a director's independence in the context of demand futility. Successfully impugning a director's independence with respect to voting on transactions, conversely, should be more difficult than challenging that same independence with respect to assessing a demand. The ultimate factual burden upon a plaintiff to prove a director's lack of independence at trial will vary accordingly. The important point is that the decision in question must be viewed in the context of the director's relationship and her ability, in light of that relationship, to apply her business judgment thereto. . . .

“Delaware law does not contain bright-line tests for determining independence but instead engages in a case-by-case fact specific inquiry based on” the facts. Facts submitted to rebut the presumption of independence should be reviewed “holistically, because they can be additive.” Plaintiffs seeking to show that a director was not independent must demonstrate that the director in question had ties to the “person whose proposal or actions he or she is evaluating;” ties so substantial that she could not “objectively discharge ... her fiduciary duties.” The inquiry is whether those ties were material such that they displace the impartiality of the individual director.

 

[1] CV 11418-VCG, 2022 WL 1301859 (Del. Ch. May 2, 2022).

Would a director be fully protected by relying on an astrologer or a psychic?

Keith Paul Bishop asks "May A Director Properly Rely On Her Rabbi?":

In prescribing the duties of directors, California Corporations Code Section 309 provides that a director is entitled to rely on information, opinions, reports or statements prepared or presented by "counsel, independent accountants or other persons as to matters which the director believes to be within such person's professional or expert competence".   While the statute makes no reference to religious authorities, it would appear to allow a director to rely on such persons so long as the director believes the matters were within their professional or expert competence.  For example, a director of a corporation that prepares kosher food might rely on a rabbi as to matters pertaining to kashrut.

DGCL section 141(e) is comparable, specifically providing that a director is "fully protected" by relying on such a person. Which made me wonder whether a director could get protection for replying in good faith on an astrologer or psychic provided the director believes the matter is within their professional expertise. 

Perhaps surprisingly (or perhaps not), I was unable to find an caselaw on point. I did find a law review article, however, which opined:

When the argument focuses on valuation and management hires well credentialed investment bankers, it is difficult to see how a court can “look behind” competently prepared valuations.114 Judges and commentators acknowledge that investment bankers make biased valuations with disconcerting frequency, but no one credibly suggests preferable alternative experts.

114 For a partial but quite useful summary of the problems and indeterminacies that investment bankers face in preparing fairness opinions, see Carney, supra note 41, at 533-35. For clear expression of the court's inability to second-guess substance as opposed to procedure, see, e.g., the PLI's 21st Annual Institution on Securities Regulation, supra note 34. In one colloquy, E. Norman Veasey, now Chief Justice of the Delaware Supreme Court, suggested that the board should “look behind what the (investment) bankers are telling it.” Moore et al., supra note 34, at 279. To Veasey's suggestion, practitioner Steven Volk replied that all a director could do is “to satisfy himself that this is a reputable banker of national repute,” and stressed that beyond that inquiry the director could only “go to a different discipline, he could hire an astrologer or some other mystic to cross-check the results.” Id. at 280. See also, Panel Discussion, supra note 40, at 601 (noted practitioner, Arthur Fleischer, responding to calls for investment banking standards of conduct by stating that he was “not clear on what (the proponent was) talking about” and that “(t)he key fact for the banker is to act sensibly: that is it, and there is not anything more.”) (emphasis added). See also id. (Panelists “had an argument in the hall after the first panel about what the word 'fair' means in these (fairness) letters, and we had no real agreement within the group.”).

Park McGinty, The Twilight of Fiduciary Duties: On the Need for Shareholder Self-Help in an Age of Formalistic Proceduralism, 46 Emory L.J. 163 (1997).

