ProfessorBainbridge.com

My WLF Legal Pulse column on federal forum selection clauses and Salzberg v. Sciabacucchi is now up

You can download it here.

A sample of yours truly teaching SOX Legal Ethics from home during the coronavirus crisis using Zoom

Yours truly gets tagged in a Wall Street Journal editorial on the fight at George Mason

As a Wall Street Journal editorial today explained, there's a big fight going on at the Antonin Scalia Law School at George Mason University, with the usual suspects on the left cancel culture trying to find out the anonymous donors behind the gift that resulted in the law school being named after Scalia:

After Scalia died in 2016, a donor, described as a friend of the Justice, offered $20 million to rename GMU’s law school in his honor. GMU, a Virginia-based public university, agreed to condition the gift on the donor’s anonymity. The name officially changed that year.

Yet this month GMU threatened to renege on its contract by identifying the donor, according to a motion filed in Arlington County Court. The motion asked for a temporary restraining order, which was granted Thursday, but the case isn’t over. GMU could win the lawsuit, while the donor says the agreement has already been breached and may demand the return of $16 million.

The background is that since the law-school renaming was proposed, liberal faculty and students have been up in arms. GMU, like most universities, leans left, but its law school is a rare bastion of classical liberal thinking in higher education. That’s made it a target of activist groups and Freedom of Information Act requests from progressives who argue conservatives have too much influence.

My friends Henry Manne and Larry Ribstein often complained about the ways in which the central GMU campus treated the law school. I have no basis for knowing how things are going now, but I doubt it's gotten any better.

Anyway, the WSJ editorial board tagged yours truly:

GMU’s apparent willingness to flout its commitment comes at a time of elevated liberal harassment of non-progressive professors and ideas in the legal academy. Stephen Bainbridge, a conservative on the UCLA law faculty, last month reported that his emails were subject to a public records request—an unusual imposition on academic freedom.

SCOTUS Oral Arguments on the CFPB: Will Kavanaugh Remember to Cite Yours Truly?

Bloomberg reports that:

The U.S. Supreme Court seemed inclined to give the president more power over the Consumer Financial Protection Bureau as the justices considered whether Congress went too far in trying to insulate the agency from political pressure.

Hearing arguments in Washington Tuesday, the court’s conservatives suggested they agreed with Trump administration contentions that the Constitution requires the president to have broad ability to fire the agency’s director. When Congress set up the agency, it gave the director a five-year term and said the person could be ousted only for specified reasons.

Justice Brett Kavanaugh noted that the current CFPB director, an appointee of President Donald Trump, is serving a term that will last until the end of 2023. “The head of this agency will go at least three or four years into the next president’s term, and the next president might have a completely different conception of consumer financial regulatory issues, yet will be able to do nothing about it,” Kavanaugh said.

Back in 2018 when he was still on the DC Circuit, then Judge Kavanaugh dissented in a CFPB case. In that case, he cited yours truly:

As compared to a single-Director independent agency structure, a multi-member independent agency structure—and its inherent requirement for compromise and consensus—will tend to lead to decisions that are not as extreme, idiosyncratic, or otherwise off the rails. Cf. Stephen M. Bainbridge, Why a Board? Group Decisionmaking in Corporate Governance, 55 Vand. L. Rev. 1, 12-19 (2002).

PHH Corp. v. Consumer Fin. Protec. Bureau, 881 F.3d 75, 184 (D.C. Cir. 2018). It's not clear to me whether the current case will end up tackling the multimember issue. but one hopes so. 

An autobiographical Twitter thread

All about me:

1/ I've picked up about 200 new followers this week thanks to that Slate business. So for you new guys here's an introduction: I am often cynical, sarcastic, light-hearted, iconoclastic, or frivolous. I'm serious about my faith, corporate law, wine, cooking, my wife, and my dogs.

