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E-MailLeo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent essay, Corporate Power is Corporate Purpose I: Evidence from My Hometown, issued as a Discussion Paper of the Program on Corporate Governance and forthcoming in the Oxford Review of Economic Policy. Related research from the Program on Corporate Governance includes Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law (discussed on the Forum here), and Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance, both by Chief Justice Strine.
Leo E. Strine, Jr., Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance, recently issued an article that is forthcoming in the Oxford Review of Economic Policy. The article, titled Corporate Power is Corporate Purpose I: Evidence from My Hometown, is available here. The abstract of Chief Justice Strine’s essay summarizes it as follows:
This article is the first in a series considering a rather tired argument in corporate governance circles, that corporate laws that give only rights to stockholders somehow implicitly empower directors to regard other constituencies as equal ends in governance. By continuing to suggest that corporate boards themselves are empowered to treat the best interests of other corporate constituencies as ends in themselves, no less important than stockholders, scholars and commentators obscure the need for legal protections for other constituencies and for other legal reforms that give these constituencies the means to more effectively protect themselves.
Using recent events in the corporate history of E. I. du Pont de Nemours and Company—more commonly referred to today as DuPont—as a case study, this article makes the point that the board of directors is elected by only one constituency—stockholders—and that core power structure translates into corporate purpose. DuPont is an American icon, creator of household names like Nylon and Mylar, which prided itself on its core values, which included commitments to the safety and health of the communities in which DuPont operated and to treat its employees with dignity and respect. But when an activist investor came, DuPont reacted by preemptively downsizing—cutting jobs, and spinning off assets. After winning the proxy fight, DuPont failed to meet the aggressive earnings it used in its campaign. More job cuts came, the CEO was replaced with a member of her proxy fight slate, and DuPont soon embraced a merger consistent with the activists’ goals. At the same time, DuPont demanded tax and other incentives from the affected community it had asked to rally around it in the proxy fight. It did all this even though at no time was there a threat of a lawsuit or judicial intervention from unhappy shareholders. The DuPont saga illustrates how power dictates purpose in our corporate governance system. DuPont’s board knew that only one corporate constituency—the stockholders—called the shots and that they were expected to make their end investors’ best interests, even if that meant hurting other constituencies. The DuPont saga isn’t a story about bad people, but a reminder to those with genuine concern for non-shareholder constituencies to face the truth and support changes in the power dynamics affecting corporate governance that make due regard for non-shareholder constituencies a required obligation for the conduct of business.
The complete article is available for download here.
