Corporate Governance in 2018: Social Responsibility or Political Action?

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Corporations, Securities & Antitrust Practice Group, was recorded on Friday, October 5, 2018 during a live teleforum conference call held exclusively for Federalist Society members.     

Wesley Hodges:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is "Corporate Governance in 2018: Social Responsibility or Political Action?" My name is Wesley Hodges, and I'm the Associate Director of Practice Groups at The Federalist Society.

      As always, please note that all expressions of opinion are those of the experts on today's call.

      Today we are very fortunate to have with us a couple of speakers and the first is Mark Nance, who is a lawyer in private practice, and he will introduce our second speaker today. After our speakers give their remarks, we will have an audience Q&A, so please keep in mind what questions you have for this subject or for one of our speakers. Thank you very much for speaking with us. Mark, the floor is yours.

Mark Nance:  Thank you, Wes. Good afternoon, good day, everybody. It's our pleasure to speak to you today on a topic of current interest. And we're very lucky to have with us today, Charles Elson, who is the Edgar S. Woolard, Jr., Chair in Corporate Governance and the Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

      And the topic today is one that Axios recently discussed in a piece, and they noted that companies are doing things under intense social pressure. And their commentary was that they're doing things that are -- actions that are left by a void because of governmental gridlock or avoidance, right? So their perspective is is that the social media mobs or the pressure associated with publicity is causing companies to do things which government abdication otherwise would've cased them to do. So it's an interesting perspective, if you think about it from a limited government perspective and the fact that we already have a well-developed system of laws and regulations which govern corporate conduct, to say that, well, there must be something missing because companies are doing these things.

      So the question that we have before us is with this idea that companies should be exercising social responsibility—and this is not to say that a company shouldn't behave responsibly and in compliance with the laws because that's something we can all agree on—the question is whether companies should do things specifically because of some political activity, some type of publicity, or whatever the case may be, and what corporate directors should consider when those sorts of decisions filter up to them. And I can tell you from personal experience the way sometimes it can work is that you that have services which monitor social media, monitor news clips, monitor everything that's going on—and sometimes it's an internal department depending on the size of the company—they monitor these things; they bring it up to senior management, and then senior management takes a look at the heat map associated with what's going on and decides whether there should be some type of press or some type of corporate activity related to it. So these are the way things often filter up to executives. And then the next question is is it a big enough issue to go to board? And if it goes to the board, what are the directors' responsibilities in response to executive management.

      So with that, and given that we have a fully-formed set of laws around what, typically, the duties of a director and executive are, I'd like to go to Charles and say -- and ask, Charles, since most public -- I'd say most if not many public companies in the U.S. are governed by Delaware corporate law, what does that say about social responsibility in the conduct of the governance of a corporation?

Prof. Charles Elson:  Well, Delaware law is very clear in that your obligation as a director is to create long-term shareholder value to maximize shareholder value for the long-term. Pure and simple. The social obligations of a corporation, typically, are to respect the law and act appropriately under law. There is a -- it's long settled that that's the sort of thrust of Delaware law, and it was, frankly, put into very crystal-clear focus a few years ago when Delaware passed and created a new type of corporation, the B Corp., which have a more social aspect to them. They're companies that argue for social good, et cetera, et cetera, and there's a whole set of law applying directly to those companies, which suggests -- actually, more than suggests, probably indicates that the Delaware corporate statute are those incorporated under the ordinary statute have this profit maximization, shareholder wealth maximization ethos, and that social issues are not part of the ethos.

      That doesn't mean that a corporation doesn't act responsibly in the social good. Obviously, it does. But where it veers off in attempts to become an agent of social change as opposed to an agent for investor wealth maximization, that's where you've crossed the line and where you've acted problematically under Delaware law. Again, long-established, and frankly, it makes a lot of sense. I mean, if you got back, historically, why don't corporations get politically involved? Now, it may be argued in some circumstances that political issue that directly affects shareholder wealth maximization is something that the company should respond to—in fact, they do. But what about subsidiary issues, issues that have social relevance but not corporate relevance?

