'Trust, But Verify' Is Crucial On the Matter of Pro-Shareholder ESG
(AP Photo/Matt Rourke)
'Trust, But Verify' Is Crucial On the Matter of Pro-Shareholder ESG
(AP Photo/Matt Rourke)
Story Stream
recent articles

In the 1980s, concerns arose that corporate managers were responding to the takeover boom by providing pretextual justifications for defending against takeovers. While they claimed to be protecting the corporation, the “omnipresent specter” of self-interest loomed large in light of the reality that they were also typically protecting their jobs. Thus, antitakeover defenses came to be subjected to enhanced scrutiny. Today, we face a woke revolution rather than a takeover boom, but our response should be the same. For the reasons set forth below, we should subject corporate decisions raising the specter of political bias to enhanced scrutiny. 

To what end should corporations be managed? In the United States, the answer to that question is largely a question of state law, and no state is more important in this area than Delaware. Fortunately, Delaware has been quite clear that the purpose of for-profit corporations is in fact to maximize profit. For example, in the 2010 case of eBay Domestic Holdings, Inc. v. Newmark, Chancellor Chandler, writing for the Court of Chancery of Delaware, noted that the “Inc.” in a corporate name must at least mean that directors should “promote the value of the corporation for the benefit of its stockholders.” Perhaps more to the point, the Honorable Leo Strine, former Chief Justice of the Supreme Court of Delaware, noted in a 2015 article that advocates for corporate social responsibility are simply pretending when they claim that directors of Delaware corporations do not have to make stockholder welfare “the sole end of corporate governance.”  

It is against this backdrop that in 2019 the CEOs of the Business Roundtable infamously claimed the authority to “redefine” the purpose of the corporation along the lines of a communitarian stakeholder capitalism. These CEOs were quickly joined by proponents of adding ESG factors (environmental, social, and governance factors) to business decision-making. Of course, the duty to maximize shareholder value already requires consideration of stakeholders and ESG factors to the extent those considerations impact share price. Accordingly, many interested observers have been suspicious of how exactly stakeholder capitalism and ESG factors are supposed to modify corporate behavior. More than a few have concluded that the efforts ultimately boil down to an illegitimate attempt to advance a progressive agenda for reshaping society via the corporate boardroom when attempts to do so via the ballot box have failed. When every item on the stakeholder / ESG wish list just happens to align perfectly with all the major talking points of the Democratic party, you’ll have to forgive people for not taking seriously the claim that stakeholder capitalism is merely about clarifying capitalism. 

All of which brings us to the question of what is to be done. Fortunately, Delaware already has a perfect solution on the books. Specifically, corporate decision-making may be subjected to enhanced judicial scrutiny when the actions of corporate managers raise the specter of self-interest. Enhanced scrutiny is typically traced to concerns that the takeover boom of the 80s led corporate managers to employ anti-takeover methods in order to save their jobs rather than maximize shareholder value. Today, rather than a takeover boom we are confronted with what at least some deem to be a woke revolution. The political has become personal, and many people now seemingly see themselves first as an activist and only secondarily as a CEO, director, or executive. In light of this new normal, Delaware courts should extend enhanced scrutiny to cases raising the omnipresent specter of ideological self-interest and partisanship. 

The triggering fact pattern may include situations where the risk of ideologically motivated partisanship is simply too great to accept at face value the claims of corporate managers to be serving the best interests of the corporation. For example, were tech giants merely acting on the basis of expected value calculations when they allowed the RussiaGate narrative to flourish but censored the Hunter Biden laptop story? Perhaps, but that conduct was also arguably sufficiently one-sided in partisan terms to warrant subjecting the decision-making to enhanced scrutiny should a relevant suit be filed.  

Importantly, the burden of enhanced scrutiny merely requires proof of reasonable information-gathering and a defensible choice of action. In the context of takeovers, this means the takeover defense must be proportional to the reasonably perceived threat to the corporation. In other words, the risk of pretextual justifications being offered for politicized corporate actions warrants insisting that corporate decision-makers show the work they did in order to conclude that the expected value to the corporation was reasonably determined to have been maximized by taking the chosen action. The risks of ideological activism undermining the poverty-eradicating benefits of capitalism warrant examining the real-time decision-making process. 

There is an old bit of negotiating strategy that is relevant here. If the advocates of stakeholder capitalism repeatedly assert that renegotiating the purpose of the corporation will only improve the corporate bottom line, then they should be willing to bind themselves to that promise by subjecting the relevant decision-making to some enhanced scrutiny. When they say, “trust us” – we should say, “trust, but verify.” (As an aside, Senator Marco Rubio has proposed a similar solution on the federal level, which he discussed in a post on the Harvard Law School Forum on Corporate Governance wherein he linked to an earlier article of mine examining the state-level solution advanced in this op-ed.) 

Stefan J. Padfield is a Professor of Law at the University of Akron's C. Blake McDowell Law Center. 

Show comments Hide Comments