Friday, March 7, 2014
Are the directors of Hobby Lobby and Conestoga Wood breaching their fiduciary duties by challenging the contraceptive mandate, seemingly without serious regard to the financial consequences?
Mark Underberg says “perhaps”.
Stephen Bainbridge says “no”.
Professor Bainbridge focuses on the facts that both Hobby Lobby and Conestoga Woods are family-owned, closely-held corporations, and that Conestoga Woods is incorporated under Pennsylvania law, which has a nonshareholder constituency statute. I am not going to jump into their disagreement directly, but, instead, will use a story I saw about Apple to extend the conversation.
Unlike Hobby Lobby and Conestoga Woods, Apple is a publicly-traded, California corporation. California does not have a constituency statute. Recently, Apple CEO and director, Tim Cook, discussed the company’s commitment to the environment, the blind, and making the world a better place. Cook supposedly told investors:
If you want me to do things only for ROI reasons, you should get out of this stock.
More forcefully, Cook said:
When we work on making our devices accessible by the blind, I don’t consider the bloody ROI.
In Cook’s first statement, he seems to be saying that ROI is one of the reasons (just not the only reason) Apple makes decisions. This appears to be a perfectly acceptable statement for a director in the day-to-day decision-making process to make. Could, however, Apple’s board of directors properly completely disregard ROI, as Cook’s second statement suggests?
While Apple is a California corporation, many states take their cues from Delaware on issues of corporate law. Two-former Delaware Chancellors, one of whom is the new Chief Justice of the Delaware Supreme Court, have reiterated the importance of considering shareholder value, at least for directors of Delaware corporations.
In eBay v. Newmark, former-Chancellor William Chandler stated that:
Having chosen a for-profit corporate form, the Craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
In a similar vein, Chief Justice Leo Strine has written that:
[A]s a matter of corporate law, the object of the corporation is to produce profits for the stockholders…. the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation.
(I note that a number of academics think the former-Chancellors' focus on shareholders is misplaced).
How much leeway does corporate law provide directors in focusing on non-shareholder interests? One might convincingly argue that even directors of public, Delaware-corporations are likely to avoid liability if they can make an argument that the decision could (possibly) lead to long-term value for the shareholders. Making such an argument would be relatively easy for Apple – likeminded customers, shareholders, and employees may become more committed to Apple following Apple's society-focused decisions. These likeminded shareholders may buy more shares and sue less frequently. Customers may buy more Apple products and goodwill may increase. Employee turnover may be reduced. All of this may increase profitability in the long-term. While a court is unlikely to challenge such an argument from Apple’s directors, is the argument an honest one? Are Apple's directors really making those decisions with a focus on profitability?
Could Apple’s directors argue, without fear of liability, that they made the society-focused decisions simply because it was the right thing to do, and openly admit that they knew that shareholders were going to suffer in both the short and long-term? I am not sure they could, and I believe that it is that uncertainty in traditional corporate law that benefit corporation statutes attempt to address. (Granted, I admit that the current benefit corporation statutes are far from perfect.)
Update: Professor Bainbridge posted a reply. Thanks to him for the detailed response, and I agree with much of what he writes. To clarify, my point was not about the likelihood of a breach, but rather the possibility of a breach. Also, while I appreciate the protection of the business judgment rule and the Shlensky v. Wrigley case, I think my hypthetical is different than Shelensky. In my hypothetical, the directors openly admit that nonshareholders were the focus of the decision and that shareholders would be hurt in the short and long run. While the court in Shlensky generously provided reasons for why not adding stadium lights might help the Cubs in the long run, I don't remember any direct statements by the defendants about shareholders being purposefully ignored.
Granted, my hypothetical might be a bit far-fetched. Any director with good attorneys may be able to just keep silent or mention the possible long-term benefits of their decisions. That said, in both Dodge v. Ford and eBay v. Newmark, the defendants seemed to insist on telling the court that they were not focused on the shareholders. Some egos may have been involved. I know some professors (such as Professor Gordon Smith) think the rules in those two cases are regulated to closely-held corporations, and while I am not convinced that the general rules are so limited, I do note that the chance of a majority of a public company board openly admiting that shareholder interests were ignored is extremely close to zero.
In the end, I agree with Professor Bainbridge that a breach is highly unlikely, but that Cook "would have been wise to be more temperate in his remarks." Where Professor Bainbridge and I may part company is that I maintain that there is a possibility of a breach if the directors (of a corporation incorporated in a state without a constituency statute) openly admit completely disregarding shareholder interests.