Business Law Prof Blog

I’m Moving to the Free Enterprise Project

It’s not quite as dramatic as LeBron James taking his talents to South Beach, but I’m nevertheless excited to announce my upcoming move to the Free Enterprise Project (FEP), a DC-based think tank that “focuses on shareholder activism and the confluence of big government and big business.” The FEP is part of the National Center for Public Policy Research, which is “a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems.” The NCPPR was founded in 1982, and readers of this blog may be interested to know that among its many activities it is the plaintiff in a recently filed lawsuit accusing the SEC of viewpoint discrimination in connection with its oversight of shareholder proposals (co-blogger Ann Lipton recently discussed an aspect of that lawsuit here).

In addition to the FEP, the National Center includes: (1) the Environment and Enterprise Institute, (2) Project 21, (3) Able Americans, and (4) The Political Forum Institute. For those interested, I’ve included a brief summary of each of these projects below.

• The Environment and Enterprise Institute seeks to “counter misinformation being spread to the public and policymakers by the environmental left.”
• Project 21 seeks to “promote the views of African-Americans whose entrepreneurial spirit, dedication to family and commitment to individual responsibility have not traditionally been echoed by the nation’s civil rights establishment.”
• Able Americans seeks to “support Americans living with intellectual, developmental and physical disabilities.”
• The Political Forum Institute seeks “to build a powerful and enduring community dedicated to the values and beliefs of the American founding: free peoples, free minds, and free markets.”

While I am looking forward to this new opportunity to advance the principles of “a free market, individual liberty and personal responsibility” – I must also express my gratitude for the opportunities I’ve been given by Akron Law to be of service to that institution and its students. If you aren’t familiar with all the great things going on at Akron Law, please visit their web page (here). There is much I could brag about when it comes to Akron Law, but perhaps the best thing I can say about the school is that everyone I ever worked with there – from the Dean’s suite to the administrative offices and throughout the school – was and is passionately committed to the success of our students. Unsurprisingly, we have not always agreed on the best path forward for the school, but I never once questioned the commitment of my colleagues to the institution and our students.

Finally, I want to express my gratitude to my past and present co-bloggers at the BLPB. I believe I can rightfully claim to be the founding member of this 2013 re-boot of the BLPB, but at this point I merely bask in the brilliance of my co-bloggers. When I was younger, I typically preferred to be a big fish in a small pond – but now the advice I almost always give is to dive into the pond with the biggest/best fish you can surround yourself with, and my experience here confirms that this is the better road travelled.

I’ve also decided to jump back on Twitter and LinkedIn, so feel free to connect with me there (at least until I’m cancelled).

Onwards and upwards!

Sharfman on "Market Share Opportunism"

Friend of the blog Bernard Sharfman has published "How the ‘Market Share Opportunism’ of Investment Advisers is Harming Investors and Public Companies" over at ProMarket. I'm providing an excerpt below but you should go read the whole thing.

The competitiveness of our public companies is being weakened by the market share opportunism of those who manage (investment advisers like State Street and BlackRock) our mutual funds and exchanged traded funds (ETFs). Instead of maximizing shareholder wealth through voting and engagement, what is maximized is an investment adviser’s market share of the investment fund market. The result is economic harm to companies and the lowering of financial returns for the tens of millions of U.S. citizens who own shares in stock mutual funds and ETFs, those who hold common stocks directly in brokerage accounts, and beneficiaries of public pension funds. The only way to mitigate this investment adviser opportunism is for the SEC to establish and enforce new fiduciary duties for investment advisers that keep them focused on maximizing the financial value of their funds when exercising their shareholder voting authority and engaging with portfolio companies. Shareholder voting and engagement with portfolio companies has become increasingly based on political values, not wealth maximization. Such voting, no matter what part of the political spectrum it represents, pressures corporate boards into making decisions that are not expected to maximize shareholder value. Without such maximization, companies are less likely to enter into the most profitable supply chain arrangements, human capital decisions, and investment opportunities. This makes them less competitive compared with those companies who do not face such pressures.

Roberto Tallarita: "portfolio primacy creates a fiduciary deadlock"

Roberto Tallarita has posted "Fiduciary Deadlock" on SSRN (here). Below is the abstract.

In May 2022, the shareholders of BlackRock, the world’s largest asset manager, voted on a proposal to push portfolio companies to reduce their social and environmental externalities, even if doing so would reduce the companies’ stock value. The proposal was based on the theory that BlackRock should maximize the value of its whole portfolio (portfolio primacy), rather than the value of individual companies (shareholder primacy), and it is driven by the expectation that portfolio primacy can harness the power of large asset managers to fight climate change and other pressing social problems. Although the proposal was rejected, portfolio primacy is gaining increasing support and will likely inspire similar proposals in the next proxy seasons. In this Essay, using the BlackRock proposal as a paradigmatic case, I examine how portfolio primacy interacts with the fiduciary duties of large asset managers. I argue that portfolio primacy creates a fiduciary deadlock: a situation in which multiple fiduciary relationships—between investment adviser and fund investors, between corporate managers and shareholders, between controlling and minority shareholders—come into conflict with each other. I show that, within the existing structure of fiduciary law, portfolio primacy will remain trapped in a tight knot of conflicts and, as a result, will prove ineffective in promoting ambitious social and environmental goals. Only legislators and regulators can cut this Gordian knot.

