The ALI’s Restatement of the Corporate Objective Is Flawed

Almost 30 years after the American Law Institute published the Principles of Corporate Governance, it has launched an effort covering similar ground, this time promising a Restatement of the Law of Corporate Governance.

The difference between the Principles and the new Restatement, according to the ALI’s director, Professor Richard Revesz, is that the Restatement will be “grounded in the sources of positive law” while the Principles presents “best practices for the affected institutions.”  In addition, the Restatement will aim to capture the evolution of corporate law prompted by institutional investors’ increasing share of stock ownership, the rise of activist hedge funds, and the recent emphasis on environmental, social, and governance (ESG) issues.  (Tentative Draft No. 1, p. xv.)

Unfortunately, the Restatement has started out with a confusing and flawed description of the corporate objective, which puts the entire project on a shaky foundation.

On May 18, 2022, the ALI membership approved the following § 2.01 as black letter law:

§ 2.01. The Objective of a Corporation

(a) The objective of a corporation is to enhance the economic value of the corporation, within the boundaries of the law;

(1) in common-law jurisdictions:  for the benefit of the corporation’s shareholders.  In doing so, a corporation may consider:

          (a) the interests of the corporation’s employees;

(b) the desirability of fostering the corporation’s business relationships with suppliers, customers, and others;

(c) the impact of the corporation’s operations on the community and the environment; and

(d) ethical considerations related to the responsible conduct of business;

(2) in stakeholder jurisdictions:  for the benefit of the corporation’s shareholders and/or, to the extent permitted by state law, for the benefit of employees, suppliers, customers, communities, or any other constituencies.

(b) A corporation, in the conduct of its business, may devote a reasonable amount of resources to public-welfare, humanitarian, educational, and philanthropic purposes, whether or not doing so enhances the economic value of the corporation.

This restatement of the corporate objective does not improve on the simpler, straightforward, and well-known version of § 2.01 in the Principles, and it misinterprets the legal import of corporate constituency statutes in a manner that unduly narrows the discretion of corporate directors and managers.[1]  At the same time, it fails even to mention the benefit corporation, an important recent development in the law that relates directly to the corporate objective and is especially relevant to increasing concerns about ESG issues.

It’s helpful to return to some basics.  Corporate law in the United States is for the most part enabling, created by frameworks of state statutes, with Delaware playing a leading role.  The law empowers private parties to construct business corporations as legal “persons” or “entities.”[2]  It sets parameters, and some mandatory rules are included (such as prohibitions against fraud and theft).  For the most part, however, corporate law does not itself set or dictate the purposes or objectives of a corporation: It empowers individuals to invent, shape, and use the legal form of the corporation for their own stated business-related ends.

The Restatement reporters seem to miss this bottom-up, enabling feature of corporate law when describing the law as “setting” or “stating” the objective of corporations (Tentative Draft No. 1, § 2.01, cmts. a & j).  They go so far as to describe their restatement as an “exhortation” in favor of an exclusionary economic objective, though recognizing that this does not require following the mantra to “maximize shareholder value,” at least not “in the short run” (§ 2.01, cmt. e).  However, corporate law gives the founders of a corporation the power to set the original business objective in the charter or certificate of incorporation, which is usually supplemented with bylaws.  Within this legal framework, corporate decisionmakers (including the board of directors and authorized managers) may change, define, and shift the corporate objectives or purposes or even the business form within the limits of relevant statutes.  (See Principles, § 3.02 & cmt. f.)  One limit is that some major changes in business form or objectives may require approval of the shareholders.

In this context, the Restatement reporters might usefully reference the history of the ultra vires doctrine in American corporate law.  Initially, many corporations were created with a provision in their charter or certificate of incorporation that specified a particular kind of business, such as building and operating a bridge, a canal, or a railroad.  Relatively narrow statements of purpose, however, caused legal problems when corporate decisionmakers wanted to undertake an activity that was outside of the stated corporate objective, such as a railroad company’s entering into “non-railroad” lines of business such as lumber, steel, or finance.  Shareholders or third parties often sued to challenge actions as ultra vires or “beyond the power” of the corporation.  Corporations learned to overcome this legal impediment by amending their charters to authorize the pursuit of “any business purpose.”  This language was soon added as boilerplate to all incorporation documents to avoid ultra vires trouble.