      And, actually, in a very interesting case many years ago called Miller v. AT&T, which was a case involving AT&T forgiving a bill to the Democratic Party for telephone services to the 1968 Democratic Convention, was argued that forgiveness had become a political attribution. And the question was what were the directors' duties there? And the directors' duties were not to allow the company to violate law by making this subterranean political contribution. But in the opinion, there was an interesting reasoning that was given, part of why the court went that way. And the idea was that the corporation is owned by its shareholders. Shareholders have many varied political viewpoints, and to take corporate assets and establish a political viewpoint with the money of those who may not agree with that viewpoint was very problematic constitutionally. You can't force someone to take a political position with which they don’t agree. And that was the underpinning, I think, of that case, and frankly, the underpinning as to why companies shouldn't be in the political business. You're dealing with lots of people's money, lots of whom have varied political beliefs.

      Now, of course, if you're in academia, there's only political belief as we know, and if you don't agree with it, too bad for you. Unfortunately, academic institutions don't represent the general populace nor do corporate management. Corporate populace who invest in corporations are extraordinarily varied. And that's why traditionally companies have stayed out of the political business until recently.

Mark Nance:  Thank you, Charles. You mentioned briefly executive management. Is there any difference between how executive management should behave versus the boards -- the board of director's duties there, or is that all pretty much consistent and dove-tailed?

Prof. Charles Elson:  Those duties are the same. An officer of the company has the same fiduciary obligations to the corporation, to the shareholders that the directors do. Directors are there to oversee management, and if management acts in a way contrary to the behest of the corporation, the board is required to act -- has to act. Now, obviously, this is in their judgment of what to do, but it's their responsibility to ensure that the company continues to meet its purpose, which is ultimate long-term shareholder value maximization.

      Now, obviously, there's some debate as to how you get there, that's the old classic stakeholder, ditto shareholder, debate. So a lot of people believe, me included, that it's really a silly debate in the sense that to create maximum long-term value, you have to have the other stakes in a corporation comfortable with you. They have to be -- your employees have to be enthusiastic working there; your community, your customers, your suppliers have to like dealing with you, and you're never going to get to long-term value until the other stakes are comfortable.

      But you're pole star has to be shareholder-wealth maximization. And it's a debate that's been even more interesting lately because today the shareholders happen to be all of us through index funds, and mutual funds, retirement funds, that's -- they basically own most of the equity in the United States. And if to suggest that I'm going to act in the interest of other stakeholders to the disadvantage of the shareholder, means that all of us get stuck. In other words, the line between stakeholders and shareholders has blurred considerably in the last 40, 50 years as stakeholders are shareholders and shareholders happen to be stakeholders too. So I think he's giving even more justification for the ultimate goal of value maximization.

 Mark Nance:  Well, I'm glad to hear you use the term pole star not load star, so we can mark you off the list. Yes, with respect to the question regarding stakeholder, though, there are some jurisdictions that do specifically speak to a fiduciary duty towards stakeholders, correct? And so if that's the case how this concept of social responsibility or even political action fit into the calculus of a director who may be in one of those jurisdictions?

Prof. Charles Elson:  Well, really no jurisdiction explicitly, well, with the exception of one, mentions the stakeholder. It's typically used in the context of a takeover and that director has an obligation in some of those jurisdictions to take into account stakeholders' viewpoints upon determining whether or not to accept a bid. There's only one jurisdiction that requires it. But that doesn’t -- I don't think that fundamentally alters the notion of shareholder primacy in all jurisdictions, frankly.

      And I think, again, this B Corp. legislations we've seen pop up all over the country only underscores that. If you want to be a stakeholder company, you can incorporate as a B Corp. If you wish to remain one shareholder primacy, then you go the traditional corporate route, which most companies do. So I think the issue of a quote, "stakeholder jurisdiction" is, at least those who use the traditional form of a corporation, is a bit of a red herring.

