Published on The CLS Blue Sky Blog on October 19, 2015
For a generation, the ideological lines within corporate law have been fairly well defined. On the one side, progressives have argued for a weakening of the shareholder primacy norm as a normative matter or that it does not exist as a positive matter. Corporations should have responsibilities that extend beyond the bottom line — that they should see themselves, and be seen as, being subject to a robust social contract. Corporate citizenship should be taken seriously.
On the other side, conventional corporate law theorists argue for the existence and appropriateness of a shareholder primacy norm. Corporations may serve non-shareholder interests only insofar as shareholder interests are furthered by doing so. The “one and only social responsibility of business,” said Milton Freidman a generation ago, is to make “as much money as possible.” A notion that corporations should be thought of as having a social contract beyond the pecuniary — that corporations should be seen as having the obligations of citizenship — is a nonstarter.
These battle lines are clear and skirmishes arise occasionally. After the global financial crisis, there appeared to be more openness to the progressive view than we had seen in a generation. A 2012 article in the Harvard Business Review proclaimed, “There’s a growing body of evidence … that the companies that are most successful at maximizing shareholder value over time are those that aim toward goals other than maximizing shareholder value. Employees and customers often know more about and have more of a long-term commitment to a company than shareholders do.” A 2014 opinion piece in The Financial Times argued that “Companies need a bigger and better purpose than simply maximizing shareholder value.” A Forbes article called shareholder primacy “the dumbest idea in the world.” A popular, non-business, essayist in the New York Times wrote that “it feels as if we are at the dawn of a new movement — one aimed at overturning the hegemony of shareholder value.” Another wrote in the Washington Post that the shareholder value “ideology” is “pernicious” and a “corrupting, self-interested dogma peddled by finance professors and money managers.” A group of international scholars issued a statement objecting to the traditional notion that shareholders own the corporation or that corporations have a duty to maximize return to shareholders. These rumblings are sufficient to prod one prominent commentator to ask whether corporate governance is “on the brink of a revolution.”
In 2010, the Supreme Court decided Citizens United v Federal Election Commission, ruling that corporations had a First Amendment right to spend money from general treasury funds in support of political candidates. Though seen as victory for political conservatives, the decision was in some ways based on a progressive view of the corporation. In the Court’s reasoning, corporations act as “associations of citizens” with rights of free speech. The Court assumed that corporations both could and should be active in the public space.
From there it is a small step to say that if corporations are to be active in the public space, it is appropriate to ask them to act more like real citizens, with obligations that cannot be encapsulated in financial statements. Citizens United could have been the genesis of a progressive moment for corporate law, when the American left rallied around a call for corporations to be made more democratic and more pluralistically managed. The challengers to corporate power might have used the broad, national skepticism of corporations that became obvious after Citizens United to call on corporations to act like what the Supreme Court assumed they were: associations of citizens.
This moment might yet occur, though it faces a surprising and ironic obstacle. The biggest impediment to using the Citizens United moment to change corporate governance for the better is the progressive left.
The most prominent progressive critique of Citizens United was that the Court ruled corporations are persons for purposes of constitutional law, and corporate personhood is a great evil. The critics rail against corporate constitutional rights and have proposed a constitutional amendment to end all constitutional rights for corporations. These critics of Citizens United now characterize corporations as having a narrow social role and they owe it to shareholders to stay out of politics. To fight corporate personhood, they are bolstering shareholder primacy.
Take for instance Justice John Paul Stevens’s dissent in Citizens United itself. He (perhaps unwittingly) bolsters shareholder supremacy by arguing that corporate speech should be limited in order to protect shareholders’ investments. Shareholders are seen as owners, as “those who pay for an electioneering communication” and are assumed to have “invested in the business corporation for purely economic reasons.” Stevens argued that corporate political speech did not merit protection because “the corporation must engage the electoral process with the aim to enhance the profitability of the company, no matter how persuasive the arguments for a broader . . . set of priorities.”
Even more revealing, Stevens cites the ALI Principles of Corporate Governance as support. The Principles were the product of compromise, both asking corporations to look after shareholder interests and allowing them to act with an eye toward “ethical” and “humanitarian” purposes. But Stevens quoted only the language embodying shareholder primacy: “A corporation . . . should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain.”
Opponents of corporate personhood are following Stevens into the shareholder rights camp. Common Cause now has a “featured campaign” for “strengthening shareholder rights.” The Brennan Center for Justice is supporting a “shareholder protection act” and calls shareholders “the actual owners” of corporations. This is all shareholder primacy language brought to bear in fighting Citizens United.
The irony runs the other way as well. In the 2014 Hobby Lobby case, the Court granted corporations the statutory right under the Religious Freedom Restoration Act to object to otherwise applicable regulations on religious grounds. Writing for the Court, Justice Samuel Alito recognized that corporations need not maximize the bottom line:
While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. . . If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well.
Alito also cites for support the fact that “Over half of the States, for instance, now recognize the “benefit corporation,” a dual-purpose entity that seeks to achieve both a benefit for the public and a profit for its owners. Benefit corporations have been a darling of many corporate law progressives; Hobby Lobby marshals their existence as an argument in favor of corporate resistance to regulation.
The world is flipped. Progressives are championing shareholder rights. Conservatives are planting their ideological flag on the summit of corporate citizenship. It is yet unclear what will be the long-term implications of this flipping of traditional ideological perspectives on the corporation. It is worth watching, to be sure, because it is something we have not before experienced in the history of corporations in the United States.