Tuesday, September 23, 2014
March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well? (Part III)
(Note: This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. The previous installments can be found here and here (NLPB) and here and here (BLPB).)
In prior posts we talked about what a benefit corporation is and is not. In this post, we’ll cover whether the benefit corporation is really necessary at all.
Under the Delaware General Corporation Code § 101(b), “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes . . . .” Certainly there is nothing there that indicates a company must maximize profits or take risks or “monetize” anything. (Delaware law warrants inclusion in any discussion of corporate law because the state's law is so influential, even where it is not binding.)
Back in 2010, Josh Fershee wrote a post questioning the need for such legislation shortly after Maryland passed the first benefit corporation legislation:
I am not sure what think about this benefit corporation legislation. I can understand how expressly stating such public benefits goals might have value and provide both guidance and cover for a board of directors. However, I am skeptical it was necessary.
Not to overstate its binding effects today, but we learned from Dodge v. Ford that if you have a traditional corporation, formed under a traditional certificate of incorporation and bylaws, you are restricted in your ability to “share the wealth” with the general public for purposes of “philanthropic and altruistic” goals. But that doesn't mean current law doesn't permit such actions in any situation, does it?
The idea that a corporation could choose to adopt any of a wide range of corporate philosophies is supported by multiple concepts, such as director primacy in carrying out shareholder wealth maximization, the business judgment rule, and the mandate that directors be the ones to lead the entity. Is it not reasonable for a group of directors to determine that the best way to create a long-term and profitable business is to build customer loyalty to the company via reasonable prices, high wages to employees, generous giving to charity, and thoughtful environmental stewardship? Suppose that directors even stated in their certificate that the board of directors, in carrying out their duties, must consider the corporate purpose as part of exercising their business judgment.
Please click below to read more.
Sunday, September 14, 2014
This coming Tuesday, I am scheduled to provide a brief overview of the corporate law/theory aspects of Hobby Lobby as part of the University of Akron’s Supreme Court Roundup. What follows are the seven key quotes from the opinion that I plan to focus on (time permitting) in order to highlight what I see as the key relevant issues raised by the opinion. Comments are appreciated.
Issue 1: Did corporate theory play a role in Hobby Lobby?
While I believe the majority made a pitch for applying a pragmatic, anti-theoretical approach (“When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of … people.” Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751, 2768 (2014)), the following quote strikes me as conveying an underlying aggregate view of corporations:
In holding that Conestoga, as a “secular, for-profit corporation,” lacks RFRA protection, the Third Circuit wrote as follows: “General business corporations do not, separate and apart from the actions or belief systems of their individual owners or employees, exercise religion. They do not pray, worship, observe sacraments or take other religiously-motivated actions separate and apart from the intention and direction of their individual actors.” 724 F.3d, at 385 (emphasis added). All of this is true—but quite beside the point. Corporations, “separate and apart from” the human beings who own, run, and are employed by them, cannot do anything at all.
134 S. Ct. at 2768.
September 14, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Religion, Social Enterprise, Stefan J. Padfield, Unincorporated Entities | Permalink | Comments (2)
Sunday, July 27, 2014
An Updated Draft of “Corporate Social Responsibility & Concession Theory” and Some Further Thoughts on Hobby Lobby
I have posted an updated draft of my latest piece, “Corporate Social Responsibility & Concession Theory” (forthcoming __ Wm. & Mary Bus. L. Rev. __) on SSRN (here). Here is the abstract:
This Essay examines three related propositions: (1) Voluntary corporate social responsibility (CSR) fails to effectively advance the agenda of a meaningful segment of CSR proponents; (2) None of the three dominant corporate governance theories – director primacy, shareholder primacy, or team production theory – support mandatory CSR as a normative matter; and, (3) Corporate personality theory, specifically concession theory, can be a meaningful source of leverage in advancing mandatory CSR in the face of opposition from the three primary corporate governance theories. In examining these propositions, this Essay makes the additional claims that Citizens United: (A) supports the proposition that corporate personality theory matters; (B) undermines one of the key supports of the shareholder wealth maximization norm; and (C) highlights the political nature of this debate. Finally, I note that the Supreme Court’s recent Hobby Lobby decision does not undermine my CSR claims, contrary to the suggestions of some commentators.
I expect to have at least one more meaningful round of edits, so all comments are welcome and appreciated.
As to the last point of the abstract, let me explain why I don’t think Hobby Lobby has meaningfully expanded the ability of corporations to pursue socially responsible actions lacking in any colorable shareholder wealth justification, which, in light of the business judgment rule, is where I believe much of the interesting CSR action is taking place. I’ll first briefly go through my understanding of what the Court held in Hobby Lobby, and then see if anything new is added to our understanding of corporations’ ability to pursue CSR activities. My analysis proceeds roughly as follows:
1. Are corporations capable of exercising religion?
As a matter of statutory construction, determining whether corporations can exercise religion for purposes of the RFRA requires looking to the Dictionary Act, which includes corporations under the definition of "person" unless the context indicates otherwise. I agree with Justice Ginsburg that the context of exercising religion is one that properly excludes corporations. In addition, due to my view of the corporation as being fundamentally a creature of the state, I have Establishment Clause concerns about allowing the recipients of the state’s corporate subsidy to further religious ends via that grant. (I address some of the related unconstitutional conditions arguments here.) But in the end, the Court said corporations can exercise religion, so that’s likely the final word till a Justice retires.
2. Is the exercise of religion by corporations ultra vires?
Given that the Court has deemed corporations capable of exercising religion, the next question is whether they have been granted the power to do so by the state legislatures that created them. In other words, is the exercise of religion ultra vires? When Justice Alito says that “the laws … permit for-profit corporations to pursue ‘any lawful purpose’ or ‘act,’ including the pursuit of profit in conformity with the owners' religious principles,” I believe he is best understood as affirming that religious exercise, like charitable giving, is not ultra vires, nothing more.
