Business Law, Public Responsibility, and Ethics Commons^™

Dynamic Disclosure: An Exposé On The Mythical Divide Between Voluntary And Mandatory Esg Disclosure, Lisa Fairfax

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In March 2022, for the first time in its history, the Securities and Exchange Commission (the “SEC”) proposed rules mandating disclosure related to climate change. The proposed rules are remarkable because heretofore many in the business community, including the SEC, vehemently resisted climate-related disclosure, based primarily on the argument that such disclosure is not material to investors. This resistance is exemplified by the current lack of any SEC disclosure mandates for climate change. The proposed rules have sparked considerable pushback including allegations that the rules violate the First Amendment, would be too costly, and focus on “social” or “political” issues …

Purpose Proposals, Jill E. Fisch

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Repurposing the corporation is the hot issue in corporate governance. Commentators, investors and increasingly issuers, maintain that corporations should shift their focus from maximizing profits for shareholders to generating value for a more expansive group of stakeholders. Corporations are also being called upon to address societal concerns – from climate change and voting rights to racial justice and wealth inequality.

The shareholder proposal rule, Rule 14a–8, offers one potential tool for repurposing the corporation. This Article describes the introduction of innovative proposals seeking to formalize corporate commitments to stakeholder governance. These “purpose proposals” reflect a new dynamic in the debate …

Board Committee Charters And Esg Accountability, Lisa Fairfax

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We are currently witnessing a sharp increase in corporate attention on environmental, sustainability, and governance (“ESG”). The steep rise in corporate focus on ESG has prompted considerable criticism, not only from those concerned about how best to ensure that corporations are held accountable for their ESG commitments, but also from those who strenuously insist that corporate commitment to ESG is merely rhetorical or otherwise merely a passing fad. In an effort to shed light on the concerns around ESG accountability, and gain perspective about the potential illusory or short-term nature of ESG, I conducted my own survey of the committee …

Are All Risks Created Equal? Rethinking The Distinction Between Legal And Business Risk In Corporate Law, Adi Libson, Gideon Parchomovsky

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Should corporate legal risk be treated similarly to corporate business risks? Currently, the law draws a clear-cut distinction between the two sources of risk, permitting the latter type of risk and banning the former. As a result, fiduciaries are shielded from personal liability in the case of business risk and are entirely exposed to civil and criminal liability that arises from legal risk-taking. As corporate law theorists have underscored, the differential treatment of business and legal risk is highly problematic from the perspective of firms and shareholders. To begin with, legal risk cannot be completely averted or eliminated. More importantly, …

The Uncertain Stewardship Potential Of Index Funds, Jill E. Fisch

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Regulators and commentators around the world are increasingly demanding that institutional investors engage in stewardship with respect to their portfolio companies. Further, the demand for stewardship has broadened from an expectation that investors engage to reduce agency costs and promote economic value to a call for investors to demand that companies serve a broader range of societal interests and objectives. This chapter considers calls for stewardship in the context of the U.S. capital markets specifically as applied to index funds. It argues that, irrespective of the merits of institutional stewardship generally, the structure of index funds and the business environment …

Stakeholderism, Corporate Purpose, And Credible Commitment, Lisa Fairfax

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One of the most significant recent phenomena in corporate governance is the embrace, by some of the most influential actors in the corporate community, of the view that corporations should be focused on furthering the interests of all corporate stakeholders as well as the broader society. This stakeholder vision of corporate purpose is not new. Instead, it has emerged in cycles throughout corporate law history. However, for much of that history—including recent history—the consensus has been that stakeholderism has not achieved dominance or otherwise significantly influenced corporate behavior. That honor is reserved for the corporate purpose theory that focuses on …

Stealth Governance: Shareholder Agreements And Private Ordering, Jill E. Fisch

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Corporate law has embraced private ordering -- tailoring a firm’s corporate governance to meet its individual needs. Firms are increasingly adopting firm-specific governance through dual-class voting structures, forum selection provisions and tailored limitations on the duty of loyalty. Courts have accepted these provisions as consistent with the contractual theory of the firm, and statutes, in many cases, explicitly endorse their use. Commentators too support private ordering for its capacity to facilitate innovation and enhance efficiency.

Private ordering typically occurs through firm-specific charter and bylaw provisions. VC-funded startups, however, frequently use an alternative tool – shareholder agreements. These agreements, which have …

Duty And Diversity, Chris Brummer, Leo E. Strine Jr.

