The Duty to Think Strategically

AuthorNadelle Grossman
PositionAssistant Professor of Law, Marquette University Law School
Pages449-508
The Duty to Think Strategically
Nadelle Grossman
ABSTRACT
Under Delaware corporate law, directors and officers have a
duty to oversee their firm’s management of risk to limit losses.
Corporate law does not, however, require directors or officers to
oversee their firm’s management of strategy to create gains. Yet,
managing both risk and strategy is essential to a firm in creating
value. In fact, as I argue in the Article, the current focus by courts
and commentators only on risk management to prevent losses
could actually undermine a firm’s management of its strategy for
gains. I therefore propose a model for how Delaware corporate law
can drive firms to manage their strategies for gains, in addition to
their risk of loss, all to create value.
This proposal is especially necessary in light of the fact that
companies such as General Motors collapsed not because of
excessive risk taking, but because they failed to sufficiently
formulate and implement innovative strategies for gains. This
proposal also opens an additional avenue to combat the significant
problem of short-termism, or the drive by firms to create short-
term profits regardless of whether that creates true value. It
combats short-termism by creating an expectation for officers and
directors to oversee their firm’s formulation and implementation of
value-creating strategic objectives. Those objectives, rather than
next quarter’s earnings targets, would then be expected to guide
firm decisions.
Copyright 2013, by NADELLE GROSSMAN.
Assistant Professor of Law, Marquette Univer sity Law School. I would
like to thank Ed Fallone, Kali Murray, Michael O’Hear, and Chad Oldfather for
reviewing and providing comments on this Article. I would also like to thank
participants at the 2011 Association of American Law Schools Annual Meeting,
Section on Law and Socioeconomics, as well as at the 2010 Midwest Law &
Economics Annual Meeting for feedback on preliminary ideas about this
Article. Finally, I would like to give a huge thanks to Jef f Benson, David Knaf f,
Emily Krambs, Jeff Mies, Paco Quiroz, and Jacob Rubbo for their stellar
research assistance in connection with this Article and related projects.
450 LOUISIANA LAW REVIEW [Vol. 73
TABLE OF CONTENTS
I. Introduction ..........................................................................450
II. Strategic Management .........................................................455
A. Stages of Strategic Management ....................................457
1. Strategy Formulation ...............................................457
2. Strategy Implementation ..........................................468
3. Strategy Evaluation and Revision ............................470
4. Board’s Role in Strategic Management ...................473
B. Advantages (and Disadvantages) of Strategic
Management ...................................................................475
III. Corporate Law Strategic-Management Duties .....................479
A. State Law Mandates .......................................................480
1. Duty of Oversight ....................................................482
2. Duty of Oversight Applied to Strategic
Management .............................................................490
B. Securities Laws Affecting Strategic-Management .............
Duties... ..........................................................................493
C. Conclusion .....................................................................495
IV. Creating a Strategic-Management Norm Through
Corporate Law .....................................................................495
A. Making a Case for Change .............................................495
B. Promoting Strategic Management Through
Fiduciary Duties .............................................................502
V. Conclusion ...........................................................................508
I. INTRODUCTION
For decades, General Motors (GM) was a pillar of strength
among U.S. public companies. Not only was it among the three
largest public companies in the United States from 1955 until its
2013] DUTY TO THINK STRATEGICALLY 451
bankruptcy in 2008,1 but for 77 years it was the largest automaker
in the world.2
Despite GM’s success, monsters lay beneath the surface. For
years, GM failed to produce smaller, safer, more fuel-efficient
vehicles in response to changing demand.3 As a result, it
increasingly lost market share to foreign competitors over the
course of three decades.4 GM also lagged behind its foreign
competitors in standardizing its manufacturing processes and the
platforms, body architectures, and components that it used to
manufacture its vehicles.5 Without such standardization, GM not
only faced substantially higher manufacturing costs, but it also
lacked the manufacturing flexibility to respond to changes in
demand.6
These failures left GM flat-footed when the financial crisis
struck in 2007–2008. Ultimately GM, together with Chrysler,
received roughly $80 billion in federal financial assistance at the
time of the crisis,7 and GM was forced to file for bankruptcy
protection to restructure its business in a way that would enable it
to compete in the future.8
While we may never know the true causes of GM’s collapse,
one factor in that collapse appears to be flaws in GM’s process for
managing its strategy. For example, numerous auto industry
experts have found that GM formulated its strategy for the creation
of gains on the basis of unrealistic assumptions about its
competitive environment.9 Even the Presidential Task Force on the
Auto Industry, formed to investigate the causes of GM’s and
1. See Fortune 500: A Database of 50 Years of Fortune’s List of America’s
Largest Corporations, CNN.COM, http://money.cnn.com/magazines /fortune
/fortune500archive/full/1998/ (last visited Feb. 21, 2012).
2. See BILL CANIS & BRENT D. YACOBU CCI, CONG. RESEARCH SERV., THE
U.S. MOTOR VEHICLE INDUSTRY: CONFRON TING A NEW DYNAMIC IN THE
GLOBAL EC ONOMY 43 (2010), available at http://www.fas.org/sgp/crs/misc
/R41154.pdf.
3. See infra Part II.A.3.
4. See OBAMA ADMINIST RATION, DE TERMINATION OF VIABILITY
SUMMARY: GENERAL MOTORS CORPORATION (2009) [hereinafter GM
VIABILITY SUMMARY], available at http://www.whiteho use.gov/assets
/documents/GMViabilityAssessmentFINAL.pdf.
5. See infra Part II.A.3.
6. See infra Part II.A.3.
7. See C
ONG. OVERSIGHT PAN EL, JANUARY OVERSIGHT REPORT: AN
UPDATE ON TARP SUPPORT FOR THE DOMESTIC AUTOMOBILE INDUSTRY 18
(2011), available at http://cybercemetery.unt.edu/archive/cop/20110402010325/
http://cop.senate.gov/documents/cop-011311-report.pdf.
8. Neil King, Jr., & Sheila Terlep, GM Collapses into Government’s Arms,
WALL ST. J., June 2, 2009, at A1.
9. See infra Part II.A.1.

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