3. Can corporations sacrifice shareholder wealth to further religious exercise?
So, corporations have the ability to exercise religion and it is not ultra vires for them to do so. None of that, however, should change the fact that if the religious exercise does not somehow advance shareholder wealth and any shareholder legitimately complains, then a viable waste or fiduciary duty claim has been asserted. Alito seems to recognize this point when he qualifies his conclusion about the viability of abandoning profit-maximization with: “So long as its owners agree ….” As Jay Brown put it (here), “this is a rule of unanimity…. it doesn't actually alter the board's legal duties.” In other words, I agree with my co-blogger Josh Fershee when he argues (here) that Hobby Lobby should not be read to create some new First Amendment defense for controlling shareholders or directors facing viable claims of waste of corporate assets or duty of loyalty violations.
Assuming all the foregoing is correct, I don’t see anything new in Hobby Lobby vis-à-vis a corporation’s ability to engage in CSR activities. Obviously, it doesn’t take much to satisfy the business judgment rule, but that’s not the issue. If there is any new ground here it should arguably create a defense where no rational business purpose is asserted (I don’t believe Hobby Lobby has redefined “business” for purposes of the waste doctrine). That’s precisely what makes benefit corporations special and necessary – they provide such a defense for corporations pursuing activities with a public benefit but open to the challenge that there is no concomitant shareholder wealth benefit. As Robert T. Esposito & Shawn Pelsinger put it (here), “the principal argument for social enterprise forms rests on the assumption that corporate law and its duty to maximize shareholder wealth could not accommodate for-profit, mission-driven entities.”
So, has Hobby Lobby somehow meaningfully shifted the playing field when it comes to CSR? I don’t think so.
Tuesday, July 15, 2014
The Hobby Lobby decision states:
No known understanding of the term "person" includes some but not all corporations. The term "person" sometimes encompasses artificial persons (as the Dictionary Act instructs), and it sometimes is limited to natural persons. But no conceivable definition of the term includes natural persons and nonprofit corporations, but not for-profit corporations. 20 Cf. Clark v. Martinez, 543 U. S. 371 , 378 (2005) ("To give th[e] same words a different meaning for each category would be to invent a statute rather than interpret one").
The decision continues:
Under the Dictionary Act, "the wor[d] 'person' . . . include[s] corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals." Ibid .; see FCC v. AT&T Inc., 562 U.S. ___, ___ (2011) (slip op., at 6) ("We have no doubt that 'person,' in a legal setting, often refers to artificial entities. The Dictionary Act makes that clear"). Thus, unless there is something about the RFRA context that "indicates otherwise," the Dictionary Act provides a quick, clear, and affirmative answer to the question whether the companies involved in these cases may be heard.
Thus, unless otherwise stated, any place a person can recover claims, so can “corporations, companies, associations, firms, partnerships, societies, and joint stock companies.” There are opinions that have distinguished the “fictional person” from the “natural person.” See, e.g., All Comp Const. Co., LLC v. Ford, 999 P.2d 1122, 1123 (Okla. App. Div. 1 2000) (stating that an LLC was a "fictional 'person' for legal purposes and thus any damages due to the LLCs would be "due to it as a fictional person," and thus certain damages were not recoverable because LLCs are not "capable of experiencing emotions such as mental stress and anguish"). RFRA, per Hobby Lobby, though, does not make such a distinction.
As such, it seems to me there are places where federal law uses the term person that might now extend potential recovery to entities for things like pain and suffering or mental anguish. Maybe I am missing something here. Any ideas come to mind? Maybe civil rights laws?
The ripples, it seems, are just beginning.
Sunday, July 13, 2014
"How Hobby Lobby Undermined The Very Idea of a Corporation" http://t.co/Rq4F6LKpCr— Ian Bogost (@ibogost) July 5, 2014
"how the common law has personified the state and how those personifications affect ... state responsibility" http://t.co/faAgRTY8cR— Stefan Padfield (@ProfPadfield) July 10, 2014
ICYMI: "Hosanna-Tabor..appears to [=] religious groups are different from secular groups for constitutional purposes" http://t.co/rydH7PM1zr— Stefan Padfield (@ProfPadfield) July 10, 2014
"a corporation has no purposes..separate from those of the people who own and control it" & the state that created it http://t.co/J157qm2PTK— Stefan Padfield (@ProfPadfield) July 11, 2014
Monday, July 7, 2014
The Court's Hobby Lobby decision, as noted in post-decision commentary (see, e.g., Sarah Hahn's guest post earlier this week), apparently relies in part on the fact that shareholders (and, potentially, employees and other relevant constituents of the firm) know that the firm has sincerely held religious beliefs and what those beliefs mean for business operations and legal compliance. The Court does not directly address this in its opinion. Rather, the opinion includes various references to owner engagement that imply buisness owner awareness. The Court states:
- For-profit corporations, with ownership approval, support a wide variety of charitable causes . . . . (Op. 23, emphasis added)
"So long as its owners agree, a for-profit corporation may take costly pollution-control and energy conservation measures that go beyond what the law requires." (Op. 23, emphasis added)
In making these statements and reasoning through this part of the opinion, the Court relies on state corporate law principles and allusions.
Importantly, the Court also indicates its views on how the policy underlying the RFRA favors an interpretation that includes corporations as persons:
An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people. For example, extending Fourth Amendment protection to corporations protects the privacy interests of employees and others associated with the company. Protecting corporations from government seizure of their property without just compensation protects all those who have a stake in the corporations’ financial well-being. And protecting the free-exercise rights of corporations like Hobby Lobby, Conestoga, and Mardel protects the religious liberty of the humans who own and control those companies.