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In the wake of the brutal deaths of George Floyd and Breonna Taylor, a slew of reforms from Wall Street to the West Coast have been introduced, all aimed at increasing Diversity, Equity, and Inclusion (“DEI”) in corporations. Yet the reforms face difficulties ranging from possible constitutional challenges to critical limitations in their scale, scope and degree of legal obligation and practical effects. In this Article, we provide an old answer to the new questions facing DEI policy, and offer the first close examination of how corporate law duties impel and facilitate corporate attention to diversity. Specifically, we show that …

Spactivism, Sharon Hannes, Adi Libson, Gideon Parchomovsky

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In this Essay, we propose a modified version of the SPAC designed to allow the public to participate in the world of corporate activism. Unlike existing SPACs, our version is designed for investments in public companies in order to change their course of action, not in private companies in order to make them go public, and overcomes many of the problems that pertain conventional SPACs. At present, direct investment in activism is reserved to affluent individuals and other professional investors of activist hedge funds. The public at large is barred from directly entering the activist arena. The current model comes …

The Supreme Court And The Pro-Business Paradox, Elizabeth Pollman

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One of the most notable trends of the Roberts Court is expanding corporate rights and narrowing liability or access to justice against corporate defendants. This Comment examines recent Supreme Court cases to highlight this “pro-business” pattern as well as its contradictory relationship with counter trends in corporate law and governance. From Citizens United to Americans for Prosperity, the Roberts Court’s jurisprudence could ironically lead to a situation in which it has protected corporate political spending based on a view of the corporation as an “association of citizens,” but allows constitutional scrutiny to block actual participants from getting information about …

Optimizing The World’S Leading Corporate Law: A 20-Year Retrospective And Look Ahead, Lawrence Hamermesh, Jack B. Jacobs, Leo E. Strine Jr.

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In a 2001 article (Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law) two of us, with important input from the other, argued that in addressing issues like hostile takeovers, assertive institutional investors, leveraged buyouts, and contested ballot questions, the Delaware courts had done exemplary work but on occasion crafted standards of review that unduly encouraged litigation and did not appropriately credit intra-corporate procedures designed to ensure fairness. Function Over Form suggested ways to make those standards more predictable, encourage procedures that better protected stockholders, and discourage meritless litigation, by restoring business judgment rule …

The “Value” Of A Public Benefit Corporation, Jill E. Fisch, Steven Davidoff Solomon

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We examine the “value” a PBC form provides for publicly-traded corporations. We analyze the structure of the PBC form and find that other than requiring a designated social purpose it does not differ significantly in siting control and direction with shareholders. We also examine the purpose statements in the charters of the most economically significant PBCs. We find that, independent of structural limitations on accountability, these purpose statements are, in most cases, too vague and aspirational to be legally significant, or even to serve as a reliable checks on PBC behavior. We theorize, and provide evidence, that without a legal …

Just Say Yes? The Fiduciary Duty Implications Of Directorial Acquiescence, Lisa Fairfax

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The rise in shareholder activism is one of the most significant recent phenomena in corporate governance. Shareholders have successfully managed to enhance their power within the corporation, and much of that success has resulted from corporate managers and directors voluntarily acceding to shareholder demands. Directors’ voluntary acquiescence to shareholder demands is quite simply remarkable. Remarkable because most of the changes reflect policies and practices that directors have vehemently opposed for decades, and because when opposing such changes directors stridently insisted that the changes were not in the corporation’s best interest. In light of that insistence, and numerous statements from directors …

Lifting Labor’S Voice: A Principled Path Toward Greater Worker Voice And Power Within American Corporate Governance, Leo E. Strine Jr., Aneil Kovvali, Oluwatomi O. Williams

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In view of the decline in gain sharing by corporations with American workers over the last forty years, advocates for American workers have expressed growing interest in allowing workers to elect representatives to corporate boards. Board level representation rights have gained appeal because they are a highly visible part of codetermination regimes that operate in several successful European economies, including Germany’s, in which workers have fared better.

But board-level representation is just one part of the comprehensive codetermination regulatory strategy as it is practiced abroad. Without a coherent supporting framework that includes representation from the ground up, as is provided …

Reversing The Fortunes Of Active Funds, Adi Libson, Gideon Parchomovsky

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In 2019, for the first time in the history of U.S. capital markets, passive funds surpassed active funds in terms of total assets under management. The continuous growth of passive funds at the expense of active funds is a genuine cause for concern. Active funds monitor the management and partake of decision-making in their portfolio companies. Furthermore, they improve price efficiency and managerial performance by engaging in informed trading. The buy/sell decisions of active funds provide other market participants reliable information about the quality of firms. The cost of active investing is significant and it is exclusively borne by active …

The Corporation As Trinity, David A. Skeel Jr.

