In 1985, the Delaware Supreme Court, in Unocal Corp. v. Mesa Petroleum Co.,[1] held that the “omnipresent specter” of a conflict of interest sufficiently clouds judicial review of anti-takeover measures to require application of enhanced scrutiny.  Notably, the court essentially took judicial notice of the inherent nature of the conflict that “of necessity” confronts the directors in these cases.  Thus, the court delayed application of the deferential business judgment rule until directors could satisfy the court that a threat to the corporation existed and that adopted anti-takeover devices were reasonably related to the perceived threat.

Today, political divisiveness has risen to the point that many believe they must resist opposing political ideologies (and advance their own) at all times and in all places – including in the workplace.  Furthermore, the intensity of the political debates, and the echo chambers that magnify them, have led people to view the world through a lens of political ideology that rationalizes political action as nothing more than simply doing the “obviously” right thing.  In light of the foregoing, a recent paper of mine, forthcoming in the Marquette Law Review, argues that we now confront an omnipresent specter of political bias in at least some instances of corporate decision-making and that courts should respond to this problem by subjecting relevant business decisions to enhanced scrutiny in a manner similar to Unocal.

My paper focuses generally on two situations that warrant additional judicial scrutiny.  The first is whenever corporate decision-makers expressly disavow any duty to maximize shareholder wealth, such as when Apple CEO Tim Cook told shareholders, “When we work on making our devices accessible by the blind, I don’t consider the bloody ROI [return on investment],”[2]  or when Ed Stack, the chairman and chief executive of Dick’s Sporting Goods Inc., decided that Dick’s should “take a stand” on gun violence by foregoing the sale of assault-style weapons and said in connection therewith, “I don’t really care what the financial implication is.”[3]  The second situation is when corporate decision-makers don’t expressly disavow concern with shareholder wealth maximization but nonetheless provide a rationale that excludes any reference to shareholder wealth maximization while providing a rationale that is reasonably characterized as political, such as when Gillette launched an ad campaign challenging “toxic masculinity” and justified the decision not on the basis of an expectation of increasing sales, but rather because it wanted to spark “a lot of passionate dialogue” and get people “to stop and think about what it means to be our best selves.”[4]  While the chosen examples are important for line-drawing purposes, the bigger issues are whether there exists a political bias problem in corporate decision-making and, if so, whether corporate governance rules should be updated to take that into account.

My paper argues that not only is shareholder wealth maximization the optimal goal of corporate governance, but it is fairly characterized as the current rule of corporate governance in many relevant jurisdictions, including, importantly, Delaware.  Thus, adherence to fiduciary duties in these jurisdictions must be analyzed in terms of shareholder wealth maximization except when pursuit of another goal is expressly authorized.

The paper next argues that, at least in some jurisdictions, disregard of shareholder value in corporate decision-making violates existing fiduciary duty law and that acknowledgement of this may be understood as a duty to calculate the expected return-on-investment (ROI) associated with competing business decisions.  Importantly, failure to calculate the ROI (or, when ROI calculations are impractical, to at least identify a rational or reasonable  business purpose for the business decision) may constitute a type of conscious disregard of a known duty that implicates the duty of loyalty, and therefore avoids duty-of-care waiver provisions.

My paper then reviews in more detail how Unocal’s enhanced scrutiny scheme deals with the omnipresent specter of conflict of interest in the takeover context.  It lays out the proposed application of enhanced scrutiny to deal with the omnipresent specter of political bias in corporate decision-making, including the identification of triggering facts, the burden directors will need to satisfy, and how the courts can maintain the proper balance between accountability and discretion by applying heightened pleading standards and other protective devices.  Specifically as to the burden of proof, it is proposed that once a plaintiff submits evidence of either (1) express disavowal of concern with shareholder wealth or (2) a non-shareholder-wealth rationale to justify a business decision that can be objectively described as political (because, for example, it generates boycotts and national media coverage), the burden shifts to the board to show that it in fact calculated the expected ROI of the decision and found it optimal in light of relevant opportunity costs or, where calculation of ROI is impractical, formally verbalized a rational or reasonable business (i.e., shareholder wealth maximizing) purpose at the time the decision was made.  In the end, this “burden” should constitute little more than confirming that the board or relevant decision-makers satisfied their duty to become informed of all material information reasonably available in connection with making a business decision.

Criticisms of the paper’s proposal include that it would harm corporations by forcing them to admit shareholder wealth maximizing motives in a market that rewards virtue signaling, that corporate disavowal of concern with shareholder wealth constitutes inactionable puffery, and that the proposed approach would subject too many business decisions to an inefficient risk of enhanced scrutiny.  As alluded to above, I suggest a number of protective devices to allow courts to strike an efficient balance between board discretion and accountability, including heightened pleading standards, reducing the burden of proof from reasonableness to rationality, and providing a safe harbor for viewpoint-diverse boards.

ENDNOTES

[1] 493 A.2d 946 (Del. 1985).

[2] Jessica Shankleman, Tim Cook tells climate change sceptics to ditch Apple shares, The Guardian (Mar. 3, 2014), available at https://www.theguardian.com/environment/2014/mar/03/tim-cook-climate-change-sceptics-ditch-apple-shares?CMP=share_btn_tw .

[3] Sarah Nassauer, How Dick’s Sporting Goods Decided to Change Its Gun Policy, The Wall Street Journal (Dec. 4, 2018), available at https://www.wsj.com/articles/how-dicks-sporting-goods-decided-to-change-its-gun-policy-1543955262 .

[4] Alexandra Bruell, P&G Challenges Men to Shave Their “Toxic Masculinity” in Gillette Ad, The Wall Street Journal (Jan. 14, 2019), available at https://www.wsj.com/articles/p-g-challenges-men-to-shave-their-toxic-masculinity-in-gillette-ad-11547467200.

This post comes to us from Professor Stefan Padfield at the University of Akron School of Law. It is based on his recent article, “Corporate Governance and the Omnipresent Specter of Political Bias: The Duty to Calculate ROI,” available here.