      Again, that's not to say you don’t think about stakeholders. Of course you do. You have to. A good director always does that. But your pole star has got to be shareholder value wealth maximization, again, over the long term. And that's of course the debate: what is long-term, what is short-term? I've always thought everything is really long-term. In the end, it's called the P/E ratio. That's the market's judgment of your future prospects. And I think in the end, an action that quote/unquote, "creates short-term value" doesn't necessarily fit into that rubric because the short-term profit ultimately leads to, unfortunately, long-term poor consequences, which is -- and the market realizes that. Again, that's the P/E.

Mark Nance:  What I hear, then, is that primarily the stakeholders' duty, if you will, to the extent that they exist, does so in the context of a contest for corporate control. So outside of that, you're saying that this concept of stakeholders really gives part and parcel to good management because you would consider, obviously, the effects of the corporation on the community, on the employees, on the customers, the consumers, et cetera, of the products in the ordinary course. But there isn't within the law anything specified -- there's no specific duty of care or loyalty associated with stakeholder, [inaudible 12.53] stakeholder?

Prof. Charles Elson:  No. Only as a subcategory, if you will, of shareholder value. And even the most ardent shareholder value people will always tell you that, again, that the -- that doesn't mean you ignore the other stakes, and that's part and parcel of a long-term corporate value. A company that's considered -- viewed positively by the public is a company that the people want to do business with. And that's the only way, unless you think if you stop doing business, you don't make money. So the idea is to keep people happy with you.

      Now, that's where you kind of -- gets us into this political issue because it's now being argued that making certain political decisions keeps the world happy with you. And that's where the line gets very, very fuzzy, because then the question is is it really to keep people happy with you or is it, in effect, a form of self-dealing by management, who may favor a particular political position and wish to see that position shared by many others and they use the corporation as a tool to effect social change. And that's where you, in my view, clearly cross the line.

Mark Nance:  Well, that is an interesting point, Charles, and this whole concept of corporate social responsibility, which has sort of been a growing issue, and there's armies of consultants out there that are selling their services to help companies comply with various CSR requirements, right?

Prof. Charles Elson:  They, too, are obviously interested in value maximization. Otherwise they wouldn't be in the business.

Mark Nance:  Right. They're maximizing the value of CSR as a consultant. I get that.

Prof. Charles Elson:  Absolutely. It's a nice way to make some money, I guess.

Mark Nance:  But then it raises the question, and anybody who has sat through one of these CSR presentations or attempted to modify a website to be consistent with whatever the best practices of CSR are out there, naturally asks the question what is the value maximization? What are the efficiencies associated with CSR? What's the data, right? Or is there data that supports that, or is this, as you sort of alluded to, an homage to some version of the current -- the political zeitgeist?

Prof. Charles Elson:  Well, number one, I've always thought that studies that attempt to show value there are usually flawed for one reason or the other. There're all kinds of ways to create studies to create the results you wish; it's so amorphous. And what is corporate social responsibility? I mean, you have to start to begin with -- to one person it's obeying the law; to another person, it's effecting social change. And that's why these studies, I think, are really not all that helpful. So I'm always reminded when I see things like that, and they frayed it out in this publication or another of the old Disraeli line "There're three kinds of lies: lies, damn lies, and statistics." And I think you can make the numbers say what you want. And that's where I think as lawyers sometimes, while it's fun and supportive of our work to point to economic justification for what we do, sometimes you just have to get back to plain old common sense.

Mark Nance:  Well, and I think it's, to that point as well, the common sense depends a bit upon the perspective of the executive management team, right, and the board of directors. And there's, I would suggest, probably tendency towards confirmation bias associating with a particular perspective often in these situations, right?

Prof. Charles Elson:  Well, absolutely. I go back to the old Tom Lehrer line from a song called "Smut." A famous part of the song he says, "When correctly viewed, everything is lewd." [Laughter.] "(I can tell you things about Peter Pan, And the Wizard of Oz, that's a dirty old man)." You can view something through any lens you wish, and that's the difficultly. And it's up to a board, in my view, to separate out a distorted lens from a clearer lens with which to view managerial conduct because you can always make the argument, "Well, you know, this is going to be in our long-term best interest because ultimately the world's a better place and more people will be happy and buy our product." That's when you get a little bit attenuated, I think, from your responsibilities as a director. And, again, it's all based on the lens through which you view things. Again, always good to cite Tom Lehrer. A very wise man.