(Op. 18, emphasis in original) Note how the last sentence reduces the protected category of persons under the RFRA to those who "own and control" the firm at issue. This represents an interesting narrowing of constituency groups from the more inclusive treatment in the first sentence of the paragraph. The reason for this narrowing may be (likely is) a practical one, evidencing judicial restraint. The plaintiffs in the Hobby Lobby actions were those who owned or controlled the corporation, and the decision likely will be limited in its application accordingly.
Given these breadcrumbs from the Court's opinion, should disclosure to shareholders or other constituencies be required, and if so, where would those disclosure rules reside as a matter of positive law? A blog post may be the wrong place to begin to address this issue (which is admittedly complex and involves, potentially, areas of law somewhat unfamiliar to me). But indulge me in a thought experiment here for a minute.
Sunday, July 6, 2014
Let me start by publicly announcing a forthcoming panel discussion at this year’s AALS Annual Meeting, tentatively titled “The Role of Corporate Personality Theory in Corporate Regulation.” As the organizer of this panel, I am extremely grateful to Stephen Bainbridge, Margaret Blair, Lisa Fairfax, and Elizabeth Pollman for agreeing to participate in what promises to be a thoroughly enjoyable discussion. For those of you who like to plan ahead, the panel is scheduled for Monday, Jan. 5, from 2:10 to 3:10 (part of the Section on Socio-Economics Annual Meeting program).
Given Stephen Bainbridge’s pending participation, I was interested to read a couple of his posts from a few weeks ago wherein he asked (here), “When was the last time anybody said anything new about corporate personhood?” and concluded (here), “I struggle to come up with anything new to say about the issue, when people have been correctly disposing of the legal fiction of corporate personality for at least 126 years!”
While I understand that asserting there is nothing new to say on a topic is not necessarily the same thing as saying it is not worth talking about, I still find myself motivated to explain why I think talking about corporate personality theory continues to constitute valuable scholarly activity (and, yes, I will connect all this to Hobby Lobby).
First of all, some qualifiers: (1) I distinguish corporate personality theory from corporate personhood because a thumbs up on corporate personhood (i.e., acknowledging that corporations can sue and be sued, etc.) still leaves a number of important questions regarding the nature of this “person,” which I believe theories of corporate personality (typically: artificial entity theory, real-entity theory, or aggregate theory) are well-positioned to answer. (2) While theories of corporate governance (typically: shareholder primacy, director primacy, or team-production theory) are distinct from theories of corporate personality, I believe there are at least some legal issues that are profitably analyzed by viewing both sets of theories as constituting a pool from which to choose an answer. With those introductory propositions in place, here are three reasons why I believe corporate personality theory still matters:
Friday, July 4, 2014
Thanks to all for the interesting posts. I am sure there will be more to come, followed by a flurry of articles in the fall and spring cycles. Looking forward to reading more.
Wednesday, July 2, 2014
Earlier this week I asked Professor Lyman Johnson if he would care to share his thoughts on the Hobby Lobby case with us because I had so enjoyed his thoughtful posts on the Conglomerate before the decision was issued (see here and here). Professor Johnson's contribution is below.
I thank the good folks here at the Business Law Prof Blog for inviting me to share some thoughts about the Supreme Court’s decision in the high-profile Hobby Lobby cases. The Court held that a closely-held business corporation was a “person” under the Religious Freedom Restoration Act (RFRA), that such a for-profit corporation could indeed “exercise religion” under that Act, and that as applied to closely-held corporations the contraceptive mandate promulgated under the Affordable Care Act violated RFRA. Two days after the controversial decision, the sky has not fallen, although dire forecasts to that effect still abound. My post today makes a simple but basic point: quite apart from the decision’s implications for religious liberty in the corporate realm - no small thing, to be sure - and notwithstanding the still unfolding legal and political fallout, Hobby Lobby immediately became a landmark decision in which the Supreme Court spoke in unprecedented fashion to an issue going to the very foundation of corporate law, the question of corporate purpose.
Let’s begin with the notion of freedom, or liberty. The Court ruled that RFRA protected the free exercise rights of close corporations and of those humans who own stock in and control those companies. [Note: human beings are routinely described in their “corporate” capacity in the majority opinion; the “corporation” is emphasized throughout] In this way, the Court protected the “negative liberty” of those “corporate” persons, freeing them from the constraint of the federal contraceptive mandate. But where exactly, from a legal vantage point, did the corporations’ “positive liberty” to “exercise religion” even come from? Not from RFRA, which protects only against substantial governmental burdens on the exercise of religion. Even though RFRA includes (via the Dictionary Act) a “corporation” within its definition of “person,” it does not itself affirmatively empower corporations. The answer is that, as with all corporate attributes, this capacity to exercise religion is endowed by state corporate law.
The federal government did not - it could not - dispute the legal origins of corporateness as being rooted in state law. And the U.S. failed to convince the Court that corporations as such cannot exercise religion because, let’s face it, our nation is full of churches and other religious bodies where religion quite obviously is being exercised in and through the corporate form. But the Court also rejected the government’s attempted distinction of for-profit corporations from their non-profit counterparts because the Court rebuffed the government’s underlying view that “the purpose of such [for-profit] corporations is simply to make money,” stating that this position “flies in the face of modern corporate law.” This is where the Hobby Lobby opinion pries open the very heart of corporate law.
