The charters for Boeing and Google, two of the largest corporations in history, run just seven and eleven pages long, respectively. These charters say almost nothing about the nature of the company’s business and do not contain policies on business challenges. While Delaware corporate law requires a charter to state the nature of the company’s business, these descriptions are almost comically vague. The charters for both Boeing and Google allow them to “engage in any lawful act or activity for which corporations may be organized.” Boeing’s charter does not contain any policy responsive to the recent spate of airline accidents that have imperiled its business, just as Google’s charter is silent about its controversial data-privacy practices that have led to class action lawsuits and multibillion dollar judgments against the company.
In a new paper, I argue that we should reconsider the vagueness of corporate charters and bylaws. Including substantive provisions could increase shareholder oversight of managers and reduce corporate misconduct. Breaching those provisions would allow shareholders to sue company or its executives. If, for example, Google were to commit to specified data-privacy practices in its charter or bylaws, its shareholders would be able to sue if the company were later found to have unlawfully usurped its users’ personal data. This would be a marked improvement over the current state of affairs, where shareholders today cannot initiate such litigation.
Substantive provisions could be an appropriate response to the widespread concern about corporate hypocrisy and the impunity with which companies can expropriate shareholder value and harm other stakeholders. In recent years, companies and their chief executive officers (CEOs) have claimed they will abandon the single-minded pursuit of shareholder wealth maximization and consider the welfare and the interests of society, workers and local communities in making decisions. However, research shows that few companies have followed through. Including such provisions would commit companies to substantive policy goals and best practices. It would also bolster the Caremark doctrine as a way to deter wrongdoing. While Caremark merely requires compliance with current law, no matter how inadequate the status quo may be, contractual provisions would commit companies to specific governance standards.
The greatest advantage of putting substantive provisions in corporate documents may be the most elementary: No change in Delaware law would be necessary. Both the text of the Delaware corporate code and case law are consistent with companies being able to place substantive provisions in charters and bylaws. The legal validity of such provisions is underlined by the increasingly contractarian turn in Delaware jurisprudence regarding corporate documents and courts’ permissive approach to upholding the validity of novel clauses in charters and bylaws. The greatest challenge to including such provisions is convincing corporate managers to commit to substantive policies that could expose them to lawsuits.
I argue that the solution lies with institutional investors, which hold large stakes in most major corporations and routinely emphasize their commitment to good corporate governance. These investors already vote their shares in accordance with their preferences and engage with managers to influence governance practices. Large institutional investors can therefore play a crucial role in spreading value-increasing substantive provisions by voting in favor of such terms, pressuring managers to support them, and encouraging other shareholders to introduce charter and bylaw amendments. Advocacy for substantive provisions would thus build naturally on the role institutional investors already play in promoting governance reforms in their portfolio firms.
One possible criticism of my proposal is that it would be unwise to increase litigation risk for companies by making them include substantive provisions because many shareholder lawsuits are frivolous. While the risk is real, it points to another advantage of my proposal: Companies are free to choose which, if any, policies they include in their charters or bylaws. Corporations can choose only policies that are especially relevant to their business and would increase the company’s value enough to offset any anticipated costs from more shareholder litigation. Companies can also exercise their business judgment in determining whether substantive policies should protect shareholders or other stakeholders, and if these policies should be included in the charter or bylaws.
Each of these decisions has important consequences under corporate law, but will be made by the managers or shareholders of the corporation rather than be dictated by statute or regulations. Moreover, most major Delaware companies have forum selection clauses that would ensure any litigation arising from substantive provisions would be adjudicated by Delaware’s skilled and contractarian judges, who would quickly dispose of frivolous lawsuits. Substantive provisions thus provide a way to modify corporate behavior through binding commitments in foundational corporate documents.
Dhruv Aggarwal is an assistant professor at Northwestern University’s Pritzker School of Law. This post is based on his new paper, “Self-Binding Corporations,” available here.