Mark Nance:  Thank you. That also raises another question, I think, that we mentioned here at the outset. And that is so you've got executive management operating under a set of prescriptions, which are pretty well set, but allow considerable latitude for management to make decisions whether they're governed by bias or the absence of bias, right? And that has left, I suspect, in the minds of some legislators the idea that perhaps some of these gaps should be filled in, and we referenced Senator Warren's Accountable Capitalism Act as one of the most recent embodiments of that. Maybe it would be interesting to hear your take on what you think about the Accountable Capitalism Act. Is it -- do you think this is a serious proposal? Is there any likelihood of this, you know, actually becoming law, or any parts of it?

Prof. Charles Elson:  You know, I would hope not for a lot of reasons. At this point, no, I don't think something like this would stand much chance of passage because it's interesting. It ends up harming the very people supposedly it's protecting because it diminishes the value of one's investment in a company. And today, as I mentioned earlier, almost everyone is an investor. And so if you take away from the investor, you're basically taking away from everyone, and that's the problem. It also creates a real problem of accountability on the part of management, and I think ultimately, leads to a corporation that ultimately fails in the end.

      It's interesting because the act itself -- it looks, smells, and talks a lot like what's something we call code determination, which you see in Germany; that's been around for a long time. And it's pointed out in that country, there're worker positions on boards of directors, worker's capsules and things like that. There is all kinds of sort of mandatory -- you've got to take into account the other stakes, et cetera, et cetera, sort of designed around that theory. And the interesting thing is—and supposedly that creates social value, benefits the world—but it's interesting, one of the great scandals, financial scandals, corporate scandals over the last couple of years involved a company called Volkswagen. Volkswagen was dead on in under that statute with labor participation of the board, et cetera, et cetera, et cetera, and it ended up they were found to have violated the emissions laws, the environmental -- designed to protect the environment quite, it's argued, blatantly to the detriment of everyone.

      So you have this corporate model that supposedly produces social benefit and social probity and one of the largest companies in the world, operating in that environment, engaged in behavior that was totally antithetical to any notion of social responsibility. So I think the point is if that's the example you're using or the model you're basing your act on, I think you need to go back to the library.

Mark Nance:  Good point, Charles. I would also note that the only reason you mentioned Volkswagen is because it is probably superseded Siemen's offenses in turn. And so you could've named them --

Prof. Charles Elson:  That's close to the same story with the FCPA-type issues, which was also a company in the same place. And these aren't little companies; these were big companies, and I think the model is flawed. You know, it's one of these things that kind of sounds good when you get on TV, you know, you can make a statement or two and how great I am to everyone to do this. But if you dig even slightly deeply, you'll run this.

      I've done a lot of writing on the Volkswagen thing, and to me, one of the causes of the problem was this model. The model effectively created a corporation whose ethos was to create market-share size and jobs, and the compliance issues kind of took the backseat, so to speak. Auto joke. And this is kind of what happens, and I think it happened there and certainly it would happen here as well. And I think that's the danger of that.

      But I think the bigger danger is the notion of devaluing investor capital, and if everyone today participates in this system through their retirement plans, pension plans -- I mean most of the stock today is owned by large institutions representing broad ranges of people. That's the problem with the whole politicization of the corporation because you're basically using other people's money to further your own personal political beliefs. That was the whole point of the Miller v. AT&T case many, many years ago. The reasoning was correct then and it's correct today. I think people, though, tend to -- what is it, the old joke: those who ignore the lessons of the past are condemned to repeat them, and that's what I think we're about to do.

Mark Nance:  Sobering examples, Charles, so we should hope that it doesn't, in fact, become law. And for those who haven't had the opportunity to familiarize themselves with Senator Warren's act, a couple of the key provisions are for corporations over a billion dollars, they would have to be chartered, and this would not surprise you by new federal agency within the Commerce Department. So there would be a federal corporation charter that would require board members to consider the interests of all company stakeholders including the communities in which the firm operates.