— Professor Bainbridge (@ProfBainbridge) February 26, 2020

Yours truly cited by Delaware Chancery Court in the Panera Bread Company Appraisal case

From Vice Chancellor Zurn's opinion:

The board of directors “has the sole power to negotiate the terms on which the merger will take place and to arrive at a definitive merger agreement embodying its decisions as to those matters.”⁴³⁴

⁴³⁴ Stephen M. Bainbridge, Mergers and Acquisitions 56 (2d ed. 2009) (citing 8 Del. C. § 251(b)); accord 8 Del. C. § 141 (“The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors ....”).

IN RE APPRAISAL OF PANERA BREAD COMPANY, CV 2017-0593-MTZ, 2020 WL 506684, at *25 (Del. Ch. Jan. 31, 2020).

The preponderance of the evidence shows that the board directed Shaich’s negotiations and “arrive[d] at a definitive merger agreement embodying its decisions as to th[ose] matters.”⁴⁶³

⁴⁶³ Bainbridge, supra note 434, at 56.

Id. at *26.

 

Pro bono legal representation may be available to University of California job candidates who were rejected because their diversity, equity, and inclusion statements scored too low

Brian Leiter has the story:

Pro bono legal representation may be available--read on.

As we've noted on several occasions, schools in the UC System have begun requiring applicants for faculty positions to submit a diversity statement. In most searches, these statements have been evaluated holistically as part of an overall application. However, several UC schools have participated in Advancing Faculty Diversity Pilot Programs where contribution to diversity statements have been evaluated as a threshold requirement. In other words, for these searches, if you didn’t get a passing score on your diversity statement, you were not considered further.

This methodology has had an enormous impact. As we discussed last month, for a 2018-2019 search in the Life Sciences, UC Berkeley rejected 76% of the applicants without even considering their research, teaching skills, or academic merits (out of 893 qualified applicants, 679 were eliminated solely because their diversity statements were deemed inadequate). ...

If you applied to and were rejected to one of these searches, or are planning to apply to one of the upcoming searches, you can help to challenge UC’s unlawful policies. Daniel Ortner from the Pacific Legal Foundation is looking for individuals who were impacted by these searches to potentially offer free pro bono representation. You can reach him at dortner@pacificlegal.org.

No word yet on whether I'll need him. In any case, maybe this is what the UC Regents are discussing in their closed door meeting today. 

Apparently I've become a "case to watch" with respect to the University of California mandatory diversity, equity, and inclusion statements

Regular readers will recall my post about my diversity statement, which I was required by the UC system to submit as part of the package for a pending merit raise review. You'll also recall my posts (e.g., here) expressing concern that these statements effectively impose a mandatory political litmus test. The post setting out my statement went viral, ending up in the Wall Street Journal's Notable and Quotable column.

I'm not the only UC faculty member pushing back, of course. Abigail Thompson, chair of the mathematics department at the University of California–Davis, famously described the problem in a Wall Street Journal editorial:

To score well [on a diversity statement], candidates must subscribe to a particular political ideology, one based on treating people not as unique individuals but as representatives of their gender and ethnic identities. . . . This system specifically excludes those who believe in a tenet of classical liberalism: that each person should be treated as a unique individual, not as a representative of an identity group. Rather than helping achieve inclusion, these [rubrics] act as a filter for those with nonconforming views.

Now the story has been picked up by Forbes. Michael Poliakoff explains:

The University of California stipulates that departments at its campuses must require faculty applicants to submit “diversity statements,” in which applicants affirm their commitment to diversity and inclusion as social ideals, detail their contributions to diversity in academia, and outline their plans for cultivating a diverse community on campus. The requirement for a diversity statement seems reasonable, given the imperative of understanding students of different backgrounds and teaching them effectively. This is particularly important given UC’s rich mixture of cultures and backgrounds. Different University of California campuses have used the diversity statements in different ways in hiring and promotion, some, so far, in relatively benign ways.

Some, however, in quite dangerous ways.

What has emerged most clearly at Berkeley is likely to have catastrophic implications for the intellectual life of the University of California, especially if such practices find homes at other campuses. A new “Initiative to Advance Faculty Diversity” adopted by several departments at Berkeley is the use of a rubric as a screening process to eliminate all applicants who do not conform to the approach to diversity that Berkeley’s Office for Faculty Equity and Welfare might have in mind. A candidate who describes, in the language of the rubric, “only activities that are already the expectation of Berkeley faculty (mentoring, treating all students the same regardless of background, etc.)” is deemed to have given an unacceptable answer. And there are real consequences for the candidate. In pilot programs, the rubric, to repeat, has been used—and continues to be used—as a screening tool, deployed before the faculty hiring committee can give due consideration to the academic merits of the candidate.

