Sunday, June 14, 2020

More on Corporate Responses to the Protests and Riots

The following will likely not make much sense if you haven’t read the preceding relevant discussion, most of which can be found here. The core issue addressed is whether the decision of many corporations to strongly support Black Lives Matter while staying silent on the riots should be insulated from scrutiny by the business judgment rule. I have put my original comments in bold, responses by Idriss Z in italics, and my further responses in plain text. In addition to comments on the substance of this post, I hope readers will let me know if the formatting can be improved.

"Are the corporate executives making these decisions doing so in accordance with their fiduciary duty to become informed of all material information reasonably available (which requires consideration of the impact of these decisions on the bottom line)..."

IZ- Of course they are! Many cases have held that companies can acquire much goodwill and better pr from such community action (examples have included charitable donations and philanthropy to local schools, including HBCUs). Or a more "hip" take: African American culture might be the most profitable marketing material source in the world, people all over the global love the various arts that come from our (unfortunately) marginalized communities.

You provide good reasons for concluding the decision is rational, but that does not tell us whether it was properly informed. Those are two different inquiries. For example, if the type of polling data I set forth in my prior comments (from here) was available, then that likely should have been considered. Charitable contribution cases are best treated separately from cases involving ordinary business decisions.

"..., or are they simply acting on the basis of some echo-chamber supported confidence in the obvious rightness of their beliefs"

IZ- One of the best aspects of the American system compared to those of the English commonwealths in my estimation is the lack of mental probing done to business decision-makers. What a ridiculous assertion it would be that there was some pro-Black echo-chamber effect in board rooms that are under criticism for having virtually no Black board members, right? Moreover, where are you getting their ideas or confidences in their beliefs from? You wouldn't be just making it up?

How free from scrutiny corporate decision-makers should be in cases like this is the issue. Many people believe the heightened political divisions of our day don’t constitute a good reason for additional scrutiny. As I’ve written elsewhere, I believe they do. Under my proposal, if a corporate decision appears to be sufficiently politicized, then our lack of knowledge regarding the decision-making process becomes a reason for increased scrutiny, not a reason for continued insulation of the decision. Whether the decision in this case is objectively politicized enough to warrant additional scrutiny would be a question of fact. One might point to the fact that, according to at least one poll, 71% of Americans supported National Guard intervention in the riots (more on that poll here), while 62% do not strongly support BLM (assuming we can read failure to choose "strongly support" as “don’t strongly support”). Yet corporate decision-makers made strong statements in support of BLM while remaining silent on the riots. Finally, the echo-chamber I’m referring to is a progressive echo chamber -- and it can be all white.

"– completely ignoring, if not being downright disdainful of, the views of the half of the country that believes law and order, blue lives, and black lives all matter?"

IZ- Again, it is unclear where you're getting your facts from, I am unable any factual support for this. Also, I think you might want to check the poll numbers on people's preferences. Moreover, supporting BLM and Civil rights for marginalized communities does not put you in opposition to law, order, or any other life. In fact many have quite intelligently and correctly pointed out that suggesting that supporting BLM and Civil Rights does put you in opposition is flat-out racist. Moreover, many have also correctly pointed out that alleging that one who supports BLM and Civil Rights supports riots is also in completely disregard of the gulf separating factual and disingenuously racist. Or consider this: "half" the country believes the world is flat, must board members take factor that unscientific argument into their decisions?

I agree that the numbers matter.  And someone can agree with my proposal for heightened scrutiny of politicized decisions without agreeing that such scrutiny is appropriate here. Assuming we adopted heightened scrutiny for facially politicized decisions, the costs of heightened scrutiny argue in favor of keeping the scope of triggering facts narrow. Having said that, I think the polling I’ve identified so far provides at least some support for my position in that it concludes 71% of Americans supported some type of National Guard intervention in the riots, while 62% were reported to not strongly support BLM (including almost 30% of blacks, and almost 70% of whites). Of course, those numbers could be wrong and/or I could be wrong about the relevant weight/interpretation of those numbers. In all this, it’s important to keep in mind that the heightened scrutiny I’m advocating for merely seeks affirmation that corporate decision-makers are informing themselves of all material information reasonably available. It does not require a particular outcome. In this case, evidence that available relevant polling was considered would arguably be sufficient to carry that burden, even if the decisions remain the same.