      It would also, for those same companies, allow employees to elect 40 percent of all board members, and then also place restrictions of the ability of officers, directors, et cetera, to sell shares under certain circumstances and require holding periods for the holding of shares granted in compensation schemes. So --

Prof. Charles Elson:  Well, and also it would be the end of Delaware law, which, again, we have two senators from Delaware who are of the same political party as Senator Warren, and I can't imagine for their own personal representation of the state that they would be all that enthused with this, unless they want to move somewhere else, I guess, or maybe to D.C. where they don’t have a corporation. Unless we suddenly become a corporate nexus.

Mark Nance:  Speaking of other senators, we've also seen recently, I don't know how best to describe it—we saw something proposed called the Stop Bezos Act, which notwithstanding bills of attainder appeared to be directed at Amazon and appeared to be directed specifically at the compensation practices of Amazon. And that was promoted by Senator Bernie Sanders. And apparently, the mere suggestion of this worked. Charles, is this something that we can expect to see more of? You know, the proposition of Draconian legislation causing companies to move in a direction that perhaps market forces weren't necessarily leading them?

Prof. Charles Elson:  Well, that's what the problem of mixing the political process, political agenda, and the economic agenda of a country. The two don't mix very well. It's also known as a form of jaw boning. And I don't think it's the right way to make policy. You know, threatening someone with legislation to force them to take an action which they ordinarily wouldn't is not, I don't think, an appropriate way to make policy. Policy is designed to affect everyone and is designed to promote the social good. But using the threat of legislation as a tool or a hammer, if you will, to force a result in a particular situation is really not, I think, what the Founders envisioned when they created the legislative branch. Again, we're all human beings and sometimes we veer away from our traditional ideals. But this one, I think, is quite troubling. It's happened many times before. Threat of legislation has forced changes and behavior for a long time, but generally it's economic related rather than more of a political motivation if you will. And to attempt to -- if you couldn’t, let's say, raise the minimum wage through congressional action but instead do it piecemeal through the threat of targeted legislation, I don't think that's the best use of the political process.

Mark Nance:  And for those of us who believe that free-market capitalism is the best path to prosperity, it presents a fairly scary scenario. And the question, I suppose, is is this populism of a form -- that has taken to become a form of [inaudible 27.19] anti-capitalism, or is it just anti-corporate? Or what is the animating spirit behind all of this because it seems to be considerably more present, at least in the public discourse than it has in the past.

Prof. Charles Elson:  I think it's a little of all the above, frankly. It's like a large corporation. So the funny thing is that many of our largest corporations are run by individuals highly sympathetic to the political views of those attempting to make the change. I mean, the notion of the evil corporation, I think, is something that you saw very prevalent in the 60s and 70s. But, again, if you look at ownership patterns today, we're all in it. I mean, it's the old Pogo line, "We found the enemy; it's us." It's all kind of one and the same, and it suggests that a corporation is this evil political vehicle is, frankly, just -- it's not correct and, frankly, it's all of us.

      And then, frankly, if you think about it if we all own it, that's why rationale behind not using the corporation is a political vehicle because you're using other people's money who may not share your views, and the most appropriate place to resolve a political disputes is through the legislature, a popularly elected body designed to do just that. And when corporations become political vehicles, they certainly move dramatically away from their purpose and, I think, you create some real free speech issues, à la forcing folks who may not agree to take a particular position because they happen to be investors in the corporation, using their money to promote a political agenda with which they don’t agree.

      And that's why traditionally companies have always stayed out of it. There's certain things you don’t discuss in polite company and politics is one of them because it's always divisive. And when a corporation uses its influence to advocate a particular political position, you're divisive and you're divisive to the people who you depend on—your customers because your customers may not share the viewpoint either. And in doing so, I think it's destructive, in my view, of long-term shareholder value. And that's why you typically stay away from it.