... News flash from Berkeley: A 2018–19 search for a professor in life sciences cut the applicant pool from 894 to 214 based solely on the diversity rubric. Who were the scientists whose academic credentials were never reviewed? What other UC academic programs are now preparing to adopt such practices? 

... If the likes of Albert Einstein or Enrico Fermi or any other great scholar and teacher did not craft a diversity statement judged satisfactory in light of standards devised by a campus inclusion and equity bureaucracy, his or her application could stop cold. 

At this point the story takes a personal turn:

In this regard, Stephen Bainbridge, professor of law at the University of California–Los Angeles, will be a test case. Professor Bainbridge shared the diversity statement that he submitted for his merit raise, which emphasizes the importance of differing viewpoints in forming a diverse community. If the university cherishes intellectual diversity, then it will value his perspective to support students of faith and conservative political views. It is a case to watch.

Some University of California faculty are pushing back against mandatory diversity statements

Regular readers will recall my post about my diversity statement, which I was required by the UC system to submit as part of the package for a pending merit raise review. You'll also recall my posts (e.g., here) expressing concern that these statements effectively impose a mandatory political litmus test. As I pointed out:

Even the relentless liberal Daily Bruin student newspaper recognized this basic fact (emphasis supplied):

UCLA is a public, academic setting, an environment meant to support a diverse range of ideas and viewpoints towards all issues – within reason – with the knowledge that they enrich our campus. EDI statements stifle this diversity by limiting qualified new hires to social activists who mirror administrators’ agendas. Even if these activists are doing good, exclusively hiring them is a subtraction from the marketplace of ideas and a slippery slope toward further homogenization of dialogue – an unavoidable end incongruent with the diversity goals UCLA claims to be striving for. ...

The “EDI Statement FAQs” document claims the statements are “not about penalizing faculty who do not promote EDI,” but that’s difficult to substantiate when they’re quite literally metricizing someone’s quality based on these standards.

The post setting out my statement went viral, ending up in the Wall Street Journal's Notable and Quotable column.

I don't know if my speaking out had any impact, but I have heard the at UC Davis a group of faculty is gathering signatures in support of the following resolution:

Resolved: 'Diversity, Equity and Inclusion Statements shall not be mandatory for the appointment or for the advancement of faculty. ‘  

The proponents have set up a website with background information and university documents on how these statements are to be evaluated. The documentation makes it clear that the diversity statements are being scored and that a low score will be disqualifying. 

It also looks like the pushback may have gotten the attention of the Regents. The agenda for the closed session of their next meeting includes an item on "Legal Considerations Relating to Faculty Diversity Item." The UCLA Faculty Association blog speculates:

The full Board’s second meeting in the open session on January 23 includes discussion of the “State of Title IX” and “Faculty Recruitment, Retention and Diversity.” But there seems to be a follow-up in the closed session that comes after the open one regarding “Legal Considerations Relating to Faculty Diversity Item.” In that seeming follow-up, it appears that some kind of litigation is pending or potentially pending. Whether the reference is to faculty diversity statements that are now being required at UC in many academic personnel actions is unclear. As prior posts on this blog have noted, there has been controversy about those diversity statements in national news media.* Are the statements being challenged through possible litigation? It would be nice to know, although it appears we won't. Note that there is a recent history of "surprise" items popping up on the Regents' agenda.

Two thoughts on possible legal challenges. First, Brian Leiter posted that he had been contacted by lawyers looking to challenge these statements and inviting faculty to contact him. Second, several conservative public interest law firms contacted me after my post went viral. They are definitely interested.

So watch this space.

PS: No news yet on whether I'll get that merit raise.

We got a LOT of email re my diversity, equity, and inclusion statement--herewith a small sampling

Names have been removed to protect the innocent.

