“Mediation-Only” Filings in the Delaware Court of Chancery: Can New Value Be Added by One of America’s Business Courts?

The following Essay by Vice Chancellor Leo Strine of the Delaware Court of Chancery advocates the enactment of legislation that authorizes the Court of Chancery to handle mediation-only cases. Such cases would be filed solely to invoke the aid of a Chancellor to mediate a business dispute between parties. By advocating this innovative dispute resolution option, the Essay embraces a new dimension of the American judicial role that allows American businesses to more efficiently solve complicated business controversies. The mediation-only device was conceived in 2001 by members of the Delaware judiciary, including Vice Chancellor Strine, in consultation with members of the Delaware Bar and the Administration of Delaware Governor Ruth Ann Minner. After this Essay was widely circulated to certain constituencies and presented at a symposium sponsored by the Duke Law Journal and the Institute for Law and Economic Policy (ILEP), legislation that contained the mediation-only device was drafted. In June 2003, with the full support of the Court of Chancery, Delaware Governor Minner secured passage of the legislation from Delaware\u27s General Assembly. The mediation-only device was enacted into law as 346 and 347 of Title 10 of the Delaware Code. To the Editors\u27 knowledge, this legislation is the first of its kind adopted in the United States

Stewardship 2021: The Centrality of Institutional Investor Regulation to Restoring a Fair and Sustainable American Economy

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 workers, the essay: 1) explains how the corporate governance system we now have is fundamentally different than the system we had when the regulatory structures governing institutional investors were put in place; 2)identifies the suboptimal results that have ensued by increasing the power of institutional investors, and thus the stock market, over public companies, while diminishing the protections for other stakeholders and society generally; 3) discusses why leaving needed change to the industry itself is not an adequate answer; and 4) sets forth a series of specific, measured public policy changes for mutual funds, pension funds, and hedge funds. In sum, the essay explains and addresses the reality that companies that make products and deliver services cannot focus more on sustainable profitability, respectful treatment of stakeholders, and social responsibility than the powerful investors that control them permit. Like any powerful economic interest, institutional investors should be expected to be responsible citizens and faithful fiduciaries

Fiduciary Blind Spot: The Failure of Institutional Investors to Prevent the Illegitimate Use of Working Americans\u27 Savings for Corporate Political Spending

For decades, American workers have been subjected to increasing pressure to become forced capitalists, in the sense that to provide for retirement for themselves, and to pay for college for their children, they must turn part of their income every month over to mutual funds who participate in 401(k) and 529 programs. These “Worker Investors” save for the long term, often hold portfolios that are a proxy for the entire economy, and depend on the economy’s ability to generate good jobs and sustainable growth in order for them to be able to have economic security. In recent years, there has been a heartening improvement in the self-awareness of the major mutual fund families — BlackRock, Vanguard, State Street, and Fidelity (the “Big 4”) — that have Worker Investors’ capital. This Big 4 has grown enormously because of the legal pressures that generate capital inflows to them every month from Worker Investors. To their credit, the Big 4 recognize that they have a duty to think and act in a way aligned with the interests of Worker Investors by encouraging the public companies in which they invest to implement business plans that will generate sound long-term growth. In fact, the Big 4 have recently recognized that unless public companies act in a manner that is environmentally, ethically, and legally responsible, they are unlikely to be successful in the long run. Thus, the Big 4 are more willing than ever to second-guess company management to fulfill their fiduciary duties. In one area, however, the Big 4 continue to have a fiduciary blind spot: they let corporate management spend the Worker Investors’ entrusted capital for political purposes without constraint. The Big 4 abdicate in the area of political spending because they know that they do not have Worker Investors’ capital for political reasons and because the funds do not have legitimacy to speak for them politically. But mutual funds do not invest in public companies for political reasons, and public company management has no legitimacy to use corporate funds for political expression either. Thus, a “double legitimacy” problem infects corporate political spending. This Essay identifies and illustrates this double legitimacy problem, and shows why unconstrained corporate political spending is contrary to the interests of Worker Investors. Precisely because Worker Investors hold investments for the long term and have diversified portfolios that track the whole economy, political spending by corporate managers to tilt the regulatory playing field is harmful to them, as humans who suffer as workers, consumers, and citizens when companies tilt the regulatory process in a way that allows for more pollution, more dangerous deceptive services. But even as diversified investors, unconstrained corporate political spending is likely to create harm, as both common sense and empirical evidence suggest. Not only that, there is no danger that public companies would have too little voice in the political process if their spending were subject to constraint by stockholders. Corporations have many other tools, including their own PACs funded by voluntary contributions, their lobbying expenditures, and the influence they wield as employers and taxpayers — tools that made business interests predominate in political spending even before Citizens United let them free to spend treasury funds without inhibition. For these reasons, the case against unconstrained corporate political spending is very strong. As of now, however, the Big 4 refuse to support even proposals to require the very disclosure they would need if they were to monitor corporate political spending. And their capacity to monitor if they have the information is lacking. But, if the Big 4 open their fiduciary eyes and follow the recommendation of industry icon Jack Bogle, and vote to require that any political spending from corporate treasury funds be subject to approval of a supermajority of stockholders, they alone could cure the double legitimacy problem of corporate political spending. Because of their substantial voting power, the support of the Big 4 would ensure that this check on illegitimate corporate political spending would be put in place and thus make an important contribution to restoring some basic fairness to our political process

Fiduciary Blind Spot: The Failure of Institutional Investors to Prevent the Illegitimate Use of Working Americans’ Savings for Corporate Political Spending