Furthermore, I agree that there is no necessary conflict between “supporting BLM and Civil rights for marginalized communities” and supporting “law, order, or any other life.” In fact, we should expect them to support each other. I also agree that racists would want to draw connections between BLM and the riots. However, I don’t agree that corporate decision-makers can ignore relevant public opinion, including the relevant concerns of well-intentioned non-racists who may be having a hard time separating the protests from the riots, however misguided those concerns might be. Accordingly, if half the country believes the world is flat, then corporate decision-makers absolutely have a duty to consider that information when making a decision to roll out a “world is round” campaign. In fact, if the board is made up exclusively of round-earthers, and they refuse to even consider the contrary public opinion of half the nation (assuming those people would otherwise reasonably be deemed potential customers), then they would be acting in bad faith.  The centrality of this point to my proposal is difficult to overstate. Critically, however, nothing requires them to shelve the campaign based on that information. They just need to fully inform themselves of all information reasonably available, and have a rational business purpose for their ultimate decision– which typically shouldn’t be hard to do.

"Such a conscious disregard of reasonably available material information would constitute not only a breach of their duty of care, but also bad faith."

IZ- Well, as I've pointed out these "conscious disregards" would be impossible to prove and are only based on conjecture. Moreover, there is a duty of care to all members of the community, so supporting a group such as BLM and civil rights would be beneficial to all members, a rising tide raises all ships. Whereas disapproval of these groups might certainly fit your criterion as they are of benefit to exactly no one. Further, consider the ramifications of your approach-> would not every corporation face the exact same liability for putting their name on a College Football Bowl Game should a "riot" breakout?

An utter failure to properly inform oneself would suffice to support a finding of bad faith consistent with a conscious disregard of a known duty. If we shift the burden to corporate decision-makers to show that they properly informed themselves, and they are unable to carry that burden – that is sufficient. I certainly want the heightened scrutiny I propose to leave significant discretion to corporate decision-makers to appropriately consider the impact of decisions on stakeholders. Nothing I’m proposing should prevent corporate decision-makers from concluding that strong support for BLM is in the best interests of the corporation, while at the same time concluding silence on the riots is likewise best. The only way my proposal should interfere with those decisions is if the decision-makers failed to properly inform themselves.  Finally, the mere coincidence of a sponsorship decision and a riot would not trigger heightened scrutiny under my proposal.

Stefan J. Padfield | Permalink


Stefan, I'm afraid I think you're all kinds of wrong on this. First, for companies incorporated in states with constituency statutes, there is no requirement to maximize profits. For Delaware corporations that do face that requirement, I agree with you that there is a good faith argument against politicized decisions. But, as the law stands directors or officers don't face any real risk of liability unless they are extremely explicit that they are ignoring effects on profits. For these points, see my forthcoming article on the corrosion critique of benefit corporations: As you recognize, your heightened scrutiny of politicized decisions is not currently the law, and I doubt it ever will be. It's too interventionist and arbitrary in application.

Even assuming one is applying heightened scrutiny to recent corporate statements, I think you are misreading the national mood. A majority of Americans are supporting the protests and the broad sentiment that black lives matter. Many are concerned that some are using the protests for looting and violence, but they are seen as a minority that doesn't discredit the protests overall. See for instance this recent Pew poll, among many others:

Of course, there are many Americans who are more unhappy than that with the protests. But here is the final way that you are wrong. This is very company-specific, but most consumer brands focus on a younger demographic than the full population. Those unhappy with the protests skew older. Thus, for most companies, the opinions of most of those opposing the protests should be heavily discounted if one is concerned only with the effect of statements on profits.

Posted by: Brett McDonnell | Jun 15, 2020 9:36:17 AM

Just to piggyback on Brett, it's not just consumers. Companies are explicitly trying to appeal to restive employees/celebrity sponsors (Adidas), franchisees (CrossFit), etc. And as my post made clear, companies vary as to how far they go in endorsing the movement which only demonstrates how they're considering what they can afford to say/not say.

Posted by: Ann Lipton | Jun 15, 2020 9:57:57 AM

Thanks, Brett. All good points that I’ll chew on. BTW, I don’t believe I’ve mentioned it on the blog, but my proposal includes the possibility of a safe harbor for viewpoint diverse boards. I doubt that changes your cost-benefit analysis, but I thought I’d mention it here nonetheless. There have been some shareholder proposals filed seeking commitments to viewpoint diverse boards.

Posted by: Stefan Padfield | Jun 15, 2020 10:09:16 AM

Thanks, Ann. I agree the market for employees is relevant and likely tilts left. I also continue to appreciate the point you've made elsewhere about the costs of expressly providing a profit-seeking rationale.

Posted by: Stefan Padfield | Jun 15, 2020 10:14:19 AM

Also I need to jump in - and this ties to Idriss's comment - what's political? Is sponsoring the Washington Redskins political? Putting out a Barbie "Math is Hard" doll? How about a Barbie "astronaut" doll? I remember when ALL detergent ran ads that said "Mama gets it out with A-L-L" which infuriated me as a child - was that political? What about when Cascade ran ads that - for the time -were shocking in that they showed men buying dishwashing detergent, rather than women? (At which point I vowed - and I was what, preteen? - never to buy All and always to buy Cascade and now I'm ahem years old and I still do that?)