Delaware Amends Section 102(b)(7) to Allow Exculpation of Certain Officers without Fixing the Basic Botch Job

There are a number of pending amendments to the Delaware General Corporation Law. Perhaps the most interesting of which is the expansion of exculpation to officers, albeit in a rather limited way. Sadden Apps summarizes the bill:

Since its adoption in 1986, Section 102(b)(7) has authorized a corporation’s certificate of incorporation to contain an exculpation clause that limits or eliminates the personal liability of its directors for monetary damages arising out of breaches of the fiduciary duty of care. The protection from monetary liability afforded by Section 102(b)(7) historically has been expressly limited to directors, and not available for officers. In recent years, the prevalence of fiduciary duty claims against officers has increased significantly, particularly in the context of class action M&A litigation seeking monetary damages. In many instances, the same breach of fiduciary duty claims are brought against both directors and officers, and while directors are able to have such claims dismissed based on Section 102(b)(7) exculpation clauses, officers are not. In some circumstances, individuals that serve a dual role as both director and officer will have such claims dismissed in their capacity as a director based on a Section 102(b)(7) exculpation clause, but they will remain in the case and subject to liability in their capacity as an officer with respect to the very same underlying allegations.

The proposed amendments to Section 102(b)(7) seek to reduce (but do not eliminate) this imbalance in the treatment of directors and officers. Notably, the proposed amendments would authorize exculpation of officers only in connection with direct claims brought by stockholders, including class actions, but would not eliminate monetary liability of officers for breach of fiduciary duty arising out of claims brought by the corporation itself or for derivative claims brought by stockholders in the name of the corporation.

In addition, not all officers would be entitled to the protection of an exculpation clause. Rather, only the following senior officers may be entitled to the benefit of an exculpation clause: the CEO, president, CFO, COO, chief legal officer, controller, treasurer and chief accounting officer, as well as any other persons identified as “named executive officers” in the corporation’s most recent SEC filings. Moreover, the same exclusions from exculpation applicable to directors (i.e., liability arising out of a breach of the duty of loyalty, acts or omissions not in good faith, or involving intentional misconduct or knowing violation of law or transactions from which the director derives an improper personal benefit) also would apply to officers under the proposed amendments, other than the exclusion for liability for unlawful dividends, since only directors are authorized to declare and cause the corporation to pay dividends.

I assume that the bill is a response to Morrison v. Berry. In that case, the target company's defendant directors obtained dismissal of a class action seeking post-closing claims for money damages arising out of the sale of Fresh Market. The target had a 102(b)(7) exculpation clause, which precluded monetary liability for breach of the duty of care on the part of the directors. The court allowed care claims to go forward against the CEO and general counsel. Although I have not conducted a careful count, I have the strong impression that there has been an uptick in the number of deal-related class actions being brought against corporate officers. So I assume this amendment is motivated by a wish to preclude those claims.

It's not clear to me why the bill is limited to direct claims, given that directors also get protection in derivative claims. I assume the intent is to allow corporations to sue officers, but why allow shareholders to sue?

The unfortunate thing is that the legislature did not see fit to use this opportunity to correct the basic flaws with Section 102(b)(7). The exculpation statute has been aptly described as “an internally contradictory botch job.” Christopher M. Bruner, Good Faith, State of Mind, and the Outer Boundaries of Director Liability in Corporate Law, 41 Wake Forest L. Rev. 1131, 1155 (2006).

That the statute is intended to permit exculpation of care violations is obvious; care is not among the exceptions to exculpation. Beyond that, however, the relative meanings of, and interrelationship among, the various exceptions is far from clear--a problem that, given Delaware's influence in the field of corporate law, has propagated itself elsewhere. . . . Notably, as one Vice Chancellor would later put it, “its subparts all illustrate conduct that is disloyal,” as that term has traditionally been understood, rendering it difficult to ascribe distinct conceptual content to each of the exculpation exceptions. . . .

Neither the statute nor the legislative comment, however, offers any interpretive guidance with respect to the exceptions.

Failing to address these problems with the statute makes the proposed amendments a missed opportunity.

What is a Poison Pill? And Why do Corporations Use Them?

In April 2022, Elon Musk bought a ~9% stake in Twitter. In response, Twitter's board adopted a shareholder rights plan--more commonly known as a poison pill. In this video, I explain what a poison pill, how it works, and why companies use them. If you want even more information about the poison pill, my book Mergers and Acquisitions has an extended treatment. https://amzn.to/38Pkj06

New Article: "Why We Should Keep Teaching Dodge v. Ford Motor Co."

