Duty and Diversity

Chris Brummer is Professor at Georgetown Law; and Leo E. Strine, Jr., the former Chief Justice of the Delaware Supreme Court, is a Senior Fellow at the Harvard Law School Program on Corporate Governance; Ira M. Millstein Distinguished Senior Fellow at the Ira M. Millstein Center for Global Markets and Corporate Governance at Columbia Law School; Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School; and Of Counsel at Wachtell, Lipton, Rosen & Katz. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here);  For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

Fifty years ago, Milton Friedman told corporate fiduciaries that they should narrowly focus on generating profits for stockholders. Less focused upon, but explicit, was his view that corporations should not have a “social conscience” and take action to “eliminat[e] discrimination,” which he trivialized as a “watchword[] of the contemporary crop of reformers.” [1] Since then, Friedman and his adherents have espoused this cramped vision of fiduciary duty within the debate over corporate purpose. Even worse, while arguing that issues like DEI should be left to external law to address, they have simultaneously sought to erode the external laws promoting equality and inclusion.

In 2021, the problem Milton Friedman trivialized remains central. The inequality gap between Black and white Americans has grown since 1980, the period in which Friedman’s views became influential with directors and policymakers. And the ongoing pandemic’s unequal impact on minorities has underscored the persistence of profound inequality. So has ongoing violence against Black people like the killing of George Floyd. Likewise, economic inequality continues to adversely affect women.

Demands are growing for corporate leaders to address these serious issues by promoting effective practices to treat their employees, communities of operation, and service and customers with respect—and to take affirmative steps to ensure equal opportunity, create an inclusive and tolerant workplace, and embrace the full diversity of humanity. This commitment to Diversity, Equity, and Inclusion (“Diversity” or “DEI” for short) is not just one corporations are being asked to make internally, but is also one requiring that companies evaluate how they treat their consumers and the communities in which they have an impact. Although the present moment has momentarily muted most of those who view corporate action to address issues like Diversity as an improper diversion from the pursuit of shareholder profits, history shows that will not last for long. Those who share Friedman’s worldview will argue that corporate fiduciaries are on unstable ground if they commit their companies to Diversity, Equity, and Inclusion policies that go beyond the legal minimum of nondiscrimination, and will suggest they face possible legal risk for failing to focus solely on corporate profit. Indeed, even in a year when issues of racial equality have been central and leading members of the corporate community are recognizing their obligation to do better, some business leaders have openly taken Friedman’s position and have admonished their employees to stay focused on profits and not to raise issues of Diversity, Equity, and Inclusion within the workplace. When the current moment passes, these voices may multiply and distort corporate law to argue that corporate leaders may not go beyond the bare legal minimum to promote these important values, because by doing so they would be improperly diverting their focus from profit maximization.

In a new article called Duty and Diversity, we explain why arguments of that type have no grounding in American corporate law, and in particular the important principles of fiduciary duty that govern the equitable expectations of corporate directors and officers. We show that, even under the nation’s most stockholder-focused corporate law, that of Delaware, Friedman’s normative view is not one that American corporate law embraces, and that corporate law presents no barrier to voluntary corporate efforts to increase equality and diversity.

Rather, corporate fiduciary duties authorize corporations to implement effective DEI policies. In fact, fiduciary duty requires boards to monitor company policies and practices that assure the company’s compliance with important DEI laws that focus on the equal treatment of diverse applicants, employees, customers, communities, and business partners. We also show that the fiduciary duty of loyalty requires affirmative efforts to promote the sustainable success of the corporation, and thus directors and managers must try to promote the best interests of the company. Substantial evidence exists that companies with good DEI practices will not only be less likely to face adverse legal, regulatory, worker, community and consumer backlash from their conduct, but that their boards and workforces will be more effective, their reputation with increasingly diverse customer bases and public will grow, as will trust from institutional investors increasingly focused on sustainable profitability and the avoidance of harmful externalities costly to their clients, who have diversified portfolios tracking the entire economy.

As a matter of fiduciary duty, therefore, we show that corporate leaders not only have broad authority to promote an inclusive and diverse corporate culture, their affirmative obligation to act in the best interests of the corporation can be understood to require it, given the important legal requirements for corporations to avoid invidious discrimination and growing societal and investor expectations that business will contribute to reducing racial and gender inequality. As important, corporate law principles like the business judgment rule protect and support directors and managers who believe that committing their companies to help improve Diversity, Equity, and Inclusion is the right way to do business.

This legal reality is important to ensuring that the accountability debate over whether corporate leaders, and the institutional investors who control public companies, are doing what they should to promote these values proceeds with clarity. All too often, the issue of Diversity is viewed as a cost center, or something external to the mission of the modern firm—driving criticisms of Diversity-oriented corporate reforms as “virtue signaling at the expense of someone else.” [2] But our Article advances a different theory—that the pursuit of Diversity, Equity, and Inclusion is authorized by the operation of traditional corporate law principles, and even squares with the views of those who embrace what has come to be known as “shareholder primacy.” Put simply, we do not debate what corporate law “should be,” but instead explain what corporate law already “is”—and offer an old answer to the novel question of what tools and obligations managers and directors must contemplate when grappling with the challenge and opportunity of Diversity.

We demonstrate that the case for Diversity has not just a strong moral basis, but a sound business rationale that makes it relevant solely as a matter of traditional corporate law principles. We also show that the internal/external dichotomy of the Friedman view is misleading: corporate law’s most foundational duty, that of loyalty, is as much outwardly facing as it requires corporations to comply with laws—including core civil rights legislation—that are of critical importance to the company, its stakeholders, and society. These clarifications enable important interventions for refining current DEI reforms and enabling new ones within even our legacy corporate law framework. This important reality therefore poses a substantial question to American business leaders, and the institutional investors who wield power over them: If corporate law not only enables directors and the board to address important DEI issues, but requires them to do so, will they meet this urgent moment with correspondingly comprehensive and effective action, or will they incur the high financial, reputational and legal causes of failing to do so?

The complete paper is available for download here.


1Milton Friedman, A Friedman Doctrine–The Social Responsibility Of Business Is To Increase Its Profits, N.Y. Times (Sept. 13, 1970), https://www.nytimes.com‌/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.?smid=em-share. In that same passage, Friedman similarly belittled “providing employment” for workers and “avoiding pollution.” Fifty years later, racial inequality, income and wage inequality, and environmental harm remain huge societal problems.(go back)

2The Editorial Board, The Woke Nasdaq, Wall St. J. (Dec. 1, 2020), https://www.wsj.com/articles/the-woke-nasdaq-11606865986. Such criticisms have been embraced by some of the most respected regulatory voices as well. See Arthur Levitt Jr, If Corporate Diversity Works, Show Me the Money, Wall St. J. (Feb. 7, 2020), https://www.wsj.com/articles/if-corporate-diversity-works-show-me-the-money-11611183633 (arguing that “diversity requirements are political at their core”).(go back)

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