Drawing on this history, an alternative restatement of the corporate objective might be simply:  The corporate objective is any business purpose or purposes stated in the charter documents.  (See Principles, § 1.05 (defining charter documents)).  This would capture the wide discretion afforded those who create and manage corporations for any business reason, without adding the requirement of an economic rationale in every case or decision.

The relevance of the ulta vires history here is that the Restatement reporters treat corporate constituency statutes, which were adopted in response to the hostile takeover wave of the 1980s and Delaware court rulings on directors’ fiduciary duties during takeovers, as having created “stakeholder jurisdictions” that define corporate purpose more broadly than traditional “common-law jurisdictions” such as all-powerful Delaware (Restatement, § 2.01(a)).  The better reading is that constituency statutes were meant only to restate the traditional scope of fiduciary duties and the business judgment rule, particularly in corporate control transactions, which in some jurisdictions (especially Delaware) began to impose a stricter “shareholders only” standard in some circumstances (i.e., “sale of control” cases).  For this reason, they may be accurately described as “fiduciary duty” rather than “constituency” statutes.  As the Restatement reporters recognize, these statutes were designed as a kind of antitakeover statute – and actually, as it turned out, not a very effective one.  See, for example, the successful acquisition of Conrail, a Pennsylvania corporation governed by a strong version of the statute, by Norfolk Southern.[3] The moral of the story:  Shareholders vote!  Even in so-called “stakeholder jurisdictions.”

Unfortunately, the Restatement’s new distinction between “common-law jurisdictions” that represent some version of shareholder primacy and “stakeholder jurisdictions” that allow consideration of broader interests doesn’t correspond with legal reality.  To begin with, even the black-letter descriptions of these two supposedly different jurisdictions overlap significantly.  So-called common-law jurisdictions allow for the consideration of interests of employees and other stakeholders (§ 2.01(a)(1)).  So-called stakeholder jurisdictions honor shareholders and give them at least some degree of primacy (§ 2.01(a)(2)).  Only shareholders and not stakeholders vote in all state jurisdictions.  The preemptive power of the business judgment rule (Principles, § 4.01 and Restatement, § 4.02) also broadly protects fiduciary decisions made in both types of jurisdictions.  In practice, then, the division the reporters draw between “common-law” and “stakeholder” jurisdictions is pretty much a distinction without a difference.

In addition, the approved black letter of § 2.01 contains some significant incongruencies.  For example, “the environment” and “ethical considerations” are explicitly included as allowable decision-making factors in common-law jurisdictions but omitted in stakeholder jurisdictions (§ 2.01(a)).  Surely corporate decisionmakers in stakeholder jurisdictions may also take account of environmental and ethical considerations even if they are not specified as stakeholder interests.[4]

This creaky construction indicates a more serious problem with the Restatement’s § 2.01.  Allowing only an “economic objective” forces out any ethical or environmental consideration that does not technically qualify as a long-term economic rationalization.  The Restatement’s § 2.01 departs from the recognition in the Principles that ethical considerations may conflict with the economic objective, and that directors and officers may nevertheless follow their consciences in these situations.  (Principles, § 2.01 & cmt. h.)  Even Milton Friedman, a famous (or infamous) champion of the economic objective in business corporations, conceded that profit-seeking must “conform[] to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”[5]  To employ an updated example, doing the right thing with respect to the climate emergency may require a particular firm (such as a big oil company) to sacrifice some profits even as calculated over the long term.[6]  The Restatement’s § 2.01 seems instead to require big oil companies to maximize their long-term profits even it means burning our planet beyond all recognition.  It seems also to require a corporation adopting an anti-racist personnel policy to justify it with an economic or “business case” rationale rather than an appeal to an ethics of mutual respect and equal treatment.

