Corporate governance and political governance are increasingly intersecting, as corporations engage in some of the most contentious and important social challenges of our time with their voice, capital, and actions. In a recent article, I examine this new convergence and its effects on law, politics, business, and society.

Through investments, pronouncements, and policies, businesses have directly acted on issues like climate change, racial justice, reproductive freedom, voting rights, gun violence, gender equity, and international conflicts. Corporate boardrooms have become critical forums for fights about social and political change, serving as an alternative to courtrooms and legislatures. And this new corporate social and political activism has drawn much attention, praise, criticism, reward, and retribution.

Although many welcome the voice and resources of corporate America on these timely issues, critics argue that these engagements are ruining business, polarizing our politics, and hurting our democracy.  Elected officials have punished businesses for engaging in activities they deemed “woke.”  For example, in recent years, numerous states moved to limit billions of dollars of state pensions from being invested with firms that engage in social issues like climate change and diversity.

The changing corporate political landscape has created tensions that significantly affect the governance of our businesses and our politics.  In light of these developments, my article makes three recommendations for corporate executives, policymakers, and other stakeholders: (1) adopt a more realistic and expansive view of corporations — a new “overstory,” (2) create a new organizing framework for corporate political engagements, and (3) look to Delaware and Nevada for models of rulemaking.

A Different Corporate Overstory

The conventional view of corporations confines them to an oversimplified, apolitical sphere of private profit for rational, unempathetic shareholders. The new corporate overstory, however, would conceptualize corporations as fundamentally political, profit-driven, and human-centered entities.  It would recognize that corporations cannot be fully divorced from the political and profit pursuits of the people that manage them.  It would also allow businesses to better reimagine and re-engage with interdependent shareholders and stakeholders in the new corporate political landscape.

The AILS Framework

A new framework, known as AILS, can help companies  systematically organize and put into effect internal social efforts. It is built on the concepts of Analyze, Internalize, Localize, and Specialize (AILS).

The AILS Framework

Analyze: Businesses should conduct a thorough analysis of their social and political activities. They should carefully audit and measure their  expenditures, efforts, and impact in a way similar to how they assess their core operational and financial expenditures and efforts.

Internalize: As part of a comprehensive analysis of their social and political efforts, businesses should account for the issues most important to their internal stakeholders, especially employees.  They should begin their social efforts and engagements internally, treating all their employees and contractors well and creating a culture where labor is valued and cared for.  Compensate them fairly, provide them with safe working conditions, and give them more than adequate benefits so that they can truly share in the profits and wealth of the business. Moreover, treating employees well can also foster and promote social and political values internally that a firm may champion externally, such as safety and inclusion.

Localize:  Once companies have meaningfully engaged with their internal stakeholders, they should, whenever appropriate, prioritize their social and political efforts locally before expanding their engagements geographically.  Taking better account of the needs and preferences of local communities is critical to fostering more inclusive, impactful, and beneficial corporate social and political engagements.

Specialize: To advance their positions and maximize their impact, firms should prioritize and focus their social and political efforts on issues most relevant to their businesses and engage in ways that leverage their comparative expertise.  Instead of responding to every issue in a myriad of ways, specialization allows firms to better align their social activism with their business interests, creating a mutually beneficial nexus.

The AILS framework is designed to help executives enhance firm value by engaging more thoughtfully with sensitive social issues while minimizing bad publicity, reputational damage, and economic harm.

Lessons from Delaware and Nevada

Delaware and Nevada offer useful models for promulgating business regulations and managing public pensions in this new, corporate political landscape.

Delaware offers an exemplary model for public policymakers who are considering retaliatory legal changes against businesses in response to their social and political activities. The state safeguards its business laws and regulations from petty partisan politics that could harm not only the state and businesses, but also the global economy, given  how many major companies are incorporated in Delaware.  First, Delaware’s corporate law, and changes to it, originate not in the state legislature but in the Council of the Delaware State Bar Association’s Corporation Law Section, a body of longstanding, learned business lawyers and leaders, rather than elected politicians.  Second, Delaware’s Constitution requires its three major courts that adjudicate business disputes – the Delaware Supreme Court, the Court of Chancery, and the Superior Court – to be nearly evenly divided between jurists of the two major political  parties. Third, Delaware’s Court of Chancery is structured to provide a specialized, swift, and learned forum for some of the most contentious and complicated business disputes, without fear of partisan favor or backlash. Collectively, these safeguards help shield Delaware business law and Delaware corporations from many dangers that arise out of reactionary, and potentially damaging short-term political impulses.

Like Delaware, Nevada offers an instructive approach for public policymakers seeking to use public pension funds to respond to the changing corporate political landscape.  The Nevada Public Employees Retirement System fund (NVPERS) with assets of $58.3 billion as of the fiscal year ending June 2023, has consistently outperformed many of its peers.  The key to its success is its focus on low-cost, passive investments like index funds, without regard for the social and political views of the underlying assets or asset managers.  In contrast to the Nevada approach, in recent years, several governors, state treasurers, and other state political leaders have sought to use the tens of billions of dollars in public retirement and pension funds under their stewardship to actively reward companies that align with their political views on certain issues and punish those who do not.  By focusing investments on a broad array of low-cost, passive funds and assets, the Nevada approach allows investors and retirees to benefit from a wide range of investment opportunities to generate the best returns over the long run, without any petty political interference

Conclusion

Addressing the issues presented by the new corporate political governance landscape will be one of the most consequential and demanding challenges for political leaders, corporate executives, and ordinary citizens in the coming years. While a perfect roadmap for the changing terrain remains elusive, a better way forward, fostered by the recommendations made here, is certainly within our grasp.

This post comes to us from Professor Tom C.W. Lin at Temple University’s Beasley School of Law. It is based on his recent article in the Boston College Law Review, “The New Corporate Political Governance,” available here.