Posted by: Ann Lipton | Jun 15, 2020 10:54:44 AM

Yes, defining “political” in the context of my proposal calls for some difficult line drawing. One basic question is whether we see a material blue-red divide related to the decision. In the case we’re focusing on here, I don’t think it would be hard to show a blue-red divide to the extent that I have seen a pretty steady stream of right-leaning sources calling out the left for not condemning the riots (or at least not condemning them more). Whether that stream is material is another question. Perhaps one could use the extent to which the divide results in boycott calls on social media, or is criticized in non-fringe media outlets. Having said that, the costs of enhanced scrutiny should resolve all close calls in favor of non-interference with board discretion, perhaps via some sort of heightened pleading standard.

Posted by: Stefan Padfield | Jun 15, 2020 11:16:03 AM

There's a red/blue divide on coronavirus. Is it political if my restaurant advertises contact-less delivery and masked servers?

Posted by: Ann Lipton | Jun 15, 2020 11:20:13 AM

Or, I sell the Barbie Dreamhouse. I can advertise it with Barbie, single working woman, or Barbie with husband Ken, or Barbie with wife Skipper, or all options. Which are the political ads, and which aren't?

Posted by: Ann Lipton | Jun 15, 2020 11:31:23 AM

In both those cases, I'd start by looking for some objective evidence of bottom-line impacting controversy, like calls for boycotts.

Posted by: Stefan Padfield | Jun 15, 2020 11:35:34 AM

Have you seen a call for boycotts for any company expressing support for Black Lives Matter? How big a cal does it have to be to count? There were definitely calls for boycotts when Barbie introduced "Math is Hard" but there are also general Barbie boycotts, so how new does it have to be? I've seen calls for boycotts based on superhero products that only include male superheroes but not the female ones - does that make a Spiderman lunchbox political? What about an extremely violent videogame - calls for boycotts all the time. Political?

Posted by: Ann Lipton | Jun 15, 2020 11:42:59 AM

Because if the test is "it's political if someone wants to boycott," I'd bet that companies that don't express support for Black Lives Matter are way more political than companies that do. Maybe the theory should be that failing to express support for a popular movement gives rise to suspicion of political/personal motive?

Posted by: Ann Lipton | Jun 15, 2020 11:50:04 AM

And - I realize this is too many comments but I am trying to think through the implications. There were calls for boycotts when Sony rebooted Ghostbusters with female leads, when Marvel produced Captain Marvel (female lead), and when Disney put out Star Wars Force Awakens/Last Jedi (female lead, Asian lead, Black lead). There were calls for boycotts when Warner Bros produced the Joker (glorifying white male violence). Are those all political decisions calling for heightened scrutiny?

Posted by: Ann Lipton | Jun 15, 2020 12:14:59 PM

Assuming enhanced scrutiny was adopted for at least some business decisions giving rise to a specter of political bias, I think it would be perfectly reasonable for a court to conclude that there was not enough objective evidence of political bias to require justification of corporate decisions to expressly support BLM while staying silent on the riots. And I certainly think a colorable claim for enhanced scrutiny could challenge a decision to not come out in strong support of BLM.

I assume no one here is arguing that boardroom bias beyond financial self-interest isn’t a problem warranting intervention in corporate decision-making. Reasonable minds can obviously differ as to the extent political bias is a problem, as well as what constitutes an efficient response thereto. I freely admit my proposal raises difficult line-drawing issues, but it’s certainly not the case that our law is consistently free of such difficulties. I will certainly think more about the various examples you’ve provided (which are excellent), and perhaps I’ll ultimately conclude the line-drawing uncertainty is just too costly. However, at this time I’m content to stick with the following as a starting point for sorting claims: (1) evidence of significant political division on the issue; (2) evidence of bottom-line impacting reaction to the decision; (3) resolving all close calls in favor of protecting board discretion, perhaps by way of a heightened pleading standard; (4) a safe harbor for viewpoint diverse boards.

Posted by: Stefan Padfield | Jun 15, 2020 12:46:03 PM

BTW, I don’t view the possibility of suits challenging both support and non-support of BLM under certain conditions to be disabling. It’s not unlike deal litigation, where boards often face a meaningful risk of suit whether they accept or reject a particular deal.

Posted by: Stefan Padfield | Jun 15, 2020 12:56:31 PM

Follow-up post here:

Posted by: Stefan Padfield | Jun 17, 2020 2:02:42 PM

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