Saturday, January 9, 2021

Bad for Business

The past few days, I’ve been thinking a lot about the classic case of AP Smith Manufacturing Co. v. Barlow, 98 A.2d 581 (N.J. 1953).

Though it is often invoked as emblematic of the “stakeholder” theory of the corporation, large portions of Barlow read more like a particularly vigorous application of the business judgment rule.  So long as corporate altruism could conceivably benefit the corporation, it will not be second-guessed.  Thus, Barlow held that corporate donations to Princeton University were permissible because, among other things:

[Corporations] now recognize that we are faced with other, though nonetheless vicious, threats from abroad which must be withstood without impairing the vigor of our democratic institutions at home and that otherwise victory will be pyrrhic indeed. More and more they have come to recognize that their salvation rests upon sound economic and social environment which in turn rests in no insignificant part upon free and vigorous nongovernmental institutions of learning….[S]uch expenditures may likewise readily be justified as being for the benefit of the corporation; indeed, if need be the matter may be viewed strictly in terms of actual survival of the corporation in a free enterprise system….

[T]here is now widespread belief throughout the nation that free and vigorous non-governmental institutions of learning are vital to our democracy and the system of free enterprise and that withdrawal of corporate authority to make such contributions within reasonable limits would seriously threaten their continuance. Corporations have come to recognize this and with their enlightenment have sought in varying measures…to insure and strengthen the society which gives them existence and the means of aiding themselves and their fellow citizens. Clearly then, the appellants, as individual stockholders whose private interests rest entirely upon the well-being of the plaintiff corporation, ought not be permitted to close their eyes to present-day realities and thwart the long-visioned corporate action in recognizing and voluntarily discharging its high obligations as a constituent of our modern social structure.

Once you get past the anti-Communist rhetoric of the era, the point here is that corporations fundamentally rely on the stability of the nations in which they operate.  Civil unrest, weak legal institutions, are bad for business.  Or, as Matt Levine put it a few years ago:

If the president can, without consulting the courts or Congress, banish U.S. lawful permanent residents, then he can do anything. If there is no rule of law for some people, there is no rule of law for anyone. The reason the U.S. is a good place to do business is that, for the last 228 years, it has built a firm foundation on the rule of law. It almost undid that in a weekend. That’s bad for business.

So it isn’t surprising that business leaders have offered some forceful condemnation of recent efforts by some Republicans to subvert the results of the presidential election.  Before January 6, the US Chamber of Commerce stated, “Efforts by some members of Congress to disregard certified election results in an effort to change the election outcome or to try a make a long-term political point undermines our democracy and the rule of law and will only result in further division across our nation.”  Other business leaders signed a statement to the same effect.

After the President of the United States incited an attack on Congress in hopes of overturning election results, the Business Roundtable stated that “elected officials’ perpetuation of the fiction of a fraudulent 2020 presidential election is not only reprehensible, but also a danger to our democracy, our society and our economy.”  The National Association of Manufacturers called for Vice Pence and the Cabinet to invoke the 25th Amendment and remove Trump from office, and the President of the American Petroleum Institute was quoted in the Washington Post saying that Trump was “unworthy of the office of being president.”

Beyond mere rhetoric, there’s been chatter about withholding campaign contributions from politicians who continue to provoke political instability.  According to a director of Merck and Morgan Stanley, “Respect for the rule of law underlies our market economy.”

To be sure, there is some question as to how committed business leaders will remain to this stance.  Business leaders have supported Trump throughout his presidency, distancing themselves during controversies only to re-embrace him when he cut taxes or regulations

In a time when we debate whether corporations suffer from a “short-term” bias, trading social stability for favorable regulatory treatment may the ultimate expression of short-term thinking. Or, as David Gelles wrote in the New York Times, “[M]oney has a short memory.”

Meanwhile, Axe Body Spray would simply like to be removed from this narrative.

Ann Lipton | Permalink


When I look at what has occurred in the last 30 years through the prism of dystopian fiction (Rollerball and Atlas Shrugged) and various documentaries, e.g., The Social Dilemma and Can You Take a Joke, one may wonder. Commerce will survive government but government cannot survive without commerce.

Posted by: Tom N. | Jan 9, 2021 6:53:24 AM

Elite graduates of elite institutions, like Messrs. Cruz and Hawley, can manipulate abstract concepts with the best of them but showed that they were totally unprincipled. They seemed to have learned nothing but excessive ambition. The country was saved by the conscientious public servants who are usually ignored but who kept their heads down, did their work, and saved a country and democracy. This was a close thing and democracy was saved by people who are often ignored, as well as a few judges. The rule of law truly is rooted in norms and habits of mind of decent people, as Tom Bingham was fond of noting.

Posted by: Charles Hamilton | Jan 9, 2021 11:11:24 AM

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