From a lawyer:

One approach to the silencing is to do just that:  be silent.  The only other respectable approach is to speak out—respectfully and truthfully—about what is happening and about one’s sincerely held beliefs.  If more and more of us choose this approach, I’m convinced that eventually we can return to some semblance of balance in the “diversity” of views being expressed.

From another lawyer:

You obviously need an intensive rehabilitation course in enlightened invisible equity.

From a Chicagoan:

Hmmmm....

From an alum:

I would be happy to fund your merit raise.  No other conditions but a lunch or dinner next time I am in California might be enlightening.

From another alum:

Just a quick note to thank you for your article in today’s WSJ. 

From yet another alum:

I want to thank you for your refreshingly straightforward and fearless statement in response to the University's request for your political accountability.  I don't read blogs, but I do read the WSJ, and when I read your piece there this morning, I stood up and applauded.

From a CEO:

The data speaks for itself and institutions of higher learning should be the bastion of civil, respectful debate / analysis relating to all important issues of the day.  Our institutions should promote freedom and objectivity of thinking.

From a lawyer specializing in employment law issues:

I hope you get your raise.

(Me too!)

From a Catholic mom:

Just read your excellent piece in today’s WSJ.  ... Am forwarding to all my children, who have all had to withstand the liberal onslaught in their different university journeys (as practicing Catholics no less.).

From a fellow academic:

It was very heartening to read your OpEd note in the Wall Street Journal today.  As another "token" conservative at a university, I feel like I am a "sheep among the wolves", to quote someone far greater than me. 

From an Arizonan (Arizonian?):

The administration was looking for something so very different but you had the courage to put your personal financial interests at risk to state a wider view of what diversity should look like in an academic or corporate setting.

From another fellow academic:

As a faculty member at [redacted], I must admit that the only thing I didn’t like about your contribution is that it wasn’t on the first page of every major newspaper in the US.

Another fellow academic wrote:

As the faculty advisor to a number of conservative student organizations .... I wanted to thank you for the courageous 'diversity' statement you submitted (which I read in today's WSJ). It made me feel a bit less alone in the world. A pity you'll have to miss out on your richly deserved merit raise.

(Let's not be hasty!)

From a retired academic:

I just finished reading the excerpt from your blog that was published in the Wall Street Journal this morning.

Thank you for your articulate and well-researched contribution to what I hope becomes a growing realization and debate over the lack of intellectual and philosophical diversity in higher education.

I recently retired from [redacted]. During that period, I watched the political composition of the faculty, even in these technical areas, move from a reasonable, albeit left-leaning, spectrum to a near complete clustering to the left.

I was especially pleased to see the publication of your essay on the heels of a related piece by Prof. Abigail Thompson in the WSJ on 19 Dec 2019. My hopes are that courageous faculty will continue to bring this issue to the attention of those outside (and inside) academia.

And my personal favorite:

BTW, this may seem totally inappropriate, but please watch your health (weight). We need minds and voices like yours, so don’t go dying prematurely!

Conservative faculty job candidates should apply to the University of California and then sue when they’re rejected.

Brian Leiter and I agree on very little politically, but we share a surprising number of academic values. To wit, his argument that the University of California’s requirement that candidates for any personnel action submit a statement on their involvement in diversity, equity, and inclusion “is a lawsuit for unconstitutional viewpoint discrimination (and maybe also race discrimination) waiting to happen“:

I recommend that those applying for jobs in the University of California system say only this in the diversity statement:  "I decline to supply this statement which constitutes illegal viewpoint discrimination in violation of my constitutional rights."   There are already lawyers gearing up to bring legal challenges; I hope they act soon.   If you have been rejected from a University of California search, and suspect it was on grounds of insufficient ideological purity about "diversity," please get in touch with me.  I can connect you with one public interest legal organization looking for plaintiffs.

To which I would add just this: go get ‘em.