In summary, the Restatement’s § 2.01 does not appear to allow for situations in which ethical or environmental considerations may trump the “economic objective” as defined in either common-law or stakeholder jurisdictions.[7]  Not only does this position fail to meet the test of common sense, it may also inadvertently open the door to shareholder litigation claiming a failure of directors or officers to justify their decisions sufficiently on economic rather than ethical grounds (though the business judgment rule will likely continue to offer significant protection).

The Restatement’s § 2.01 recapitulates a debate held when the Principles’ § 2.01 was first being formulated more than several decades ago.[8]  At first, the Principles reporters expressed the corporate objective as “long term maximization of corporate profit and shareholder gain,” but objections by the ALI’s Council resulted in a softening of language to account for non-economic considerations (including law, ethics, and other values).  The final version holds that the corporation “should have as its objective the conduct of business activities with a view to enhancing corporate profits and shareholder gain.”  “Enhancing” of course is not “maximizing,” and the Principles’ § 2.01 qualifies its primary objective by allowing deference to the law, ethical considerations, and other values. The Restatement’s new § 2.01 mirrors the language to “enhance the economic value of the corporation,” but refuses to include the ethical and other qualifiers presented clearly in the Principles’ version.

Finally, in contrast to its misplaced emphasis on constituency statutes, the Restatement in its black-letter treatment of the corporate objective omits any mention of benefit corporations, which are expressly intended to expand the ability of incorporators to specify in their charter documents a hybrid social objective rather than a strictly economic one.[9]

As the reporters themselves note, 34 states have provided for benefit corporations, including Delaware.  (Restatement, § 2.01, cmt. b & note 8).  The main point of these statutes is to eliminate any uncertainty about a hybrid social objective, giving the board the authority to balance “the stockholder’s pecuniary interests, the best interests of those affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation” (quoting the Delaware statute).

The Restatement reporters say they don’t mention the benefit corporation because “it is so new, there is little case law interpreting its [statutes’] provisions and thus it would be premature to restate this form as black letter law.”  (Restatement, § 2.01, cmt. b).  But corporate law is as much about codes as cases.  If anything, the widespread adoption of benefit corporation statutes signals a shift in public sentiment, as expressed through law, toward encouraging greater consideration of environmental and ethical issues in business.  The ESG movement, flawed as it may be with respect to measurements and marketing, sends a similar message.[10]  Many investors and executives now believe that business corporations should not limit themselves to only an economic objective.

There is plenty of time for the Restatement reporters to correct course, for the project has only just begun.  If § 2.01’s treatment of the corporate objective is not significantly revised, however, then this new Restatement will be built on a faulty foundation – and therefore likely to crash.

ENDNOTES

[1] I cut my academic teeth on constituency statutes when they were first adopted.  See Eric W. Orts, “Beyond Shareholders: Interpreting Corporate Constituency Statutes,” 61 George Washington Law Review 14 (1992).

[2] For my take, see Eric W. Orts, Business Persons: A Legal Theory of the Firm 9-51 (rev. ed. 2015).

[3] For an overview, see David N. Hecht, Note, “The Little Train That Couldn’t: Did the Pennsylvania Anti-Takeover Statute Fail to Protect Conrail from a Hostile Suitor?” 66 Fordham Law Review 931 (1997).

[4] There is debate in business ethics about whether the natural environment should be included in a concept of “stakeholders.”  For my view that it should not, see Eric W. Orts & Alan Strudler, “The Ethical and Environmental Limits of Stakeholder Theory,” 12 Business Ethics Quarterly 215 (2002).  If the Restatement reporters continue to include “stakeholders” in the black letter, then some explanatory references to the literature on “stakeholder theory” are called for in the comments or notes.  See, e.g., R. Edward Freeman, et al., Stakeholder Theory: The State of the Art (2010); Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications,” 20 Academy Management Review 65 (1995); Eric W. Orts & Alan Strudler, “Putting a Stake in Stakeholder Theory,” 88 Business Ethics Quarterly 605 (2009).