      Boards of directors are extraordinarily politically diverse groups too. Ones I've seen over in my experience, they're many different viewpoints. But you check the politics at the door and they're not discussed in the meetings because the point of the business is to generate long-term value, and when you shy away from that, I think you made a big mistake.

Mark Nance:  Absolutely. And you know, Charles, it's beyond the scope of today's discussion but we do have some recent examples of companies who have become very large and quite important in terms of our ability to communicate. And in those companies you would, I suppose, would probably have an even greater responsibility to attempt to avoid taking sides in those areas—one of which is based in California that I can think of, maybe more, and how the State recently passed the law now that requires the appointment of a certain number of women directors to each board. Yeah, is this a CSR thing or is this some other form of activism at the state level, and is this something that we can expect to see more of? And is there data to support this is a good idea or not?

Prof. Charles Elson:  Well, the argument is that boards need to be diverse from a gender standpoint. That's the key here. And most of them are, anyway. But the idea is to make a political point and they bring out data that boards with gender diversity, companies tend to perform better. I'm not so sure I agree with that one because I think that regardless of differences in gender, there's always variances of opinion on boards, and people come onto a board not because of their gender, male or female, but because of the talent they bring. And the danger with the California statute is you've effectively -- well, put it this way. Years ago when boards were all male, that was a real problem for a lot of reasons. The most important to me was that anytime you reduce your talent pool dramatically, you don't get as good talent. And if you say we're all male, then you've basically knocked out 50 percent of the population from your pool of qualified directors. That's a bad move for obvious reasons because the goal is talented individuals regardless of immutable factors on your board. You want their judgment; you want their wisdom and simply saying, well, we're reducing our pool by half means you're going to lose some good people, a lot of good people.

      And I think the same thing is applied on the flip side to suggest that a board slot must only to go a person of one gender is really problematic, too, because in that slot, you've reduced your talent pool dramatically. I also think it's from a political or democratic standpoint it's problematic. It's like telling the voters, "Oh, in this election, you can only elect a person of one gender; only that one gender can run," and we don’t allow that in the political process. It's an insult to the voters, obviously, and I don't think it would ever fly. In the state of California if the male legislators who supported this thing were really true to their beliefs, they would resign their offices and give their seats to someone of a different gender. But obviously they're not going to do that. "Well, I represent everyone."

      And that's the point. You don't have to have a particular gender to represent everyone. Whether a male or female director, you're there to represent all the shareholders and you're there for your talents, your individual talents and abilities. I think any system that discriminates on the basis of an immutable factor is dangerous no matter how you look at it, one way or the other because, again, you're limiting talent and you're telling someone because of an immutable factor, they're not an appropriate representative. And that would be an anathema in the political system and it should be an anathema in the corporate system.

      I also think, frankly, they're all kinds of constitutional issues that thing raises. And I would expect, I would hope at some point a court would throw it out. But I don't think that those who proposed it really were that concerned about issue. They probably recognized it, too, but this is political. And, again, when politics affect and intrude into the economic arena, trouble results, and I think this is one of them.

Mark Nance:  Well, that was the first principle that you articulated out of the shoot on this when this becomes a question, right? So I guess, then, sort of as just a general matter, when something like this comes in, when a company is going to be -- you know, finds itself in the maelstrom of one of these large, sort of, political issues, what should be board do? How should they respond to that? You sit on a couple of company boards. What has been your experience and how have you dealt with it?

Prof. Charles Elson:  Well, I think that you have to stay out of politics, pure and simple. I say that -- now, look, there's certain political issues, particularly if you're in a regulated industry, that you have to consider and that is part of your evaluation of the company's performance. Certain industries are operated under heavy regulation and obviously regulation is a result of the political process. And in that circumstance, you have to think about it. But when you get to issues that are not related to your business's core principles but merely reflect a social position, I think you ought to be more careful. And I think diving into that is problematic because you're going to end up offending some people, and a good business tries not to offend anybody. It tries to be a good citizen with which all can agree is a good place to do business, and that should be your focus. But when you start taking on ancillary issues, I think you make a real mistake. And I think a good board recognizes that, which is why, fortunately, you don't see a lot of companies in politics.

