Corporations in the United States are governed under applicable state law by a board of directors. The board has a fiduciary duty to maximize value for stockholders. That duty is often referred to as the “stockholder primacy” of corporations.
Corporations over the years have become very important in driving the American economy. A number of players in the economy have increasingly argued that a corporation owes duties to constituencies other than its stockholders… its employees, customers, suppliers, the environment and its communities. For example, BlackRock, one of the largest institutional investors in many American companies, has written: “To prosper over time, a company must not only deliver financial performance but also show it makes a positive contribution to society. Companies must benefit all of its stakeholders, including shareholders, employees, customers and the communities in which they operate”. This view has been called “stakeholder primacy”.
The Business Roundtable, an organization of the CEOs of America’s largest corporations, endorsed the “stakeholder primacy” view in an August 2019 release “Statement on the Purpose of a Corporation”. The BRT release generated considerable publicity and debate, from editorials in the Wall Street Journal and articles in Fortune and many other news magazines. Leading corporate law firms gave different weight to the BRT views.
Wachtell Lipton wrote: “In fulfilling their fiduciary duties, directors must exercise their business judgement in considering the interests of all stakeholders, including stockholders, employees, the environment and communities”.
Sullivan & Cromwell wrote: “Under Delaware law, directors of a corporation owe fiduciary duties to the corporation and its stockholders. It is unclear how a court applying state law would think about factors other than stockholder value in fulfilling its duties”.
Delaware is the incorporation state of many corporations and the governance of these corporations is controlled by Delaware law. Fifty percent of all publicly traded corporations are incorporated in Delaware and over sixty percent of the Fortune 500 is incorporated in Delaware. Delaware has historically followed the stockholder primacy rule. Delaware Chief Justice Leo Strine has written: “In current corporate law scholarship, there is a tendency among those who believe that corporations should be more socially responsible to avoid the more difficult task of encouraging institutional investors to exercise their power as stockholders responsibly… a clear-eyed look at the law of corporations in Delaware reveals that directors must make stockholder welfare their sole-end, and that other interests may be taken into consideration as a means of promoting stockholder welfare”.
Many state courts follow Delaware corporate law rulings. So the views of the Delaware court are significant. The arguments on both sides of the stockholder / stakeholder primacy issues are not new. Most responsible companies, both public and private, both Delaware and non-Delaware, consider the interests of employees, customers, the environment and their communities, as part of the board’s goals of increasing the long-term value of the corporation for stockholders. The current debate has focused on social policy rather than legal requirements and what real world corporations actually do.
A Final Thought
Recent position papers and related debate have generated a healthy discussion on the stockholder / stakeholder primacy issue and should be considered by all attorneys advising a board of directors.