Sunday, September 18, 2022

Zheng on "Corporations As Private Regulators"

Wentong Zheng has published Corporations As Private Regulators, 55 U. Mich. J.L. Reform 649. The paper can be downloaded here. Below is an excerpt.

In August 2018, technology giant Microsoft made headlines by announcing that it would soon require its suppliers and contractors with more than fifty employees to offer workers at least twelve weeks of paid parental leave.1 Microsoft's new policy closely mirrors a Washington state law requiring that workers in the state receive twelve weeks of paid family leave; it is an effort to extend that same level of benefit to workers outside of the company's home state.2

While groundbreaking for the world of paid family leave, Microsoft's move was only one example of an increasingly common trend of corporations weighing in on public policy through corporate action. Following the 2018 mass shooting at Marjory Stoneman Douglas High School in Parkland, Florida, Dick's Sporting Goods banned sales of assault-style weapons and raised the minimum age for purchase of firearms and ammunition in its stores to twenty-one.3 Citigroup placed restrictions on their new retail business clients, prohibiting them from selling guns to customers who have not passed a background check and are under the age of twenty-one.4 Bank of America announced that it would stop lending money to gun manufacturers that make military-style firearms for civilian use.5 In addition to gun control, banks are taking meaningful action on immigration. In March 2019, JPMorgan Chase & Co. announced its plan to stop financing private operators of prisons and immigration detention centers.6 JPMorgan's move was followed by Wells Fargo, which in the same month told Congress that it was exiting its business relationship with the private prison industry.7 *651 As a final example, banks are facing increasing pressure from politicians and advocacy groups to stop funding oil pipelines, a major source of greenhouse gas emissions widely believed to cause climate change.8 In March 2020, UBS Group said it would no longer finance certain fossil fuel projects, including new offshore oil projects in the Arctic, thermal coal mines, and oil sands on undeveloped lands.9

In a sense, this trend of corporate action on public policy issues is a continuation of the corporate social responsibility (CSR) movement that dates back to at least the 1950s.10 As opposed to the traditional corporate model, CSR “refers to the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.”11 The earlier forms of CSR, however, featured mostly voluntary action on the part of willing corporations, be it charitable donations or corporate action to improve employee, customer, or shareholder relations.12 For instance, during the civil rights movement, many corporations in the South hired and served African American employees and customers before the practice was widely accepted.13 Another example is when corporations offered employment benefits to LGBTQ employees before they were legally required to do so.14 These corporate actions were mostly voluntary, with little coercion involved.

By contrast, the recent corporate action on public policy issues heralds a fundamentally different mode of corporate activism. Instead of relying on voluntary action, corporations impose their preferred policies *652 on their suppliers, contractors, and customers. Parties on the receiving end of such corporate action are forced to either comply with the action or discontinue their business relationship with the corporation.15 More importantly, this corporate action goes above and beyond the law--parties on the receiving end of such action are required to undertake activities not required by law, or barred from activities that they are legally entitled to do.16 Through this kind of coercive action, corporations are assuming the role of regulators and are drastically changing the scope of permissible and impermissible business conduct in the marketplace.17

This scholarship is the first to discuss this new phenomenon--referred to as “Corporations as Private Regulators” (CPR) in this Article--which signifies a new mode of corporate participation in public policymaking in the United States. Traditionally, corporations affect public policy through lobbying or industry self-regulation.18 Under either of these two modes, corporations attempt to capture, manipulate, or avoid the sovereign power of the government in an effort to shape public policy in their favor.19 CPR, however, departs from these traditional modes by disregarding the sovereign power of the government and relying instead on corporations' own private regulatory power.20 This changing role of corporations in public policymaking is another manifestation of the complex relationships between private businesses and government in the modern economy. Whereas governments increasingly conduct business affairs as market participants, private businesses increasingly exercise power akin to the government's regulatory power.21

Indicating the nuanced nature of corporations' private regulatory power, many politicians decry corporations' economic power in general but are nonetheless comfortable encouraging corporations to exercise their regulatory power--which is predicated upon their economic power--to achieve desired political outcomes.22 Political convenience aside, *653 one reason for this apparent contradiction is that the consequences and broader implications of corporations' private regulatory power have not been thoroughly scrutinized….

[T]there are no perfect solutions to the CPR problem. Tackling the problem within the existing legal framework faces serious limitations. Whether antitrust, property, or constitutional law, existing laws do not provide a natural fit for corporations exercising CPR power. A general CPR law that would prohibit large corporations from exercising CPR power on any issues is too inflexible to be practicable. For the time being, an ad hoc approach that allocates the right of refusal on a case-by-case basis appears to be the most realistic way to discipline the CPR power.

Of course, before deciding how to deal with the CPR power, society must first decide a threshold question: whether the CPR power is a problem to begin with. If society does not consider corporations wielding CPR power to be problematic and desires that corporations exercise that power, society more likely than not will embrace the status quo. If society considers the CPR power a threat to citizens' rights, it is conceivable that society will gravitate toward reformed legal arrangements in effort to reign in the CPR power. The greater the threat society considers the CPR power to pose, the more radical the legal solution society will be willing to adopt. On the far end of this spectrum is a completely revamped constitutional order under which private corporations are made subject to constitutional constraints.

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