By Brea Hinricks
Over the last fifty years, the concept of “shareholder primacy” espoused by the Friedman Doctrine has been the dominant view of the purpose of business. Under this model, the singular social responsibility of business is to maximize profits for shareholders, constrained only by the limits of laws and regulations.
Lately, however, the Friedman Doctrine is starting to show cracks—academics, politicians, and even business leaders are questioning whether it should be abandoned for a “stakeholder” model in which the interests of non-shareholder constituencies (e.g., employees, customers, debtholders, the company itself, and the community in which it operates) are considered and balanced alongside the sole pursuit of profits.
When considering the practical legal realities of implementing the stakeholder model in the United States, one question looms large: Does Delaware law allow for this type of long-term stakeholder governance? Should it? Given the prominence and influence of Delaware corporate law, the answer to this question is paramount. On May 16, 2019, the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School and Gibson Dunn convened a group of academics, business leaders, and legal practitioners to discuss the current state of Delaware law and debate whether it allows or could be headed toward a more stakeholder-centric model.
In his 2015 article, “The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law,” Delaware Supreme Court Chief Justice Leo Strine argues that Delaware law is clear: shareholder primacy is the law of the land. Although the law allows corporate managers and boards to consider the interests of stakeholders as a means toward increasing long-term shareholder value, they may never prioritize the interests of employees, the company itself, or any others above the interests of shareholders. All decisions must in some way tie back to the fundamental goal of long-term shareholder value, and this justification must be reflected in the record.
The legal basis for Strine’s view ties back to caselaw. In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the Delaware courts indicated that directors generally have a duty to (as Strine summarizes it) “maximize value for (hypothetical) stockholders who have entrusted their capital to the firm indefinitely.” Solidifying the legal status of shareholder primacy even further, in eBay Domestic Holdings, Inc. v. Newmark the Delaware courts held that craigslist founder Craig Newmark breached his fiduciary duties by proclaiming his desire to run the company for the benefit of craigslists’ community of consumers rather than its shareholders. The opinion explained that, having opted to organize the company as a standard for-profit Delaware corporation, Newmark was required to maximize the value of the company for the benefit of shareholders above all else.
Roundtable participants generally agreed with Strine’s view of the law on shareholder primacy, although they varied in their opinions about how constraining Delaware’s rules are in practice. Though they agreed that it is necessary to tie considerations of stakeholder value back to long-term profits, many acknowledged that there is broad room within the business judgment rule to make these sorts of determinations in a way that takes into account stakeholders’ interests as well. Indeed, one commentator pointed out that the robust amounts of charitable giving by corporations clearly demonstrates this flexibility, since there is no direct and immediate link between charitable giving and increased profits. Strine himself recently commented at the Millstein Center’s Counter-Narratives Conference that there is no Delaware case which says that boards of directors cannot allocate a robust share of a company’s prosperity to workers through increased pay.
Despite this flexibility under the current shareholder primacy regime, many experts in the room agreed that in situations where employees’ or other stakeholders’ interests are at odds with maximizing shareholder value, shareholders must ultimately win the day. For instance, when considering bids for the purchase of a company in an acquisition, directors would not be able to forego a higher sale price from a bidder who planned to fire all employees in favor of a lower bidder whose plans would leave employees better off. According to some in the room, these types of situations precisely demonstrate the problems inherent in a shareholder primacy model.
Given the general agreement among participants on the current state of Delaware law, the more interesting debate may be whether the law should change in order to accommodate a stakeholder model. Delaware currently allows for “public benefit corporations” (or “PBCs”), for-profit corporations that must also state a public purpose to which they are committed, and whose directors must balance the pecuniary interests of shareholders with that public purpose and the best interests of those materially affected by the corporation’s conduct. But there are limits to the PBC model. One commentator pointed out that if an established company wishes to convert to a PBC, there may be a credible threat of litigation based on claims of misrepresentations in prior SEC filings which stated the company planned to operate as a standard, purely for-profit corporation. In addition, the PBC rules do not allow directors to prioritize the interests of non-shareholder constituencies; instead, they must balance their interests with those of the shareholders. Rather than allowing directors to fully adopt a broad stakeholder model, many view the PBC form as merely a shield against potential shareholder litigation.
In addition to the limits of the PBC rules, some participants highlighted a politically rooted reason why Delaware law perhaps ought to change to allow for stakeholder governance. They explained that capitalism is under attack in an unprecedented way and that business is being blamed for much of the wealth and income inequality in the U.S. today. At the same time, many view the government as failing to deliver on society’s needs, and increasingly they are looking to businesses to help fill the gap by serving social purposes. One commentator noted that corporations were originally conceived as existing in order to serve some social purpose (a point that Professor Colin Mayer of Oxford’s Saïd Business School has also emphasized), and that their perpetual legal existence is partially justified by serving such purposes. Under this view, if companies continue to move away from this model towards the pure pursuit of profits, then the capitalist system as it currently exists will be challenged and eventually break down.
On the other side of the debate, some participants were extremely wary of the potential consequences of a broad stakeholder primacy model. One pragmatic concern is that robust capital formation depends on the guarantee of shareholder wealth maximization. After all, investors are unlikely to part with their resources if they are not promised at least a company’s best efforts towards providing a return on their investment. The economic health of the U.S., according to this view, would be damaged if Delaware law allowed companies to deviate from their primary duties to provide value to shareholders. Others pointed out that corporate directors, a group that mostly consists of upper class elite and lacks gender, race, and other types of diversity, are not in the best position to decide how to serve the bests interests of society, especially when the mechanisms for holding them accountable under a stakeholder governance model are not clearly defined. Instead, the argument goes, only those elected through the democratic process and accountable to the electorate should have this power. Corporate law was designed to protect shareholders, and so perhaps it is not the best mechanism to address the problems facing society today.
Finally, the group considered how ESG—the broad and burgeoning area of environmental, social, and governance criteria for investing—affects the debate, since many view these factors as a way to prioritize the interests of other stakeholders alongside shareholder value. Many in the group believe that businesses primarily view the consideration of ESG factors as providing downside risk protection for shareholders. For instance, many believe that considering environmental factors (at a company-level, a systemic level, or both) is essential to the long-term prosperity (and even existence) of their companies. This lens through which to view ESG seems generally consistent with the current state of Delaware law, which considers stakeholders’ interests as a means to ensure long-term shareholder value. However, other participants questioned whether ESG criteria, at least in their current state, truly have a connection to shareholder value and profits. Instead, they believe that ESG as it stands is often a form of “greenwashing,” perhaps making the company appear more favorable to stakeholders but at the expense of delivering value to shareholders.
While there seems to be general agreement on the current state of Delaware law vis-à-vis shareholder primacy, there is much disagreement and debate about whether it will (and should) endure. The very existence of this debate perhaps signals an impending shift in the law, but we are far from a clear path forward. We at the Millstein Center believe that it is essential to continue this important discussion, and we look forward to exploring this topic further as part of our Counter-Narratives Project.
 Strine, Leo E. Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761 (2015).