I have just posted a new article to SSRN: Stephen Mark Bainbridge, Why We Should Keep Teaching Dodge v. Ford Motor Co. (April 5, 2022). UCLA School of Law, Public Law Research Paper No. 22-05, Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4076182

Abstract

What is the purpose of the public business corporation? Is it to maximize shareholder value? Or is it to simultaneously enhance the welfare of shareholders, stakeholders, and the larger society? These are perennial questions, of course, but they also have been much in the news in recent years. Whether tagged as stakeholder capitalism, stakeholder theory, corporate social responsibility, or ESG (i.e., environmental, social, and governance), much attention is being paid.

The time has thus seemed propitious to many legal scholars to revisit the law of corporate purpose. Many of these scholars have been influenced by the late Lynn Stout’s work on the topic. Ten years ago, Stout published her book, The Shareholder Value Myth, which built on her earlier article, Why We Should Stop Teaching Dodge v. Ford. As the latter title suggests, Stout’s principal foil was the Dodge case.

Stout’s focus on Dodge was well chosen, as the case is included in almost all law school corporation law and business association casebooks and has been widely discussed in the academic literature. The influence of Stout’s critique of Dodge work was confirmed by a March 31, 2022, search of the Westlaw Law Reviews and Journals database, which identified 98 articles published in the last three years that cited her book and 43 during the same period that cited her article.

Given the renewed attention to the corporate purpose question and the continuing influence of Stout’s work on that debate, it seems appropriate to revisit her arguments to determine whether she was correct that law professors should stop teaching Dodge. I conclude that law professors ought to keep teaching Dodge. It was good law when handed down in 1919 and remains good law today.

Keywords: corporate purpose, corporate social responsibility, CSR, ESG, Henry Ford, Dodge v. Ford Motor Co., shareholder primacy, stakeholder theory, stakeholder capitalism, corporate law, shareholder wealth maximization, shareholder value maximization

JEL Classification: K22, L21, M14

Judge Issues an Opinion in the California Board Diversity Quota Statute Litigation, Striking Down the Law

A couple of days ago, I passed along news about Crest v. Padilla, the case in which Judicial Watch challenged the constitutionality of California Corporations Code § 301.4, which requires corporations whose principal executive offices are located in California to have at least a specified number of underrepresented minorities on their boards of directors (the exact minimum number depends on the size of the board). As I said, that the trial judge hearing the case had granted summary judgment in favor of Judicial Watch. The judge has no issued his opinion, a copy of which you can get here.

Meanwhile, litigation against the California board gender diversity quota law continues.

I have long argued that theses statutes were unconstitutional under the internal affairs doctrine insofar as they attempted to regulate companies incorporated outside of Delaware. The Crest v. Padilla court did not discuss that issue. Instead, the court focused exclusively on equal protection issues.

Keith Bishops Reports "Plaintiffs Prevail In Constitutional Challenge To California Board Quota Law"

Keith Paul Bishop reports:

This afternoon, Judge Terry Green granted the plaintiff's summary judgment motion in a case challenging the constitutionality of AB 979.  Crest v. Padilla, LA Super. Ct. Case No. 20STCV37513.  AB 979 is a California law that purports to require publicly held domestic and foreign corporations having their principal executive offices in California to have a specified minimum number of directors who are members of underrepresented communities.  Cal. Corp. Code §§ 301.4 & 2115.6.   The case had been scheduled to go to trial in May.

I'll follow up ASAP.

A Comment on Leo Strine's Article on "Board Practices in the Digital Era": Time to Revisit Outsourcing the Board with a Note on the Ever Expanding Caremark Doctrine

Former Delaware Supreme Court Justice Leo Strone recently posted a co-authored article, Board Practices in the Digital Era: Maximizing the Benefit-to-Cost Ratio of Information Technology, which argues that:

Information technology can improve the quality of the deliberative processes of corporate boards of directors. Yet, if used imprudently, these technologies can reduce the integrity of corporate decisionmaking and increase business, legal, and reputational risk.