      Where you do tend to see it more often than not, would be an instance where you have a management team who, for one reason or another, controls the organization, including the direction of the board. And that's where you're probably more likely to see it where there isn’t the check of a strong board made up of a diverse group of individuals who say, "No, this isn't where we want to go." Or you see a board, I think sometimes shortsightedly, responding in a kneejerk manner to a contemporary political development without thinking out the long-term consequences of what they're doing. Again, to me, the best answer to that is just to stay out of it. That's not your business. Your political viewpoints are welcome, important in a democratic society, but that's from an individual standpoint. And if you feel strongly about something, you run for office, you support particular candidates, particular positions, but using the corporate pot which belongs to a lot of different people I think is inappropriate.

Mark Nance:  Do you think, Charles, that directors and executive management are sensitized to the fact that these often social-media-driven issues have behind them -- you pull back the curtain and you can find all kinds of people generating the issues, right? It could be a specifically politically-generated sort of issue, right? So some political actor who really has no interest in the long-term liability or economic success in the company. Or it could be a state actor who actually has a malevolent interest in terms of reducing the efficiency and reducing the success of the company. Do you think that officers and directors are aware that they may be manipulated by these sorts of issues?

Prof. Charles Elson:  Well, I think these days with increasing sophisticated knowledge of the workings of social media—and, again, it could be one person generating thousands of social media tweets or whatever and you have -- you know, they're using pretty anonymous. And you know, I've always been one of those folks who believes that something that's anonymous should be dealt with anonymously; in other words, don’t ignore it. Anyone who doesn't put their name on it in a position, you have to wonder. And I do think that boards are more sophisticated in that matter.

      Look, using corporations for political purposes is an old game. You can go back to the 1960s and the whole shareholder resolution, shareholder proposal brouhaha really got started, if you will, debate about it when political activists used the corporate ballot box as a way to oppose the Vietnam War. And there was a lot of back and forth on that. In the end, it wasn't the belief that any of these resolutions would pass, but there're ways to call attention to particular political causes. And I think the same could be said in social media. The question there, the appropriate response is to keep a cool head and try to understand what your business is and that you can't be moved by an anonymous, seemingly large way which may actually be but a puddle. You don’t know. And that's why I think social media is so problematic. But from a directors' standpoint, you have to be sophisticated in the way you view it. And, again, common sense.

Mark Nance:  Excellent. Well, thank you for that. That's very informative. So, Wes, maybe now would be a good time to open the floor if there're any questions.

Wesley Hodges:  Excellent. Well, no immediate questions. We definitely have time if anyone has one. But I will let you know if one pops up. I turn the mic back to you.

Prof. Charles Elson:  Well, obviously, Mark we're so persuasive. [Laughter]. 

Mark Nance:  Well --

Wesley Hodges:  Oh, i0t looks like one question popped up.

Prof. Charles Elson:  Oh, good.

Wesley Hodges:  So let's go ahead and move to that first caller.

Caller 1:  Hi. I can't say that I agree with whatever positions that the corporations may take in their presentation of social justice or opposite or whatever you want to call it, but you can't deny that it sure creates a lot of discussion and press regarding their activities. So when looking back at things through business judgment, can anyone really say that the amount of free press that's generated is necessarily against the long-term value of the companies?

Prof. Charles Elson:  That's a good question. I mean, again, it's a double-edged sword. It can cut one way or it can cut the other. My concern is that any time you take a political position that there is going to be someone on the other side who is going to disagree. And usually it's a lot more than one; it's usually quite a few. And to operate successfully in business, I think -- and look, maybe someone has a business model that, you know -- Ben & Jerry's has a particular political viewpoint, obviously, and they've been quite successful of that. Certain television networks cater to particular interests and they find business that way. But an ordinary good or service provider provides services/goods to a wide range of people. The greater range of people, the more -- greater customer base, the better you do. And to shut off one group because -- I just think is not a very great idea. Again, they're other vehicles for that. It's called a political process. And, yes, you may generate some attention, but in generating that attention there's some who are going to like you and some that won't.