Padfield on Crony Stakeholder Capitalism (Final)

My paper, Crony Stakeholder Capitalism, 111 Ky. L.J. 441, 442 (2023), is now available on Westlaw, and I have posted the final version on SSRN here. Below is the abstract.

Capitalism in the context of corporate governance may be understood as an economic system that equates efficiency with corporate managers only pursuing projects that they reasonably expect will have a positive impact on the value of the corporation's shares (accounting for opportunity costs). Such projects may be referred to as positive net-present-value (NPV) projects. Stakeholder capitalism, on the other hand, may be understood a number of different ways, including: (1) an improved form of calculating NPV; (2) a conscious choice to sacrifice some NPV in order to advance broader social objectives; (3) a form of rent-seeking; (4) a form of green-washing; (5) a manifestation of the agency problem whereby managers prioritize their personal political preferences over NPV; (6) a manifestation of the agency problem whereby managers prioritize their personal financial wealth over NPV; (7) a form of crony capitalism. Of these, an argument can be made that only the first is both legal and efficient, at least in the case of Delaware corporations operating under the relevant default rules. Given the high risk of stakeholder capitalism thus constituting illegal or inefficient conduct, this Essay argues that decisions justified on the basis of stakeholder capitalism (as opposed to NPV calculations) should not be presumed to be fully informed and free of material conflicts, as is the case when the business judgment rule otherwise applies. Rather, such conduct should be subject to enhanced scrutiny to account for the omnipresent specter of illegal/inefficient motives. Such a rule would be similar to what is already often the case in Delaware when corporations defend against hostile takeovers, due to the omnipresent specter of managerial entrenchment motives.

Following an Introduction, this Essay proceeds as follows. First, because the argument that stakeholder capitalism can constitute a form of crony capitalism is at least somewhat novel, the connection between the two is fleshed out. Second, Senator Marco Rubio's Mind Your Own Business Act (MYOBA) is analyzed as a potential solution to the problem of crony stakeholder capitalism. Finally, recommendations are made for improving MYOBA.

ICYMI: "Civil Rights Complaint Against McDonald’s for Unlawful and Racist Hiring Practices"

From America First Legal (here) on April 5, 2023:

Today, as part of its initiative under the Center for Legal Equality, America First Legal (AFL) asked the U.S. Equal Employment Opportunity Commission (EEOC) to open a civil rights investigation into McDonald’s Corporation for engaging in unlawful, discriminatory hiring practices. Federal law forbids discrimination based on race, color, religion, sex, or national origin by an employer against an employee or potential employee. Yet, McDonald’s publicly admits to intentionally violating this law. McDonald’s even created a “Diversity Snapshot” that breaks down its staffing goals by race .... As part of its “Allyship through Accountability” program, McDonald’s actively uses hiring practices focusing on immutable characteristics rather than skillsets.... The odious and illegal practice of hiring based on immutable characteristics like race is a flagrant attack on civil rights that harms all Americans. Under the guise of “equity,” companies like McDonald’s openly discriminate against individuals without facing any repercussions or pushback. America First Legal is determined to stop the destructive hiring practices of woke companies across the country and will continue to fight for equal opportunity for all Americans.

Gene Hamilton, America First Legal Vice President and General Counsel, added the following:

So many of America’s biggest and most celebrated corporations have abandoned the very systems, values, and laws that made this country great. Now, even McDonald’s, with its iconic golden arches and international recognition as a standard-bearer for American success, has caved to a woke mob of activists and has committed to violating the law to achieve their desired social outcomes–even aiming for racial quotas. Their actions are un-American, bad for business, and patently unlawful. As McDonald’s prepares for widely anticipated corporate layoffs–an unfortunate development that will hurt real American families–our hope is that it abides by federal law and refuses to use these anticipated layoffs with an eye towards achieving its racial diversity goals.

ICYMI: Fed Soc Litigation Update on Stop WOKE Act Cases

Imagine a group of state university faculty sitting around a table discussing their upcoming five-year plan. They decide that one of their priorities will be to promote some or all of the following eight concepts in their classes (the hypo also works if you imagine a board of directors contemplating priorities for mandatory employee training):

1. Black people are morally superior to White people.
2. White people are inherently racist.
3. All White people are privileged, and all Black people are oppressed.
4. Assertions of color-blindness are racist.
5. White people should be discriminated against because of actions committed in the past by other White people.
6. White people should be discriminated against to achieve diversity, equity, and inclusion.
7. All White people bear personal responsibility for and must feel guilt, anguish, or other forms of psychological distress because of actions committed in the past by other White people.
8. Such virtues as merit, excellence, hard work, fairness, neutrality, and objectivity are racist and were created by White people to oppress Black people.

