Proposed Legislation to Address the Problem of Woke Corporations

Marco Rubio is U.S. Senator from Florida. This post is based on his proposed legislation before the United States Senate. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; 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).

The public support by large corporations for socially progressive ideologies, both in politics and business, has created a crisis of legitimacy for corporate America. By embracing the “woke” revolution that is politicizing nearly every area of Americans’ lives, corporate America has severely damaged its credibility with the rest of the country, and broken its relationship with conservatives and the Republican Party. This collapse of trust not only harms the health of our public life; it prevents large corporations from effectively serving the patriotic and necessary roles we need them to in order to advance the common good. It is time to change course.

To everyday working Americans, the examples of corporations pushing the woke revolution in our society are so plentiful that it should hardly require further explanation. But because it may be difficult to observe from the inside, a reminder of that in this forum may be helpful. According to a recent survey by American Compass, 63 percent of non-management workers want businesses to “focus on business and stay out of social justice issues” like “election reform, racial equity, and LGBTQ+ rights.” Among the workforce generally, those numbers went up to 66 percent of independents and 85 percent of Republicans. The greatest levels of support for companies taking a public stance on behalf of social justice were white, college-educated Democrats, at 77 percent.

Unsurprisingly, the corporate social policies being advanced today reflect the views of this narrow, elite slice of the population against the views of the public as a whole:

  • State laws passed by democratically elected legislatures that many blue states had on their books less than a decade ago, on subjects ranging from religious freedom to election reform, now prompt threats of subversion and willful economic harm inflicted by the largest companies in the world.
  • Consumers in various industries and classes that have been historically valuable to American life, but that are now considered politically incorrect by the elite—including firearms and gun-owners, oil and gas energy production, religious groups and pro-life advocacy organizations, among many others—are denied access to basic economic resources.
  • Workers see their companies spending millions of dollars and altering business strategies to accommodate social justice initiatives that they can barely comprehend, and which often reward identity over merit.

Not only do these actions alienate the working public, they have severed the once constructive connection between corporate America and the conservative movement in politics. Much of the conservative consensus on economic policy relied upon the assumption that large corporations are good for our economy and society. Woke corporate policies undermine this assumption. As a result, conservatives are increasingly open to pursuing anti-corporate antitrust, tax, and labor law that, when combined with similar positions on such policies shared by the far left, could sharply reduce the profitability and influence of large corporations.

Though this outcome would be a necessary response to corporate America’s ongoing dereliction of its obligations to our nation, it would still represent a terrible lost opportunity. Successful and patriotic corporations helped make America a great and prosperous nation. And today, in our century-defining rivalry with China, we need patriotic corporations to advance our national interests, innovate, and employ workers in family-supporting jobs. That is why we must change course, before it is too late.

The best solution would be to have good and patriotic corporate leadership. But unfortunately, that is not what we have today. As a senator, I talk often with corporate executives about the economy and how their businesses can help to advance the national interest. Though many corporate executives are good people who want to do the right thing, patriotic corporate leadership is too often in the minority. Today, too much of corporate leadership—including, importantly, among some the biggest investors on Wall Street—would rather cave to leftist social activists in their workforces, on social media, and even in the boardroom.

But the fact that corporate America’s embrace of woke ideology is internally contested suggests an opportunity for the realignment of corporate governance policy against it. Corporate governance policy has long focused on how to align the way corporations are run with their purpose in our society, whether that is to maximize profits or furthering other goals. Today, no matter one’s view on corporate purpose, corporate governance policy should at least be a guardrail to check the influence of woke ideology in how our largest businesses are run.

That is why I recently introduced S. 2829, the Mind Your Own Business Act. This legislation would require large, publicly traded companies to amend their charters or bylaws to provide certain stockholders with procedural advantages in state law fiduciary duty litigation when the underlying corporate action at issue is a circumstance in which political conflicts of interest are likely, such as those we’ve seen in recent woke actions. Namely, those circumstances would include the material actions of a company:

  1. taken primarily in response to state law when the subject of the law is facially unrelated to the pecuniary interest of the company; for example, a state law about election procedures;
  2. to deny the sale of goods or services to an industry with which the company already does business primarily on the basis of a characteristic of that industry that is facially unrelated to the pecuniary interest of the company; for example, if a company stops buying firearms from suppliers because that industry is politically disfavored;
  3. to promote or use in public reasoning as any basis for the action a covered divisive concept, as defined by Executive Order 13950 issued by President Trump, relating to concepts such as “the United States is fundamentally racist or sexist,” and “meritocracy or traits such as a hard work ethic are racist or sexist,”; for example, mandatory company-wide employee trainings using these concepts; and
  4. for which the public reasoning used by the company as the primary basis for the action is facially unrelated to the pecuniary interest of the company; for example, justifying hiring policies on primarily on the basis of “diversity, equity, and inclusion.”