Conservatives need not apply: Impact of University of California’s diversity, equity, and inclusion statement requirement on hiring at Berkeley

University of Chicago scientist Jerry Coyne—who supports affirmative action—is reviewing internal University of California Berkeley data on hiring in life sciences to assess whether the University’s requirement that candidates for all personnel actions submit a statement detailing their involvement with diversity, equity, and inclusion. After putting it through the statistical wringer, he concludes:

We’ve recently been discussing the use of mandatory “diversity statements” for academic job candidates, and the University of California’s commitment to not just using them in all searches, but giving these statements precedence in the hiring process, so that if your statement doesn’t exceed a minimum numerical cutoff for promoting diversity, increasing it in your past, and promulgating it in the future should you be hired, your candidacy is terminated (see here and here). This practice of making candidates not only swear fealty to diversity, but also show a history of concerted efforts to increase it, has been controversial, deemed as a form of ideological/political conformity that don’t belong in a hiring process.

A document from the University of California tells us how the system worked in six searches in the life sciences, and I find it a bit disturbing—disturbing because the ideology and social engineering is clear, because candidates, however good in scholarship, were eliminated if their diversity statements fell below a specified cutoff, and disturbing because the only kind of diversity involved was racial and gender diversity. ...

Nobody should ever be automatically eliminated because their “diversity score” is below 11. If you do that, you will eliminate all those who are good scholars but don’t have a track record in promoting racial and gender diversity, even though they may have been involved in other valued social activities that don’t affect diversity (I’ve mentioned writing about your field for the public and giving talks to high school students to educate and interest them in your field).

But that seems to be what’s happening. 

The Wall Street Journal's Notable and Quotable Makes my University of California Diversity, Equity, and Inclusion Statement Go Viral

Well this just keeps getting bigger:

Tweeting the #AALS2020 Business Associations Section Panel on Corporate Purpose

I’m the (not terribly) svelte guy on the far left. Perhaps appropriately, however, I’m on the far right from my perspective. https://t.co/z3v7YWkSJo

— Professor Bainbridge (@ProfBainbridge) January 2, 2020

1/ @DHWebber1 is presenting a great paper that I heard an earlier version presented by @mbarzuza https://t.co/FmIfdm1r3S The assumption seems to be that millennials are unusually progressive, uniquely willing to base investment and employment decisions on those values, AND ... https://t.co/z3v7YWkSJo

— Professor Bainbridge (@ProfBainbridge) January 2, 2020

2/ that millennials will maintain those unique attributes as they age. Hence, this paper always calls to my mind the adage that if you are not a liberal in your youth you have no heart but if you are not a conservative in your age you have no brain. Are millennials brainless?

— Professor Bainbridge (@ProfBainbridge) January 2, 2020

If I had more time at this panel, I’d read this blog post as my rebuttal remarks. https://t.co/brym18Mbcm https://t.co/z3v7YWkSJo

— Professor Bainbridge (@ProfBainbridge) January 2, 2020

1/ My intervention at #AALS2020 corporate purpose panel drew attention to the implications of our present populist era for corporate governance and purpose. Legal academics live in a bubble comprised mainly of what @joelkotkin calls the Clerisy.

— Professor Bainbridge (@ProfBainbridge) January 2, 2020

2/ Our debates are mostly about the rules and norms that we think do or should govern Oligarchs. But we largely ignore the Yeomanry except in a very abstract sense. We certainly don’t think very much about how our work relates to the lives of the folks who voted for Trump. #AALS

— Professor Bainbridge (@ProfBainbridge) January 2, 2020

Remarks on Corporate Purpose for AALS 2020 Panel on Rising Tensions Among Corporate Stakeholders

We are convened to discuss “Rising Tensions Among Corporate Stakeholders.” Really?

I see something very different happening. The corporate social responsibility debate continues, but some key players have switched sides.

Investors—including the big three of Blackrock, Vanguard, and State Street—increasingly at least purport to care about ESG issues.

And this fall, The Business Roundtable—a center of corporate C-suite elitism—purportedly switched sides, as well.

What’s going on?

As we all know, a couple of months ago, the BRT released a statement on the purpose of the corporation in which it made a major break from its longstanding position. Starting in 1997, the BRT had issued a series of statements positing that corporations exist principally to serve their shareholders. In its recent statement, however, the BRT announced that going forward its members would recognize that “we share a fundamental commitment to all of our stakeholders.” The 181 signing CEOs committed themselves to leading “their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.”