If you think that should be illegal (or if you think that would be the best of all possible worlds), then you might be interested in a recent Federalist Society litigation update on the Stop WOKE Act cases (available here) in which Ryan Newman, General Counsel to Florida Governor Ron DeSantis, discusses recent cases such as Pernell v. Florida Board of Governors, Novoa v. Diaz, and Honeyfund.com Inc. v. DeSantis. The following remarks from Newman provide some background on the legislation.

In our view, woke ideology poses a direct and irreconcilable challenge to a fundamental principle of the American political community -- not always faithfully observed of course, but nevertheless stretching back to the Declaration of Independence – and that is the equality of all persons, that we are all created equal. The question raised by these cases is whether the people, acting through their elected representatives, have the authority to take limited measures to prevent the forced indoctrination of people in the workplace and in our public educational institutions in concepts that amount to rank discrimination on the basis of race and sex and that if accepted by most Americans would effectively destroy our country as we know it. The Stop WOKE Act does not ban the eight concepts that it identifies. These ideas, as pernicious and repugnant as they are, will continue to exist in the marketplace of ideas but they cannot be foisted upon employees in the workplace or imposed on impressionable students in public schools. We don't believe that the Constitution requires the people to surrender this small degree of self-protection from an ideology that would itself destroy our political community. The Constitution is not, after all, a suicide pact.

Alliance Defending Freedom: "JPMorgan Chase loses SEC challenge, must allow shareholders to consider viewpoint diversity proposal"

The following is from the ADF press release, which you can find here.

The U.S. Securities and Exchange Commission has ruled against JPMorgan Chase’s attempt to exclude a shareholder resolution on viewpoint diversity from its ballot for its annual shareholder meeting.... Submitted by the Bahnsen Family Trust, the proposal directs Chase’s board of directors to evaluate and issue a report on the bank’s disturbing trend of politicized debanking.... In the past two years, Chase has denied payments or canceled accounts associated with people and organizations who hold mainstream American values, such as former Ambassador Sam Brownback, the Arkansas Family Council, and Defense of Liberty.... The SEC ruling comes amid a rising wave of opposition to Chase’s engagement in cancel culture through politicized debanking. Chase was featured prominently in the “Statement on Debanking and Free Speech,” signed in November of last year by a group of nearly 60 financial professionals. Last week, Nebraska State Treasurer John Murante led a group of 14 colleagues in a letter to Chase CEO Jamie Dimon calling on him to address and correct the issue by adopting policies recommended by ADF’s Viewpoint Diversity Score 2022 Business Index and providing necessary shareholder transparency by participating in the survey portion of the 2023 Business Index. Citing analysis from the 2022 Business Index, where Chase scored just 15% overall, the Bahnsen Family Trust proposal also calls on Chase to adopt those policies and participate in the survey. Along with criticizing Chase’s actions as “an affront to public trust,” the proposal highlights the vague and subjective terms-of-use policies (including terms like “hate speech” and “intolerance”) that allow companies like Chase unbridled discretion to discriminate against customers for their views.

When Corporations Outsource Racial Discrimination

Earlier this month, Daniel Lennington, deputy counsel at the Wisconsin Institute for Law and Liberty, published a piece at The Federalist entitled, “How Corporations Launder Their Race Discrimination Through Third Parties.” Here is an excerpt:

[T]he world’s largest corporations desperately want credit for being “woke” and advancing “racial equity” through programs targeted solely at certain races. Such practices — involving blatant race discrimination — are immoral and contrary to core American values, despite being in fashion with corporate elites. Yet the typical guide rails — state and federal law — may be less available remedies if corporations launder their discrimination through third parties. Corporations should avoid this temptation to outsource their discrimination and perhaps take a lesson from Comcast, one of the first corporations to face legal scrutiny for its race-based program. Following the settlement with our clients, Comcast renewed its efforts toward something called “Project Up,” which, from all indications, is a race-neutral program designed to “advance economic mobility, and open doors for the next generation of innovators, entrepreneurs, storytellers, and creators.” Comcast will run this program itself and reap the goodwill that will undoubtedly come, while adhering to (lawful) nondiscrimination principles.

In response to this piece, Scott Shepard, director of the Free Enterprise Project at the National Center for Public Policy Research, published “States Can Stop the Outsourcing of Race Discrimination by Corporations” over at RealClearMarkets. Here is an excerpt:

The clearest route to ending this practice is through state corporations laws. A very short amendment would serve the purpose. Add to the law this phrase at an appropriate spot: “Corporate donations or other pecuniary grants to entities that discriminate, facially or in fact, on grounds forbidden by the civil rights acts of this state have breached their fiduciary duty to shareholders unless they have secured from each shareholder written confirmation of their desire to contribute corporate assets to discriminatory entities.”… [A] second move by states inclined to rein in the new discrimination …. [is to] add to their civil rights statutes a line to the effect that “publicly traded corporations doing business in this state violate this statute if they use corporate assets to fund entities that discriminate in violation of this statute” unless getting the express permission of all shareholders.