In each circumstance my legislation would cover, there is an apparent “specter of political bias.” Compared to more ordinary exercises of business judgment, these circumstances make it more likely the action was based on political pressure, or the personal public image of corporate leadership, rather than the best interests of the corporation and its stockholders.

If a stockholder meeting the SEC’s stock ownership thresholds for including a shareholder proposal asserts a claim for breach of fiduciary duty under state law, the relevant defendant would bear the burden of proof with respect to any determination of business judgment and, if found in breach, be personally liable (without indemnification) for a minimum damages amount and attorney’s fees.

Additionally, the charter and bylaws provisions required by the legislation would establish presumptions that certain defenses are not in its pecuniary interest, which the defendant could rebut in the course of meeting their burden. These would include common defenses that are often pre-textual justifications for woke social policies, such as employee morale, coverage by the news media, and favorability in the eyes of ESG-focused investment funds. It would also include presumptions with respect to the independence of directors affiliated with outside organizations that agitate for using corporations for socially progressive ends.

Political conflicts of interest can cause breaches of fiduciary duty, just like financial conflicts of interest. However, corporate leadership acts today as if they cannot. My legislation would help ensure shareholders are able to hold corporate leadership accountable for acting on these conflicts of interest by raising the risks associated with violating fiduciary duties in this particular way. I believe this would be an important first step toward realigning the governance of America’s large corporations with the national interest.

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  1. Stephen Moran
    Posted Wednesday, October 6, 2021 at 11:07 am | Permalink

    Precisely Senator. We need to revert to the sage advice and counsel of Milton Friedman expounded in his article, “The Social Responsibility of Business is to Increase its Profits, in The New York Times Magazine on September 13, 1970. Stockholders over stakeholders.

  2. ahr aitaitch
    Posted Friday, October 8, 2021 at 2:56 pm | Permalink

    If it were enacted into law, this might be a decent start; however, it should go much further and ban corporations from all participation in the political process including providing funds to any candidate, party, cause or issue. Penalties should include huge fines and automatic removal of all corporate officers and board members requiring a complete and utter overhaul.

  3. Douglas K. Chia
    Posted Tuesday, October 12, 2021 at 5:24 pm | Permalink

    Federal legislation that would “require large, publicly traded companies to amend their charters or bylaws to provide certain stockholders with procedural advantages in state law fiduciary duty litigation”? This from a US Senator of the party of laissez-faire economics, free market capitalism, freedom of contract, states’ rights, deregulation, and government staying out of the affairs of businesses in general. His definition of “patriotism” seems to be “America First” protectionism. Senator, with all due respect, please mind *your* own business. If you don’t like what the company is doing, you are free to sell your stock and invest it somewhere else.

  4. Travis
    Posted Monday, November 15, 2021 at 3:14 am | Permalink

    We stand for two propositions. One, in coalition there is
    strength.. We have the greatest, most diverse representa-
    tive democracy. If you are not forging political unity, you
    can’t expect to win. Secondly, you have to have an aggressive
    affirmative agenda. Playing defense is not enough. You have
    to be able to focus on the future. You’ve got to be able to
    offer something positive as an alternative to the negative
    messages that bombard us every day.
    I believe in the power of bipartisanship. Yes, Democrats
    have been the catalysts for social change over the last forty
    years. But every civil rights bill that’s been enacted in this
    country has required not only Democratic votes, but also the
    votes of moderate Republicans. And unless you are able to
    forge a unity around these important issues, you can’t
    advance your affirmative agenda. You can play defense, but
    you can’t advance your affirmative agenda..
    But now, something fundamentally different is happening
    in the country. Ideological extremism on the right makes
    achieving bipartisanship more difficult than ever before.
    You can’t have bipartisanship when one side is playing
    nardball and the other side is playing softball.…

    The first place to inquire is not the failures of govern-
    ment but the malformed power relationships of American
    capitalism- the terms of employment that reduce many
    workers to powerless digits, the closely held decisions of
    finance capital that shape our society, the waste and
    destruction embedded in our system of mass consumption
    and production. The goal is, like the Right’s, to create
    greater self-fulfillment but as broadly as possible. Self-
    reliance and individualism can be made meaningful for all
    only by first reviving the power of collective action.