The False Dichotomy of Corporate Governance Platitudes.

• Author: Lipshaw, Jeffrey M.

1. INTRODUCTION 346 II. THE ARGUMENT FROM REALITY (OR RHETORIC) 350 A. 2017 CEO Letters to Shareholders 351 B. Responses to the COVID-19 Pandemic 353 C. Conclusions 354 III. THE ARGUMENT FROM ECONOMICS 354 A. Neoclassical Economics 355 B. New Institutional Economics 361 IV. THE ARGUMENT FROM JURISPRUDENCE 365 V. CONCLUSION--FALSIFYING THE PLATITUDE PROPOSITION 374 APPENDIX A 375 APPENDIX B 382 I. INTRODUCTION

   The Business Roundtable ("BRT") describes itself as "an association of chief executive officers of America's leading companies working to promote a thriving U.S. economy and expanded opportunity for all Americans through sound public policy." (1) On August 19, 2019, it announced an amendment to its Principles of Corporate Governance in a document signed by 181 chief executive officers (the "2019 Statement"). (2) The effect was to eliminate previous references to the "primary purpose" of a corporation as serving its shareholders. Rather, the CEOs observed, while every company might have its own corporate purpose, they shared a "fundamental commitment" to different groups of corporate stakeholders, all of which were "essential" to the future success of their companies, communities, and the country. (3) One of those commitments would have been uncontroversial in the eyes of most corporate law scholars and commentators: "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." (4)

   The 2019 Statement caused an immediate kerfuffle because the CEOs affirmed other commitments in the four preceding paragraphs: to customers (delivering value; meeting or exceeding their expectations), employees (fair compensation and benefits, training, diversity, inclusion, dignity, and respect), suppliers (fair and ethical treatment), and communities (respecting people; protecting the environment). (5) The ideological extreme of "shareholder-focus" absolutists, represented in the academy by corporate law icon Stephen Bainbridge (6) and in the real world by the Council of Institutional Investors, (7) immediately took as an affront to shareholders the mere suggestion they might not be the exclusive stakeholders to which the corporations owed commitments under the Delaware General Corporation Law and that of states with similar doctrine. At the other end of the spectrum, 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. (8) Senator Warren described herself "encouraged" by the statement but only "if... accompanied by tangible action that provides real benefits to workers and other stakeholders." (9) The left-hand column of the Wall Street Journal editorial page had the most cynical reaction, characterizing it as less substance than media spin in light of a potential Warren presidency. (10)

   The shareholder-stakeholder debate was taking place in legal academic circles long before the BRT issued the 2019 Statement, with Professor Bainbridge ably a consistent protagonist for the shareholder wealth maximization principle ("SWMP") on one side. (11) The other side, reflected in both academic writing and political rhetoric, has been the "social responsibility view," under which corporate directors should be held to have no particular duty to favor shareholder interests over those of other corporate constituencies, or more affirmatively, be required to consider stakeholder interests. (12) Indeed, academics, practitioners, and judges had previously weighed in on the narrower question whether Delaware law actually incorporated the SWMP. (13) One of the most subtle articulations of the SWMP came from Leo Strine, now the former chief justice of the Delaware Supreme Court, and widely recognized as perhaps the nation's leading corporate jurist. His view of the SWMP has been wholly descriptive but not normative. While he supports the idea that corporations should have legal obligations to stakeholders other than shareholders, Delaware law presently does not allow for them. That is, current doctrine incorporates the SWMP. (14)

   The 2019 Statement merely brought the policy and doctrinal debates forward once again, most notably by Professor Bainbridge. Call my thesis here "the Platitude Proposition." The debates are a war of platitudes based on a false dichotomy having almost no traction worth discussing as a practical matter. In the real world, directors obviously promote the shareholders' interest in returns on their investments, but they do so by mediating the various and often opposed interests of shareholders, employees, customers, suppliers, and communities. (15) That was true before the BRT issued the 2019 Statement and it is true now. To the extent the 2019 Statement suggested otherwise, it probably should have been amended. To suggest that one or another corporate constituency is the exclusive beneficiary of the directors' concern, the protagonists in "shareholders vs. constituencies" debate must put aside real-world social and economic checks and balances. Instead, they must propose zero-sum thought experiments in which affording a benefit to another constituency by definition is "in irreconcilable conflict" with maximizing shareholder wealth. (16)