Justice Alito, for the Court, rejected the view that business corporations must (and do) singularly act to make money, even as he acknowledged making profits to be “a” (not “the” or “sole”) objective and one that is “central.” A few gems here: “[M]odern corporate law does not require for-profit corporations to pursue profit at the expense of everything else and many do not do so.” “[I]t is not at all uncommon for such corporations to further humanitarian and other altruistic objectives.” “Not all corporations that decline to organize as nonprofits do so in order to maximize profits. For example, organizations with religious and charitable aims might organize as for-profit corporations…” Alito then notes that “the objectives that may properly be pursued by the companies in these cases are governed by the laws of the states in which they are incorporated…” Given the breadth of objectives that can be pursued under state corporate law, it was easy for the Court to conclude that corporate liberty extended to “the pursuit of profit in conformity with the owners’ religious principles.” This liberating principle was pointedly germane to the Hobby Lobby case itself, as Alito cited to the record wherein the owners of that corporation calculated they lose millions of dollars annually by closing on Sundays - precisely because of religious beliefs. Doing so, that is, sacrificing profits, the Court ruled, is permitted and altogether proper under corporate law. Too bad former Chancellor William Chandler did not have the benefit of Alito’s recent primer when Chandler wrote the deeply-flawed eBay v. Craigslist decision in 2010.
To hold that close corporations were “free” from the contraceptive mandate of the Affordable Care Act, because of RFRA, the Court thus had to determine that, under state corporate law, such companies are likewise “free” from some imagined state legal mandate to maximize profits. Readily concluding that corporations clearly do have the liberty not to maximize profits, the Court concluded that, as a legal matter, they were necessarily “free” to exercise religion. But critically, that means business corporations, being free in this respect under state corporate law, can pursue a whole host of objectives other than making money. Those objectives include various humanitarian, social, and environmental objectives of the sort progressives have long championed. As one who for decades has favored a vision of corporations (and corporate law) as being utterly conducive to serving broad social purposes - as freely determined, of course, by the appropriate corporate decisionmakers - and as one who supported Hobby Lobby, I found it odd to see these companies opposed by so many corporate progressives. When one advocates for freedom on the corporate purpose front, just as is the case on the free speech front, one fights for those with whom one may disagree. Remember here Voltaire and his “I do not agree with what you have to say, but I will defend to the death your right to say it.” But take comfort: although progressives lost the Hobby Lobby battle, they gained (accidently) an ironic victory on the all-important corporate purpose war.
On the other hand, those in the corporate law academy who think corporate law mandates strict profit maximization now have a formidable judicial foe, and one that dwarfs the puny authority of Dodge v. Ford Motor Co. or eBay: i.e., the U.S. Supreme Court. Time to change the syllabus on corporate purpose… To those on the right who favored Hobby Lobby (me) but who also favor the now-discredited position that corporate law requires profit maximizing (not me) take note: you won the battle on religious freedom but to do so you had to suffer a major setback on corporate purpose.
Finally, this case shows me that those who seek corporate reform may do so either from progressive impulses or from religious impulses, and from the left or the right of our political and theoretical spectrums. The Hobby Lobby decision should, in that respect, ultimately be seen as a unifier for those in corporate law with reformist goals, not as a divider.
My longtime colleague and collaborator, David Millon, and I, who typify these two quite different reformist impulses, respectively, will have much more to say on this vital subject in an article now in the works….
Monday, June 30, 2014
Rather than try to rehash what is now done, I will pose a different question: How does one reconcile this religious exercise with the profit-seeking mandate that the Delaware court imposes from time to time. As Chancellor Chandler noted in eBay v. Newmark (more here):
The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.
Note that “purely” is not an entirely accurate modifier here. Craigslist made a profit and had some ventures that raised money. They just did not monetize the majority of the endeavors
So what about an entity that operates for purely religious ends? Hobby Lobby and those similarly situated seem to be saying that religion trumps profit (see, e.g., Chik_Fil-A closing on Sundays). This is not the argument that our business model is stronger because of our choices, which I have argued before should be protected, but this is saying we choose religion over profit.
As Chancellor Chandler noted in eBay, if there are no shareholders to complain, then perhaps it is not an issue. Still, as soon as a shareholder disagrees, will decisions such as limiting healthcare options (thus limiting the talent pool for employees) or closing on Sunday? It seems to me the Hobby Lobby decision has opened the door for several fiduciary duty fights down the road.
Can a corporation now choose to give a majority of its funds to a church, even if it harms the entity? I think no, but I hope, for the sake of businesses everywhere, the Court did not just create a First Amendment out to such fiduciary duties.
From Anne Tucker (who is off filming academic videos this afternon--whatever that means!):
Today’s Supreme Court decision in Burwell v. Hobby Lobby Stores Inc. et al. exempted closely held corporations from complying with the contraceptive mandate in the Affordable Care Act. There is plenty to debate about the opinion—corporations are persons under RFRA and can exercise religion as well as a host of choice quotes from the SCOTUS about “modern corporate law”—and I will leave that fun for another time. I want to highlight three initial reactions:
- There is no definition of closely held in today’s opinion. Will we draw lines based on state corporate codes and elections to be S corp? Will we rely upon the IRS definition of a closely held company? It is unclear. There is NOTHING in the opinion that prevents today’s ruling from applying to publically traded, closely held corporations like Wal-Mart. The line drawing engaged by the SCOTUS in Hobby Lobby is not such a neatly drawn, tight circle, but is a wide net. I discussed this briefly in a HuffPost Live segment earlier today—here.
- This is a statutory, not a constitutional ruling. On its face. Of course Congress could amend RFRA and exclude corporations, but there are exactly zero people holding out hope for that solution, at least in our present climate. The language of the opinion, however, gives strong dicta supporting religious rights and identities of corporations, whether for profit or not. [“Any suggestion that for-profit corporations are incapable of exercising religion because their purpose is simply to make money flies in the face of modern corporate law.”]
