Corporate Governance Beyond Economics

Corporate law and governance are complex and continually changing.  Yet, broadly speaking, throughout the 20th century corporate law developed with a focus on the allocation of power between shareholders and boards of directors.  And, notwithstanding significant ambiguity and dissent, the dominant view that has emerged and remained relatively stable sees corporate law in predominantly economic terms and, specifically, as focused on shareholder value.

At the beginning of the 21st century, legal developments at the federal and state level have arisen that diverge from a narrow view of corporate law as serving primarily or only to order private financial interests. In a forthcoming book chapter, I gather the threads of these developments and examine coming controversies.

On the federal front, the Supreme Court’s decisions in Citizens United and Hobby Lobby have put corporate law in a new quasi-constitutional light.  In Citizens United, the Court expanded corporate political spending rights and rejected concerns about dissenting shareholders on the basis that “[t]here is . . . little evidence of abuse that cannot be corrected by shareholders ‘through the procedures of corporate democracy.’”[1]  In Hobby Lobby, the Court concluded that corporations are “persons” capable of the “exercise of religion” within the meaning of the Religious Freedom Restoration Act and disposed of concerns about disputes relating to religion by noting that “[s]tate corporate law provides a ready means for resolving any conflicts . . .”[2]  While significantly expanding the rights of corporations, these decisions rely on corporate law to coordinate and settle the discord that arises from their political and religious activity.

In addition to these landmark Supreme Court decisions, Congress, the Securities and Exchange Commission, and other federal courts have been embroiled in battles over the scope and appropriateness of regulating corporate speech and disclosures on topics such as conflict minerals and political expenditures.  These issues encompass not only economic interests, but also humanitarian and democratic values.

A separate development has occurred at the state level.  Catalyzed by a social entrepreneurship movement, more than 30 states, including Delaware, have adopted benefit corporation statutes, establishing a new form of business entity in which the board of directors must consider the interests of all stakeholders and pursue a dual mission of profits and a public benefit.  The benefit corporation structure embodies the ideal of pursuing goals beyond economic value to shareholders.  Because the federal developments are separate from the benefit corporation movement, the broader picture is one of a reshaping of the rights and roles of corporations.

The chapter considers the possibility that reform that is responsive to the changing rights and roles of corporations will be slow and difficult to achieve.  The Supreme Court can move relatively quickly in expanding the speech and religious liberty rights of corporations, but responsive legislative change and private ordering are often difficult to effectuate and narrower or piecemeal in scope.

Finally, the chapter looks ahead to potential challenges concerning speech and association that these developments may presage.  Although these challenges may arise within constitutional law, they are important for business lawyers and academics to follow and weigh in on because of their implications for securities regulation, corporate law, and governance.

One area to watch is the growing number of federal decisions that have relied upon the compelled commercial speech doctrine to strike down laws mandating commercial disclosures,[3] and the Supreme Court’s application of “heightened” scrutiny to commercial regulation.[4]  These recent decisions suggest that courts may have begun to lose sight of the limited basis for protecting commercial speech – rooted in the interests of listeners – that the Supreme Court relied on in establishing the commercial speech doctrine.  With changing views of corporations and the values they pursue, courts could increasingly view commercial speakers as having their own interests to protect and open the door to additional First Amendment challenges to securities and other business regulation.

Another area that is ripe for controversy is the Supreme Court’s freedom of association jurisprudence. Commercial associations have in the past been understood to receive minimal constitutional protection from regulation.  Justice Antonin Scalia once explained, “The robust First Amendment freedom to associate belongs only to groups ‘engage[d] in expressive association . . .’  The Campbell Soup Company does not exist to promote a message, and ‘there is only minimal constitutional protection of the freedom of commercial association’.”[5]  Will this distinction hold when corporate governance is pushed to focus on political, social, and religious values?

A great deal is at stake with these controversies on the horizon.  With the arrival of benefit corporations, these developments suggest that participants in corporations may face a changing corporate contract and will need to do more work to decide how they should operate, what activities they should engage in, and the purposes and rights they will pursue.


[1] Citizens United v. FEC, 558 U.S. 310, 361-62 (2010) (quoting First Nat’l Bank of Boston v. Bellotti, 435 U.S. 765, 794 (1978)).

[2] Burwell v. Hobby Lobby Stores, Inc., 573 U.S. _, 134 S. Ct. 2751, 2775 (2014).

[3] See, e.g., Nat’l Ass’n of Mfrs. v. SEC, 800 F.3d 518 (D.C. Cir. 2015); Nat’l Ass’n of Mfrs. v. NLRB, 717 F.3d 947 (D.C. Cir. 2013); R.J. Reynolds Tobacco Co. v. FDA, 696 F.3d 1205 (D.C. Cir. 2012); Authentic Beverages Co. v. Tex. Alcoholic Beverage Comm’n, 835 F. Supp. 2d 227 (W.D. Tex. 2011).

[4] Sorrell v. IMS Health Inc., 564 U.S. 552 (2011).

[5] Wash. St. Grange v. Wash. St. Repub. Party, 552 U.S. 442, 467 (2008) (Scalia, J., dissenting) (internal citations omitted).

This post comes to us from Professor Elizabeth Pollman at Loyola Law School, Los Angeles. It is based on her book chapter, “Corporate Governance Beyond Economics,” forthcoming in The Corporate Contract in Changing Times: Is the Law Keeping Up? (Steven Davidoff Solomon, William Savitt, & Randall Thomas, eds., Univ. of Chicago Press), and available here