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In “Corporate Capitalism and ‘The City of God,’” Adolf Berle references Augustine’s theological classic The City of God in service of his contention that corporate managers have a social responsibility. In this Article, I turn to another work by Augustine, The Trinity, for insights into another feature the corporation, corporate personhood. The Trinity explicates the Christian belief that God is both three and one. I argue that corporations have analogously Trinitarian qualities. Much as theologically orthodox Christians understand God to be both one and three, I argue that corporations are best seen as both a single entity and through …

Should Corporations Have A Purpose?, Jill E. Fisch, Steven Davidoff Solomon

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Corporate purpose is the hot topic in corporate governance. Critics are calling for corporations to shift their purpose away from shareholder value as a means of addressing climate change, equity and inclusion, and other social values. We argue that this debate has overlooked the critical predicate questions of whether a corporation should have a purpose at all and, if so, what role it serves.

We start by exploring and rejecting historical, doctrinal, and theoretical bases for corporate purpose. We challenge the premise that purpose can serve a useful function either as a legal constraint on managerial discretion or as a …

The History And Revival Of The Corporate Purpose Clause, Elizabeth Pollman

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The corporate purpose debate is experiencing a renaissance. The contours of the modern debate are relatively well developed and typically focus on whether corporations should pursue shareholder value maximization or broader social aims. A related subject that has received much less scholarly attention, however, is the formal legal mechanism by which a corporation expresses its purpose—the purpose clause of the corporate charter. This Article examines corporate purpose through the evolution of corporate charters. Starting with historic examples ranging from the Dutch East India Company to early American corporations and their modern 21st century parallels, the discussion illuminates how corporate purpose …

The Corporate Governance Machine, Dorothy S. Lund, Elizabeth Pollman

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The conventional view of corporate governance is that it is a neutral set of processes and practices that govern how a company is managed. We demonstrate that this view is profoundly mistaken: in the United States, corporate governance has become a “system” composed of an array of institutional players, with a powerful shareholderist orientation. Our original account of this “corporate governance machine” generates insights about the past, present, and future of corporate governance. As for the past, we show how the concept of corporate governance developed alongside the shareholder primacy movement. This relationship is reflected in the common refrain of …

Corporate Law For Good People, Yuval Feldman, Adi Libson, Gideon Parchomovsky

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This article offers a novel analysis of the field of corporate governance by viewing it through the lens of behavioral ethics. It calls for both shifting the focus of corporate governance to a new set of loci of potential corporate wrongdoing and adding new tools to the corporate governance arsenal. The behavioral ethics scholarship emphasizes the large share of wrongdoing generated by "good people" whose intention is to act ethically. Their wrongdoing stems from "bounded ethicality" -- various cognitive and motivational processes that lead to biased decisions that seem legitimate. In the legal domain, corporate law provides the most fertile …

Caremark And Esg, Perfect Together: A Practical Approach To Implementing An Integrated, Efficient, And Effective Caremark And Eesg Strategy, Leo E. Strine Jr., Kirby M. Smith, Reilly S. Steel

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With increased calls from investors, legislators, and academics for corporations to consider employee, environmental, social, and governance factors (“EESG”) when making decisions, boards and managers are struggling to situate EESG within their existing reporting and organizational structures. Building on an emerging literature connecting EESG with corporate compliance, this Essay argues that EESG is best understood as an extension of the board’s duty to implement and monitor a compliance program under Caremark. If a company decides to do more than the legal minimum, it will simultaneously satisfy legitimate demands for strong EESG programs and promote compliance with the law. Building …

Stewardship 2021: The Centrality Of Institutional Investor Regulation To Restoring A Fair And Sustainable American Economy, Leo E. Strine Jr.

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In this essay, which formed the basis for the luncheon keynote speech at the Rethinking Stewardship online conference presented by the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School and ECGI, the European Corporate Governance Institute, the essential, but not sufficient, role of regulation to promote more effective stewardship by institutional investors is discussed. To frame specific policy recommendations that align the responsibilities of institutional investors with the best interests of their human investors in sustainable wealth creation, environmental responsibility, the respectful treatment of stakeholders, and, in particular, the fair pay and treatment of …

Fiduciary Law And The Preservation Of Trust In Business Relationships, Brian J. Broughman, Elizabeth Pollman, D. Gordon Smith

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This chapter explores the role of mandatory fiduciary obligations in preserving trust between business parties. Because contracts are inevitably incomplete, after investment there is always a risk of opportunism. While the parties could try to draft a more detailed agreement prohibiting various forms of opportunism, the very act of haggling over such protections may signal distrust, eliciting costly reactions (defensive measures/hedging/lack of intrinsic motivation) in the counterparty. In the absence of fiduciary protections, a vulnerable party may decide to forgo important protections against opportunism, not because such protections are suboptimal or hard to specify ex ante but because bargaining for …