- Today, the Court weighed in on the moral dilemma of performing an “innocent” act (i.e., providing health care coverage) that enables an “immoral” act (i.e., using an IUD whether for family planning or medical reasons). May companies object to coverage that includes screening for sexually transmitted diseases because unwed employees may use it ensure safe, premarital sex? The answer would seem to be yes. Of course, we can imagine that the Court would find a compelling interest here like they did with contraceptives, but what about the least restrictive means? In Hobby Lobby, the Court found the existing program for the government to pay for contraceptives (for exempted nonprofit entities) as evidence of a less restrictive alternative. So the government pays for the thing that for-profit corporations don’t want to pay for. In other words, we now subsidize corporate religious beliefs. And if you are a corporation do you want to pay for something that competitors don’t have to? The sincerity of the belief might be an issue, but if corporate law teaches us one thing, it is how to build a record.
Formatting changes/errors are all mine.
Great work, Anne!
The Burwell v. Hobby Lobby opinion is here. 5-4 in favor of Hobby Lobby.
"As applied to closely held corporations, the HHS regulations imposing the contraceptive mandate violate RFRA.”
Sure that a number of us will have thoughts to share.
Friday, June 20, 2014
In various airports and airplanes over the past few weeks I read University of Chicago professor Martha Nussbaum’s (University of Chicago) book on religious equality in America entitled Liberty of Conscience (2008). Even though this book predates the Hobby Lobby case, it addresses a number of underlying issues at play in the case.
More after the break.
Tuesday, April 22, 2014
Over at realclearpolitics.com, a number of leading thinkers, including some leading business law folks such as Richard Epstein and Jonathan Adler, among others, have signed a public statement: Freedom to Marry, Freedom to Dissent: Why We Must Have Both. Following is a portion of the statement:
The last few years have brought an astonishing moral and political transformation in the American debate over same-sex marriage and gay equality. This has been a triumph not only for LGBT Americans but for the American idea. But the breakthrough has brought with it rapidly rising expectations among some supporters of gay marriage that the debate should now be over. As one advocate recently put it, “It would be enough for me if those people who are so ignorant or intransigent as to still be anti-gay in 2014 would simply shut up.”
The signatories of this statement are grateful to our friends and allies for their enthusiasm. But we are concerned that recent events, including the resignation of the CEO of Mozilla under pressure because of an anti-same-sex- marriage donation he made in 2008, signal an eagerness by some supporters of same-sex marriage to punish rather than to criticize or to persuade those who disagree. We reject that deeply illiberal impulse, which is both wrong in principle and poor as politics.
For those who don’t know, former Mozilla CEO Brendan Eich resigned following the public outcry when it was revealed that he had donated $1,000 to support Proposition 8, a 2008 California ballot initiative and constitutional amendment designed to ban same-sex marriage in the state.
To be clear on my stance: I strongly support same-sex marriage, and I fundamentally disagree with Prop 8. Still, punishing people, as opposed to criticizing people, for contrary and even wrong-headed political views is neither productive nor proper. (Nonetheless, there are multiple examples of people who felt Eich needed to resign. See, e.g., here, here, and here.)
Admittedly, if it’s clear that the head of any organization, whether it is a profit or nonprofit entity, doesn’t further the goals of the organization, then there is a bad fit. Furthermore, this isn’t about Mr. Eich’s free speech rights in that there is no government actor here. This was a private response to a private person’s actions. Mozilla has the power to act to replace Mr. Eich, and members of the public have a right to call for his ouster. It just doesn’t make it inherently right or wise.
Certainly, one can imagine a scenario where a CEO’s prior political or organizational giving would create problems for the organization. For example, an environmental organization may not be comfortable with a CEO who had given money to a group fighting climate legislation. But, in that circumstance, the hiring body, and likely the CEO, would, or at least should, have known that support for climate change initiatives would be expected as part of the job. Top employees often become the face of the organization, and that comes with job, but if a particular political view is deemed necessary for the job, it would help if the CEO knew it during the interview process.
Even if Mozilla was responsible for the mistake (in hiring someone with political views that were not accepted to many employees and customers), as an entity, the company was not improper to respond in what it deemed to be in the best interest as the organization. Just as important, though, is the community response to Mozilla as an entity. The free market allows us all to choose with whom we wish to do business. But when we make such decisions, we need to be careful about who we are punishing and why.
People have a right to be upset and to protest Mr. Eich’s views. I think Prop 8 was dead wrong, and I don’t like that anyone supported it. Still, I don't think calling for Mr. Eich or anyone else to lose their job is proper simply because I disagree with their views. I would feel differently if there were evidence that Mr. Eich discriminated against gay employees. There just doesn't seem to be any support for that proposition.
We need to be careful to avoid a world where every portion of what we do becomes politicized and polarized. Although there are core values each of us holds, we should also recognize that not everyone shares all of our core values, all of the time. Nor can they. My wife and I agree on a lot of things, and it is a big reason why we’re together. Still, some of my best learning has been when we don’t agree. Sometimes I change my mind, and other times I don’t, but even then I have learned more about my views and why I hold them.
I don’t want to live in a world where politicians and news outlets and companies operate in lockstep to a specific set of ideals. There are too many examples of that already to make me comfortable. I don’t want to choose only from a Republican burger joint or a Democratic sub shop. We need more. We need a populist pizza place, and a libertarian ice cream shop, and everything in between. In my view, the litmus test should be whether people do a good job at doing their job, and whether they treat others well (employees and customers), regardless of their ideological differences.
Open public discourse is a right under our Constitution, but it is not socially required. When respectful and thoughtful, open discourse helps all of us be better citizens and better people. If we commit ourselves as individuals to respecting others and listening, even when (and especially when) we disagree, good things will follow. It is one thing to dismiss views with which we disagree; it is another to dismiss, out of hand, the people who hold such views. For all the complaints about the evils of business, I have a suspicion that if we expected more of ourselves, businesses would follow our lead.
Sunday, March 30, 2014
In my article, “The Silent Role of Corporate Theory in the Supreme Court’s Campaign Finance Cases,” 15 U. Pa. J. Const. L. 831, I criticized the Supreme Court justices for failing to acknowledge the role of competing conceptualizations of the corporation in their corporate political speech cases. I noted, however, that former Chief Justice Rehnquist was arguably the lone modern justice to deserve at least some praise in this area.
