STARK CHOICES FOR CORPORATE REFORM

For decades, corporate law scholars insisted on a simple division of responsibilities. Corporations were told to focus exclusively on maximizing financial returns to shareholders while the government tended to all other concerns by adopting new regulations. As reformers challenged this orthodoxy by urging corporations to take action on pressing social problems, defenders of the status quo have responded by suggesting that these efforts could be dangerous. In their view, internal corporate governance reforms could interfere with the adoption of external governmental regulations that would be more effective. The hypothesis that reformers face a stark choice between pursuing internal corporate changes and pursuing new external regulations is playing an increasingly important role in the corporate law literature, but it has not been subjected to meaningful analysis.

This Article seeks to fill that gap. After isolating the “stark choice” hypothesis, the Article unpacks and challenges the assumptions that drive it. There is no clear constraint that forces a choice between internal and external reforms, and there are good reasons to believe that an internal strategy is more likely to generate valuable change. Internal reforms can also lay the groundwork for external reforms as corporations cease to resist or even come to actively support new regulations. Analyzing these dynamics can yield new insights into efforts to improve corporate outcomes on issues like racial justice and climate change.

The full text of this Article can be found by clicking the PDF link to the left.

* Associate Professor, Indiana University Maurer School of Law, Bloomington. I thank Douglas Baird, Dhammika Dharmapala, Lee Fennell, William H.J. Hubbard, Hajin Kim, Saul Levmore, Yair Listokin, Joshua Macey, Richard McAdams, Elizabeth Pollman, and participants in workshops at the Indiana University Maurer School of Law, the University of Chicago Law School, and the National Business Law Scholars Conference for helpful comments and conversations. All remaining errors are my own.

Introduction

Corporate law has been wracked by a decades-long debate. A majority of academics and practitioners support shareholder primacy, the view that corporations exist solely to generate financial returns for shareholders. But an increasingly vocal minority support stakeholder governance, the view that corporate leaders should consider the interests of a broader range of stakeholders, including workers, consumers, and members of surrounding communities. Shareholder primacy theorists have long claimed that stakeholder governance would be costly or ineffective in advancing the interests of stakeholders. But they have recently escalated their attacks by insisting that stakeholder governance rhetoric is potentially dangerous to stakeholders: Eminent commentators have suggested that adopting corporate governance measures to promote stakeholder interests could “derail,” “crowd out,” “impede,” “cannibalize,” or otherwise prevent governmental reforms and regulations that would do more to advance stakeholders’ interests. 1 See, e.g., Lucian A. Bebchuk, Kobi Kastiel & Roberto Tallarita, For Whom Corporate Leaders Bargain, 93 S. Cal. L. Rev. 1467, 1471 (2021) (“[A]cceptance of stakeholderism would be counterproductive: rather than protecting stakeholders, stakeholderism would serve the private interests of corporate leaders by increasing their insulation from shareholder oversight and would raise illusory hopes that could deflect pressures to adopt laws and regulations protecting stakeholders.”); Lucian A. Bebchuk & Roberto Tallarita, The Illusory Promise of Stakeholder Governance, 106 Cornell L. Rev. 91, 171–78 (2020) [hereinafter Bebchuk & Tallarita, Illusory Promise] (“Stakeholderism Would Impede Reforms . . . .”); Lucian A. Bebchuk & Roberto Tallarita, Will Corporations Deliver Value to All Stakeholders?, 75 Vand. L. Rev. 1031, 1086 (2022) (suggesting that corporate pledges to support stakeholders are “counterproductive” because they “deflect outside pressures to adopt governmental measures that would truly serve stakeholders”); Matteo Gatti & Chrystin Ondersma, Can a Broader Corporate Purpose Redress Inequality? The Stakeholder Approach Chimera, 46 J. Corp. L. 1, 63–70 (2020) [hereinafter Gatti & Ondersma, Stakeholder Approach Chimera] (“A Stakeholder Approach Is Likely Detrimental to Redressing Inequality . . . .”); Matteo Gatti & Chrystin Ondersma, Stakeholder Syndrome: Does Stakeholderism Derail Effective Protections for Weaker Constituencies?, 100 N.C. L. Rev. 167, 170 (2021) (describing “concerns over the fact that stakeholderism could be used as both a shield and a sword: corporations could use it to defend the status quo and interfere with opportunities to achieve reforms that would shift power and resources to weaker constituencies via direct regulation”); Mark J. Roe & Roy Shapira, The Power of the Narrative in Corporate Lawmaking, 11 Harv. Bus. L. Rev. 233, 267 (2021) (suggesting that the “short-termism” narrative could “Crowd Out Good Policymaking”). For a similar set of claims in the popular press, see Kim Phillips-Fein, Opinion, I Wouldn’t Bet on the Kind of Democracy Big Business Is Selling Us,
N.Y. Times (Feb. 1, 2022), https://www.nytimes.com/2022/02/01/opinion/corporations-democracy.html (on file with the Columbia Law Review) (“The ideal of an easy symbiosis between public and private sectors would undermine the kinds of political mobilizations, however difficult to organize and enact, that are needed for reform that benefits most Americans.”); Cam Simpson, Akshat Rathi & Saijel Kishan, The ESG Mirage, Bloomberg (Dec. 10, 2021), https://www.bloomberg.com/graphics/2021-what-is-esg-investing-msci-ratings-focus-on-corporate-bottom-line/ [https://perma.cc/W8CU-RJJ6] (reporting sentiment that “the emphasis on” environmental, social, and governance (ESG) concerns at corporations “has delayed and displaced urgent action needed to tackle the climate crisis and other issues”); Tunku Varadarajan, Opinion, Can Vivek Ramaswamy Put Wokeism Out of Business?, Wall St. J. (.June 25, 2021), https://www.wsj.com/articles/can-vivek-ramaswamy-put-wokeism-out-of-business-11624649588 (on file with the Columbia Law Review) (suggesting that corporations have offered “woke” arguments on issues that are not central to their operations to distract from issues that are central). Similar concerns have also begun to affect the debate over Professor Jack Balkin’s “information fiduciaries” proposal, in which companies like Meta would have an obligation to use user data in ways that advance user interests. See Lina M. Khan & David E. Pozen, A Skeptical View of Information Fiduciaries, 133 Harv. L. Rev. 497, 537 (2019) (“[W]e suspect that the fiduciary approach, if pursued with any real vigor, would tend to cannibalize rather than complement procompetition reforms.”).

