Saturday, May 18, 2019
In 2014, the Supreme Court decided Burwell v. Hobby Lobby Stores, where it held that it is possible for a for-profit corporation to have a religious identity, derived from the religious commitments of “the humans who own and control those companies.” In so holding, the Court relied in part on state laws that permit even for-profit corporations to pursue purposes beyond stockholder wealth maximization. As the Court put it:
Not all corporations that decline to organize as nonprofits do so in order to maximize profit. For example, organizations with religious and charitable aims might organize as for-profit corporations because of the potential advantages of that corporate form, such as the freedom to participate in lobbying for legislation or campaigning for political candidates who promote their religious or charitable goals. In fact, recognizing the inherent compatibility between establishing a for-profit corporation and pursuing nonprofit goals, States have increasingly adopted laws formally recognizing hybrid corporate forms. Over half of the States, for instance, now recognize the “benefit corporation,” a dual-purpose entity that seeks to achieve both a benefit for the public and a profit for its owners.
In any event, the objectives that may properly be pursued by the companies in these cases are governed by the laws of the States in which they were incorporated—Pennsylvania and Oklahoma—and the laws of those States permit for-profit corporations to pursue “any lawful purpose” or “act,” including the pursuit of profit in conformity with the owners’ religious principles.
So it was a bit of an eyebrow-raiser to read this April Executive Order in which Trump declares:
The majority of financing in the United States is conducted through its capital markets. The United States capital markets are the deepest and most liquid in the world. They benefit from decades of sound regulation grounded in disclosure of information that, under an objective standard, is material to investors and owners seeking to make sound investment decisions or to understand current and projected business. As the Supreme Court held in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976), information is “material” if “there is a substantial likelihood that a reasonable shareholder would consider it important.” Furthermore, the United States capital markets have thrived under the principle that companies owe a fiduciary duty to their shareholders to strive to maximize shareholder return, consistent with the long-term growth of a company.
As readers of this blog are likely aware, academics love to argue over whether existing law requires that corporations be run solely to maximize stockholder wealth, and of course over whether such law – if it exists – is a good idea or a bad idea. See generally Joan MacLeod Heminway, Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents, 74 Wash. & Lee L. Rev. 939 (2017). Usually, however, these battles occur in the context of state law. And while federal law – securities regulation, and so forth – often implies a corporate purpose of wealth maximization, I have to admit, I don’t recall seeing so blatant a statement about it before.
In any event, this section of the Executive Order directs the Department of Labor to review its existing guidance re: ERISA plans’ involvement in ESG matters. It’s a follow-up to last year’s Labor Department release – which I blogged about here – warning that ERISA plans may violate their duties to plan beneficiaries if they engage on ESG matters, or vote for ESG-related proxy proposals, for reasons other than plan wealth maximization.
As I’ve previously discussed, the SEC is currently reviewing rules governing the proxy process – including the role of proxy advisory services – to determine if additional regulation is needed. Much of this fight is, of course, about shareholder involvement in ESG matters and corporate governance more generally. I assume from this latest Executive Order that we’re about to see something of a two-pronged effort to limit shareholder power, with new guidance and/or regulations issuing from the SEC on one side and the Labor Department on the other. Anyone’s guess how successful this effort is likely to be, but I will highlight Andrew Tuch’s recent article, Why Do Proxy Advisors Wield So Much Influence? Insights From U.S.-U.K. Comparative Analysis, B.U. L. Rev. (forthcoming), pointing out that proxy advisory services have far less influence in the UK than in the United States, which he attributes to the fact that US shareholders have less power, and have reached less consensus on best practices in corporate governance, than shareholders in the UK. He concludes that many of the attempts to limit shareholder power – and the power of proxy advisors – in the US will not only be ineffective, but will actually strengthen proxy advisors’ hand.