Monday, June 20, 2022

So much to say today . . . .


Having just come back from the first in-person National Business Law Scholars Conference since 2019 (at The University of Oklahoma College of Law, pictured here), I have many thoughts swirling through my head.  I always love that conference.  The people, whom I dearly missed, are a big part of that. And Megan Wischmeier Shaner was an awesome planning committee host. But the ideas that were shared . . . .  Wow. So many great research projects were shared by these wonderful law teachers and scholars!  Over time, I hope to share many of them with you.  

But for today, I want to focus on one thing that I heard in a few presentations at the conference: that the shareholder wealth maximization norm is and always has been the be-all and end-all of corporate purpose and board decision making. I am posting on that topic today not only because of my engagement with the conference, but also because the issue is implicated in Ann's post on Saturday (Bathrooms are About Stakeholders) and by Stefan's post yesterday (ESG & Communism?). I want to focus on a part of Stefan's post (and Stefan, you may that issue with my remarks here, based on your response in the comments to your post), but I promise to work in a reference to Ann's post, too, along the way.

Like Paul, I am somewhat troubled by the connections made in abstract for the article featured in Stefan's post—albeit perhaps for different reasons. I will read the article itself at some point to learn more about the issues relating to the Fed. And I agree with Stefan's commentator Paul that the Elizabeth Warren reference in the abstract is a bit of a stalking horse. I want to address here, then, only the asserted corroboration of an “incipient trend” offered as an aside at the end of the abstract excerpted in Stefan's post.

As readers may know from my published work and commentary on the BLPB, I do not accept that there is a legal duty to maximize shareholder wealth embedded in corporate law. (Articles have pointed out that the shareholder wealth maximization mantra has not existed consistently over the course of corporate history, but I will leave commentary on that literature for another day.) Regardless, to be sustainable, a corporation must make profit that inures to the benefit of shareholders, while also understanding and being responsive to the corporation's other shareholder commitments—commitments that may vary from corporation to corporation. But that does not mean that the board must maximize shareholder wealth, especially in each and every board decision. (Let's leave Revlon duties aside, if you would, for these purposes.). It also does not mean that shareholder wealth is properly ignored in corporate decision making, but in my experience, few firms actually completely ignore short-term and long-term effects on shareholder wealth in making decisions.

In essence, the standard shareholder wealth maximization trope would have us believe that the board's task is too simple, as I have noted in some of my work. A compliant, functional board engaged in corporate decision making first needs to understand as well as it can the firm's business and the markets in which the firm operates and then needs to assess in that context how the corporation should proceed. Some of the board's decisions may require it taking a stand on what have (regrettably, imv) become highly politicized social justice and commercial issues. It involves weighing and balancing. It is hard work. But that is the board's job. The board may want to inform itself of which political party likes what (especially as it relates to its various constituencies), but the board's decisions ultimately need to be made in good faith on the basis of what, after being fully informed in all material respects, they collectively believe to be in the best interest of the corporation (including its shareholders).

Some folks seem to ignore that reality. Instead, they assume (in many cases without adequate articulated foundation) that a board is catering to or rejecting, e.g., ESG initiatives based on a political viewpoint. I have more faith in corporate boards than that. I urge people to check those assumptions before making them (and to leave their own political preferences behind in doing so). Although I have seen a few dysfunctional boards in my 37 years as a lawyer and law professor, I have seen many more that are looking out for the long-term sustainability of the firm for the financial and other benefit of shareholders. That does require that employee interests, customer/client interests, and the interest of other stakeholders be understood and incorporated into the board’s decision making. Ann seems to agree with this last point when she writes in her post that: "despite occasional rhetoric to the contrary, it may very well be profit-maximizing to bow to employee demands; it doesn’t mean the CEO is pursuing a personal political agenda, it simply means that restive employees make a company difficult to run."

In concluding, I do not see an “incipient trend” or any “diametric opposition” of the kind noted in the abstract posted by Stefan. I also see board (and overall corporate management) support for ESG—although I admittedly am not a fan of looking at all the E, S, and G together—as the probable acknowledgement of an economic or financial reality in or applicable to those firms. Economies and markets are changing, and firms that do not respond to those changes one way or another will not survive. And that will not inure to the benefit of shareholders or other corporate stakeholders. The Business Roundtable Statement on the Purpose of the Corporation acknowledges the importance of corporations in our local, national, and global economies and, in light of that, articulates management’s recognition of the need to create sustainable economic and financial symbiosis through the firm's decision making: “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

As scholars, we should recognize the realities of the boardroom and of firm management in general, which optimally involve complex, individualized decision-making matrices. Moreover, as we theorize about, and assess the policy objectives of, the laws we study and on which we comment, we should keep those realities in mind. Rather than assuming why boards (and C-suite officers, for that matter) act the way they do based on our theoretical and political viewpoints, we should interrogate their management decisions thoroughly, understanding and critiquing the actual bases for those decisions and, when possible, suggesting a "better way."