Justice Rehnquist's stand-alone dissent in Bellotti provides arguably the sole example in these opinions of a Justice affirmatively adopting a theory of the corporation for purposes of determining the constitutional rights of corporations--though not via the express adoption of one of the traditionally recognized theories. Specifically, Justice Rehnquist relied on Justice Marshall's Dartmouth College opinion to conclude that: “Since it cannot be disputed that the mere creation of a corporation does not invest it with all the liberties enjoyed by natural persons . . . our inquiry must seek to determine which constitutional protections are ‘incidental to its very existence.”’ Thus, while it may be true that “a corporation's right of commercial speech . . . might be considered necessarily incidental to the business of a commercial corporation[, i]t cannot be so readily concluded that the right of political expression is equally necessary to carry out the functions of a corporation organized for commercial purposes.” I would argue that this is a formulation most aligned with concession theory because not only does Justice Rehnquist rely on Dartmouth College, but he also goes on to say: “I would think that any particular form of organization upon which the State confers special privileges or immunities different from those of natural persons would be subject to like regulation, whether the organization is a labor union, a partnership, a trade association, or a corporation.” Stefan J. Padfield, The Silent Role of Corporate Theory in the Supreme Court's Campaign Finance Cases, 15 U. Pa. J. Const. L. 831, 853 (2013) (quoting First Nat'l Bank of Bos. v. Bellotti, 435 U.S. 765 (1978)).
While this is only one data point, I think it suggests the former Chief Justice would have been hesitant to grant corporations any form of free exercise rights, since it is difficult to see how free exercise rights are more incidental to a corporation’s existence than political speech rights. Cf. Kent Greenawalt, Religion and the Rehnquist Court, 99 Nw. U. L. Rev. 145, 146 (2004) (“With limited qualifications, the Rehnquist Court has abandoned the possibility of constitutionally-required free exercise exemptions.”).
For more on concession theory, I shamelessly suggest my more recent article, “Rehabilitating Concession Theory,” 66 Okla. L. Rev. 327 (2014) (“the reports of concession theory's demise have been greatly exaggerated”). And if you find that of interest, you can check out my latest SSRN posting, “Corporate Social Responsibility & Concession Theory.”
Thursday, March 27, 2014
I wonder how many people are boycotting Hobby Lobby because of the company’s stance on the Affordable Health Care Act and contraception. Perhaps more people than ever are shopping there in support. Co-blogger Anne Tucker recounted the Supreme Court’s oral argument here in the latest of her detailed posts on the case. The newspapers and blogosphere have followed the issue for months, often engaging in heated debate. But what does the person walking into a Hobby Lobby know and how much do they care?
I spoke to reporter Noam Cohen from the New York Times earlier today about an app called Buycott, which allows consumers to research certain products by scanning a barcode. If they oppose the Koch Brothers or companies that lobbied against labels for genetically modified food or if they support companies with certain environmental or human rights practices, the app will provide the information to them in seconds based on their predetermined settings and the kinds of “campaigns” they have joined. Neither Hobby Lobby nor Conestoga Woods is listed in the app yet.
Cohen wanted to know whether apps like Buycott and GoodGuide (which rates products and companies on a scale of 1-10 for their health, environmental and social impact) are part of a trend in which consumers “vote” on political issues with their purchasing power. In essence, he asked, has the marketplace, aided by social media, become a proxy for politics? I explained that while I love the fact that the apps can raise consumer awareness, there are a number of limitations. The person who downloads these apps is the person who already feels strongly enough about an issue to change their buying habits. These are the people who won’t eat chocolate or drink coffee unless it’s certified fair trade, who won’t shop in Wal-Mart because of the anti-union stance, and who sign the numerous change.org petitions that seek action on a variety of social and political topics.
I had a number of comments for Cohen that delved deeper than the efficacy of the apps. The educated consumer can make informed choices and feel good about them but how does this affect corporate behavior? Although the research is inconsistent in some areas, most research shows that companies care about their reputations but the extent to which a boycott is effective depends on the amount of national media attention it gets; how good the company’s reputation was before the boycott (many firms with excellent reputations feel that they can be buffered by previous pro-social behavior and messaging); whether the issue is one-sided (child labor) or polarizing (gay marriage, Obamacare, climate change); how passionate the boycotters are; how easy it is to participate (is the product or service unique); and how the message is communicated.
Many activists have done an excellent job of messaging. The SEC Dodd-Frank conflict minerals regulation made it through Congress through the efforts of NGOs that had been trying for years to end a complex, geopolitical crisis that has killed over 5 million people. They got consumers, social media and Hollywood actors talking about “blood on the mobile” or companies being complicit in rape and child slavery in Congo because when they changed the messaging they elicited the appropriate level of moral outrage. The conflict minerals “name and shame” law depends on consumers learning about which products are sourced from the Congo and surrounding countries and making purchasing decisions based on that information. Congress believes that this will solve an intractable human rights crisis. The European Union, which has a much stronger corporate social responsibility mandate for its member states has taken a different view. Although it will also rely on consumers to make informed choices, its draft recommendations on dealing with conflict minerals makes reporting voluntary, which has exposed the EU to criticism. As I have written here, here, here here and here, relying on consumers to address a human rights crisis will only work if it leads to significant boycotts by corporations, investors or governments or if it leads to legislation, and that legislation cannot harm the people it is intended to help.
So what do I think of apps like GoodGuide, BuyCott and 2ndVote (for more conservative causes)? I own some of them. But I also send letters to companies, vote regularly, call people in Congress and write on issues that inspire me. How many of the apps’ users go farther than the click or the scan? Some researchers have used the word “slacktivists” to describe those who participate in political discussions through social media, online petitions and apps. The act of pressing the button makes the user feel good but has no larger societal impact.
