I'm no longer on Twitter, but readers sometimes a friend sends me a tweet they think will interest me. Case in point: this highly provocative tweet:
Obviously, the tweet was deliberately written in a way that would appeal to a certain political tribe (i.e., those that wear MAGA hats), but it actually raises an interesting question; namely, when a firm is in sufficient distress that it is laying off employees, should it be engaged in corporate philanthropy?
That question is a subset of the broader issue of how we reconcile competing stakeholder claims. I suggest that there are three possible answers to this claim.
To be clear, I am not addressing the merits of the specific gifts to BLM or giving to BLM in general. Instead, I am simply using the tweet as a jumping off point from which to generalize the issue of corporate philanthropy.
The Shareholder Wealth Maximization Answer
If we assume that the purpose of the corporation is to maximize sustainable long-term wealth gains for the shareholders, corporate philanthropy is problematic only if it results in sustained long-term reductions in corporate earnings or assets. In many cases, however, corporate philanthropy is consistent with shareholder wealth maximization. In Eitingon-Schild Co., Inc. v. C.I.R., 21 B.T.A. 1163, 1170 (B.T.A. 1931), for example, the Tax Court held that:
Direct business benefits flowed to the petitioner as a result of meeting its contribution quota to the charity chest, in that it was enabled to maintain cordial relations with the directors who were representatives of big concerns which were customers of the petitioner. The contribution also possessed a definite advertising value. The amount of the petitioner's contribution was advertised in the papers by the charity chest corporation, and was made well known to the trade. It aided the petitioner in becoming known as a large and prosperous concern among present and prospective customers.
This can be true even of corporate giving to controversial groups or causes. Such giving can be seen as a form of cause-related marketing, in which the corporation aligns itself with a cause it believes its consumer base supports.
From a shareholder wealth maximization perspective, the question thus is whether simultaneous increases (or shifts in) corporate giving and employee layoffs each separately contribute to enhanced long-term shareholder wealth gains. Put another way, the tweet errs by conflating two actions that have to be analyzed individually and by assuming that the actions are necessarily inconsistent.
The Corporate Social Responsibility Answer
One of the advantages of the shareholder wealth maximization is that it gives clear answers to otherwise difficult questions. uppose that the board of directors is considering closing an obsolete plant. The closing will harm the plant's workers and the local community, but will benefit shareholders, creditors, employees at a more modern plant to which the work previously performed at the old plant is transferred, and 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—or, required—to deviate from shareholder wealth maximization, however, they must inevitably turn to indeterminate standards balancing the interests of multiple parties.
The corporate social responsibility answer thus requires corporate decision makers to weigh two competing interests with no clear standard for choosing between them. It is in this context that the tweet actually has teeth. The author presumably thinks that it poses an unresolvable dilemma: Do we let go employees or contribute to BLM?
Side note: The assumption that underlies the tweet is that AirBnB faced a zero-sum decision in which every X number of thousand dollars given BLM requires it let go an employee who otherwise might have kept their job. There are two problems with that assumption. First, zero-sum business decisions--while theoretically of great importance--are rare. Second, it assumes that the charity/layoff decision is a binary one. In fact, of course, AirBnB presumably is spending money on countless activities. It's not fair to focus on this particular pair.
Setting aside the side note, however, I think the corporate social responsibility answer does present a serious problem. As I have explained elsewhere:
Standards that require the directors to balance the interests of multiple constituencies, shading between them from case to case, ... 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. The conflict of interest rules governing the legal profession provide a useful analogy. Despite many years of refinement, these rules are still widely viewed as inadequate, vague, and inconsistent— hardly the stuff of which certainty and predictability are made.
Second, absent clear standards, directors will be tempted to pursue their own self-interest. Directors who are responsible to everyone are accountable to no one. In the foregoing hypothetical, for example, if the board's interests favor keeping the plant open, we can expect the board to at least lean in that direction. 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 directors' 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.
Stephen M. Bainbridge, Much Ado About Little? Directors' Fiduciary Duties in the Vicinity of Insolvency, 1 J. Bus. & Tech. L. 335, 354–55 (2007).
The Correct Answer
In an earlier post that discussed corporate philanthropy at length, I argued that:
More important, deference to corporate philanthropic decisions is consistent with—indeed, mandated by—[my director primacy] theory of the firm. ...
As noted, corporate charitable giving typically is defended on grounds that it produces good will and favorable publicity. In effect, charitable giving is simply another form of advertising. As such, it supposedly results in more business and higher profits. Who knows for sure if that is true? Maybe GM really does sell more luxury sport utility vehicles because it sponsors PBS programs—or maybe not. But that is not the right question. The right question is: who decides? The board of directors or the courts? That directors feel good about themselves for having made such a decision hardly seems like the kind of self-dealing that justifies heightened scrutiny.
Board discretion over issues like charitable giving is the inescapable side-effect of separating ownership and control. If there are good reasons for maintaining that separation, and there are, the board’s discretionary authority must be preserved. As we have repeatedly seen, holding directors accountable for their use of that discretionary authority inevitably limits that discretion. Consequently, deference to board decisions is always the appropriate null hypothesis.
There are cases where the board’s abuse of its discretionary authority warrants regulatory or judicial intervention. Breaches of the duty of loyalty spring to mind as the clearest example. As already noted, it seems doubtful that corporate philanthropy poses the sort of conflict of interest necessary to justify limiting board discretion. Yet, even if corporate philanthropy involved material sums, deference would still be appropriate. The theory of the second best holds that inefficiencies in one part of the system should be tolerated if “fixing” them would create even greater inefficiencies elsewhere in the system as a whole. Even if we concede arguendo the case against board control over corporate giving, judicial oversight or regulatory intervention still would be inappropriate if it imposes costs in other parts of the corporate governance system. By restricting the board’s authority in this context, the various academic proposals to “reform” corporate philanthropy impose just such costs by also restricting the board’s authority with respect to the everyday decisions upon which shareholder wealth principally depends. Slippery slope arguments are usually the last resort of those with no better argument, but one nonetheless must beware eviscerating exceptions that could swallow the general rule of deference. Once regulation of corporate philanthropy allows the camel’s nose in the tent, it becomes harder to justify resistance to further encroachments on board discretion.
As such, the correct answer is that the board of AirBnB properly is vested with authority to make these decisions. To be sure, people are free to criticize those decisions, but as a matter of law the board was well within its authority.