Regrettably, rather than evolving to keep pace with technological developments, corporate governance practices often involve an admixture of obsolete past approaches and ad hoc new ones, a combination that underutilizes the benefits of technology and increases its potential risks. In this article, we look in particular at two types of board-level practices that should evolve to take into account technological developments:

i) board information policies involving (a) the transmission to and use of information by the board of directors and (b) the documentation of action taken by the board and board committees; and

ii) board meeting practices in the wake of the COVID-19 pandemic and the ubiquitous use of web conferencing platforms to conduct director meetings remotely, rather than in person.

These topics are related, because virtual meetings put pressure on board information policies. Virtual meetings require directors and managers to be self-disciplined so that the efficiency advantages that come with virtual meetings are not undermined by inattention, unproductive online interaction, and insufficient in-person time for the board and key managers to meet and develop the chemistry and expectations for information flow vital to successful governance.

This article is not theoretical, but practical. After situating board practice in its historical context, we make recommendations about affirmative steps — “do’s” — that companies could take to improve their board information policies, positive steps that imply actions to avoid — “don’ts”— which we set forth in correlative footnotes. From there, we recommend “do’s” and “don’ts” for board organizational, calendaring, and meeting practices, an understudied area. We then explain how our recommendations facilitate informed, efficient, and credibly-documented decisionmaking.

First, Strine seems untroubled by the prospect that an emphasis on board information flows and meeting procedures is likely to result in directors having greater exposure to Caremark liability. He appears to believe that board failures with respect to overseeing technology and using technology could result in Caremark liability and that that could be a good thing. (See pp. 7-8.)

I have never shared the enthusiasm for Caremark one sees in some circles. To the contrary, I believe Caremark was a mistake from the outset. I also believe the steady expansion of Caremark liability in recent years has been an appalling error. See my article, Don’t Compound the Caremark Mistake by Extending it to ESG Oversight, which is forthcoming in the Business Lawyer, which argues that:

Since the foundational decision in In re Caremark Intern. Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996), Delaware corporate law has required boards of directors to establish reasonable legal compliance programs. Although Caremark has been applied almost exclusively with respect to law and accounting compliance, the original Caremark decision contemplated applying the oversight duty to the corporation’s “business performance.” Accordingly, there is no doctrinal reason that Caremark claims should not lie in cases in which the corporation suffered losses, not due to a failure to comply with applicable laws, but rather due to lax risk management.

The question thus arises as to whether Caremark should be extended to board failures to exercise oversight with respect to environmental, social, and governance (ESG) factors. Obviously, where existing legislation or regulations impose compliance obligations in ESG-related areas, such as human resources, the environment, or worker safety, Caremark already applies. As such, boards must “ensure that compliance and monitoring systems are in place” to oversee corporate compliance with those laws.

Many ESG issues are not yet the subject to legal requirements, however. The question addressed in this Article is whether the board’s Caremark obligations should be extended to encompass oversight of corporate performance with such issues. In other words, should the board face potential liability not just for failing to ensure that the company has adequate reporting and monitoring systems in place to insure compliance with ESG-related legal requirements, but also to monitor ESG risks in areas where corporate compliance would be voluntary or aspirational.

Let us turn, however, to the main issue that jumped out at me when I read Strine's article; namely, the ever increasing demands for board expertise.Strine repeatedly calls for boards to have more expertise regarding information technology:

• He posits that Caremark liability arose in cases in which companies "failed to set up structures that ensured adequate time for board members with relevant industry expertise to focus regularly with key company officers on the companies' most important industry-specific issues."
• He thinks companies "need to update board committee structures to prioritize the most important issues at the forefront of board time and to make sure that diverse business risk, EESG, and legal issues are addressed with adequate expertise ...."

