Sorkin’s piece initially attracted a lot of attention, but then it sort of got overwhelmed by the sound & fury surrounding the BRT’s decision to bid farewell to shareholder primacy. That’s too bad, because I think Gamble’s views about the legal obligations of corporate directors are based on a false premise, and it’s the same one that seems to have framed at least some of the reaction to the BRT’s new statement of purpose.
I doubt there’s a single corporate lawyer who would dispute the contention that true sociopaths are by no means absent from America’s boardrooms or C-suites. But does the law really require sociopathic behavior? UCLA’s Stephen Bainbridge says no way – and also says that Sorkin & Gamble’s arguments amount to “a mass dump of uninformed silliness.” (You won’t like the Prof. when he’s mad). Here’s an excerpt from his recent blog responding to the DealBook article:
This argument is patently absurd. The corporation is a legal fiction. To paraphrase the first Baron Thurlow, who observed that the corporation has neither a soul to be damned nor a body to be kicked, the corporation has neither a mind to be psychoanalyzed not a brain to be diseased. Corporations are run by people, so if “they” act like sociopaths, it must be because they are run by sociopaths. It is estimated that psychopaths make up at most 1% of the population, so are we to believe they are disproportionately located in corporate C-suites?
Second, both Gamble and Sorkin grossly misstate the law. Sorkin writes:
“It may be an oversimplification, but if they veer from seeking profits in the name of other stakeholders, shareholders may have a legal case against them.”
That is not an oversimplification; it is a gross oversimplification. Absent proof that the directors were engaged in a breach of the duty of loyalty or certain takeover situations, the business judgment rule would preclude courts from reviewing director decisions. To be sure, that is not the purpose of the business judgment rule, but that is its effect.
Prof. Bainbridge is absolutely right on the law (see also this 2015 NYT opinion piece by the late Prof. Lynn Stout). But if you asked directors & officers of public companies what they think their legal obligations are, my guess is that their responses would be pretty consistent with Gamble’s characterization of what the law requires. The “value maximization” imperative has been internalized by a whole lot of D&Os, and has been used to justify some pretty cold-blooded corporate decisions.
By the way, if this debate sounds familiar, pundit Matthew Yglesias tweeted a similar comment last year – and got clobbered by legal academics.
-John Jenkins, TheCorporateCounsel.net September 4, 2019