Somewhat more subtly, former Delaware Chief Justice Leo E. Strine, Jr. has suggested that current corporate law does not allow meaningful consideration of stakeholder interests and that misunderstanding this aspect of current corporate law could impede the adoption of external and internal reforms. Leo E. Strine, Jr., Corporate Power Is Corporate Purpose I: Evidence From My Hometown, 33 Oxford Rev. Econ. Pol’y 176, 177 (2017) [hereinafter Strine, Corporate Power] (arguing that “scholars and commentators obscure the need for legal protections for . . . constituencies” other than shareholders by suggesting that corporate boards are empowered to treat the interests of these other stakeholders as equal to shareholder interests); see also Leo E. Strine, 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, 767 (2015) [hereinafter Strine, Dangers of Denial] (“It is not only hollow but also injurious to social welfare to declare that directors can and should do the right thing by promoting interests other than stockholder interests.”). Chief Justice Strine’s position suggests that certain pathways to internal reform—such as advocating for corporate consideration of stakeholder interests without pressing for legal changes—could endanger external reforms.

The hypothesis that reformers face a stark choice between internal corporate governance reforms and external regulations plays an important role in the case against stakeholder governance. 2 This Article generally uses the term “internal” to refer to the bodies and processes that a corporation uses to make decisions and “external” to refer to the rules that shape the context within which decisions are made. To improve outcomes for workers, for example, an internal strategy might involve a company (or government) providing for worker representation on the board of directors, while an external strategy might involve the government raising the minimum wage. However, there is no bright line between these categories, and some policies defy easy categorization. For example, policies that boost unionization are readily categorized as external because unions typically bargain with the corporation at arm’s length. But unions also affect internal governance: Workers are arguably just as internal to the corporation as shareholders; unions sometimes make use of internal processes, like leveraging their stock holdings, to achieve their objectives; and union processes for aggregating worker preferences and taking positions are arguably part of a corporation’s decisionmaking process. It is also possible for an external process to dictate internal policies, as when legislatures mandate particular corporate governance arrangements. Workers and other stakeholder constituencies have plainly suffered in the past few decades. 3 See, e.g., Anna Stansbury & Lawrence H. Summers, The Declining Worker Power Hypothesis: An Explanation for the Recent Evolution of the American Economy, Brookings Papers on Econ. Activity, Spring 2020, at 1, 63. Stakeholder governance is a movement born of desperation over the plight of these constituencies and pessimism about the likelihood of effective and helpful government intervention. The “stark choice” hypothesis seeks to play one concern against the other.