What about the vast majority of consumers? The single mother shopping for her children in a big-box retailer or in the fast food restaurant that has been targeted for its labor practices may not have the time, luxury or inclination to buy more “ethically sourced” products. Moreover, studies show that consumers often overreport on their ethical purchasing and that price, convenience and costs typically win out. The apps’ developers may have more modest intentions than what I ascribe to them. If they can raise consumer awareness- admittedly for the self-selected people who buy the app in the first place- then that’s a good thing. If the petitions or media attention lead to well-crafted legislation, that’s even better.
Tuesday, March 25, 2014
(1) As I explained here, entities should be able to take on a racial, religious, or gender identity in discrimination claims. I would add that I feel similarly about sexual orientation, but (though I think it should be) that is still not generally federally protected. To the extent the law otherwise provides a remedy, I’d extend it to the entity.
(2) It is reasonable to inquire, why is discrimination different than religious practice? For me, I just don’t think religious exercise by an entity is the same as extending discrimination protection to an entity. There is something about the affirmative exercise of religion that I don’t think extends well to an entity. That is, discrimination happens to a person or an entity. Religious practice is an affirmative act that is different. Basically, reification of the entity to the point of religious practice crosses a line that I think is unnecessary and improper because discrimination protection should be sufficient.
As a follow up to that, I also think it's a reasonable question to ask: Why is religion different than speech? To me it is different because entities must speak, but entities don’t have to practice religion. The entity needs speech to conduct business. A public entity speaks in its public filings. Speech is not just something an entity could do. It is something it must do. Religion, at the entity level is not necessary.
(3) Reverse piercing is not as good a solution as it might appear. Professor Bainbridge suggests that reverse veil piercing is one way in which the religion of the shareholders could be used to justify extending a religious identity to the Hobby Lobby entity, thus allowing the entity to object to certain provisions of the federal healthcare mandate. His argument is, as usual, reasonable and plausible. Still, as explained above, I don't think this is necessary.
More important, though, I don’t like expanding the use of any form of veil piercing. Veil piercing is supposed to be used (at least in my view) solely as a heightened level of fraud protection. It is already used too often and too haphazardly, and further degradation of the line between the entity and others is a dangerous proposition, regardless of the purpose. That is, as people (and courts) get more comfortable with disregarding the entity, they are more likely to disregard the entity. As a general proposition, I think that’s a bad outcome. That alone is reason enough for me to hope the Court will pass on reverse veil piercing as a potential remedy.
Tuesday, March 18, 2014
Ed Whelan at National Review Online (h/t: Prof. Bainbridge) asks, in light of a recent Fourth Circuit opinion, “Will those who (wrongly) think that for-profit corporations are incapable of exercising religion for purposes of RFRA object as vigorously to the concept that for-profit corporations can have a racial identity for purposes of Title VI? If not, why not?”
I have been following the Hobby Lobby case with interest, though I am just delving into its depths now. After starting through the various amicus briefs, my initial reaction is that the law has not evolved to where it needs to be with respect to protecting those engaging in the widespread use of entities. I, as is often the case, my intitial reaction is that the answer to Mr. Whelan’s question is somewhere in the middle: I think for-profit corporations are capable of exercising religion under RFRA, but in this case I don’t see the necessary substantial burden, at least when balanced with an individual’s right to make such decisions, to carry the day. (Reasonable minds can disagree on this, but that’s my take).
Taking a broader look, though, view entities should be able to take on the race, gender, or religion of its primary shareholders (or members) in proper circumstances to protect against discrimination. The Fourth Circuit opinion states: “We hold that a corporation can acquire a racial identity and establish standing to seek a remedy for alleged race discrimination under Title VI.” Seven other circuit courts “have concluded that corporations have standing to assert race discrimination claims.” This seems proper, because a minority-owned company might be denied a contract or be treated differently in the execution of a contract because of the race of the primary shareholders. It would be improper to deny protections for the shareholders/members just because they chose to avail themselves of entity protections to conduct their business.
The same should be true in cases of religion and gender. Suppose, for example, an all-female construction company were denied a bid because the city seeking the project thinks construction is “man’s work to be done by men.” Similarly, protections should be available if a Catholic-owned company were to lose a bid because the county seeking the bid was run by people who didn’t “trust Catholics to finish anything on time.” (Disclosure: I was raised Catholic, and while I most certainly don’t speak for any other Catholics, my comfort level leads me to use Catholics in such examples.)
Thus, an entity should be able to take on the race, gender, or religion of the shareholders/members to fight cases where the same discrimination against an individual would stand. Obviously, then, having a member of a certain race, gender, or religion as a shareholder, member, director, or employee would not be sufficient to make the claim. The entity would also have to demonstrate: (1) that the alleged discrimination was predicated on race, gender, or religion, and (2) the entity (and not just certain individuals) was identified with the group against whom the discrimination was targeted.
In the Hobby Lobby case, then, under this rubric I think the claim would fail because the entity would not be able to demonstrate they have satisfied the first test. Regardless of what one thinks of the healthcare law, the law was not designed to discriminate against certain religions (or race or gender). The law also does not mandate any individual course of action, but merely requires that access be provided to certain healthcare options. (That is, it mandates access, not use.)
This is not the current state of the law, of course. Still, it seems to me that the proper way forward is to recognize that entities can often take on identities of those running them, but that protections should only be available where the entity’s identity was targeted for harm because of that identity, and not an arguable result of another non-identity-based decision.