   Professor Bainbridge has proposed and, indeed, has marketed one: the Bainbridge Hypothetical. (17) An obsolete plant needs to be closed. It will cost jobs and devastate the local community around the old plant but will benefit shareholders as well as the employees and communities associated with the new plant. Professor Bainbridge's question incorporates the zero-sum assumption: "Assume that the latter groups cannot gain except at the former groups' expense. By what standard should the board make the decision?" (18) He answers his own question, "Shareholder wealth maximization provides a clear answer--close the plant." (19)

   This is a nice academic problem to ponder in the rarified atmosphere of an ethics class or Corporation Law 101, but the reality is the zero-sum choice between the shareholders and some other constituency rarely so presents itself. The Bainbridge Hypothetical is the corporate equivalent of the famous ethical trolley problem and its variants, the basic one involving an uncontrolled trolley rolling down the tracks toward a junction and the protagonist having to decide whether to pull a switch that would cause only one and not six people to die. (20) Just as people in real life are rarely asked to make that kind of horrific decision, corporate management rarely faces the binary choice of diverting value away from the shareholders to other stakeholders. I understand the basis for the rhetoric and the value of the problems as pedagogical tools. Nevertheless, there is a significant gap between academic thought experiments or political positioning, on one hand, and how the real-world works, on the other. The debate (like many in today's polarized political environment) speaks far more to each pole's fear of the slippery slope of the other's position than to a real-world concern.

   I thus offer three arguments that will likely disappoint the ideologues but are more representative of what corporate managers really do. The first, in Part II, is the argument from reality (or at least from the rhetoric of what the corporations themselves say about their commitments, assuming that reflects the reality). The second, in Part III, is the argument from economics. The third, in Part IV, is the argument from jurisprudence. Each makes the same point: any absolutist maxim designating a single constituency to which directors owe their complete duty is not so much wrong as it is meaningless platitude, unhelpful in either describing what boards do or prescribing what they should do. Rather, the business judgment rule, which is an actual rule of decision, justifies almost any allocation of corporate surplus having an articulable connection to the best interest of the enterprise and subsumes platitudes like the SWMP posing as rules of law. (21)

   After fifteen years as a law professor that followed more than a quarter-century as a real-world corporate lawyer and senior officer of a public corporation, I still find myself more amused than educated by the debates between the ideologues on real-world subjects that I know, as a practical matter, rarely present themselves in such a binary fashion when those in the corporate management trenches address them. Academics (especially tenured), politicians (especially those tending to the extremes of the liberal-conservative continuum), and pundits have the luxury of professing ideologically pure positions. But they are false dichotomies. Corporate executives and their lawyers know that leading and managing organizations--i.e. execution rather than mere rhetoric--is a lifelong process of coming to terms with the tension between principles, on one hand, and pragmatism, on the other. The shareholder absolutists and the stakeholder or social responsibility purists are engaging in a rhetorical battle largely removed from the reality that shareholder success is and always has been inseparable from corporate commitment to some or all of those constituencies. (22)

2. THE ARGUMENT FROM REALITY (OR RHETORIC)

   In one of his early absolutist defenses of shareholder wealth maximization, Professor Bainbridge asserted that principle "long has been the fundamental norm which guides U.S. corporate decisionmakers." (23) That is an assertion that hovers delightfully and enigmatically between the empirical and the normative. Really? Is it a statement about what directors actually discuss in the boardroom, or what executives actually do in the management suite? In the real world, when there is no litigation involved, do corporations really view shareholders as the sole constituency...