It is also one of the few arguments for shareholder primacy that would resonate with people focused on stakeholder interests. Critics of stakeholder-governance–based reforms sometimes claim that such initiatives may be destructive because they would create obstacles to corporate acquisitions and other transactions that could generate economic value. 4 See, e.g., Bebchuk & Tallarita, Illusory Promise, supra note 1, at 164–68; Gatti & Ondersma, Stakeholder Approach Chimera, supra note 1, at 63–64 & n.365 (articulating the concern that a stakeholder approach will “take us back to managerialism and empire building,” which stands in stark contrast to the shareholder primacy approach that “helped spur growth and efficiency at corporations”). But stakeholder governance theorists are likely to accept some loss of economic value to deliver benefits to stakeholders. 5 Cf. Lee Anne Fennell & Richard H. McAdams, The Distributive Deficit in Law and Economics, 100 Minn. L. Rev. 1051, 1071–72 (2016) [hereinafter Fennell & McAdams, Distributive Deficit] (noting that different social welfare functions may weigh distributive gains and efficiency differently). Only a threat to stakeholder interests is likely to be persuasive. Similarly, critics of stakeholder governance claim that it may not deliver the intended benefits. 6 Bebchuk & Tallarita, Illusory Promise, supra note 1, at 94; Gatti & Ondersma, Stakeholder Approach Chimera, supra note 1, at 9. But that concern alone is not a reason to preclude experimentation with these reforms, especially after decades of shareholders enjoying outsized gains and other corporate constituencies suffering deeply, while external regulators did little to help. 7 See Aneil Kovvali & Leo E. Strine, Jr., The Win-Win That Wasn’t: Managing to the Stock Market’s Negative Effects on American Workers and Other Corporate Stakeholders, 1 U. Chi. Bus. L. Rev. 307, 324–34 (2022) (discussing the failure of corporate law and external regulations to advance the interests of nonshareholder constituencies). To explain why stakeholder governance should not be pursued, shareholder primacy theorists must argue that it would be risky to try. The stark choice hypothesis plays that necessary role in the rhetoric of shareholder primacy theorists.

Despite its enormous importance, the hypothesis that reformers face a stark choice between two exclusive strategies has not been subjected to serious critical analysis. A more careful look reveals that the hypothesis is undertheorized and difficult to square with experience. Like much of the traditional law and economics literature, the hypothesis ignores important realities about the costs of political action. 8 See Fennell & McAdams, Distributive Deficit, supra note 5, at 1052–53; Lee Anne Fennell & Richard H. McAdams, Inversion Aversion, 86 U. Chi. L. Rev. 797, 805–07 (2019) (noting that the idea that “welfarists should ignore the distributive consequences of legal rules and conduct all redistribution through tax alone” is a fundamental tenet in law and economics but “depends on a core unrealistic assumption—that political impediments to redistribution are insensitive to the method of redistribution”). There is no reason to believe that the choices are mutually exclusive: No clear constraint forces a choice between the internal and external paths. 9 See infra section II.A. There is little reason to assume that reformers are biased or naive in their expectations: Reformers are often sophisticated to the point of cynicism and are unlikely to overestimate the value of an internal reform or to trade away an achievable external reform that would be more effective. 10 See infra section II.B. And there is no reason to believe that the choices carry fixed political costs: Internal reforms could reshape the way that corporations use their formidable political capital with respect to external reforms, making external reforms more likely. 11 See infra section II.C.