“The Court finds that the Complaint alleges significant encouragement and coercion that converts the otherwise private conduct of censorship on social media platforms into state action, and is unpersuaded by Defendants’ arguments to the contrary.”

From a New Civil Liberties Alliance press release (here):

In a thorough and well-reasoned decision, Judge Terry A. Doughty of the U.S. District Court for the Western District of Louisiana has denied government defendants’ motion to dismiss in State of Missouri, et al. v. Joseph R. Biden, Jr., et al. The New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, represents renowned epidemiologists Drs. Jay Bhattacharya and Martin Kulldorff, as well as Dr. Aaron Kheriaty and Ms. Jill Hines, in a lawsuit that has exposed an elaborate, multi-agency federal government censorship regime. Judge Doughty wrote, “The Court finds that the Complaint alleges significant encouragement and coercion that converts the otherwise private conduct of censorship on social media platforms into state action, and is unpersuaded by Defendants’ arguments to the contrary.”

UPDATE (3/21/23): Keith Bishop was kind enough to pass along a related post of his entitled "Government Censorship By Proxy?" wherein he notes:

Last week, I wrote about an unsuccessful challenge to the activities of the Office of Elections Cybersecurity within the California Secretary of State's office: Is The California Secretary of State Monitoring What You Publish Online? In that case, O'Handley v. Weber, 2023 WL 2443073, the Ninth Circuit Court of Appeals found that the Secretary of State did not violate federal law when it notified Twitter of tweets containing false or misleading information that potentially violated the company's content-moderation policy. More recently, Judge Terry A. Doughty, who sits in the Western District of Louisiana, refused to dismiss claims for "alleged coercion by the Biden Administration and various government agencies and officials of social-media companies, urging those companies “to censor viewpoints and speakers disfavored by the Left". In this memorandum ruling, Judge Doughty distinguishes O'Handley as follows: ....

A Review of Some of Larry Fink's Recent Letters

Some word counts that may be of interest to BLPB readers (please check my work and let me know if I've gotten any of these wrong):

Letter	“ESG”	“stakeholder”	“stakeholder capitalism”
2023 Letter to Investors	0	3	0
2022 Letter to Shareholders	0	7	0
2022 Letter to CEOs	1	18	5
2021 Letter to CEOs	4	13	0

Compare word counts for "Wachtell Lipton Discusses Larry Fink’s [2023] Annual Letters to Investors": "ESG" = 0; "stakeholder" = 6; "stakeholder capitalism" = 2.

Addendum: The Wachtell post notes that "[f]or more than ten years, Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset manager, has published separate annual letters — one to CEOs and another to BlackRock’s shareholders. This year, Fink combined the two letters into one."

Recommended: "A Roundtable on Recent Developments at the FTC"

On March 6, the Federalist Society hosted "A Roundtable on Recent Developments at the FTC." Yesterday, I had the chance to listen to a podcast of the event and I think it may be of interest to BLPB readers. All the relevant links can be found here. Below is a brief description of the event.

Recent months have seen a flurry of notable developments at the Federal Trade Commission, including oral arguments in the high-profile Axon v. FTC and SEC v. Cochran Supreme Court cases, administrative complaints challenging deals between Altria and JUUL and Illumina and GRAIL, and FTC Commissioner Christine Wilson’s announced resignation. Please join us for an in-person luncheon featuring a panel of antitrust law experts examining these developments and debating what might come next at the FTC.

The Hoover Institution on "Markets vs. Mandates: Promoting Environmental Quality and Economic Prosperity"

On January 30, 2023, the Hoover Institution hosted a one-day conference on Markets vs. Mandates: Promoting Environmental Quality and Economic Prosperity. You can find an overview of the program (including speaker bios) here, and recordings of the seven sessions here. What follows are some excerpts from the session descriptions.

Sanjai Bhagat explained that ESG investing principles and new standards of corporate social responsibility are not based on the fiduciary duty to maximize shareholder value.

 

John Cochrane asserted that the Security and Exchange Commission’s plan to enforce ESG investment practices isn’t based on “saving the planet” but on bending corporations to serve a particular political agenda. Echoing Bhagat, Cochrane said the ESG mandates would not maximize shareholder value. It would instead deny capital to companies, lower their asset prices, and curb returns to investors. ESG mandates would also pervert markets, destroy competition, and encourage some companies to rent-seek from the government.

 

Mark Mills argued that ambitious goals to achieve zero carbon emissions in the coming decades are delusional. He said that over the past 20 years, after $5 trillion spent worldwide, there hasn’t been any significant movement toward transitions to renewables. Today, global energy derived from wood exceeds that of solar and wind power combined (which make up just 3 percent of all fuels). Moreover, a rapid transition to these other renewable sources, including batteries, would require a level of mineral extraction never seen in history.