[5] Milton Friedman, “A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its Profits,” N.Y. Times, Sept. 13, 1970, https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html.

[6] Brian Berkey & Eric W. Orts, “The Climate Imperative for Business,” California Management Review (Apr. 2021),  https://cmr.berkeley.edu/2021/04/climate-imperative/.  See also Einer Elhauge, “Sacrificing Corporate Profits in the Public Interest,” 80 N.Y.U. Law Review 733 (2005).

[7] Like its counterpart in the Principles, § 2.01(b) is aimed primarily to allow for charitable contributions.  Here, “environmental” purposes might be usefully added to the Restatement version.

[8] This account is based on correspondence with Joseph Vining, a professor emeritus at the University of Michigan Law School.

[9] See Orts, Business Persons, op. cit., at 206-15 (describing hybrid social enterprises of various types).

[10] Multiple measures and metrics of ESG performance are notoriously conflicting and unverifiable, which has led to allegations that many ESG marketing claims amount to greenwashing, if not outright fraud.  This is not to say that ESG values should not be supported and advanced in a more rigorous fashion.

This post comes to us from Eric W. Orts, the Guardsmark Professor of Legal Studies & Business Ethics and professor of management at the Wharton School of the University of Pennsylvania, an elected member of the American Law Institute, and a 1994 JSD graduate of Columbia Law School.

7 Comments

  1. Stephen M Bainbridge

    I would respectfully disagree with Professor Orts on several aspects of his analysis. First, I am far less certain than he that it is possible for corporations to opt out of the shareholder value maximization principle via the articles of incorporation. In fact, that question has been the subject of considerable debate. See, e.g., Joan MacLeod Heminway, Shareholder Wealth Maximization As A Function of Statutes, Decisional Law, and Organic Documents, 74 Wash. & Lee L. Rev. 939, 957 (2017) (arguing that “a charter provision that is inconsistent with the shareholder wealth maximization norm should be valid”); Stefan J. Padfield, The Role of Corporate Personality Theory in Opting Out of Shareholder Wealth Maximization, 19 Transactions: Tenn. J. Bus. L. 415, 439 (2017) (suggesting that “Chancellor Chandler’s comments in the eBay decision suggest that” efforts to opt out of shareholder value maximization may be unavailing). My own view at one time was that “state law arguably does not permit corporate organic documents to redefine the directors’ fiduciary duties.” Stephen M. Bainbridge, Interpreting Nonshareholder Constituency Statutes, 19 Pepp. L. Rev. 971, 985 (1992). Today, however, my view is that it is a question that has been essentially mooted by the availability of the public benefit corporation (PBC) option.
    The benefit corporation point leads to my second disagreement. As I read Professor Orts’ analysis, he suggests that we should understand the widespread adoption of PBC statutes as being pertinent to understanding the duties of directors and officers of business corporations incorporated under a state’s general business corporation law. If so, I disagree.
    Although it has not done so to date, the widespread availability of PBCs as an alternative to the traditional business corporation could alleviate the growing pressure on the latter to pursue ESG, since they provide an alternative by which social justice activists can pursue their ESG goals while still making a profit. In any case, the widespread adoption of PBC statutes confirms that shareholder value maximization—i.e., Dodge v. Ford Motor Co.—is corporate law’s general rule. After all, if Dodge were not the law, PBCs would be unnecessary. Boards of business corporations would be free to pursue public benefits without violating their fiduciary duties. The perceived need for PBC statutes suggests that boards are not free to do so absent the statute.
    The drafters of the California PBC statute presumably had such an argument in mind when they including the following qualification in the statute: “The existence of a provision of this part shall not of itself create any implication that a contrary or different rule of law is or would be applicable to a business corporation that is not a benefit corporation.” CAL. CORP. CODE § 14600 (b).