Thanks to the National Business Law Scholars Conference participants for their stimulating presentations and to Ann and Stefan for their posts. I hope that this post serves to illuminate my perspective on shareholder wealth maximization a bit. The conversation is important, even if a common understanding may not be forthcoming.

Ann Lipton, Conferences, Corporate Governance, Corporations, Joan Heminway, Management, Stefan J. Padfield | Permalink


Thanks, Joan. I think it’s fair to say you trust our current crop of corporate leaders more than I do. But in my defense, if you’re right about them then it shouldn’t be that hard for them to satisfy the enhanced scrutiny I argue they should be subjected to more often. (Obviously, I recognize the relevant CBA is more complicated than that.) Regardless, I am extremely grateful for these conversations.

Posted by: Stefan Padfield | Jun 20, 2022 5:44:46 PM

I may as well ask this question here since there are so many business law professors accessible at the same time: In the U.S. context, directors can pretty much favor any group of stakeholders they choose (within reasonable limits) under the business judgement rule. But only shareholders can vote for (or against) directors. If shareholders become too annoyed with any company’s direction, they can show their displeasure through director voting. This process was until recently a simple rubber stamp, but the trend is to imbue director voting with sharper teeth. So, unless we are considering a change of control or bankruptcy situation, would the professors opine as to whether shareholder primacy is always the ultimate de facto governance regime, and a debate about shareholder versus stakeholder governance is essentially irrelevant? Thank you!

Posted by: Paul Rissman | Jun 21, 2022 11:06:13 AM

Professor: Nobody can fault you for not "poking the bear." LOL. Although literature may not be moving as fast as events (or, taking account of how fast Boomers are or may passing on) and I agree that every board decision may weigh sometimes complex issues involving PR and other factors, I truly sense a backlash "brewing" that Boards are going to have to acknowledge as part of their "calculus." I still adhere to the obligation of Boards to maximize "return on investment."

Posted by: Tom N. | Jun 21, 2022 6:54:12 PM

Stefan, Paul, and Tom N., I appreciate your comments. Sorry for the delay in posting them and responding to them. I had some issues with Typepad on Tuesday and also have had a tight schedule (since I am out of town today and Friday).

Stefan, thanks for adding a brief statement of your perspective. We should do a forum here on the BLPB on judicial review and fiduciary duties! I agree that the conversation is worth the candle.

Paul, thanks for the nice analysis and the question. Certainly, stockholders hold the principal tools of enforcement/accountability in the corporate form—both as to voting for directors and as to bringing derivative litigation (in addition to the possibilities in some cases of bringing direct individual and class action litigation). As a result, shareholders are often considered the primary beneficiaries of the board’s fiduciary duties to the corporation—the primary constituency that the board considers in its decision making. (This does not necessarily mean, however, that the board must maximize the wealth of shareholders in each decision it makes!) Does that help? If not, feel free to shoot another question back at me. Also, others may have different ways of looking at this than I have.

As an aside, interestingly, the stockholder enforcement/accountability mechanisms applicable to traditional for-profit corporations are the same for for-profit benefit corporations, even though the statutes for for-profit benefit corporations expressly provide for board consideration of the interests of stakeholders other than stockholders. We might also comment similarly on the state of for-profit corporate stockholder accountability in states with “other constituency” statutes . . . .

Tom N., depending on what you mean by maximizing ROI, we may agree or disagree in relevant part. First, I have a question about what “maximizing” means in this context—a context in which stockholders may have very different investment time horizons. Second, I have a question about what “return” means in an environment where stockholders may want different things from one firm than they do from another (keeping in mind that a stockholder’s returns can be financial, nonfinancial, or blended). If the board and the stockholders are not on the same page as to stockholder returns/value, then there may well be a backlash.

Posted by: joanheminway | Jun 22, 2022 11:46:16 PM

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