A Middle Way to Good Corporate Governance: Former Chief Justice Leo E. Strine Jr. weighs in on stakeholder vs. shareholder primacy.

• Author: Raymond, Doug

A current hot debate among governance professionals concerns shareholder vs. stakeholder primacy. Should business corporations pursue shareholder wealth maximization or broader societal interests beyond shareholder returns? This debate is taking place in boardrooms, in the political sphere and among governance mavens. Recently, The Walt Disney Company was involved in what became a very politicized debate that reportedly contributed to the replacement of its CEO. The stakes can be high for boards that take on issues beyond those directly impacting the company.

In a forthcoming article for The Business Lawyer, titled "Good Corporate Citizenship We Can All Get Behind? Toward a Principled, Non-Ideological Approach to Making Money the Right Way," former Delaware Supreme Court Chief Justice Leo E. Strine Jr. suggests a possible path forward and proposes a new framework for good corporate citizenship while retaining the primacy of the stockholder. Strine's approach focuses on what he sees as the "most heated part of the debate ... the intersection of corporate power and voice and controversial issues of general social and political polity."

Strine starts with fundamental principles of corporate law: that the board of directors has the authority to set corporate policy and to oversee how management implements that policy. That authority extends to corporate policy on political and social issues--notwithstanding the diverse and even conflicting views on such issues that management, employees and other stakeholders may have. This authority to set corporate policy is quite expansive, cabined only by the board's fiduciary obligations and the rights of shareholders to implement select changes, such as a change to the charter or a merger. As Strine observes, absent a conflict of interest in the boardroom, these are weak restraints, particularly because any policy adopted by the board need only further the shareholders' best interests on some rational basis. These sorts of decisions are a textbook example of business judgment of the board. As any law student can tell you, any doubts are almost invariably resolved in favor of the board.

Setting Policy Is in the Board's Purview

Some argue that the shareholder/stakeholder debate can be resolved whenever a majority of shareholders (or their proxy advisors, such as Glass Lewis and ISS) can speak with a unified voice. But even in these companies, the responsibility to set policy rests with the board and not the...