The Corporate Governance of National Security

A central goal of corporate law is to make managers accountable to shareholders. So it may come as a surprise that America’s federal government frequently compels companies to “effectively exclude the Shareholder from . . . influence over the Corporation’s business or management [.]”[1] Indeed, there is a federal agency whose principal is to ask companies to entrench the board of directors, waive the duty of loyalty, and hire individuals with little business experience to run the company.

That agency is located in the Pentagon. The managers hired and entrenched are former spies, military officers, and law enforcement officials. They take the reins from the shareholders for reasons of national security, at companies completing secret projects or those vital to the military or espionage agencies.  I discuss this secretive program of repurposing corporate boards as instruments of national security in my forthcoming article, The Corporate Governance of National Security.

National security corporate governance is born of the need to reconcile the two conflicting logics of security and efficiency. The closed culture of national security stultifies creativity and efficiency. This is why nations often outsource much of their defense preparation and production to private contractors, where market dynamics encourage creativity and economy. Yet these same market dynamics can undermine national security if companies feel that their interests are better served spying on or sabotaging these important projects – perhaps because a major investor or another client has ties to a foreign state. National security corporate governance attempts to focus private sector dynamism onto problems of national importance, without naively trusting that the national interest and private interests are identical. With national security corporate governance, government representatives commandeer the boardrooms of private companies for public purposes, where they intercept illegal or risky plans before they become corporate policy.

In America, national security corporate governance is a widespread and important practice. Under its ambit are some of the nation’s most pivotal security programs, such as civilian wiretapping, and the use of armed military contractors in combat zones. Covered companies perform some 5 percent of all classified government projects. They include the U.S. operations of household names like Rolls Royce, BAE, and Siemens. About 400 firms are currently subject to national security corporate governance, with one new agreement negotiated each week. All it takes to fall under its scope is a classified project and a potentially influential foreign client or investor.

Research at the intersection of national security and corporate law is rare, in part because of the difficulty in getting the relevant information. In the case of national security corporate governance, it is not even easy to find “the law” itself. No statute refers to national security corporate governance. Until 2014, neither did any administrative rule or pronouncement. I attempt to overcome these challenges through a variety of research techniques, including FOIA requests, visits to the National Archives, and interviews with industry insiders – attorneys, government officials, consultants, business people, and the directors of these unusual companies themselves.

This work amounts to just a peek inside of a very black box, but what we find leads naturally to many questions: Is the boardroom a sensible channel for states to address their concerns about contractor trustworthiness, or does this intervention increase bureaucracy and paper over real national security risks? Security aside, scholars have long debated whether corporate law should vest boards with priorities apart from (or instead of) shareholder wealth maximization, or whether we should instead achieve social priorities only through regulations external to corporate law. National security corporate governance is a decades-long experiment with one form of multi-constituency corporations, which may have lessons for other such ventures.

Corporate law and national security law envision fundamentally different forms of coordination. Corporate law supports private ordering and accountability, particularly of managers to shareholders, in pursuit of profits and efficiency. National security law provides for the common defense, even if it means tolerating a measure of secrecy, coercion, and bureaucracy. This article examines a program at the border between these two domains, implicating important questions for both.

ENDNOTE

[1] Proxy Agreement Template available here.

This post comes to us from Andrew Verstein, an associate professor of law at Wake Forest University and a visiting associate professor of law at the University of Chicago. It is based on his recent article, “The Corporate Governance of National Security,” available here. A version of this post appeared on the Oxford Business Law Blog.