The problem is that a combination of increasing regulatory requirements for board expertise, such as the need for financial expertise on the audit committee that resulted from the Sarbanes-Oxley "reforms" to the audit committee, plus the demands of expertise flowing from the steady expansion of Caremark liability, is already forcing companies to seek directors with increasingly specialized expertise. In turn, the demand for specialized firm-specific expertise bumps up against the requirements forcing companies to have almost all board members to be independent directors. 

The problem, as Todd Henderson and I explained in our book, Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance:

In contrast to insiders, who possess significant firm-specific human capital, independent directors tend to be generalists with little firm-specific knowledge, skills, or expertise. Modern boards thus tend to be “composed of individuals who are not qualified to assess the strategic viability of the corporations they direct.” Unfortunately, the rules mandating director indepen- dence virtually ensure that this problem will remain insoluble, because they effectively “rule out just about anybody who has firsthand knowledge of the company and its industry.”...

A board composed principally of generalists will typically lack the sort of specialized skills and expertise many board tasks require.

We also pointed out that the increasing desire on the part of boards to embrace stakeholder theory (a trend I deplore, but that's a story for another day) compounds the needs for board-level expertise:

For the traditional board to manage these stakeholder interests, it will have to have a board member with labor or environmental expertise. Some boards may have these people, but perhaps not. Since the range of potential stakeholders is large, it is unlikely that a firm will have a board member that can claim expertise or networks in all the areas in which a firm may want to deploy the board. After all, boards already need a range of expertise in areas like accounting, finance, strategy, the particular industry, compensation, and a host of other topics.

Strine proposes bringing an insider onto the board:

We also think that the case could be made for adding another member of management to the board; although that individual would not be an independent director, the added expertise and experience would benefit the board as a whole.

But as Henderson and I explained:

Even if there is an expert on labor or environmental issues on the board, there is a potential weakness in relying on an individual board member to be solely responsible for managing this process. Although boards routinely dele- gate authority to committees or subgroups of the board, there is additional risk from having a single individual board member be the only person on the board with the information, expertise, and authority to handle the management of an important stakeholder relationship.

There is, however, a solution. It is a solution that would reduce the risk of Caremark liability and bring a huge increase in expertise to the board. It is what Henderson and I proposed in out book Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance. We asked:

Why does the law require governance to be delivered through individual board members? While tracing the development of boards from quasi-political bodies through the current “monitoring” role, the authors find the reasons for this requirement to be wanting. Instead, they propose that corporations be permitted to hire other business associations – known as “Board Service Providers” or BSPs – to provide governance services. Just as corporations hire law firms, accounting firms, and consulting firms, so too should they be permitted to hire governance firms, a small change that will dramatically increase board accountability and enable governance to be delivered more efficiently.

With regard to the board expertise issue, we pointed out that:

When board members currently need outside expertise, it all too often comes from outsiders hired by or influenced by the CEO, which creates serious conflict-of-interest problems. In the BSP model, by contrast, we assume that the board-service company would have an internal expert staff backing up the individuals who provide the board functions. ... This is a classic example of the choice between “building” (that is, having expertise inside a particular firm) and “buying” (that is, hiring the expertise in the market) that firms face in a host of activities.

As we demonstrate in the book, buying board expertise by outsourcing the board function to a consultant firm is going to be much more efficient.

BSPs are highly adaptable. They are well suited to perform the monitoring function as required by current law and best practices, but they are equally well suited to performing service and managerial functions. Indeed, as we shall see, because BSPs are less subject to time and expertise constraints than individual directors, they are capable of fully carrying out the monitoring function while also simultaneously providing more effective advisory, networking, and managerial services.

So the solution seems to be revisiting the possibilities offered by BSPs.

Recommended reading: Roy Shapira, Max Oversight Duties: How Boeing Signifies a Shift in Corporate Law

Regular readers know that the direction of Delaware's Caremark litigation worries me. See my blog post on the disastrous Boeing decision and my forthcoming article on how the Caremark mistake might evolve into imposing duties on directors who fail to conduct ESG oversight to the satisfaction of a Delaware jurist. 

