The Need for Greater Discourse in Corporate Law

The following post comes to us from Michael R. Siebecker, Professor of Law at the University of Denver Sturm College of Law. It is based on his recent paper, Bridging Troubled Waters: Linking Corporate Efficiency and Political Legitimacy Through a Discourse Theory of the Firm, which is forthcoming in the Ohio State Law Journal and is available here.

As corporations increasingly dominate our economic, social, and political lives—and as shareholders vie for greater influence over business policies—can a new “discourse theory” of the firm guide the evolution of corporate law better than current theories primarily focused on shareholder wealth maximization? A series of related developments render the question of paramount importance to sustaining the basic efficacy of business decisions and the stability of our polity as well. In my latest article, Bridging Troubled Waters: Linking Corporate Efficiency and Political Legitimacy Through a Discourse Theory of the Firm, I suggest modest improvements regarding how we theorize the modern firm in order to promote enhanced political legitimacy and economic efficiency.

So what are the developments that make a new theory of the firm necessary? First, existing corporate law principles provide insufficient guidance regarding how managers should take into account the various shareholder and stakeholder interests expressed with increasing intensity.   Although often perceived by corporate managers as nettlesome distractions, shareholder and stakeholder opinions now present potential avenues for significant economic growth; ignoring their concerns puts the corporation at risk for serious sanctions from investors, consumers, and the communities the corporations inhabit.   Current corporate law doctrine predicated upon shareholder wealth maximization, however, relegates shareholders to relatively passive roles and says precious little about the degree to which corporations should heed concerns of employees, community members, and other stakeholders affected by corporate practices.

Although an increasing number of corporate managers tout the need to engage shareholders and stakeholders at some level, the quality of the discourse remains dysfunctional at best. In some instances, corporations suffer attack by zealous interest groups that privilege moral positions over profit motives. On the other side of the failed discourse, shareholders and other stakeholders often feel ignored or intimidated by corporate managers. For example, Chevron recently subpoenaed from one of its largest shareholders, Trillium Asset Management, documents related to Trillium’s proxy proposals that requested the Securities and Exchange Commission (“SEC”) to review the accuracy of the company’s environmental disclosures and asked the company to designate one board seat for an environmental expert. After suffering an $18 billion judgment from an Ecuador court related to environmental harms, Chevron brought a racketeering claim in the United States against a host of parties and asserted that Trillium worked with plaintiffs in the Ecuador case to pressure Chevron into a settlement. Chevron’s retaliation against Trillium received fast criticism as an inappropriate attack on the legitimate voicing of important shareholder concerns. But even in the absence of acrimony, a happy yet hapless discourse among corporate managers, shareholders, and stakeholders does not clearly result in improved corporate practices or greater profits. As a result, existing corporate discourse often imposes significant costs without garnering clear mutual gains.

Second, the impotence of corporate law to sustain minimal integrity and trust in the collection, reporting, and disclosure of social data threatens the viability of the $32 trillion market for corporate social responsibility (“CSR”). With snowballing celerity, consumers and investors take into account a variety of social, environmental, and ethical criteria before purchasing a company’s products or stock. In an efficient market, consumers and investors should reward companies that comply with CSR preferences by paying a premium in stock or product price. To the extent that premium exceeds the cost of compliance, corporations gain along with CSR-focused consumers and investors. Current corporate law, however, permits corporations to engage in a kind of strategic ambiguity in their public disclosures that enables pilfering a CSR premium without actually embracing CSR practices. Continual dissembling by corporations, however, cannot go undetected or punished by the market. After recognizing a systemic failure in transparency regarding CSR data, rational shareholders and consumers will stop paying ostensibly socially responsible companies a premium in stock or product price. Absent new corporate law principles that ensure higher quality collection, reporting, and disclosure of CSR data through enhanced discourse, the market for socially responsible behavior will eventually collapse.

Third, the prevailing corporate law regime permitting corporate managers to ignore various shareholder and stakeholder interests becomes morally untenable as corporations aggressively dominate the political landscape. The recent Supreme Court decision in Citizens United v. FEC, which gives corporations essentially the same political speech rights as humans, invites corporations to dictate even further the political process. Although corporations remain distinct from sovereign nations, as corporations occupy territory previously allocated to government and control the political agenda, the legitimacy of the polity remains inextricably tethered to the legitimacy of corporate decision-making. Within existing current corporate doctrine predicated upon shareholder wealth maximization, however, no processes for robust and transparent democratic deliberation exist that would provide the necessary sense of legitimacy in either setting to thrive.

At the core of each of these three problems lies a fundamental failure to engage in effective discourse with the constituencies that corporations should ultimately serve.   Unless legal doctrine evolves to embrace effective discourse as a guiding principle for assessing corporate decisions, the efficiency of corporate practices and the legitimacy of the polity hang in the balance.

This Article represents the second major installment in a series advancing a new “discourse theory” of the firm that would promote both economic efficiency and political legitimacy. The first article in the series, A New Discourse Theory of the Firm After Citizens United, identified the basic need for a new discourse theory of the firm through exploring a tectonic shift in the evolution of the corporation from a simple investment vehicle for generating wealth to an institution that plays a dominant role in almost every aspect of our collective lives. The article suggested that the legitimacy of corporate decisions should not depend on whether they maximize shareholder wealth but instead on whether they emerge from full and fair discussion among the constituencies that corporations serve. Grounded in the notion that robust discourse enhances the effectiveness and justness of the organizational structures that affect our lives, a discourse theory of the firm requires crafting rules and incentives that promote independent expression of opinions, equal participation by affected parties in deliberative processes, respectful consideration of viewpoints, and the ability to alter past decisions through continued discourse. While the first work in the series simply provided a skeletal introduction regarding the amenability of corporate law to discourse theory, the latest article puts substantial doctrinal meat on the bones by fleshing out in detail the legal standards and organizational mechanisms for implementing a new discourse theory of the firm. The latest article establishes that implementing a new discourse theory of the firm would help solve the problems infecting current corporate law, promote greater efficiency in business decisions, and ensure basic legitimacy within the political realm.