Making Sense of the Business Roundtable's Reversal on Corporate Purpose.

• Author: Bainbridge, Stephen M.
• Position: Response to article by Jeffery M. Lipshaw, in this issue, p. 345

1. INTRODUCTION 285 II. THE BUSINESS ROUNDTABLE STATEMENT 288 III. THE LAW OF CORPORATE PURPOSE 289 A. Mere Dicta? 289 1. Lipshaw's Claims 290 2. Quibbles 291 3. Dodge's Precedents and the Contemporaneous Reaction to It 294 B. Opinio Juris 299 C. The Bainbridge Hypothetical, the Business Judgment Rule, and the Trolley Problem 301 IV. WHAT'S REALLY GOING ON? 310 A. What People Do Matters More than They Say 311 B. So Why Do Directors Say What They Say? 316 1. Puffing for the Good of the Shareholders 316 2. Feathering Their Own Nests 317 V. CONCLUSION 318 I. INTRODUCTION

   In August 2019, the Business Roundtable (BRT) issued a statement on the purpose of the corporation in which it reversed a longstanding position. (1) Since 1978, the BRT has periodically issued statements on Principles of Corporate Governance, which purport to summarize law and best practice in this area. (2) Since 1997, all versions of those statements had embraced the view corporations exist primarily to serve their shareholders. (3) In contrast, the 2019 version contains a much broader conception of corporate purpose, which posits that corporations should "commit to deliver[ing] value to all of" the corporation's stakeholders. (4)

   As Professor Jeffrey Lipshaw notes in the article to which this article responds, the 2019 revision "caused an immediate kerfuffle," evoking sharply worded criticism from proponents of wealth maximization who objected to "the mere suggestion [that shareholders] might not be the exclusive stakeholders to which the corporations owed commitments." (5) In contrast, "those appalled by excessive executive compensation, the gaps in wealth distribution, and the overall concentration of corporate power thought the acknowledgment of inclusive corporate commitment was overdue." (6)

   In debating the BRT's new statement, Professor Lipshaw and I stand mainly on well-trodden ground. There is a very considerable body of scholarship on the corporate purpose and a corporation's social responsibility. (7) It seems as though every generation of scholars feels obliged to contribute to the debate, (8) even though most are simply reiterating points that can be traced back to the Berle-Dodd debate in the 1930s. (9) My justification for nevertheless revisiting this debate, despite having trodden much of this same ground previously, (10) is two-fold. First, is to ask whether the new BRT statement changes the terms or direction of the debate. Second, to reply to Professor Lipshaw's use of my prior arguments in other work on corporate purpose "as... a good-natured foil for [his own] reflections." (11) I trust my response will be equally good-natured. My admiration for Professor Lipshaw's knowledge and deep base of practical experience remains intact, after all, even though I remain unpersuaded by his argument in this context.

   Professor Lipshaw makes a number of arguments, all of which he asserts are grounded in the real world. (12) I do not propose to address each bullet point seriatim. Instead, I want to focus on just two questions.

   First, what is the law of corporate purpose? As it turns out, Professor Lipshaw and I agree about how the vast majority of cases in this area will come out; namely, the court will invoke the business judgment rule and toss the case at the motion to dismiss stage. I will argue, however, that the reason courts do so differs from Professor Lipshaw's argument and that that reason matters. In addition, I will argue that the law in an admittedly small set of cases is clear and that class of cases matters.

   Second, it turns out that Professor Lipshaw and I agree about what (at least some) directors are doing in the corporate responsibility space, but I want to probe more deeply into why they are doing so. When one does so, I will argue, the real world turns out to be less benign than Professor Lipshaw paints it.

   Part II of this article introduces the problem with a very brief review of the BRT's history of advocating what it regards as best corporate governance practices, which culminated in the new statement. Part III responds to certain points of Professor Lipshaw's arguments about the law of corporate purpose. Professor Lipshaw argues that the BRT's new version more closely accords with the way the law works in the real world than did the prior statement. (13) In contrast, I will argue that the law of corporate purpose remains that directors have an obligation to put shareholder interests ahead of those of other stakeholders and pursue long-term sustainable profits for those shareholders. Part IV replies to Professor Lipshaw's argument that the BRT's new statement also more accurately reflects the way businesses behave in the real world than did the older versions. As noted, I agree that some--but far from all--businesses are behaving in ways that purport to comport with the BRT statement. For most, however, socially responsible corporate purposes are just window dressing. For those where it is something more than that, moreover, it potentially introduces a whole new set of agency costs. (14)

2. THE BUSINESS ROUNDTABLE STATEMENT

   The BRT is a trade association comprised of approximately 200 CEOs of large U.S. public corporations, which was formed in 1972 as a public policy advocacy group. (15) Its policy statements receive considerable attention and have significant influence with policymakers. (16) Since 1978, the BRT's policy statements have included periodic reports on Principles of Corporate Governance. (17) Starting in 1997, those principles have endorsed shareholder wealth maximization as the appropriate normative principle by which board of director decisions should be guided. (18) The 2012 version of the Principles, for example, opined that "it is the responsibility of management, under the oversight of the board, to operate the corporation in an effective and ethical manner to produce long-term value for shareholders." (19)

   In August 2019, the BRT issued a new statement on the purpose of the corporation: (20) While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

   * Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.

   * Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.

   * Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.

   * Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

   * Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

   Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country. (21)

   The statement was signed by 181 of the BRT's members. (22) It is regarded by many (but not all) as confirmation that "America's top business and financial leaders now officially support the rapidly evolving ESG [environmental, social and corporate governance] /sustainability movement...." (23)

3. THE LAW OF CORPORATE PURPOSE

   I believe the law of corporate purpose is quite clear:

   As corporations developed and grew, a central principle of corporate law emerged: the sole duty of a corporation's officers is to maximize shareholder wealth. As time passed, calls rose for corporations to be more socially responsible, nonetheless, the principle that a corporate officer's overriding duty is to maximize shareholder wealth remains intact. Today, this appears to be the dominating goal of corporations in a free market society. (24) The same is true of a corporation's board of directors, whose obligation it is "to attempt, within the law, to maximize the long-run interests of the corporation's stockholders...." (25)

   1. Mere Dicta?

      Professor Lipshaw claims that there are only two categories of cases in which courts have meaningfully addressed the shareholder wealth maximization norm and, moreover, that judicial statements about the norm in those cases are mere dicta. (26) One can quibble with both of those claims. (27) Even if one assumes, arguendo, that Professor Lipshaw is correct on both points, there is ample contemporaneous evidence that the alleged "dicta" was understood from the outset to be an accurate statement of the law. (28)

      1. Lipshaw's Claims

         Professor Lipshaw first argues that statements in cases articulating what he calls the shareholder wealth maximization principle (29) are mere dicta. (30) One only finds such dicta, he further argues, in just two categories of decisions. (31) The first category includes cases like Dodge v. Ford Motor Co. (32) and eBay Domestic Holdings, Inc. v. Newmark, (33) which "are what [former Delaware] Chief Justice [Leo] Strine calls 'confession' cases." (34) Strine defines such cases as those in which the dominant manager "admits that he is treating an interest other than stockholder wealth as an end in itself, rather than as an instrument to stockholder wealth." (35) Indeed, in both cases, the defendants freely admitted--repeatedly and publicly--that they were putting stakeholder interests ahead of those of shareholders. (36)

         According to Professor Lipshaw, Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., (37) typifies the other category of cases in which one finds the alleged dicta. (38) Once the board enters Revlon-land, as by deciding that the company is for sale in a way that will result in a...