So I noted with great interest Roy Shapira's new article on Caremark:

In September 2021, the Boeing 737 Max debacle turned into an important moment in corporate law. A Delaware court allowed a derivative lawsuit brought by Boeing shareholders to proceed, based on the theory that Boeing’s directors breached their oversight duties by not doing enough to monitor, prevent, and react to fatal airplane safety issues. This Essay explains what the Boeing decision means for director oversight duties going forward, and uses it as a springboard to discuss broader trends in corporate law. Specifically, the Essay makes the following five contributions.

First, the Essay delineates the contours of a new era of heightened oversight duties. Corporate law courts are increasingly willing to designate certain compliance risks as “mission critical,” thereby activating an enhanced scrutiny mode. Boeing suggests that practically all directors of manufacturing companies are operating in or around the mission critical zone these days, and illustrates just how enhanced the scrutiny is once in this zone. Second, the Essay fleshes out a shift in focus: from scrutinizing compliance with regulations meant to protect investors (such as financial reporting), to scrutinizing compliance with regulations meant to protect broader societal interests (such as product safety). Boeing, for example, faults directors for focusing on restoring corporate profitability and image instead of putting consumer safety front and center. Third, the Essay uses Boeing to show how corporate law guides behavior not just directly, through legal sanctions, but also (and indeed more so) indirectly, through shaping norms and reputations in the business community. Boeing did not end in a verdict in favor of the plaintiffs: it was instead settled quickly after the motion to dismiss. Still, the case created significant changes in the advice that lawyers give their director clients, and in the volume and tone of media coverage, which in turn created reputational fallouts. Fourth, the Essay evaluates the desirability of the Boeing development. On one hand, the development holds the promise of mitigating incentives to remain ignorant, and improving accountability. On the other hand, Boeing may have gone too far in removing corporate law’s guards against hindsight bias. Finally, the Essay spotlights two big questions that Boeing left unanswered: officer oversight liability, and director liability for oversight of nonlegal requirements.

I lean so much to the "other hand" position, that I disagree with some of his "one hand" analysis, but I nevertheless think it is a very important article that deserves wide attention.

"How Would Directors Make Business Decisions Under a Stakeholder Model?": Recommended reading

I really enjoyed Robert Miller's new article, obtaining a number of useful insights to incorporate into the book I'm writing on corporate social responsibility and stakeholder capitalism:

Strong forms of the stakeholder model of corporate governance hold that, in making business decisions, directors should consider the interests of all corporate constituencies (employees, customers, suppliers, shareholders, etc.) in such a way that directors may sometimes decide to transfer value to a non-shareholder constituency even though doing so produces no net benefit for shareholders even in the long-term. This article makes four main points about the stakeholder model. First, although its advocates often speak as if the model placed all corporate constituencies on a par, in fact the model uniquely disadvantages shareholders: since the claims of other constituencies arise in contract or by law, directors have no power to invade these claims for the benefit of shareholders; hence, business decisions made under a stakeholder model will often transfer value from shareholders to other constituencies but never from other constituencies to shareholders. Second, although critics of the stakeholder model have long argued that the model provides no definite standard by which directors may decide what to do in particular cases, this greatly understates the point. In fact, the stakeholder model leaves business decisions radically indeterminate, for it includes no normative criteria by which any business decision could be judged to be any better or any worse than any other. Third, some normative criteria that can be added to the stakeholder model and might seem to solve this problem in fact fail to do so; this includes criteria based on Kaldor-Hicks efficiency, on hypothetical bargains among the corporate constituencies, or even on Delaware doctrines about allocating merger consideration among classes of shareholders. Finally, the article notes a surprising point of agreement between advocates of stakeholderism and its critics, viz., that decisions made under a stakeholder model would be essentially political in nature. That is, they will be based not on rational, normative considerations but on the varying abilities of different constituencies to pressure or lobby the directors—i.e., business decisions become essentially rent-seeking contests.

Miller, Robert T., How Would Directors Make Business Decisions Under a Stakeholder Model? (February 6, 2022). Business Lawyer (2022 Forthcoming), Available at SSRN: https://ssrn.com/abstract=4032539 or http://dx.doi.org/10.2139/ssrn.4032539