    • Eric Orts

      It’s an honor to attract Prof. Bainbridge as an interlocutor. Here are some incomplete but perhaps helpful responses. I’ll post my replies in three comments.

      1. Shareholder wealth maximization is a concept of financial economics that has, in my view quite unfortunately, been imported into corporate law in the last several decades through the vector of the law-and-economics movement. There is no corporate statute that that tells corporate managers and directors that they must adopt shareholder value maximization as a corporate objective. Of course, many modern corporations, especially in the United States, have imbibed this formula – perhaps most notoriously represented by Jack Welch of G.E. “Neutron Jack” adopted a corporate policy (supported by his board) of firing thousands of employees and raising the stock price of G.E. by transforming it into a much different kind of corporation, heavily reliant on finance rather than manufacturing. His style of corporate leadership was then copied by many others. See David Gelles, The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America―and How to Undo His Legacy (2022). One can debate the wisdom of this sort of approach to corporate leadership, but the question here is whether the underlying corporate law in the United States requires a share price maximizing orientation by a CEO and board. I believe the answer is clearly no: there is no “shareholder wealth maximization” norm written into the corporate law, except perhaps in a few isolated circumstances – such as the “sale of control” cases inaugurated by the famous Revlon case, which then triggered defensive responses in many states (including Delaware). As Professor Revesz promises in his role as ALI director, the new ALI Restatement project will address new pressures that encourage managers and directors of public business corporations to focus on shareholder value, such as from activist hedge funds.

      To their credit, the Restatement reporters specifically refuse to embrace shareholder wealth maximization as the definition of the corporate objective. They note other more recent economic models such as the “shareholder welfare maximization” formulation by Oliver Hart and Luigi Zingales. They might also usefully add in a comment the stakeholder financial model proposed by Jean Tirole (who won the Nobel Prize in Economics in 2014).

      The reporters err, however, in failing to recognize that sometimes a corporate director and officer should follow a moral or ethical principle even when it conflicts with the economic objective. I fear that their emerging “restatement” of the law will instead open an avenue for new shareholder lawsuits challenging actions that (such as with respect to climate policy) that are not sufficiently rationalized by corporate boards in economic terms. Or corporate directors and officers will feel forced to rationalize “long-term economic consequences” or possible outcomes for what is really a different ground of decision, namely, what is right or good to do in a given situation.

      To some extent, I have to wonder whether the new Restatement is motivated in part by a contemporary view that the Principles of Corporate Governance were not oriented sufficiently to concerns about economic efficiency. If so, then an ideological agenda hides within the Restatement project that is unfortunate – and not truly oriented toward an accurate and balanced “restatement” of what the law is rather than what the reporters would like it to be. I don’t believe that the current corporate law – and the understandings of many managers and corporate board members – excludes morality and ethics, and even politics (to add mention, for example, of the current war in Ukraine and how business corporations are responding to it). Sometimes doing the right thing has an economic cost, and most if not all CEOs and board members today understand that reality.

    • Eric Orts

      Reply to Prof. Bainbridge (continued)

      2. On benefit corporations (or public benefit corporations): This new form of business organization is indeed a type of corporation, and it illustrates what I see as the inherent flexibility of the corporate form in general. In fact, I believe that corporations already can take many actions for “the public benefit” that do not adhere strictly to an economic regimen of analysis and decision-making. The benefit corporation provides for a specific institutional option by which shareholders can invest with an intention that board members and managers can be held accountable (to the shareholders) to perform on specified social or environmental objectives that are not economically oriented – hence what I call “hybrid” forms. Business Persons, pp. 206-15. Benefit corporations appear to me as an intermediary organization existing in between pure nonprofits and pure profit-oriented entities. The reporters are right that these entities are relatively new, but already we are seeing some of them listed on major stock exchanges – and it’s true also that it remains to be seen how popular (or not) they will prove to be.

