Last August, the Business Roundtable (an organization of around 200 corporate CEOs) announced it was amending its Principles of Corporate Governance to eliminate the statement that the “primary purpose” of a corporation was to serve its shareholders. The CEOs wanted to reconcile the statement of principles to what they felt they actually do – namely, balance the interests of a number of corporate stakeholders, including customers, employees, suppliers, and communities.
The amendment reinvigorated the “shareholders vs. stakeholders” debate. The shareholder wealth maximization absolutists, like Professor Stephen Bainbridge at UCLA and a number of op-ed columnists at the Wall Street Journal, were aghast. The anti-corporate crowd, people like Senator Warren, thought it was at least a hopeful first step.
My forthcoming article, The False Dichotomy of Corporate Governance Platitudes, suggests there is far less significance to the debate than meets the eye. Though I’ve been a law professor now for the better part of 15 years, I spent over a quarter century as a practicing lawyer and businessperson, including a tenure as an officer of a mid-cap NYSE company. I learned that, in the first instance, the goal was to maximize the enterprise’s ability to generate surplus, regardless which constituency, as among shareholders, customers, employees, suppliers, and communities, ended up reaping the benefit. Fortunately, shareholder interests rarely stood in sharp conflict with those of other corporate stakeholders. But if we had not generated wealth to fight over, what was the point?
My first reaction to the shareholder wealth absolutists’ dismay was that corporate management regularly affirms its commitments to constituencies other than shareholders (whether that is a matter of reality or mere rhetoric). I tested that by coding such commitments in 100 CEO annual report letters (33 from the BRT signatories and the balance from others) to shareholders from 2017, before the BRT amendment. Ninety percent of the letters referred explicitly to the company’s commitment to its shareholders. Nevertheless, shareholder value was not the only commitment the CEOs confirmed. An overwhelming majority (88 percent) acknowledged commitments to customers. Almost half (47 percent) acknowledged commitments to employees. Significant minorities referred to the environment or to the companies’ communities (31 percent and 38 percent, respectively). Even language about inclusion or diversity showed up in 24 percent of the letters.
The COVID-19 pandemic provided another opportunity to gauge corporate commitments (or at least the rhetoric of such commitments). Of the same 100 companies, 98 mentioned the pandemic either in the earnings release for the first quarter of 2020 or in another communication. Eighty-three of the 100 companies stated explicitly that the health or safety of employees or customers was the top priority of the company. Nineteen of the 100 companies referred explicitly in their earnings releases to a commitment to shareholder value or returns to shareholders. Of those 19, 16 were among the 83 companies stating that the health or safety of employees or customers was the highest priority of the company. Hence, only three companies committed to shareholder value and not to the health or safety of customers or employees as the top priority. But the sample did not include a single communication suggesting directly or indirectly that the highest priority of the corporation was the continued short-term maximization of shareholder wealth.
To the contrary, the consistent message, even in the earnings releases for the first quarter of 2020, was that employees and customers were either explicitly or implicitly the company’s highest priority, and that companies were diverting resources to employees, customers, and communities by way of enhanced benefits, relaxed of contractual limitations, and significant charitable contributions of cash and resources. Companies advised that, while they could not predict the impact on financial results (and indeed withdrew previous earnings guidance), the companies had strong balance sheets, liquidity, and access to capital, and that their focus was on the long term. In other words, “shareholders, please be patient; we have other things to attend to right now.”
The point of all of this is to highlight the nuance of real-world corporate management and its resistance to easy platitudes like “maximizing shareholder wealth,” whether enshrined in BRT principles or espoused by academic theorists. That nuance was true in 2017. It was borne out by the priorities that companies set in response to the pandemic and in their outpouring of concern and largesse to constituencies other than the shareholders (at least in the short term).
My second reaction was to disagree with two icons of corporate law, Professor Bainbridge and Leo Strine, the former chief justice of the Delaware Supreme Court, about whether Delaware law enshrines the shareholder wealth maximization principle. In their view, Delaware law imposes a duty on directors to maximize shareholder wealth, and the corporation’s primary purpose is to create profit for the shareholders. Professor Bainbridge has evoked this vividly in his “Bainbridge Hypothetical:” Where the board is faced with a binary choice between closing a plant because it benefits the shareholders, on one hand, or leaving it open because it benefits employees and the community, on the other, the board has a legal duty to choose the former.
I believe that this is an incorrect reading of the law. There may be Delaware dicta, Delaware platitudes, Delaware arguments, or articles written by present and former Delaware judges that invoke shareholder wealth primacy. But there is no Delaware law to that effect. Rather, to the extent that the courts invoke the concept, they have done so in cases in which the issue is binary, as with the Bainbridge Hypothetical: (1) “confession” cases in which the CEO admits that the company is not being run for the benefit of the shareholder but for some personal social goal of the CEO (Dodge v. Ford Motor and eBay/Craigslist); or (2) takeover cases in which the target resigns itself to being sold, and there is no corporate interest to protect other than the price paid to the shareholders (Revlon). In those cases, any suggestion of a generalized primary duty to maximize shareholder wealth is pure obiter dictum.
More importantly, shareholder wealth purists demonstrate how subtly to transform narrow case holdings into broad policy statements. If you can say what the law is, say a speed limit, it is a descriptive exercise, but not particularly interesting. What makes law normative and interesting is not what it is, but what in each unique case it ought to be. Hence, a rule of law in the abstract is neither right nor wrong; it is meaningless. A doctrinal rule is only really meaningful as an “is” of the law when it supplies the rule of decision in the unique narrative that constitutes a particular case. The Bainbridge Hypothetical is the corporate version of the “trolley problem” in philosophy. It may sharpen thought by taking a narrative to the extreme, or it may articulate a preference for the policy. But just as we rarely find people at the switch forced to decide which humans to let the trolley kill, we rarely see corporate decisions starkly pitting stakeholders against shareholders.
In short, the “shareholder vs. stakeholder” debate presents a false dichotomy of governance platitudes. As to the reality, corporate management is always balancing the interests of stakeholder constituencies in the interest of the long-term success of the enterprise. As to the legal doctrine, the principle of shareholder wealth maximization is not so much right or wrong as meaningless. Rather, the business judgment rule, which justifies almost any allocation of corporate surplus having an articulable connection to the best interest of the enterprise, subsumes all other platitudes posing as rules of law.
This post comes to us from Professor Jeffrey M. Lipshaw at Suffolk University Law School. It is based on his recent article, “The False Dichotomy of Corporate governance Platitudes,” available here. Professor Bainbridge’s response to the article is available here.