For decades, American workers have been subjected to increasing pressure to become forced capitalists, in the sense that to provide for retirement for themselves, and to pay for college for their children, they must turn part of their income every month over to mutual funds who participate in 401(k) and 529 programs. These “Worker Investors” save for the long term, often hold portfolios that are a proxy for the entire economy, and depend on the economy’s ability to generate good jobs and sustainable growth in order for them to be able to have economic security. In recent years, there has been a heartening improvement in the self-awareness of the major mutual fund families—BlackRock, Vanguard, State Street, and Fidelity (the “Big Four”)—that have Worker Investors’ capital. This Big Four has grown enormously because of the legal pressures that generate capital inflows to them every month from Worker Investors. To their credit, the Big Four recognize that they have a duty to think and act in a way aligned with the interests of Worker Investors by encouraging the public companies in which they invest to implement business plans that will generate sound long-term growth. In fact, the Big Four have recently recognized that unless public companies act in a manner that is environmentally, ethically, and legally responsible, they are unlikely to be successful in the long run. Thus, the Big Four are more willing than ever to second-guess company management to fulfill their fiduciary duties. In one area, however, the Big Four continue to have a fiduciary blind spot: they let corporate management spend the Worker Investors’ entrusted capital for political purposes without constraint. The Big Four abdicate in the area of political spending because they know that they do not have Worker Investors’ capital for political reasons and because the funds do not have legitimacy to speak for them politically. But mutual funds do not invest in public companies for political reasons, and public company management has no legitimacy to use corporate funds for political expression either. Thus, a “double legitimacy” problem infects corporate political spending. This Article identifies and illustrates this double legitimacy problem, and shows why unconstrained corporate political spending is contrary to the interests of Worker Investors. Precisely because Worker Investors hold investments for the long term and have diversified portfolios that track the whole economy, political spending by corporate managers to tilt the regulatory playing field is harmful to them. Worker Investors are human beings who suffer as workers, consumers, and citizens when companies tilt the regulatory process in a way that allows for more pollution, more dangerous workplaces, less leverage for workers to get decent pay and benefits, and more unsafe products and deceptive services. But even as diversified investors, unconstrained corporate political spending is likely to create harm, as both common sense and empirical evidence suggest. Not only that, there is no danger that public companies would have too little voice in the political process if their spending were subject to constraint by stockholders. Corporations have many other tools, including their own Political Action Committees (“PACs”) funded by voluntary contributions, their lobbying expenditures, and the influence they wield as employers and taxpayers—tools that made business interests predominate in political spending even before Citizens United let them free to spend treasury funds without inhibition. For these reasons, the case against unconstrained corporate political spending is very strong. As of now, however, the Big Four refuse to even support proposals to require the very disclosure they would need if they were to monitor corporate political spending. And their capacity to monitor if they have the information is lacking. But, if the Big Four open their fiduciary eyes and follow the recommendation of the late industry icon Jack Bogle, and vote to require that any political spending from corporate treasury funds be subject to approval of a supermajority of stockholders, they alone could cure the double legitimacy problem of corporate political spending. Because of their substantial voting power, the support of the Big Four would ensure that this check on illegitimate corporate political spending would be put in place and thus make an important contribution to restoring some basic fairness to our political process

Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy A Reply to Professor Rock

In his excellent article, For Whom is the Corporation Managed in 2020?: The Debate Over Corporate Purpose, Professor Edward Rock articulates his understanding of the debate over corporate purpose. This reply supports Professor Rock’s depiction of the current state of corporate law in the United States. It also accepts Professor Rock’s contention that finance and law and economics professors tend to equate the value of corporations to society solely with the value of their equity. But, I employ a less academic lens on the current debate about corporate purpose, and am more optimistic about proposals to change our corporate governance system so that it better supports a fair and sustainable economy. By contrast to Professor Rock, I do not trace the debate to recent statements by business elites belatedly recognizing that our corporate governance system has failed to work for the many and contributed to growing inequality. Rather, I source the debate to the work of advocates and scholars who have long been trying to restore fairness to our economy by updating an outdated mid-twentieth century corporate governance system to address evolving market and political developments, like concentrated institutional investor power and a corresponding decline in the leverage of workers. These developments have created a profoundly different twenty-first century economy that has outgrown our current corporation governance model’s ability to promote our nation’s best interests. For forty years, a strain of economic thinking, typically embraced by those who believe that society is best served when corporations focus solely on shareholder profit, has increased the power of economic elites and gone to war against the regulatory state and the protections put in place by the New Deal and Great Society to protect workers, consumers, and the environment. Because corporate power has been employed to decrease the ability of the political process to protect corporate stakeholders, the power and purpose dynamics within corporate governance itself must be updated to align with the outcomes we desire for society. Taking a more positive view than Professor Rock, I argue that the most promising corporate governance reform proposals do not involve a revolution, but a restoration. They build on traditional corporate law techniques, and restore the balance among stakeholders that characterized governance in the period when the U.S. economy worked best. Requiring all large companies and institutional investors to act in a socially responsible way that respects all stakeholders would bring our system into greater harmony with other high-functioning market economies like Germany and those in Scandinavia that compete effectively in the global market while producing wide spread prosperity. The real danger now for the U.S. is inaction and failing to recognize that our current model of corporate law does not function fairly and is tearing away our social fabric. The article by Edward Rock to which this article responds is available on SSRN at: http://ssrn.com/abstract=358995

Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance

In this essay, Vice Chancellor Strine reflects on the common interests of those who manage and those who labor for American corporations. The first part of the essay examines aspects of the current corporate governance and economic environment that are putting management and labor under pressure. The concluding section of the essay identifies possible corporate governance initiatives that might — by better focusing stockholder activism in particular and corporate governance more generally on long-term, rather than short-term, corporate performance — generate a more rational system of accountability, that focuses on the durable creation by corporations of wealth through fundamentally sound, long term business plans