      Professor Bainbridge misunderstands my point about benefit corporations. I’m suggesting only that they should be included in a “Restatement of the Law of Corporate Governance” because they are, in fact, a type of corporation. An ALI member asked at the annual meeting: “What about limited liability companies?” That’s a good question, because a Restatement of the Law of Limited Liability Companies might be more useful right now – given that they have taken off in popular over the course of the last several decades – than a Restatement of the Law of Corporate Governance that rehashes the pretty much the same territory covered by the Principles project. My point is only that benefit corporations are directly relevant to a restatement of the corporate objective and should be included in the black letter.

      I am therefore NOT saying, as Prof. Bainbridge suggests, that the authorization of benefit corporation statutes should affect the interpretation of fiduciary duties (or the scope of the business objective) of corporations created under the general corporation statutes. I’m only saying that it’s odd to leave them out of the black letter statement of corporate objective when their very purpose is specifically to authorize a hybrid purpose (profit plus nonprofit) in charters or certificates of incorporation. Their omission seems especially egregious given that one reason given for the entire Restatement project is to account for public and investor pressure on business firms to respond to ESG considerations writ large.

  2. Eric Orts

    Reply to Prof. Bainbridge (continued)

    3. Last but not least, how can one have a debate among friends about the corporate objective without reference to that old chestnut, Dodge v. Ford Motor Co. (Mich. 1919)? 😉

    This case appears as the sole reference in Reporters Note 2 of new Restatement § 2.01 to justify their embrace of an unqualified “economic objective.” And Professor Bainbridge says that the case stands for the norm of shareholder wealth maximization.

    I’d suggest, however, that Dodge shows instead how flexible the corporate law can be – and how subject to circumstances and particular facts when courts make decisions. One interpretation of Dodge is that it’s perfectly OK to pay employees significantly higher than market wages (and provide other benefits) or to engage in vertical integration deals or to invest in a major new manufacturing facilities with an unknown and risky future pay-off. The principal reporter of the new Restatement, Ed Rock, has suggested that a defensive antitrust motive may underlie the case – indicated by the famous names of the parties – rather than any abstract corporate governance dispute about the prerogatives of managers versus shareholders. In any case, the dividend withholding decision by the board that was overturned in the case would be thrown out immediately in most contemporary circumstances, with a wave toward some economic rationalization (whether authentic and true, or not) and protected under the business judgment rule.

    We need and should expect more than a citation to Dodge to justify a restatement of the law of the corporate objective.

    • Brett McDonnell

      I think the proposed Restatement rule gets it at least basically right, particularly in distinguishing between common law and stakeholder jurisdictions. For the common law, I am less inclined to cite the old Dodge chestnut–if all we had was a 1919 case from Michigan, that would be pretty unpersuasive. The key cases are Revlon and eBay. Although I am normatively sympathetic to the stakeholder position, I don’t see how to get around those cases in understanding black letter Delaware law. Leo Strine hammers the point home in his articles with titles like “Our Continuing Struggle with the Idea that For-Profit Corporations Seek Profit.” On the other hand, it’s pretty clear that constituency statutes are intended to move away from the stakeholder wealth maximization duty. Professor Bainbridge quite honestly recognized that in his old article on those statutes. Whatever may have been the case many decades ago, there is now a divide between states with constituency statutes and Delaware (and other common law states probably follow Delaware).

      On Professor Orts’s point that given the business judgment rule, there is little practical difference between the two: That’s mostly, but not entirely correct. Consider Craigslist in the eBay case. It could probably have avoided the result had it simply given a hand-waving argument that its approach would ultimately lead to higher profits. But that would have been dishonest and inconsistent with its real purpose. For a genuine social enterprise, not only is requiring such dishonesty morally dubious, it restricts the ability of such companies to effectively communicate and commit to their pro-social purpose.

      I give a lot more detail supporting these points in “The Corrosion Critique of Benefit Corporations,” 101 Boston U. L. Rev. 1421 (2021).

  3. Eric Orts

    Hi Prof. McDonnell and thanks for this comment. Here are some responses.

