United States: The Purposes Of A Corporation And The Role Of The Board

Monday's Business Roundtable Statement on the Purpose of a Corporation is significant, mostly because it opens the door for more discussion of the idea of "corporate purpose". While there are many ways that conversation could go, there are good reasons to believe the discussion will lead to a shift in corporate governance towards more authority and responsibility for corporate boards. Specifically, boards will be expected to lead on corporate social responsibility issues.

Andrew Ross Sorkin sums up the background nicely in his article in Tuesday's New York Times1, including his summation that "for whatever progress may have been made Monday, it is hardly clear the debate is over." There are two issues, in particular, touched on by Sorkin that deserve quick supplementation.

First, a reason that Milton Friedman would say in 1970 that "there is one and only one social responsibility of business– to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game," and that the Business Roundtable would say in 2019 that companies "share a fundamental commitment to all of our stakeholders," is that in Friedman's time we had a functioning federal government (think Great Society programs of the mid-1960's, the National Environmental Policy Act of 1970 and the Employee Retirement Income Security Act of 1974), and today we have a dysfunctional federal government2. If you are optimistic that our political governance will improve markedly in the short term, then you should expect the corporate purpose debate to cool off soon. Friedman, by the way, was very explicit about the premise underlying his view of corporate social responsibility; namely, that corporate social responsibility involves the diversion of corporations for the performance of political functions: "[the corporate executive] is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other. . . . The doctrine of 'social responsibility' involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses."

Second, the Council of Institutional Investors ("CII"), in responding negatively to the Business Roundtable's Statement, is relying on an argument that bends to the pressure of close inspection. On the one hand, CII could not credibly take a position against corporate social responsibility, insofar as its members have been very vocal supporters of that idea, in an active way. For example, for the third year in a row in 2019 environmental and social proposals were a majority of all shareholder proposals filed under Rule 14a-8. On the other hand, CII's membership is threatened by a return to the era of corporate managerialism, in which corporate executives had discretion to determine corporate policy with relatively little consultation with shareholders or oversight by boards. CII tried to thread the needle by strongly linking corporate social responsibility to long-term shareholder value, while kind of preserving the idea of shareholder primacy: "To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners." Echoing Friedman, CII argues that to the extent that social responsibility cannot be linked to stock price performance, the corporate responsibility issues are in the sphere of government, not business: "It is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value." The principal problem with that thread-the-needle solution is that the link between long-term shareholder value and corporate social responsibility may not be strong enough, at least at this time, to fill the current vacuum.

Where are we headed? A stakeholder perspective, as contemplated by the Business Roundtable's Statement, does not necessarily involve any legally binding obligation. What the CEOs "commit" to in the Business Roundtable's Statement is almost certainly not legally enforceable under a contract theory. As for corporate fiduciary law, CII is probably right when it argues that "accountability to everyone means accountability to no one." Proposals have been made for creating a framework for legal responsibility in a world of stakeholder-focused governance. One such proposal would have each corporation have a statement of its corporate purpose included in its by-laws, with board fiduciary responsibility to justify their decisions in light of their statements of corporate purpose, to the satisfaction of the courts.3

A more likely landing point for the current debate is a strengthening of the role of directors, on whose shoulders can be placed responsibility for balancing shareholder interests with social interests. To bear that responsibility, the resources and commitment of boards would be increased.4 The result could perhaps retain the idea of shareholder primacy, but with increased attention to stakeholder perspectives – and, specifically, social and environmental issues – accompanied by disclosure related to those issues, as well as a heightened standard for board attention to the risks of inaction.5 The corporate law of Delaware, and likely most other states, could accommodate a new balance along those lines without any fundamental change to the law, because of the deference accorded to directors by the business judgment rule. Thus, directors would be encouraged to give heightened attention to stakeholder interests and would be protected under a traditional business judgment rule analysis from second guessing by the courts. Plaintiffs challenging corporate social responsibility efforts would have to plead facts showing that a corporate decision being challenged was not undertaken because of the potential benefit to shareholders that results from the intangible value of the corporation acting as a good corporate citizen. The board would be well positioned to assume that role as representatives of shareholders, who can be voted out by them, and not as corporate managers with the same types of entrenchment risks and incentives that Friedman's shareholder primacy theory was designed to address.

Footnote

1 Andrew Ross Sorkin, "How Shareholder Democracy Failed the People (at https://www.nytimes.com/2019/08/20/business/dealbook/business-roundtable-corporate-responsibility.html?action=click&module=Top%20Stories&pgtype=Homepage).

2 We do not use the term "dysfunctional" as an aspersion on any political party or philosophy, but rather to describe a generalized inability of elected officials of all philosophies to engage in consistent dialogue and compromise that leads to the passage of thoughtful legislation designed to address the many existing issues faced by the country.

3 Colin Mayer, "Prosperity – Better Business Makes the Greater Good" (Oxford University Press, 2018).

4 As contemplated by Ronald J. Gilson & Jeffrey N. Gordon in their recent article entitled "Board 3.0 – An Introduction," Business Lawyer, Vol. 74, p. 351, 2019.

5 As contemplated by our recent notes entitled "Caremark and Reputational Risk Through #MeToo Glasses" (at https://www.clearymawatch.com/2018/05/caremark-reputational-risk-metoo-glasses/) and "Not So Sweet: Delaware Supreme Court Revives Caremark Claim, Provides Guidance On Directors' Oversight Duties" (at https://www.clearymawatch.com/2019/06/not-so-sweet-delaware-supreme-court-revives-caremark-claim-provides-guidance-on-directors-oversight-duties/).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions