Several pieces have emerged in the last few months questioning, sort of, the notion of shareholder supremacy in corporate decision-making. The Business Roundtable published what in the corporate world constitutes a bombshell statement to the effect that a corporation’s purpose should be to improve the lot of all constituencies, here. That statement was quickly followed by the Council of Institutional Investors’ publication of “concerns,” here. In a fight reminiscent of the one here, UCLA Law Professor Stephen Bainbridge rebuts recycled criticisms of “sociopathic” (blindly self-interested) corporate decision-making here and notes that (a) the only “law” relevant to director and officer actions is the “business judgement” standard of judicial review (basically, the idea that, as long as directors don’t have a conflict and follow a reasonable process, a court won’t revisit their decisions), (b) corporations have plenty of leeway to consider long-term interests of shareholders over short-term interests, and (c) to the extent advocates believe corporations should consider non-shareholder interests, a benefit company structure allows that (and benefit company charters may specify what other interests must be considered). All of that is, of course, completely true. (Some additional analysis of the Business Roundtable statement is here.)
Advocates of pushing corporate considerations beyond narrow shareholder concerns may get a boost from just-retired Delaware Chief Justice Leo Strine, a corporate law luminary if ever there was one, who recently published the horribly titled “Toward Fair and Sustainable Capitalism: A Comprehensive Proposal to Help American Workers, Restore Fair Gainsharing Between Employees and Shareholders, and Increase American Competitiveness by Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth and Encouraging Investments in America’s Future,” available here. Strine suggests corporate governance reforms can and should look beyond the short-term interests of institutional shareholders to the longer-term interests of the human beings whose capital they control, and that the realignment can be achieved with “modest changes” to the laws and regulations that apply to institutional investors.
Many states, like our own home state of Oregon (see here), have “constituencies” provisions in their corporate codes that specifically allow directors to consider groups other than shareholders when deciding whether to approve a company sale, the point in time when short- and long-term shareholder interests reduce to “how much am I getting,” and typically when director fiduciary duties are most important and most closely scrutinized by courts. Outside a sales context, even absent a constituencies provision, the business judgement rule means directors and officers could defensibly shift dividends to salaries, for example, because focusing on employee retention is in the long-term interests of the corporation and, ultimately, shareholders. That said, it’s difficult to imagine that, absent significant changes to fiduciary duty clauses in state corporate codes, courts will quickly deviate from established case law or directors or executives will push the boundaries to act for the benefit of a group to the detriment of shareholders. At the end of the day, it might be nice if corporations solved social problems, but that’s not what they were designed to do.