    1. I read the eBay case mostly as a reaffirmation of Revlon in a sale of control situations. My policy preference runs in the other direction, but you’re right that Delaware law has been pushing the shareholder value maximization norm in the context of these kinds of control cases. It’s also true that shareholders vote in all jurisdiction (one of the points that Leo Strine has also made repeatedly).

    I won’t go into more detail here, but with respect to a restatement of the corporate objective, my view is that the Principles had the better structural approach: Its § 2.01 said that special rules applied to control cases; when in Delaware and jurisdictions that follow Delaware, then a value maximization strategy for shareholders is required as the black letter. But that’s in exceptional situations, not a general rule of corporate governance.

    This is also really the main difference between state “jurisdictions”: not whether a state has a version of a constituency statute or not, but the extent to which a state has a panoply of statutory and precedential protections that bend more toward respecting corporate boards in hostile takeover situations — or not.

    2. I do not disagree with Leo Strine and others who state (and emphasize) the obvious: yes, business corporations are run for a primary purpose of “enhancing corporate profits and shareholder gain” (to quote the more elegantly expressed Principles). By definition, business is about making money.

    My concern is that academic lawyers – and yes, even judges – should not be in the business of imposing economic theories and tests such as “shareholder value maximization” (which in finance usually means the short run given an assumption that the current share price is the best available measure of long-term value) on corporate boards and officers.

    A firm can both pursue profits and act ethically, just as people can walk and chew gum at the same time. And that doesn’t mean that they will act ethically (or even legally)!

    I also agree with former Chief Justice Strine that nobody should be surprised if corporate CEOs and boards are pressed to cut corners to make money. That’s exactly what the law is for, though – to put limits on the cutting of corners. And certainly, in my view, the law – or a restatement of it – should not be read to preempt a corporate board that wants to “do the right thing,” for example, with respect to the climate or racial injustice, without going through some exercise of rationalization in favor of “shareholder value in the long run.” Perhaps the climate emergency will give new meaning to Keynes’ quip that “in the long run we’re all dead.” Forcing everything about corporate decisions-making into an “economic objective” feels a little bit like joining a religious cult.

    3. Thanks for the reference to your article on benefit corporations. I don’t ask the new Restatement reporters to resolve all of the questions that you and others are raised about benefit corporations. But it strikes me as unacceptable to simply leave them out. (Maybe the reporters might at least consider adding a new black letter section on benefit corporations as a § 2.02?)

    Benefit corporations speak directly to the question of corporate objective, so to simply ignore them is to disrespect the dozens of state legislatures that have passed these statutes.

    Your piece and others (e.g. by Dana Reiser) about how to interpret the new legal form should be cited in the notes or comments, and its appropriate for a restatement not to take a position on the controversial parts.

    My own view is that benefit corporations seek to allow for the recognition of the fact that shareholders and investors (or corporate founders) often also have other moral concerns or constraints about investing, rather than a purely financial value maximizing orientation. The benefit corporation – at least in some jurisdictions – gives these shareholders some enforcement powers, or at least an expectation, to get some information about how a corporations is performing on its public benefit purpose as well as financially. In other words, they are as much about empowering a certain and growing category of shareholders as providing defenses to boards or managers. Cf. Daniel J.H. Greenwood, “Fictional Shareholders: For Whom Are Corporate Managers Trustees, Revisited, 69 Southern California Law Review 1021 (1996).

    4. I’m in full agreement with your comment about authenticity and honesty. In a world full of fake news and big lies, we don’t need to add incentives for corporate boards or managers to dissimulate more than they already do: forcing them to fit moral, ethical, political, or environmental considerations into some sort of long-term economic rationale every time a decision is made.

    If a majority of shareholders in a public company don’t like how things are going, then they have the option to voter the bounders out. (Allowing quick-financed tender offers is another kettle of fish.)

    At the same, we should take notice that many newer big tech companies (including Google, Facebook, and more) solve the problem of hostile takeovers by locking up control in several hands. (Ford, I think, does so too – or close to it.)