 

Steven Koonin argued that many advocates of sweeping mandates for climate change frequently peddle misinformation, promote extreme scenarios as the consequence of global temperature rises, and smear critics of their arguments as “deniers” and with other detractions. Koonin then presented several examples from his research that provide context for environmental trends that are usually omitted from the prevailing literature on the subject.

Corporate Speech and the Omnipresent Specter of Political Bias

This post was originally intended to be submitted as a comment to Ann Lipton’s recent “Don’t Say Anything” post – so please read that post first before continuing. I ultimately decided to publish this as a free-standing post because it got a bit long for a comment and I’ll be better able to follow any subsequent comments here. As always, I remain open to changing my mind in the light of convincing feedback.

Ann’s post starts by referencing “Florida’s ‘Don’t Say Gay’ law, HB 1557.” For context, the following from Heritage Action's Executive Director Jessica Anderson (here) may be helpful:

While the Left and the corporate media continue to lie about Florida’s Parental Rights in Education bill, HB 1557, Florida Republicans haven’t stopped working to protect parents and children. Nothing in the bill bans the word ‘gay’ or censors schools — it simply protects grades K-3 from sexualized instruction and bolsters parents’ rights to know what’s going on in their children’s lives at school.

As for the substance of the case, I predict that Chancery will not dismiss the request. Why? Because it does not have to dismiss it in order to discourage “bullying” because this is not properly dismissed as bullying (i.e., an improper purpose). Simeone is certainly not the only shareholder to be concerned about Disney’s decision possibly being tainted by political bias – and this request is a proper way to try to get at the truth on that issue. What’s the most likely form of circumstantial evidence of political bias in a case like this? I believe it is failures of information-gathering that conveniently tilt in only one partisan direction. For example, if the decision-makers utterly failed to even consider simply firing the disruptive employees as a way to restore order at the company, or if they utterly failed to account for the completely foreseeable costs of backlash – in the form of state action or an even bigger PR nightmare – for trying to undermine the decisions of a democratically elected governor arguably doing precisely what he was democratically elected to do (cf. "Nikki Haley Says Florida’s Parental-Rights Law Doesn’t Go ‘Far Enough'"), then we start to get smoke suggesting a fire of politically biased willful blindness. Phrased more conventionally, if the corporate decision-makers failed to properly inform themselves in the course of reaching their decision, then they breached their duty of care, and if their information-processing failures rose to the level of consciously disregarding their known duty to become fully informed, then they engaged in non-exculpable bad faith. Given the highly politicized nature of this dispute, and the specter of political bias it raises, granting the request here seems perfectly in line with Section 220’s purpose and precedents. FWIW, I have previously written about the need for enhanced scrutiny in cases like this here, here, and here; Senator Marco Rubio has linked to some of that work here.

As for the concern that granting this request will somehow sanction improper or illegal “bullying” of corporations by political actors, I don’t think corporate decision-makers can ignore likely material impacts of political actions simply because they believe those actions may ultimately be deemed illegal. For example, should corporate decision-makers ignore the potential costs/benefits of President Biden’s loan forgiveness program because it may ultimately be ruled illegal? I think not.

ICYMI: "House Republicans Launch Anti-ESG Working Group Targeting SEC Climate Rules"

Thomson Reuters recently published an accounting & compliance alert (here) noting the following.

• Representative Bill Huizenga of Michigan signaled a new working group "will lean heavily into the Supreme Court's 2022 ruling in West Virginia v. EPA to argue that the SEC has gone beyond its statutory authority with the proposed [climate] rules, set to be finalized this spring.... The working group will examine how to 'rein in the SEC's regulatory overreach' and reinforce the materiality standard in the disclosure regime, as well as 'hold to account market participants who misuse the proxy process or their outsized influence to impose ideological preferences in ways that circumvent democratic lawmaking,' according to a news release." 

 

• "Senator Marco Rubio on Feb. 2 announced his 'anti-woke agenda' for the 118th Congress, including the Mind Your Own Business Act that would enable shareholders to more easily sue public companies over socially-driven actions, such as refusing to do business in states that crack down on abortion or restrict voting rights." [FWIW, I suspect that Sen. Rubio might replace "refusing to do business in states that crack down on abortion or restrict voting rights" with "refusing to do business in states that protect the lives of the unborn or defend the integrity of our voting system."]

 

• "Senator Mike Braun of Indiana on Feb. 1 announced plans to launch a Congressional Review Act (CRA) resolution seeking to nullify the Department of Labor's recent rules clearing barriers to ESG investing and proxy voting for retirement plan fiduciaries, alongside 49 other senators, with Representative Andy Barr of Kentucky introducing the resolution in the House."

Texas Governor Abbott's Chief of Staff: "Rebranding ... employment discrimination as ‘DEI’ doesn’t make the practice any less illegal."

