By:  Richard R. Caputo, Jr., DJCL staff member at Widener University Delaware Law School.

Tracing its origins back to the early twentieth century, the doctrine of shareholder primacy became necessary with the emergence of a relatively new type of business organization:  the public corporation.  The doctrine of shareholder primacy was necessary in determining the purpose of the public corporation.  Famously, in Dodge v. Ford Motor Co. the Michigan Supreme Court noted that “a business corporation is organized and carried on primarily for the profit of the stockholders.”^[1]  This remark, although arguably dicta, constitutes the “famous statement of the shareholder primacy norm;”^[2] this viewpoint has been referred to by scholars and judges as the “property” model.^[3]  It has been referred to as the “property model” because the corporation is considered a form of property, with the stockholders owning the corporations shares.[4]  As stockholders, the individuals are seen as the corporation’s owners.^[5]  Another well-established view of American business considers the corporation an institution of society with larger responsibilities than simply a return of wealth to its stockholders.^[6]  This theory has evolved in the latter half of the twentieth century as corporations have also evolved from small closely held entities to large publicly traded behemoths whose shareholder base is “comprised largely of transient equity holders with no long-term stake in the fate of any particular corporation.”^[7]  In this case, the directors owe a duty to the business itself and are “entitled to think about the well-being of various interests vital to the corporation’s long-term success as an economic entity;”^[8]  hence, why this view is referred to as the “entity” model.^[9] 

For much of the latter half of the twentieth century, the entity and property models have been the two competing theories on the purpose of a public corporation and generally have been able to coexist.[10]  The entity model is generally accepted by the courts for purposes of everyday management via the business judgment rule,[11] while the property model is a director’s guiding principle in the evaluation of a takeover or change in control transaction:  the Revlon duties.[12] 

The sustainability movement in the corporate context has gained steam in the early part of this century, and it will be interesting to see if the 2020’s will bring an end to the shareholder primacy model or simply a further erosion and boxing up of the Revlon principle.   With the emergence in the last ten years of the benefit corporation (referred to as a Public Benefit Corporation in Delaware), there now exists a business organization that has made, legally binding on directors, a duty to consider all stakeholders, not just shareholders, in its decision making;[13] a formalization of the entity model so to speak.  This legal duty has yet to be tested in the courts, and it remains to be determined whether courts would impose a Revlon-like duty on the directors of a benefit corporation in a takeover or change in control transaction. 

The benefit corporation movement is consistent with the general trend towards addressing sustainability concerns in corporate governance.  In August 2019, a group of 181 CEOs signed a commitment to lead their companies for the benefit of all stakeholders.[14]  While this is a more informal commitment to pursue the same values that a benefit corporation legally commits itself to do, it is still important:  it represents the changing view of the purpose of an American corporation.[15]  It seems plausible to wonder whether the CEOs’ motives were wholesome or whether this ‘new philosophy of corporate purpose’ is just an acknowledgment of what they must navigate to remain competitive in the marketplace.  BlackRock CEO Larry Fink, in his annual letter to CEOs, stated that “a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders.”[16]  While this was a reiteration of statements made in previous letters, in his letter this year, Fink went further by stating that his firm, the largest asset manager in the world, will begin to reallocate its investors’ capital away from companies that have high sustainability risk profiles, such as coal producers, and will hold directors accountable via their proxy power when sustainability risks are not properly addressed.[17] 

BlackRock’s guidance and potential to use its investors’ proxy power with a more active rather than passive voice seems to call for a redefinition of the shareholder primacy principle.  Shareholder concerns over sustainability, not just their concerns over maximizing their monetary investment, will drive corporations to adjust their risk profiles.  While there are many arguments that sustainability is good business, there do remain scenarios where a good sustainability decision will be more costly than its alternative, such as a company deciding to exclusively purchase more expensive wind power for its factories and facilities rather than traditional coal or nuclear power.  While seemingly inconsequential, such a decision for a large multinational corporation could mean an additional several million dollars in expenses per year with the only-seeming benefit being that the carbon footprint of the corporation is reduced, translating into a better sustainability profile for the corporation.  Some investors may see this as good business judgment, while others may feel it puts the company at a disadvantage relative to its competitors who have not made such pro-sustainability decisions and have not suffered the hard costs associated with such decision.  This gray area is most likely where the property versus entity debate will again emerge and ultimately where the Delaware courts may undoubtedly be asked to intervene.

About the Author: Rick is a second-year regular division student with an anticipated graduation of May 2021.  Currently, and during his 1L summer, Rick worked as a Legal Intern for Knoll, Inc., an NYSE-listed furniture manufacturer, reporting to the General Counsel and Corporate Secretary and assisting with SEC Compliance, trademark enforcement, employment issues, and transactional matters.  Rick is an active staff member of the Delaware Journal of Corporate Law.  Rick plans to leverage his prior work experience in accounting and business by focusing his future practice on advising and counseling small and mid-size businesses.

Footnotes:

[1] Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919).

[2] D. Gordon Smith, The Shareholder Primacy Norm, 23 J. Corp. L. 277, 319 (1998).

[3] Leo E. Strine, Jr., The Social Responsibility of Boards of Directors and Stockholders in Charge of Control Transactions: Is There Any There There, 75 S. Cal. L. Rev. 1169, 1170 (2002).

[4] Id.

[5] Id.

[6] Id. at 1171.

[7] Id.

[8] Strine, supra note 3, at 1171.

[9] Id.

[10] See generally Adolph A. Berle, Corporate Powers as Powers in Trust, 45 Harv. L. Rev. 1049 (1932); E. Merrick Dodd, For Whom are Our Corporate Managers Trustees? 45 Harv. L. Rev. 1144 (1932) (Berle and Dodd brought forth the two competing versions of the purpose of a public corporation.  Berle believed in the shareholder primacy or property viewpoint, while Dodd believed that a corporation’s purpose should be to evaluate all stakeholders, the entity model).

[11] See eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 33 (Del. Ch. 2010) (explaining application of the business judgment rule as, “[w]hen director decisions are reviewed under the business judgment rule, this Court will not question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value. Under the Unocal standard, however, the directors must act within the range of reasonableness.”).

[12] Revlon, Inc. v. McAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) (holding that once a board had decided a sale of the company is appropriate, “obtaining the highest price for the benefit of the stockholders should have been the central theme guiding director action.”).

[13] What is a Benefit Corp.?, B Lab,https://benefitcorp.net (last visited Nov. 17, 2019).

[14] Business Roundtable, Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’, (Aug. 19, 2019), https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans.

[15] See id.

[16] Larry Fink, A Fundamental Reshaping of Finance, BlackRock(January 20, 2020). https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter.

[17] Id.