Wednesday, February 26, 2014
As previously noted on this blog, 44 law professors filed an amicus brief in Sebelius v. Hobby Lobby Stores, Inc., outlining several corporate law issues in the arts-and-craft store chain’s request for a religious exemption from complying with contraceptive requirements in the Affordable Care Act. That brief prompted several responses and sparked a corporate law debate, which is being recapped and weighed in on at Business Law Prof Blog (see earlier thoughtful posts: here, here, and here by Stefan Padfield and Haskell Murray).
So what is at stake in this case? Religious exemptions for corporations. The role of benefit corporations and other hybrid, triple bottom line entities. The classic entity theory vs. aggregate theory debate of how do we treat the legal fiction of individuals acting through businesses and businesses acting, in part, on behalf of people. The role and future of Corporate Social Responsibility generally. Corporate personhood. Corporate constitutional rights. And existential questions like can corporations pray? You know, easy stuff.
CSR. Our laws set the floor; they establish the minimum that social actors must do and that other members in our society can expect to receive. Corporate social responsibility asks companies to do more than their minimum legal obligations and to do so for a host of reasons, some of which may be religious. The owners of Hobby Lobby can elect a corporate board that will authorize the company to donate to religious charities, to reimburse employees for religious expenses, to provide paid leave for a mission trip, or to not operate on Sundays. (Who here hasn’t craved a chicken biscuit on a road trip only to realize that Chick-Fil-A is closed on Sunday? Just us in the south?). Under what I will call the standard state corporate law regime, corporations can take actions like increasing their use of renewable energy sources, implementing diversity programs for women and minorities, refusing to support tobacco products and other actions that are in line with CSR. Whether for religious or environmental or other conscience-driven reasons, a corporation may take these actions and the directors of the corporation (under whose governance the acts took place) are protected by the business judgment rule in the event that any shareholder challenges the program or expenditure as a form of waste or conflict of interest.
Benefit Corporations & Hybrid Entities. For companies incorporated in states with benefit corporate statutes or laws that recognize hybrid entities interested in seeking (but not always maximizing) profits and other goals, there is even greater protection. These entities contain provisions in their charters identifying their “other” purpose, the shareholders are on notice of the dual pursuit and the corporate actions are protected by statutes recognizing this charter-based exception to profit maximization. In the event a shareholder sues for waste or conflicts of interest, not only is the business judgment rule available to protect the corporate actors, but the validity of the corporate action is strengthened by the special legislation. [This in no way captures the full scope of benefit corporation and hybrid entity legislation, but this post is about religious exemptions for corporations, so please excuse the over simplification here.]
Hobby Lobby. The owners of Hobby Lobby are not asking to do more, rather they are asking to do less. Hobby Lobby want to provide less than the standards established in the Affordable Care Act, and less than their competitors will be required to provide. Who would complain if Hobby Lobby failed to comply with the ACA? The employees without access to contraceptive medicine, and the federal government. This isn’t about the business judgment rule and whether owners, acting through boards of directors, can run companies in line with their view of religious or social or environmental consciousness. This case asks can the religious beliefs of owners of a corporation entitle that corporation to do less under the law and as compared to their competitors. On these grounds, deciding against a religious based exemption for Hobby Lobby does no harm to CSR or benefit corporations.
The Hypothetical. If the privately held religious belief of owners can change legal obligations for corporate actors, this could pose a threat to the stability, reliability and uniformity of the floor that the law sets. Poking a hole in the floor for religious exemptions based upon the owners’ religious beliefs may seem like a small concession in the Hobby Lobby case. If religion is a means to opt-out of regulations and requirements, and if doing so could lower costs, shortcut compliance obligations and otherwise provide a competitive edge there will be robust incentives for businesses to claim such an exception in a likely wide array of issues.
The Horrible. The sacred ground of religion has long been an unhappy refuge for arguments in support of racial, gender, religious and sexual-orientation discrimination. Every major social movement that I can think of has met resistance shrouded in religious beliefs. The right for women to vote (and the continuing progress towards equality), desegregating schools, the Civil Rights Acts, and our most modern example: gay rights. Consider the law that the Arizona Legislature passed last week that would exempt businesses refusing to serve same-sex couples from civil liability on the grounds of a religious exemption. Substantially similar legislation is pending in Georgia.
Religion, if we have it, should call us to do more and to be better. As individuals, we may disagree about what “more” and “better” means. I have no doubt that the owners of Hobby Lobby believe that their stance on birth control is consistent with their view of “more” and “better”. As individuals, they can express that value in many ways. As owners of a corporation they can express those values by electing directors that will govern the company and possibly pursue corporate donations to abstinence charities, promote natural family planning among employees via posters in the break room, and other avenues. The individual values of the owners should not be used to excuse the corporation from compliance with the legal standard. Individual religious views should not lower the minimum standards for corporate actions in this context, or others.
Monday, February 24, 2014
The abstract is posted below:
The Patient Protection and Affordable Care Act (ACA) effected numerous changes in the legal regime governing health care and health insurance. Among the ACA’s more controversial provisions is the so-called contraceptive mandate, which requires employer-provided health care insurance plans to provide coverage of all FDA approved contraceptive methods.
On March 25, 2014, the Supreme Court will hear oral argument in the Hobby Lobby and Conestoga Wood cases, in which the shareholders of two for-profit family-owned corporations argue that requiring them to comply with the contraception mandate violates the Religious Freedom Restoration Act.
Forty-four law corporate law professors filed an amicus brief in these cases, arguing that the essence of a corporation is its “separateness” from its shareholders and that, on the facts of these cases, there is no reason to disregard the separateness between shareholders and the corporations they control. The Brief is replete with errors, overstated claims, or red herrings, and misdirection.
Contrary to the Brief’s arguments, basic corporate law principles strongly support the position of Hobby Lobby and Conestoga Wood. In particular, the doctrine known as reverse veil piercing provides a clear and practical vehicle for disregarding the legal separateness of those corporations from their shareholders and thus granting those shareholders standing to assert their free exercise rights.