As reported by America First Legal (here), Texas Governor Greg Abbott’s office recently issued a memo reminding state agencies and universities that “federal and state law forbid discrimination against a current or prospective employee because of that person’s race, color, religion, sex, national origin, age, disability or military service.” As stated in the letter (here): “Rebranding this employment discrimination as ‘DEI’ doesn’t make the practice any less illegal.” Of course, the extent to which diversity may be deemed a compelling interest justifying at least some forms of racial discrimination is an issue currently before the Supreme Court (see here).

Bainbridge on “The Profit Motive”

Many BLPB readers are likely aware that Stephen Bainbridge recently published a new book, The Profit Motive: Defending Shareholder Value Maximization. I must admit that I’m a fan of the Introduction:

There are a lot of books on the market praising stakeholder capitalism. They proclaim a new age in which big corporations should embrace—and, in fact, are embracing—environmental, social, and governance (ESG) goals. Whether putatively objective academic tomes filled with statistics or mass market books filled with bullet points, the bottom line is the same; namely, that stakeholder capitalism is the right thing to do both morally and financially. This is not one of those books.

For those of you on the fence, there is an hour-long overview on YouTube (here), but if that’s too long you might consider a recent guest post by Prof. Bainbridge on the Corporate Finance Lab discussing the book (here). Below is a brief excerpt from that post.

Three major themes animate the project. First, any conception of corporate purpose that embraces goals other than creating value for shareholders is inconsistent with the mainstream of U.S. corporate law. Second, directors do—and should—have wide and substantially unfettered discretion as to how they go about generating shareholder value. Although many commentators claim that those statements are inconsistent, in fact they both reflect fundamental normative principles deeply embedded in U.S. corporate law. Third, a shareholder-centric conception of corporate purpose is preferable to stakeholder capitalism….

 

Pursuit of shareholder value maximization leads to more efficient resource allocation, creates new social wealth, and promotes economic and political liberty. To be sure, there will always be externalities. Just as pursuing profit is baked into the corporation’s DNA, so is externalizing costs. There is no such thing as a free lunch. The theory and evidence recounted in The Profit Motive, however, suggests that the balance comes down strongly in favor of shareholder value maximization.

Emilie Kao on 303 Creative v. Elenis: "Can Stand-Alone Dignitary Harm Create A Right to Endorsement and Duty to Endorse?"

The following excerpt is from the introduction to a recent publication that may be of interest to BLPB readers. The publication is: Emilie Kao, 303 Creative v. Elenis: Can Stand-Alone Dignitary Harm Create A Right to Endorsement and Duty to Endorse?, 2023 Harv. J.L. & Pub. Pol'y Per Curiam 5, 2–5 (2023). Emilie Kao is Senior Counsel and Vice-President for Advocacy Strategy at Alliance Defending Freedom (ADF), which represents Lorie Smith.

All people have inherent dignity and should be treated with respect. However, whether and how courts should address legal claims surrounding dignity are notoriously complicated. Does the government have an interest in protecting citizens from “dignitary harm”--subjective feelings of emotional distress or stigma? If so, does the government's interest require it to compel or silence the expression of certain views? If so, does the dignity of the person compelled to speak or remain silent matter? Dignitary harm has played important roles in conflicts between religious freedom and anti-discrimination laws in Masterpiece Cakeshop v. Colorado Civil Rights Commission and Fulton v. Philadelphia. And they are at issue again in 303 Creative v. Elenis, a free-speech case that was recently argued at the U.S. Supreme Court.

 

In 303 Creative, Colorado's public accommodation law--the Colorado Anti-Discrimination Act (CADA)--requires graphic artist, Lorie Smith, to create websites celebrating same-sex marriage that violate her religious belief that marriage is between one man and one woman. Colorado stipulated that Ms. Smith serves all people, regardless of sexual orientation and that her websites are unique, custom, and expressive; in other words, that she is engaging in pure speech. Like many artists, Ms. Smith chooses each word, visual design, and artistic element to tell a unique story that is consistent with her beliefs, whether about animal rescue, homelessness, or marriage. She wants to design websites to “promote God's design for marriage.” Therefore, she cannot create websites that celebrate marriages contrary to God's design for any of her clients, regardless of sexual orientation. Her decisions are always based on the message, not the person.

 

Colorado claims that it has a compelling interest in ensuring that members of protected classes are shielded from “dignitary harm.” That dignitary harm, though, consists merely in a creative professional declining to endorse their desired message. The Tenth Circuit agreed with Colorado. But in his dissent, Chief Judge Tymkovich warned that, “[l]ike Nineteen Eighty-Four's Winston Smith, CADA wants Lorie Smith to not only accept government approved speech but also to endorse it.” The Supreme Court should refuse Colorado's attempt to create a right to endorsement and a corresponding duty to endorse that would compel Ms. Smith to speak messages that violate her conscience. A government interest in protecting citizens from the emotional and moral distress of disagreement is intrinsically distinct from the material and dignitary harms created by status-based denials. Therefore, courts should treat the claims arising from these distinct interests differently.