Stakeholder governance theorists have not pressed this case, perhaps because many are not eager to encourage governmental action. 12 See Martin Lipton, Corporate Governance: The New Paradigm,
Harv. L. Sch. Forum on Corp. Governance (.Jan. 11, 2017), https://corpgov.law.harvard.edu/2017/01/11/corporate-governance-the-new-paradigm/ [https://perma.cc/963E-LGTG] [hereinafter Lipton, New Paradigm] (suggesting that a stakeholder governance paradigm could “forge a meaningful and successful private-sector solution, which may preempt a new wave of legislation and regulation”); Simpson et al., supra note 1 (quoting MSCI chairman and CEO Henry Fernandez as saying that investors should embrace social goals “to protect capitalism . . . [because] [o]therwise, government intervention is going to come, socialist ideas are going to come”); cf. Martin Lipton, Professor Bebchuk’s Errant Attack on Stakeholder Governance, Harv. L. Sch. Forum on Corp. Governance (Mar. 4, 2020), https://corpgov.law.harvard.edu/2020/03/04/professor-bebchuks-errant-attack-on-stakeholder-governance/ [https://perma.cc/D5FD-5RRT] (arguing that corporate governance legislation like that proposed by Senator Elizabeth Warren is “unnecessary if companies and investors embrace stakeholder capitalism”). But once the stark choice hypothesis is identified and inverted to match reality, it becomes possible to evaluate opportunities to effect real change through internal corporate governance reforms.

In addition to filling a gap in the literature, this Article also illuminates the somewhat confusing corporate law discourse on political process. Supporters of shareholder primacy are sometimes profoundly optimistic about how effective government can be in addressing problems, suggesting that corporate leaders can focus on shareholder profits because government officials will tend to all other issues. 13 See, e.g., Jill E. Fisch, Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy, 31 J. Corp. L. 637, 668 (2006) (“The justification for granting courts a specialized role in protecting shareholder interests vis-à-vis those of other corporate stakeholders, is one of institutional competence. The markets and the political process generally function well with respect to other corporate stakeholders.”); Jonathan R. Macey, An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties, 21 Stetson L. Rev. 23, 42–43 (1991) [hereinafter Macey, Economic Analysis] (“If actions of a firm are genuinely detrimental to a local community, the members of that community can appeal to their elected representatives . . . for redress. . . . [L]ocal communities should be able to mobilize into an effective political coalition to press for protection from harmful actions by corporations.”). On other occasions, they are implicitly pessimistic, suggesting that corporations can actually harm stakeholders for long periods of time without the government interfering in any way that affects corporate profitability. 14 For example, a group of prominent commentators has urged that there is a significant difference between attention to a corporation’s long-term interests and attention to externalities and distributional concerns. See Mark Roe, Holger Spamann, Jesse Fried & Charles Wang, The Sustainable Corporate Governance Initiative in Europe, 38 Yale J. on Regul. Bull. 133, 136 (2021), https://www.yalejreg.com/bulletin/the-sustainable-corporate-governance-initiative-in-europe/ [https://perma.cc/4A7W-SRM2] (suggesting that short time horizons and externalities are distinct problems). Presumably, if the government is effective, corporations will be forced to bear the costs of externalities in the long run. Supporters of stakeholder governance are similarly torn between deep pessimism about the government’s ability to address problems 15 See, e.g., Larry Fink, Letter to CEOs: Profit & Purpose, BlackRock (2019), https://www.blackrock.com/corporate/investor-relations/2019-larry-fink-ceo-letter [https://perma.cc/PYS5-GK2V] [hereinafter Fink, 2019 CEO Letter] (suggesting that the move toward stakeholder governance is based in part on “the failure of government to provide lasting solutions” to “fundamental economic changes”); Tim Wu, The Goals of the Corporation and the Limits of the Law, CLS Blue Sky Blog (Sept. 3, 2019), https://clsbluesky.law.columbia.edu/2019/09/03/the-goals-of-the-corporation-and-the-limits-of-the-law/ [https://perma.cc/J99A-SNEJ] (“[O]ne reason there is so much mounting pressure for corporations to take action today is that government has failed to act in many areas that people care about, often by overwhelming margins.”). and an apparently strong belief in its regulatory capacity. 16 For example, Senator Warren’s Accountable Capitalism Act would impose a stakeholder approach to corporate governance and provide extremely broad grants of authority to regulators. See Accountable Capitalism Act, S. 3348, 115th Cong. (2018). A careful look at the processes for internal and external reform can throw some light on a debate that is normally characterized more by heat.

This Article proceeds as follows. Part I identifies and contextualizes the stark choice hypothesis, situating it in broader concepts from law and economics. Part II presents evidence from current debates and historical reforms suggesting that the stark choice hypothesis is not true. Part III applies the analysis to live areas of debate, including social justice and climate change, and considers potential counterexamples that suggest the scope and limits of the stark choice argument.