    Some of the largest firms (e.g. Unilever) are probably also immune to hostile takeovers – or pretty close.

    Corporations who want to retain a clear sense that ethical values can be taken into account may wish to remain closely held. See Patagonia, the first benefit corporation in California.

    Family-owned firms may also have a greater incentive to care about long-term environmental sustainability because they are connected immediately to the welfare of their children, grandchildren, great grandchildren, etc.

    What’s unfortunate is that the new Restatement § 2.01 doesn’t clearly say that these family businesses or large locked-up control tech and other companies can of course sacrifice profits in order to do the right thing in a compelling case. Fortunately, they will still not have to check with the courts or minority shareholders first (one hopes), though the threat of this kind of litigation may increase if the current Restatement continues to move forward on its current track.

  4. Dr. Leon Anidjar (IE Law School, Madrid)

    Thanks so much for a very thought-provoking article.

    I want to share with you several comments:
    According to your article: “[t]he Restatement reporters seem to miss this bottom-up, enabling feature of corporate law when describing the law as “setting” or “stating” the objective of corporations… In this context, the Restatement reporters might usefully reference the history of the ultra vires doctrine in American corporate law.”

    First, as you well described, the US corporate law follows the contractarian approach that considers the corporations as a standardized form provided to facilitate private ordering; specifically, each state offers majoritarian default rules, which are those rules to which most parties would agree if they could bargain (In re Trados Inc. S’holder Litig., 73 A.3d 17, 36–37 (Del. Ch. 2013)). However, the second part of your statement points toward the concession theory of corporate law, which states that a corporation is regarded as a quasi-state actor exercising powers delegated by the country. As Collin Mayer argues:
    “The creation of a corporation is not a right. It is a privilege to employ a legal concept to construct an artificial entity that has the potential to produce untold wealth, prosperity, inequality, and misery in equal measure… That privilege has substantial obligations to ensure that it is used wisely, not only for the benefit of its creators and owners but for all who engage with and are affected by it” (Colin Mayer, Ownership, Agency, and Trusteeship: An Assessment, 36 OXFORD REVIEW OF ECONOMIC POLICY 223, 228 (2020)).

    Therefore, your statement includes a tension between the contractarian approach adopted by the US corporate law and concession theory adopted by civil legal systems and is prone to the same critique you raised against the Restatement, namely: “the division [of] the reporters draw between “common-law” and “stakeholder” jurisdictions is pretty much a distinction without a difference.” Although combing the contractarian and concession approaches is a possible theoretical move, it is much more difficult to justify or provide coherent explanations of various legal doctrines of corporate law and governance based on an eclectic understanding.

    Second, another approach might be closer to the method you advance in your article in Israel and the UK. The third alternative posits that the corporate purpose is the purpose of the firm (or the enterprise) as a separate, independent legal persona without owners (YEDIDIA Z. STERN, THE GOAL OF THE BUSINESS CORPORATION 296 (BAR-ILAN, 2009) [IN HEBREW]; Andrew Keay, Ascertaining the Corporate Objective: An Entity Maximisation and Sustainability Model, 71 MODERN L. REV. 663 (2008)). Any firm can structure its own purpose, and the role of corporate law is to support the purpose that enhances the corporation’s well-being as an independent legal entity. As a result, the law can rely on neither shareholder primacy nor stakeholder capitalism as extreme examples of corporate purpose. Instead, it must adopt a dynamic and pluralist approach that supports the goal articulated by the firm when it follows its own business interests. Of course, this approach requires further discussion on what should be the limits of the court’s review of business actions carried out by insiders, given the vital protection provided in the US to the business judgment rule (For further discussion, please: Leon Anidjar, Corporate Law and Governance Pluralism, CANADIAN JOURNAL OF LAW AND JURISPRUDENCE (2022); Leon Anidjar, Board Diversity: The State of the Art (2022); https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4077140).

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