The BRT statement was met with enthusiastic praise in some quarters, condemnation in others, and skepticism in still others. Much of the commentary, however, failed to correctly assess either the effect of the statement or the reasons the BRT felt moved to issue it.

In most cases, the BRT statement likely will prove no more than an irrelevant and innocuous platitude, which may make some people feel a bit better about the role big corporations play in our lives, but which will not affect corporate decision making. Most business decisions, after all, do not directly oppose the interests of stakeholders and shareholders. To the contrary, most business decisions are potentially win-win scenarios. The proverbial rising tide usually does lift all boats.

This is true even of decisions that in the short-run seem to favor stakeholders at the expense of shareholders. Providing health benefits for employees may increase expenses and reduce profits in the short term, for example, but often leads to greater productivity in the long term. Focusing on environmental sustainability can be a useful means of engaging with customers and thereby building brand reputation. Indeed, companies such as Walmart and Coca-Cola have used sustainability in their messaging with success.

Occasionally, however, a business faces a true zero-sum decision. It cannot make both stakeholders and shareholders better off either in the short- or in the long-run. In such a case, would we really expect the signers of the BRT statement to put stakeholders interests ahead of shareholders?

Obviously, the BRT has no power to change the law and the law remains clearly contrary to the BRT’s new commitments. One hundred years ago, in Dodge v. Ford Motors, the Michigan Supreme Court held that: “A business corporation is organized and carried on primarily for the profit of the stockholders.”[1] Much more recently, in eBay v. Newmark, the Delaware Chancery Court likewise held that directors of a company incorporated in Delaware—as are most BRT companies—are obliged to “promote the value of the corporation for the benefit of its stockholders.”[2] The court therefore held that “a business strategy that openly eschews stockholder wealth maximization” was inconsistent with the directors’ fiduciary duties to the company’s shareholders.

In a 2015 Wake Forest Law Review article, former Chief Justice of the Delaware Supreme Court Leo Strine—arguably the leading corporate law jurist of our era—took what he called a “clear-eyed look at the law of corporations in Delaware,” on the basis of which he concluded “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.”

He therefore rejected arguments by various academics that Delaware law allowed executives and directors to make tradeoffs between shareholder and stakeholder interests, stating that “Dodge v. Ford and eBay are hornbook law.” Anyone who argues to the contrary, he said, was pretending. Let’s pause to savor that word: “pretending.”

To be sure, the business judgment rule usually insulates directors from liability for decisions that depart from a short-term focus on maximizing shareholder wealth. But the prudential judgment that courts generally should defer to board of director business decisions does not change the legal obligation of the board and in appropriate cases officers and directors can be held liable for putting stakeholder interests ahead of those of shareholders.

Whether the BRT likes it or not, its statement doesn’t change that rule.

Just as the BRT statement does not change the signers’ legal duties, it does not change the governance structures that constrain their freedom to act as they see fit.

CEOs are appointed by the board of directors. Boards of directors are elected by the shareholders. Until recent decades, of course, none of that mattered very much. Boards of directors passively rubberstamped the wishes of imperial CEOs. As a result, the predecessors of the CEOs who signed the BRT statement had broad discretion to make decisions that put the interests of stakeholders ahead of those of shareholders.

That world no longer exists. In response to new obligations imposed by state and federal laws, boards of directors have become more independent and less willing to acquiesce in a CEO’s wishes. At the same time, share ownership has shifted from individual retail investors to institutions. Some of those institutions—especially activist hedge funds and some pension funds—have made corporate governance activism a central part of their business model. Such investors are constantly on the lookout for managers who are failing to maximize shareholder value and are willing to pressure their boards for change.

Granted, governance activism by shareholders is somewhat offset by social justice activism by ESG-oriented investors. Even so, managers and boards that put stakeholder interests ahead of (or even on a par with) shareholder interests are likely to face proxy contests and other forms of activism from activist hedge funds and their allies. Managers and directors who too often shortchange shareholder value in the name of social responsibility may well find themselves on the losing end of such contests.