ICYMI: "25-State Lawsuit on New Labor Rule Allowing Asset Managers to Direct Their Clients’ Retirement Money to ESG Investments"

From the Office of the Utah Attorney General (here):

Today, [January 26, 2023,] Utah Attorney General Sean D. Reyes led a 25-state coalition in a lawsuit over a Department of Labor rule which would affect the retirement accounts of millions of people. The rule would allow 401(k) managers to direct their clients’ money to ESG (Environmental Social Governance) investments and runs contrary to the laws outlined in the Employee Retirement Income Security Act of 1974 (ERISA). “The Biden Administration is promoting its climate change agenda by putting everyday people’s retirement money at risk,” Attorney General Reyes said. “Americans are already suffering from the current economic downturn. Permitting asset managers to direct hard-working Americans’ money to ESG investments puts trillions of dollars of retirement savings at risk in exchange for someone else’s political agenda.... From the complaint: “[T]he 2022 Investment Duties Rule makes changes that authorize fiduciaries to consider and promote “nonpecuniary benefits” when making investment decisions. Contrary to Congress’s clear intent, these changes make it easier for fiduciaries to act with mixed motives. They also make it harder for beneficiaries to police such conduct.” The 25 states joining Utah Attorney General Reyes in this lawsuit are: Alabama, Alaska, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, New Hampshire, Ohio, South Carolina, North Dakota, Tennessee, Texas, Virginia, West Virginia, and Wyoming.

Can The Next Generation of Lawyers Save the World?

An ambitious question, yes, but it was the title of the presentation I gave at the Society for Socio-Economists Annual Meeting, which closed yesterday. Thanks to Stefan Padfield for inviting me.

In addition to teaching Business Associations to 1Ls this semester and running our Transactional Skills program, I'm also teaching Business and Human Rights. I had originally planned the class for 25 students, but now have 60 students enrolled, which is a testament to the interest in the topic. My pre-course surveys show that the students fall into two distinct camps. Most are interested in corporate law but didn't know even know there was a connection to human rights. The minority are human rights die hards who haven't even taken business associations (and may only learn about it for bar prep), but are curious about the combination of the two topics. I fell in love with this relatively new legal  field twelve years ago and it's my mission to ensure that future transactional lawyers have some exposure to it.

It's not just a feel-good way of looking at the world. Whether you love or hate ESG, business and human rights shows up in every factor and many firms have built practice areas around it. Just last week, the EU Corporate Sustainability Reporting Directive came into force. Like it or not, business lawyers must know something about human rights if they deal with any company that has or is part of a supply or value chain or has disclosure requirements. 

At the beginning of the semester, we discuss the role of the corporation in society. In many classes, we conduct simulations where students serve as board members, government officials, institutional investors, NGO leaders, consumers, and others who may or may not believe that the role of business is business. Every year, I also require the class to examine the top 10 business and human rights topics as determined by the Institute of Human Rights and Business (IHRB). In 2022, the top issues focused on climate change:

1. State Leadership-Placing people at the center of government strategies in confronting the climate crisis
2. Accountable Finance- Scaling up efforts to hold financial actors to their human rights and environmental responsibilities
3. Dissenting Voices- Ensuring developmental and environmental priorities do not silence land rights defenders and other critical voices
4. Critical Commodities- Addressing human rights risks in mining to meet clean energy needs
5. Purchasing Power- Using the leverage of renewable energy buyers to accelerate a just transition
6. Responsible Exits- Constructing rights-based approaches to buildings and infrastructure mitigation and resilience
7. Green Building- Building and construction industries must mitigate impacts while avoiding corruption, reducing inequality, preventing harm to communities, and providing economic opportunities
8. Agricultural Transitions- Decarbonising the agriculture sector is critical to maintaining a path toward limiting global warming to 1.5 degrees
9. Transforming Transport- The transport sector, including passenger and freight activity, remains largely carbon-based and currently accounts for approximately 23% total energy-related CO2 global greenhouse gas emissions
10. Circular Economy- Ensure “green economy” is creating sustainable jobs and protecting workers

The 2023 list departs from the traditional type of list and looks at the people who influence the decisionmakers in business. That's the basis of the title of this post and yesterday's presentation. The 2023 Top Ten are:

1. Strategic Enablers- Scrutinizing the role of management consultants in business decisions that harm communities and wider society. Many of our students work outside of the law as consultants or will work alongside consultants. With economic headwinds and recessionary fears dominating the headlines, companies and law firms are in full layoff season. What factors should advisors consider beyond financial ones, especially if the work force consists of primarily lower-paid, low-skilled labor, who may not be able to find new employment quickly? Or should financial considerations prevail?
2. Capital Providers- Holding investors to account for adverse impacts on people- More than 220 investors collectively representing US$30 trillion in assets under management  have signed a public statement acknowledging the importance of human rights impacts in investment and global prosperity. Many financial firms also abide by the Equator Principles, a benchmark that helps those involved in project finance to determine environmental and social impacts from financing. Our students will serve as counsel to banks,  financial firms, private equity, and venture capitalists. Many financial institutions traditionally focus on shareholder maximization but this could be an important step in changing that narrative. 
3. Legal Advisors- Establishing norms and responsible performance standards for lawyers and others who advise companies. ABA Model Rule 2.1 guides lawyers to have candid conversations that "may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client's situation." Business and human rights falls squarely in that category. Additionally, the ABA endorsed the United Nations Guiding Principles on Business and Human Rights ten years ago and released model supply chain contractual clauses related to human rights in 2021. Last Fall, the International Bar Association's Annual Meeting had a whole track directed to business and human rights issues. Our students advise on sanctions, bribery, money laundering, labor relations, and a host of other issues that directly impact human rights. I'm glad to see this item on the Top 10 list. 
4. Risk Evaluators- Reforming the role of credit rating agencies and those who determine investment worthiness of states and companies. Our students may have heard of S&P, Moody's, & Fitch but may not know of the role those entities played in the 2008 financial crisis and the role they play now when looking at sovereign debt.  If the analysis from those entities  are flawed or laden with conflicts of interest or lack of accountability, those ratings can indirectly impact the government's ability to provide goods and services for the most vulnerable citizens.
5. Systems Builders- Embedding human rights considerations in all stages of computer technology. If our students work in house or for governments, how can they advise tech companies working with AI, surveillance, social media, search engines and the spread of (mis)nformation? What ethical responsibilities do tech companies have and how can lawyers help them wrestle with these difficult issues?
6. City Shapers-  Strengthening accountability and transformation in real estate finance and construction. Real estate constitutes 60% of global assets. Our students need to learn about green finance, infrastructure spending, and affordable housing and to speak up when there could be human rights impacts in the projects they are advising on. 
7. Public Persuaders- Upholding standards so that advertising and PR companies do not undermine human rights. There are several legal issues related to advertising and marketing. Our students can also play a role in advising companies, in accordance with ethical rule 2.1, about persuaders presenting human rights issues and portraying controversial topics related to gender, race, indigenous peoples, climate change in a respectful and honest manner. 
8. Corporate Givers- Aligning philanthropic priorities with international standards and the realities of the most vulnerable. Many large philanthropists look at charitable giving as investments (which they are) and as a way to tackle intractable social problems. Our students can add a human rights perspective as advisors, counsel, and board members to ensure that organizations give to lesser known organizations that help some of the forgotten members of society. Additionally, Michael Porter and Mark Kramer note that a shared-value approach, "generat[es] economic value in a way that also produces value for society by addressing its challenges. A shared value approach reconnects company success with social progress. Firms can do this in three distinct ways: by reconceiving products and markets, redefining productivity in the value chain, and building supportive industry clusters at the company's locations." Lawyers can and should play a role in this. 
9. Business Educators- Mainstreaming human rights due diligence into management, legal, and other areas of academic training. Our readers teaching in business and law schools and focusing on ESG can discuss business and human rights under any of the ESG factors. If you don't know where to start, the ILO has begun signing MOUs with business schools around the world to increase the inclusion of labor rights in business school curricula. If you're worried that it's too touchy feely to discuss or that these topics put you in the middle of the ESG/anti-woke debate, remember that many of these issues relate directly to enterprise risk management- a more palatable topic for most business and legal leaders. 
10. Information Disseminators- Ensuring that journalists, media, and social media uphold truth and public interest. A couple of years ago, "fake news" was on the Top 10 and with all that's going on in the world with lack of trust in the media and political institutions, lawyers can play a role in representing reporters and media outlets. Similarly, lawyers can explain the news objectively and help serve as fact checkers when appearing in news outlets.

If you've made it to the end of this post, you're either nodding in agreement or shaking your head violently in disagreement. I expect many of my students will feel the same, and I encourage that disagreement. But it's my job to expose students to these issues. As they learn about ESG from me and the press, it's critical that they disagree armed with information from all sides.

So can the next generation of lawyers save the world? Absolutely yes, if they choose to. 

Society of Socio-Economists Annual Meeting Continues Through Friday

Below are the upcoming events taking place online as part of the Society of Socio-Economists Annual Meeting (all times EST). All events are accessible via a single link, which will be sent to you after registering here (registration is free). Readers of this blog will likely recognize a number of the presenters. I hope to see you there.

UPDATE: You can find the paper Robert Ashford will be discussing Thursday at 2:15 here: https://scholarlycommons.pacific.edu/cgi/viewcontent.cgi?article=1372&context=uoplawreview . 

UPDATE 2: Two videos from economists discussing Professor Ashford's Inclusive Capitalism: (1) https://youtu.be/lL1gEEj0tCU; (2) https://video.syr.edu/media/t/1_nnt9e504 .