Does (and Should) Delaware Law Allow “Long Term Stakeholder Governance”?

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.[1] 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.

[1] 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).

Mark Roe on Leo Strine and the Big Picture: Is Short-Termism Really to Blame?

Editor’s Note: This post is part of an ongoing multi-part series covering the Millstein Center’s March 1, 2019 conference, “Corporate Governance ‘Counter-narratives’: On Corporate Purpose and Shareholder Value(s).”

By Brea Hinricks

In his remarks at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s), Delaware Supreme Court Chief Justice Leo Strine argued that a major issue facing public corporations and capitalism today is that they are failing to work for the average person (a recurring theme in the Chief Justice’s recent writings).

Mark Roe, in reflecting on Strine’s work for the conference, identified another main narrative espoused by Strine: that “short-termism” is a deep problem which is damaging the U.S. economy. Indeed, the short-termism story is pointed to by many in the legal, political, and business realms as a major threat to economic prosperity. Commentators from Joe Biden to Warren Buffet and Jamie Dimon have argued that there is a problematic pressure on companies to prioritize short-term profits over long-term, sustained growth, in part due to more intense focus from activist investors.

Despite this widespread rhetoric, Roe argues that economy-wide data simply doesn’t provide clear support for the short-termism story. He identifies four main trends often put forth as evidence of the bad economic effects of stock market short-termism:

  1. cutbacks in capital expenditures;
  2. stock buybacks which starve firms of cash;
  3. reduced R&D investment resulting from the lack of cash (which, in turn, reduces employee welfare); and
  4. a U.S. stock market that does not support longer-term innovation.

Continue reading Mark Roe on Leo Strine and the Big Picture: Is Short-Termism Really to Blame?

Chief Justice Leo Strine on Berle, Friedman, and Corporate Purpose

Editor’s Note: This post is part of an ongoing multi-part series covering the Millstein Center’s March 1, 2019 conference, “Corporate Governance ‘Counter-narratives’: On Corporate Purpose and Shareholder Value(s).”

By Brea Hinricks

A lot has changed in the U.S. since Adolf Berle made his case for shareholder primacy in the early 1930s, and since the Friedman Doctrine rose to power thirty years later. Starting in Berle’s time, robust protections for employees came about as a result of the New Deal (passed thanks in part to Berle’s participation) and the rise of labor unions. Employees had enough bargaining power to ensure that they were treated fairly by their employers and were still protected in an environment that extolled the sole pursuit of profits.

Today, says Chief Justice Leo Strine of the Delaware Supreme Court, the Friedman Doctrine and the sole pursuit of profits within the “rules of the game” seems extreme. But in the context of Friedman’s day, where these substantial worker protections were in place and the “rules” were quite robust, it made sense for enterprise to “stick to its knitting” and leave social protections for the realm of government and regulation.

Chief Justice Strine made these observations at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s). (You can find an audio recording of his full remarks here.) He highlighted a very different reality facing today’s workers. Globalization, he points out, has given companies the ability to outsource labor to lower-paid and worse-protected workers abroad, and has allowed companies to forego providing benefits to their employees (if they are considered employees at all). Workers have worse job security today than they once did, especially due to automation-related layoffs. Companies create fewer jobs in the communities in which they operate, weakening their social ties and the informal expectation for companies to “give back” at the local level. Today, only a relatively miniscule number of private sector workers belong to labor unions. The “rules of the game” look very different than they did in Friedman’s day.

Continue reading Chief Justice Leo Strine on Berle, Friedman, and Corporate Purpose

The Government ‘Match’ to High-Powered Corporate Governance

Editor’s Note: This post is part of an ongoing multi-part series covering the Millstein Center’s March 1, 2019 conference, “Corporate Governance ‘Counter-narratives’: On Corporate Purpose and Shareholder Value(s).”

By Brea Hinricks

Professor Jeff Gordon presents his argument for addressing the economic insecurity faced by today’s employees—a robust government investment program in human capital to subsidize employee retraining and reeducation.

Capitalism and corporate purpose have evolved over the last half century to become increasingly and more narrowly focused on profits and shareholder value. The Friedman Doctrine has firmly taken hold. At the same time, the rise of global product and capital markets have subjected firms to increased competitive pressures, and domestic disrupters in the U.S. such as Walmart, Amazon, Netflix, and the large tech companies have transformed entire industries and resulted in a more dynamic and less predictable domestic economy. The rise of asset managers and index funds have allowed shareholders to hold globally diversified equity portfolios at a low cost. A “high-powered” corporate governance regime has emerged in which managerial performance is closely monitored through shareholder value metrics, and activists tolerate only minuscule amounts of slack. Firms are encouraged to engage in more risk-taking and less diversification of cashflows at the firm level (which is inefficient given shareholders’ diversified portfolios across firms), resulting in shorter company lifespans.

Continue reading The Government ‘Match’ to High-Powered Corporate Governance

Corporate Purpose, The New Paradigm, and Unintended Consequences

A panel discussion with Colin Mayer, Mats Isaksson, Martin Lipton, and Ron Gilson at the Millstein Center’s Counter-Narratives Conference.

Editor’s Note: This post is part of an ongoing multi-part series covering the Millstein Center’s March 1, 2019 conference, “Corporate Governance ‘Counter-narratives’: On Corporate Purpose and Shareholder Value(s).”

