The Need for Corporate Guardrails in U.S. Industrial Policy

U.S. politicians are actively “marketcrafting”: the passage of the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act collectively mark a new moment of robust industrial policy. However, these policies are necessarily layered on top of decades of shareholder primacy in corporate governance, in which corporate and financial leaders have prioritized using corporate profits to increase the wealth of shareholders. The Administration and Congress have an opportunity to use industrial policy to encourage a broader reorientation of U.S. businesses away from extractive shareholder primacy and toward innovation and productivity. This Article examines discrete opportunities within the major policy programs for rule-makers to include corporate guardrails to prevent public funds from flowing mainly to shareholders, to encourage gain-sharing with multiple corporate stakeholders, and to ensure that the public interests embedded in industrial policy are met

Shareholder Primacy versus Shareholder Accountability

When corporations inflict injuries in the course of business, shareholders wielding environmental, social, and governance (“ESG”) principles can, and now sometimes do, intervene to correct the matter. In the emerging fact pattern, corporate social accountability expands out of its historic collectivized frame to become an internal subject matter—a corporate governance topic. As a result, shareholder accountability surfaces as a policy question for the first time. The Big Three index fund managers, BlackRock, Vanguard, and State Street, responded to the accountability question with ESG activism. In so doing, they defected against corporate legal theory’s central tenet, shareholder primacy. Shareholder primacy builds on a pair of norms. The first is substantive and concerns purpose— the firm should be managed for the shareholders’ financial benefit. The second norm is procedural and concerns power—shareholders should be able to tell managers how to run the firm. Once put into operation, the two norms are supposed to ensure that market control over production, and hence economic efficiency, is maximized. Prior to the Big Three’s turn to ESG activism, the two norms operated in tandem—power on the ground assured shareholder value maximization in the boardroom toward the generally accepted efficiency goal. But power on the ground now also triggers questions about shareholder accountability, and the Big Three, upon switching into activist mode to address those questions, put the two norms out of synch, causing the directive of management for the shareholders’ financial benefit to lose focus and compromising shareholder primacy in the performance of its mission. This Article looks closely at this confrontation between shareholder primacy and shareholder accountability, asking three questions: (1) whether investment institutions can legitimately sacrifice their investors’ financial returns in connection with the installation of socially responsible business practices at operating companies; (2) whether assuming ESG concerns take a permanent place at the top of the corporate governance agenda, shareholder primacy can continue to provide a viable cornerstone for corporate legal theory; and (3) whether recent institutional interventions in the name of ESG herald a structural shift toward a welfarist corporation. The Article answers all three questions in the negative. The sequence of questions and answers delivers us to an unsatisfactory destination riven by contradiction and tension

The Limits of Corporate Governance

What is the purpose of the corporation? For decades, the answer was clear: to put shareholders’ interests first. In many cases, this theory of shareholder primacy also became synonymous with the imperative to maximize shareholder wealth. In the world where shareholder primacy was a north star, courts, scholars, and policymakers had relatively little to fight about: most debates were minor skirmishes about exactly how to maximize shareholder wealth. Part I of this Essay discusses the shortcomings of shareholder primacy and stakeholder governance, arguing that neither of these modes of governance provides an adequate framework for incentivizing corporations to do good. Instead, as we argue in Part II, regulation is the best way to curb corporate misbehavior

A Different Approach to Agency Theory and Implications For ESG

In conventional agency theory, the agent is modeled as exerting unobservable “effort” that influences the distribution over outcomes the principal cares about. Recent papers instead allow the agent to choose the entire distribution, an assumption that better describes the extensive and flexible control that CEOs have over firm outcomes. Under this assumption, the optimal contract rewards the agent directly for outcomes the principal cares about, rather than for what those outcomes reveal about the agent’s effort. This article briefly summarizes this new agency model and discusses its implications for contracting on ESG activities

Delegated Corporate Voting and the Deliberative Franchise

Starting in the 1930s with the earliest version of the proxy rules, the Securities and Exchange Commission (SEC) has gradually increased the proportion of “instructed” votes on the shareholder’s proxy card until, for the first time in 2022, it required a fully instructed proxy card. This evolution effectively shifted the exercise of the shareholder’s vote from the shareholders’ meeting to the vote delegation that occurs when the share-holder fills out the proxy card. The point in the electoral process when the binding voting choice is communicated is now the execution of the proxy card (assuming the shareholder completes the card without error); proxy-holders merely transmit the shareholder’s instruction as a formality. This shift is more significant than generally recognized because, as this Essay explains, it restores the potential for deliberative shareholder governance to the large, publicly held corporation. Furthermore, the shift has occurred at a moment in history when technologies exist to facilitate new processes of deliberative shareholder governance. Market actors now are leveraging technology to create such innovations as pass-through voting and advance voting instructions, and academic support is building for new rules that would require intermediaries to provide their beneficial holders with choice infrastructure. This is the realization of the New Deal project to make shareholder preference-satisfaction the crux of the share-holder franchise, and it holds real promise to move corporate governance beyond shareholder wealth maximization

Capitalism Stakeholderism

Today’s corporate governance debates are replete with discussion of how best to operationalize so-called stakeholder capitalism—that is, a version of capitalism that considers the interests of employees, communities, suppliers, and the environment alongside (if not before) a company’s shareholders. So much focus has been dedicated to the question of capitalism’s reform that few have questioned a key underlying premise of stakeholder capitalism: that is, that competitive capitalism does not serve these various constituencies and groups. This Essay presents a different view and argues that capitalism is, in fact, the ultimate form of stakeholderism. As such, the Essay urges that the best way to elevate the welfare of all stakeholders in a society is to maximally free markets, leaving the State with limited responsibilities in the marketplace—namely, to calibrate incentives for pro-social innovation, regulate evident market-failures, and occasionally provide for public goods