Although U.S. corporate law has traditionally been left to the states, it is widely understood that a host of federal actors can and do affect the broader rules of corporate governance in fundamental ways.  How might the corporate governance landscape change, then, in response to the tectonic shifts recently experienced in American politics – forces reflected most dramatically in the November 2016 election?  Discerning how such dynamics might affect corporate governance moving forward naturally requires a thorough reckoning of how state and federal political forces have affected the field’s development to date.  In a recent paper, I provide such an account, focusing on a surprising divergence between the formulation of normative views on corporate governance at state and federal levels.

For as long as corporations have existed, debates have persisted among scholars, judges, and policymakers regarding how best to describe their form and function as a positive matter, and how best to organize relations among their various stakeholders as a normative matter.  This is hardly surprising given the economic and political stakes involved with control over vast and growing corporate resources, and it has become commonplace to speak of various approaches to corporate law in decidedly political terms.  In particular, on the fundamental normative issue of the aims to which corporate decision-making ought to be directed, shareholder-centric conceptions of the corporation have long been described as politically right-leaning while stakeholder-oriented conceptions have conversely been described as politically left-leaning.  When the frame of reference for this normative debate shifts away from state corporate law, however, a curious reversal occurs.  Notably, when the debate shifts to federal political and judicial contexts, one often finds actors associated with the political left championing expansion of shareholders’ corporate governance powers, and those associated with the political right advancing more stakeholder-centric conceptions of the corporation.  Examples of the former include various corporate governance-related reforms enacted through the Sarbanes-Oxley Act and the Dodd-Frank Act at the behest of congressional Democrats, and examples of the latter include noteworthy pronouncements on corporate law and the nature of the corporate form advanced by the U.S. Supreme Court’s conservative justices in the 2010 Citizens United decision and the 2014 Hobby Lobby decision.

My paper aims to explain this disconnect and explore its implications for the development of U.S. corporate governance, with particular reference to the varied and evolving corporate governance views of the political left – the side of the spectrum where, I argue, the more dramatic and illuminating shifts have occurred over recent decades, and where the state/federal divide is more difficult to explain.  I begin with an overview of progressive thinking about corporate governance in the context of state corporate law, contrasting those views with the very different perspectives associated with center-left political actors at the federal level.  While varying perspectives and counter-trends are acknowledged (consider, for example, left-leaning Delaware Chief Justice Leo Strine’s embrace of shareholder-centrism, on the one hand, and conservative communitarian scholars’ embrace of stakeholder-centrism, on the other), the predominant trends are quite clear.  When the frame of reference is state-level corporate law, conservative contractarians have favored strong commitment to shareholder wealth maximization, and self-described progressives have overwhelmingly responded that boards ought to have substantial discretion to show regard for the interests of non-shareholders.  At the federal level, however, one often finds exactly the opposite at both ends of the political spectrum.

While the divide among right-leaning actors maps coherently onto the distinction between so-called communitarian and libertarian brands of conservatism (the former being more socially conservative and favoring stakeholders, and the latter favoring shareholders), the divide among the political left is more difficult to explain.  Accordingly, the bulk of the paper examines various legal, regulatory, and institutional frameworks, as well as important economic and cultural trends, that have played consequential roles in prompting or exacerbating the state/federal divide among left-leaning actors.  Some are well familiar to students of corporate federalism, including fundamental distinctions between state corporate law and federal securities regulation, and the differing postures of lawmakers in Delaware and Washington, DC.  These distinctions do not, however, straightforwardly illuminate why such a divide might emerge among actors at a given end of the political spectrum.  More telling, I argue, is the confluence of other regulatory and market dynamics, including the rise of institutional investors, the evolution of organized labor interests, certain unintended consequences of extra-corporate regulation, and the Democratic Party’s sharp rightward shift since the late 1980s.

For example, why do we find organized labor supporting stakeholder-centric corporate law in the 1980s, and then favoring the dismantling of impediments to takeovers in subsequent decades?  Over time, as union membership has fallen and the ranks of union pensioners have grown (on which see Martin Gelter’s work), organized labor’s emphasis has shifted from traditional organizing to institutional pension management, and this naturally prompts an identity-shift from employee-orientation toward investor-orientation.  This has been strongly reinforced by ERISA fiduciary duties, which are widely interpreted not only to require singular focus on maximizing returns for beneficiaries, but also strong-form activism by union pensions themselves.  Indeed, it is striking that interpretations of ERISA’s fiduciary duties promulgated by the U.S. Department of Labor have been among the most consequential, and highly shareholder-centric, regulatory documents affecting corporate governance to have arisen in any U.S. legal setting.

Meanwhile, these trends have dovetailed with efforts to restructure the Democratic Party’s electoral coalition to compete more effectively in national elections.  The rise of the New Democrats in the late 1980s and early 1990s marked a decided shift toward the political center, prompting an electoral strategy involving a concerted effort to appeal to the elite, highly educated professional class – notably financial professionals, who are often socially liberal and, of course, wealthy potential donors.  The resulting alliance of organized labor and Wall Street proved extraordinarily effective for the Democrats as a matter of national politics (for a time, anyway), and it is critical to recognize that this electoral strategy has profoundly affected corporate governance.  Regardless of the marginal nature of corporate governance in broader strategic thinking about electoral coalitions and the overall party platform, this coalition of financial and labor interests effectively allied shareholders and employees against management – and the potency of this coalition has been fully apparent in Democrat-led reform efforts over recent years favoring anti-manager governance reforms over more robust financial sector reforms that were opposed by a now-key electoral constituency (on which see John Cioffi’s work).

The latent instabilities of this electoral coalition, and the resulting tensions between traditional labor and finance-oriented commitments, came home to roost in the November 2016 election, and the paper closes with brief thoughts on potential consequences for the state/federal divide among the political left.  Many of the legal, economic, and cultural trends described in the paper continue to evolve, and on-going developments affecting the power base, the interests, and the identity of organized labor – as well as the electoral strategy of the Democratic Party – will likely affect how U.S. corporate governance develops in coming years.  Just as falling and aging union membership has prompted a shift from traditional organizing activities toward pension management, so we can expect that the political and market salience of private-sector union pensions will wane as today’s smaller active membership becomes tomorrow’s smaller base of pension beneficiaries.  As such developments unfold, other forms of institutional investors may enjoy proportionately greater salience in electoral politics.  It remains entirely conceivable, however, that labor could politically reassert itself in some new institutional configuration – or return to a more prominent electoral position, should the Democratic leadership chart a decidedly populist course in the wake of its unexpected November 2016 loss.  Although it remains early days, it can be predicted with reasonable certainty that electoral imperatives will remain paramount, and that the center-left’s federal corporate governance politics will accordingly move in whatever direction the prevailing wind blows.

This post comes to us from Christopher M. Bruner, the William Donald Bain Family Professor of Corporate Law at Washington and Lee University School of Law.  It is based on his recent paper, “Center-Left Politics and Corporate Governance: What Is the ‘Progressive’ Agenda?” available here.