In a recent article[1] I explore the history of the law of corporate purpose, a subject recently highlighted by the Business Roundtable’s “Statement of the Purpose of a Corporation.” This August 19 statement was signed by more than 180 CEOs who committed to “delivering value to . . . customers,” “investing in . . . employees,” “dealing fairly . . . with suppliers,” “supporting . . . communities,” and “generating long-term value for shareholders.” “Each of our stakeholders is essential,” the statement concluded; “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”[2]
The statement, which explicitly superseded the Roundtable’s previous statements, according to which “corporations exist principally to serve their shareholders,”[3] appeared also to reject the Delaware courts’ insistence, as recently as October 2019, that “a board of directors . . . owes fiduciary duties to the corporation for the ultimate benefit of its residual risk bearers, viz., the class of claimants represented by the undifferentiated equity.”[4]
A careful examination of the history of the law of corporate purpose suggests, however, that the Roundtable’s statement is not out-of-line with Delaware’s corporate law. Reading the few cases that, in the course of the 20th century, explicitly addressed corporate purpose reveals that courts have consistently used the rhetoric of corporate purpose to empower corporate managers to address social and political concerns outside the realm of corporate law, namely the survival of the modern American state. Shareholders’ (and other stakeholders’) interests have been promoted only when they fit within this larger goal.
In the early decades of the 20th century, courts used the doctrine of the implied powers of the corporation to justify corporations’ contributions to the needs and morale of their employees. Reacting to rising labor agitation, courts allowed managers to use corporate funds to benefit employees so as to fight the advance of unionization and socialism among working men and women, even when doing so was at some expense to the shareholders.[5] The only exception to the rule were situations where the control group was using the rhetoric of welfare capitalism to oppress minority shareholders. In this vein, in Dodge v. Ford (1919), the Supreme Court of Michigan halted Henry Ford’s attempt to stop paying special dividends. Ford argued that reinvesting the funds in the corporation would enable him to hire more employees and further reduce the price of Ford cars. But, as the court saw it, Ford was using progressive rhetoric to mask an anti-competition agenda. The plaintiffs – the Dodge brothers, who owned 10 percent of the Ford Motor Company stock – were Ford’s competitors. Moreover, Ford’s rhetoric seemed to reject one of the most important tenets of capitalism: the profit motive. Fears about the power of concentrated control led the court to carve out an exception to the rule that management held the power to determine the corporation’s (and corporate law’s) purpose. Management’s actions could not be oppressive to minority shareholders.[6]
By the 1940s, social demands on corporations changed. Federal programs to protect employees helped alleviate concerns about labor unrest, unionization, and socialism. With the rise of totalitarian regimes in Europe, courts embraced a different corporate purpose: ensuring the survival of American democracy. As political and legal theorists struggled to explain the contrast between democratic and non-democratic societies,[7] corporations (and their managers) were quick to claim their unique role in ensuring the survival of the former. Shareholders’ interests were subordinated to this end. Take, for example, A.P. Smith Mfg. v. Barlow (1953), a test case brought by the National Association of Manufacturers to obtain a court ruling on the propriety of corporate contributions to higher education. Relying on testimony of the corporation’s CEO and other business leaders, the New Jersey Supreme Court held a corporation’s contribution to Princeton University valid against potential challenge by shareholders. As Justice Jacobs explained, corporate charitable contributions were critical to maintaining “free and vigorous nongovernmental institutions of learning,” and such institutions, in turn, were critical to ensuring the survival of American democracy against the “vicious[] threats from abroad.”[8]
Corporations were not equipped to determine social priorities and lacked any democratic authority to do so, but the statements of corporate leaders insinuated that responsible corporate management could reconcile the corporation’s interest with the public good and help the nation. Viewed as critical for ensuring the survival of American democracy, charitable contributions were not only intra vires but also best left to managerial discretion. Management could choose to make certain contributions in the face of shareholder disapproval, but it was not required to do so, even if the shareholders so wished. Corporations and their managements were free to exercise their power, with or without their shareholders’ consent. Within a few decades, questions involving corporate purpose were no longer examined using the ultra vires framework; rather, they were subsumed within the doctrines of management’s fiduciary obligations and business judgment. Corporate managers’ decisions regarding the corporation’s goals were almost guaranteed to be upheld, provided that they did not constitute a waste of corporate assets.
If policymakers and legal scholars in the early 20th century focused on the role of the corporation in fighting socialism, and mid-century scholars wanted corporate managers to exercise their power for the benefit of American democracy, jurists in the later part of the century sought to ensure the survival of our market economy by focusing on the stockholders. With no real threats to the modern American state, the only perceived threat was that of corporations to the market economy. In the 1980s, criticism of conglomerates and fears about growing numbers of hostile takeovers, presumably intent on breaking down these large corporations, led courts to embrace the limited goal of shareholder wealth maximization – the classical capitalist profit motive – as a means of ensuring the credibility of the stock market in our global society.[9] Just as Wall Street embraced the norm of shareholder wealth maximization as a justification for hostile takeovers,[10] the Delaware courts used it to empower corporate managers and directors to defend against unwanted bids. In so doing, the courts provided corporate managers with a tool, both practical and rhetorical, with which to thwart challenges to their power (including the threat of hostile takeovers). Like courts throughout the 20th century, the Delaware courts in the 1980s offered managers a corporate purpose with which they could justify their actions; so long as corporate managers explained their decisions as maximizing wealth for their shareholders, the Delaware courts were not likely to intervene or evaluate their actions. Subsumed under the doctrine of fiduciary obligations, the maximization of profit for the shareholders became corporate law’s single purpose.
As my article concludes, throughout the 20th century, the discourse of corporate purpose has served as a rhetorical tool. Courts turned to the corporation’s purpose to address concerns about socialism in the early 20th century, communism in the mid-century, and the success of the stock market at its end. The early 20th-century emphasis on employee benefits, the mid-century focus on charitable contributions, and the shareholder wealth maximization goal of the late 20th century have further served to allow corporate managers freely to exercise their corporate power, provided that they justified their actions with reference to the ideals or concerns of the era. Using the rhetoric of corporate purpose, the courts enabled the exercise of corporate power without interference by corporate constituencies or the courts. The Business Roundtable’s recent statement simply affirms that decisions about a corporation’s purpose, like any other business matter, are in the discretion of corporate directors and executives. The latter have defined and will continue to define the role and purpose of corporations in our society.
ENDNOTES
[1] Dalia T. Mitchell, From Dodge to eBay: The Elusive Corporate Purpose, 13 Va. L. & Bus. Rev. 155 (2019).
[2] https://opportunity.businessroundtable.org/ourcommitment/
[3] Id.
[4] Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP (C.A. No. 2018-0372-JTL) (Del. Ch., October 7, 2019).
[5] See, e.g., Steinway v. Steinway & Sons, 40 N.Y.S. 718 (N.Y. Sup. Ct. 1896).
[6] Dodge v. Ford Motor Co., 204 Mich. 459 (1919).
[7] See, e.g., Edward A. Purcell, Jr., The Crisis of Democratic Theory: Scientific Naturalism & the Problem of Value (1973).
[8] A. P. Smith Mfg. Co. v. Barlow, 13 N.J. 145 (1953).
[9] See, e.g., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
[10] See, e.g., Karen Ho, Liquidated: An Ethnography of Wall Street (2009).
This post comes to us from Professor Dalia T. Mitchell at the George Washington University Law School. It is based on her recent article, “From Dodge to eBay: The Elusive Corporate Purpose,” available here.