Given that nether the legal rules nor the governance environment in which the BRT’s members must operate were changed by the new statement, what purpose was served by issuing the statement? What are the signers up to?

1. Some of the signatories are themselves social justice warriors. Oligarchs like Salesforce.com CEO Marc Benioff, for example, promote “social activism among American chief executives.”
2. The BRT leaders are responding to perceived consumer and labor demand.In particular, 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 business community that to attract Millennial and Generation Z workers and customers, companies must project an image as social justice activists. Nike’s embrace of Colin Kaepernick is but the most obvious example of this phenomenon, but even such heartland companies as Walmart are embracing socially progressive stances, despite the risk of alienating their Red State customer base.
3. The BRT may be trying to head off regulation by progressive politicians. As Wall Street Journal columnist David Benoit has observed, “Democratic presidential candidate Elizabeth Warren has argued that the primacy of shareholder returns has worsened economic inequality, enriching wealthy investors at the expense of workers.” With the mainstream of the Democratic Party seemingly moving in Warren’s direction on business and finance issues, the BRT’s members may have hoped that a voluntary—and perhaps intentionally ambiguous—embrace of corporate social responsibility platitudes would help them fend off more intrusive regulation in the event of a Democratic presidential victory in 2020.
4. 4. The BRT may be responding to pressure from a few very powerful investors, especially the big three institutional investors. Institutional investors long have offered funds that focus on corporations perceived as socially responsible, which generally has been understood to mean companies pursuing progressive goals. As I noted at the outset, however, a growing number of major institutional investors, however, have embraced social activism in support of progressive goals with respect to all of the funds they manage. But this simply pushes the question further up the corporate finance food chain, since it fails to explain why investment fund managers like Larry Fink are pursuing that agenda.
5. Some BRT members may crave a return to the days of imperial CEOS. This is the flip side of #3. Aside from a brief period in the 1980s, when the hostile takeover was viable, CEOs were virtual emperors for most of the last 100+ years. Over the last decade or two, however, shareholder activists have grown in number and power. Unlike the gadflies of old, the new activists—mainly hedge funds—have been all about shareholder return. We have seen repeated cases where hedge fund activism has forced out CEOs (and entire boards), resulted in massive changes in corporate strategy, and even led to companies being broken up.

By embracing stakeholderism, the BRT leaders may hope to restore a measure of freedom.

Indeed, to my mind this is the basic problem with CSR. Suppose Acme's board of directors is considering closing an obsolete plant. The board is advised that closing the plant will cost many long-time workers their job and be devastating for the local community. On the other hand, the board's advisors confirm that closing the existing plant will benefit Acme's shareholders, new employees hired to work at a more modern plant to which the work previously performed at the old plant will be transferred, and the local communities around the modern plant. Assume that the latter groups cannot gain except at the former groups' expense. By what standard should the board make the decision?

Shareholder wealth maximization provides a clear answer: close the plant. Once the directors are allowed to deviate from shareholder wealth maximization, however, they must inevitably turn to indeterminate balancing standards. Such standards deprive directors of the critical ability to determine ex ante whether their behavior comports with the law's demands, raising the transaction costs of corporate governance.

Worse yet, absent the clear standard provided by the shareholder wealth maximization norm, managers and directors will be tempted to allow their personal self-interest to dominate their decision making. If the CEO’s interests favor keeping the plant open, the plant likely will stay open, with the decision being justified by reference to the impact of a closing on the plant's workers and the local community. In contrast, if the CEO’s interests are served by closing the plant, the plant will likely close, with the decision being justified by concern for the firm's shareholders, creditors, and other benefited constituencies.

Some BRT leaders probably would be quite content to see that kind of freedom restored to the C-suite.

In sum, the BRT statement changes nothing. Neither the law nor the governance system in which the BRT’s members must function has changed. Shareholder wealth maximization remains the law. When push comes to shove, corporate executives are unlikely to put stakeholder interests ahead of those of shareholders. And anyone who says otherwise is, to again quote Leo Strine, pretending.