Implicit Communication And Enforcement Of Corporate Disclosure Regulation, Ashiq Ali, Michael T. Durney, Jill E. Fisch, Hoyoun Kyung

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This study examines the challenge of implicit communication -- qualitative statements, tone, and non-verbal cues -- to the effectiveness of enforcing corporate disclosure regulation. We use a Regulation Fair Disclosure (Reg FD) setting, given that the SEC adopted the regulation recognizing that managers can convey non-public information privately not just through explicit quantitative disclosures but also through implicit communication. In a high-profile enforcement action, however, the court focused on a literal examination of the manager’s language rather than his positive spin to conclude that the SEC had been “too demanding” in examining the manager’s statements and that its enforcement policy …

Management-Based Regulation, Cary Coglianese, Shana M. Starobin

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Environmental regulators have embraced management-based regulation as a flexible instrument for addressing a range of important problems often poorly addressed by other types of regulations. Under management-based regulation, regulated firms must engage in management-related activities oriented toward addressing targeted problems—such as planning and analysis to mitigate risk and the implementation of internal management systems geared towards continuous improvement. In contrast with more restrictive forms of regulation which can impose one-size-fits-all solutions, management-based regulation offers firms greater operational choice about how to solve regulatory problems, leveraging firms’ internal informational advantage to innovate and search for alternative measures to achieve the intended …

Defined Contribution Plans And The Challenge Of Financial Illiteracy, Jill E. Fisch, Annamaria Lusardi, Andrea Hasler

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Retirement investing in the United States has changed dramatically. The classic defined-benefit (DB) plan has largely been replaced by the defined contribution (DC) plan. With the latter, individual employees’ decisions about how much to save for retirement and how to invest those savings determine the benefits available upon retirement.

We analyze data from the 2015 National Financial Capability Study to show that people whose only exposure to investment decisions is by virtue of their participation in an employer-sponsored 401(k) plan are poorly equipped to make sound investment decisions. Specifically, they suffer from higher levels of financial illiteracy than other investors. …

Toward Fair And Sustainable Capitalism: A Comprehensive Proposal To Help American Workers, Restore Fair Gainsharing Between Employees And Shareholders, And Increase American Competitiveness By Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth And Encouraging Investments In America’S Future, Leo E. Strine Jr.

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To promote fair and sustainable capitalism and help business and labor work together to build an American economy that works for all, this paper presents a comprehensive proposal to reform the American corporate governance system by aligning the incentives of those who control large U.S. corporations with the interests of working Americans who must put their hard-earned savings in mutual funds in their 401(k) and 529 plans. The proposal would achieve this through a series of measured, coherent changes to current laws and regulations, including: requiring not just operating companies, but institutional investors, to give appropriate consideration to and make …

The Reverse Agency Problem In The Age Of Compliance, Asaf Eckstein, Gideon Parchomovsky

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The agency problem, the idea that corporate directors and officers are motivated to prioritize their self-interest over the interest of their corporation, has had long-lasting impact on corporate law theory and practice. In recent years, however, as federal agencies have stepped up enforcement efforts against corporations, a new problem that is the mirror image of the agency problem has surfaced—the reverse agency problem. The surge in criminal investigations against corporations, combined with the rising popularity of settlement mechanisms including Pretrial Diversion Agreements (PDAs), and corporate plea agreements, has led corporations to sacrifice directors and officers in order to reach settlements …

Making Sustainability Disclosure Sustainable, Jill E. Fisch

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Sustainability is receiving increasing attention from issuers, investors and regulators. The desire to understand issuer sustainability practices and their relationship to economic performance has resulted in a proliferation of sustainability disclosure regimes and standards. The range of approaches to disclosure, however, limit the comparability and reliability of the information disclosed. The Securities & Exchange Commission (SEC) has solicited comment on whether to require expanded sustainability disclosures in issuer’s periodic financial reporting, and investors have communicated broad-based support for such expanded disclosures, but, to date, the SEC has not required general sustainability disclosure.

This Article argues that claims about the relationship …

Social Activism Through Shareholder Activism, Lisa Fairfax

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In 1952, the SEC altered the shareholder proposal rule to exclude proposals made “primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes.” The SEC did not reference civil rights activist James Peck or otherwise acknowledge that its actions were prompted by Peck’s 1951 shareholder proposal to Greyhound for desegregating seating. Instead, the SEC indicated that its change simply reflected a codification of a position the SEC staff had taken in 1945.

Today, the shareholder proposal rule has evolved, giving way to several amendments that now enable shareholders to submit proposals on the proxy statement …