By Brea Hinricks

In his recent book, Prosperity: Better Business Makes the Greater Good, Oxford Professor Colin Mayer lays out a framework for radically reconceptualizing business for the 21st century. At the core of his argument is the idea that the purpose of business is not solely to make profits, but to “produce profitable solutions to the problems of people and planet, and in the process it produces profits.”

Mayer’s proposed law and policy reforms, which he detailed in his remarks at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s), would aim to incentivize companies to create and deliver on a corporate purpose that transcends profit alone. (We discuss Colin’s presentation in greater detail here.)

Mayer debated these ideas during a panel discussion with Mats Isaksson, Head of the Corporate Affairs Division at the OECD, Martin Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz LLP, and Ron Gilson, Professor of Law at Columbia Law School and Stanford Law School. (A full recording of Mayer’s remarks and this panel discussion is available here.)

Continue reading Corporate Purpose, The New Paradigm, and Unintended Consequences

Colin Mayer’s ‘Prosperity’ and the Future of the Corporation

Editor’s Note: This post is part of an ongoing multi-part series covering the Millstein Center’s March 1, 2019 conference, “Corporate Governance ‘Counter-narratives’: On Corporate Purpose and Shareholder Value(s).”

By Brea Hinricks


In the more than fifty years since the enshrinement of the Friedman doctrine as fundamental business canon, the conventional view has been that the singular purpose of a corporation is to increase profits (and therefore, shareholder value) to the maximum extent possible within the rules of the game. Oxford Professor Colin Mayer (and more than 30 other academics who collaborated with him on the British Academy’s Future of the Corporation project) would like that to change.

Under the Friedman doctrine, corporations have been a source of great economic prosperity and growth, but also great inequality and environmental degradation. As companies have become increasingly focused on profits and detached from a broader public purpose, Mayer says, they have engendered in society a “profound, pervasive, and persistent” distrust of business leaders and corporations.

In his work on the Future of the Corporation and in his recent book, Prosperity: Better Business Makes the Greater Good, Mayer seeks to determine how business needs to change over the coming decades in order to address this distrust, ameliorate inequality and environmental impacts, and grapple with the many other social, political, and economic challenges we face today. Mayer presented his views at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s). (A full recording is available here.)

Mayer proposes an alternative, alliterative, and, to some, radical theory of the purpose of business: rather than producing profits for their own sake, “[t]he purpose of business is to produce profitable solutions to the problems of people and planet, and in the process it produces profits.” While this “counter-narrative” is certainly a significant departure from the Friedman doctrine, Mayer argues that it is hardly a novel concept. He points out that corporations were originally established under Roman law to undertake public functions such as collecting taxes, minting coins, and building infrastructure. It is only over the last 60 years that the Friedman doctrine and shareholder primacy have taken hold, and public purposes have become detached from the corporation.

The purpose of business is to produce profitable solutions to the problems of people and planet, and in the process it produces profits.

Continue reading Colin Mayer’s ‘Prosperity’ and the Future of the Corporation

Corporate Governance “Counter-Narratives”: Remarks by Ira M. Millstein

Opening remarks from Ira M. Millstein presented at the Millstein Center’s March 1, 2019 conference, Corporate Governance “Counter-narratives”: On Corporate Purpose and Shareholder Value(s)

While I wish I could personally be with all of you today, I am pleased that so many of you are here to discuss this very important topic.

Today we live, and work, in a very complex and constantly evolving capital market system filled with uncertainty―political uncertainty and economic uncertainty. This means that corporations need to be able to evolve with the changing times.

The corporation has three legs―management, the board of directors and shareholders. Management’s role has been vital from the beginning as the engine of corporate performance, at one time in control. Boards, once passive, are now embracing a more active role in oversight and planning. Over the past decade, a coalescence of economic power has reinvigorated shareholders to become actively involved. Once faceless, groupings of shareholders of different varieties now have more significant concentrated power, particularly the ability and inclination to wield considerable influence over the corporation through its directors.

Today’s reality is that shareholders play a critical role in the longevity of a company. They are the capital on which the corporation thrives. Corporations cannot turn a blind eye to shareholders or their demands for faster and visible so-called shareholder value. Continue reading Corporate Governance “Counter-Narratives”: Remarks by Ira M. Millstein

How My Board Made Me a Better CEO

Editor’s Note: This piece was written in July 2018. 

By William E. McCracken with Jonathan B. Kim

When Bill McCracken joined CA, Inc. (NASDAQ: CA) crisis management was at the forefront. The company was recovering from a serious case of fraudone that called into question the organization’s future. During his initial tenure as Chairman, Bill’s primary concern was rebuilding the company’s board. Later, as CEO, the course CA charted would shape his view on activist board governance.

Sometimes an experienced coach needs all the backing he can get to turn the fortunes of a struggling team. In 2005, I joined the Board of Directors of CA after 36 years at IBM. Shortly thereafter I was elevated to Non-Executive Chairman. At the time the company was operating under the burden of a deferred prosecution agreement with the U.S. Department of Justice, including an outside monitor to oversee its compliance.

I quickly realized we were at a critical stage in the never-ending lifecycle of the board. As a result of mandatory retirements and term limits, nearly half of our directors had departed or were reaching the end of their tenures.

Continue reading How My Board Made Me a Better CEO