      I had a student once ask me what were -- name the most atrocious Supreme Court rulings I can think of. And I said, "None." He said, "Well, what do you mean?" I said, "None of them are atrocious. I may disagree with them." I said, "But by the time something reaches that point, there've been so many good arguments on both sides, it's usually not that easy of a call. And just because you lose a case and a court goes another way doesn't mean it's an invalid position. There was something to it." And I think that's true of any issue, and if you take a very strong position on an issue that doesn't relate to the corporate purpose, you are -- there's going to be someone on the other side, lots on the other side, who will not agree. And their question may be what is this corporation from whom I'm purchasing a good or service doing/telling me what my beliefs should be? I'd rather shop somewhere else. And that's the danger. It just doesn’t make someone with a particular political viewpoint feel good at that point, and maybe a number of people would be excited about it, but if you do a calculus over the long term, I don't think it's helpful.

      And then the question is if you do it once, don't you have to do it again, and again, and again? Once you've jumped into this, aren't there going to be other issues that people will demand that you take a position on? And at that point, you are going to offend some people. And it's just a dangerous business to get into because once you do it, it's really hard to get out, and that's why, typically, companies don’t.

Caller 1:  Would you have a criticism of an entity that socially acknowledges some issue as opposed to taking on as a spokesperson that same class or type of individual? Are those different situations?

Prof. Charles Elson:  One is extension of the other. By taking a position, you naturally invite someone to support that position publicly. I mean, that's why it's better not to take the position. Again, a company has to act ethically and legally. Period. Otherwise you shouldn't be in business. But at some point, what you view as an acceptable position, others may not agree on, and that's where you run into trouble. And, again, the further it moves from your purpose, your corporate purpose -- again, in a regulated industry, there's a reason to either support or oppose certain kinds of regulation. That makes sense. On the other hand, if it's something unrelated and the further out you get from your purpose, the greater risk you run. And remember, it's other people's money you're dealing with. It's not your own. And you shouldn't take money that's entrusted to you that's supposed to be taken and stewarded and grown to give a good return to individuals who invest—who then can take money, by the way, and do whatever they wish with it, take any political position they'd like. That's not your job. It's not within the function, in my view, of a corporation.

      It's like corporate philanthropy has always been a hot topic of debate. What is corporate philanthropy for? How closely does the philanthropy have to relate to corporate purpose? And sometimes the danger with it is is that it's used to protect the self-interest of an executive who gives money to a particular philanthropy which others either may not agree, or more importantly, may have others they'd like to see money given to. And at that point, it becomes almost a managerial entrenchment device, if you will, as opposed to a legitimate donation.

      So it's effectively the same issue. It's sort of a -- corporate philanthropy is kind of a corporate social responsibility light or a corporate political belief's light. It's a form of something that moves away from the corporate purpose and the further away you get, the more problems you create. I mean, the idea is I've always thought you do well and you generate profits for your investors and then the can take those profits and do with it what they wish. But that's their right as an investor. They invest not to make a political statement but it's an economic decision that's designed to increase personal means, which can be then used to benefit society as the individual chooses.

Mark Nance:  And I think it's important, too, to remember here that neither Charles nor I, I don't think we're advocating for laws about any of this. This is a prudential decision, right? I mean, these companies are well within their authority to make the statements and do what it is they do from a CSR perspective. The question is whether is it in the best interest of stakeholders and shareholders in the long term, and I think that's where they serious question is, right?

Prof. Charles Elson:  Yeah, that's the rub. And, again, that's why I've always thought the pole star needs to be long-term value and the recognition that it's other people's money who might not necessarily agree with you. That's why many public pension funds have always stayed out of politics because they collect the capital of a wide range of people with a wide range of viewpoints. And typically they've shied away from that because is it right to -- again, this goes back to that Miller v. AT&T case, which I think is a wonderful case. I teach it and I think it's just a great case. It really lays out this issue beautifully. And it was written in the early 70s and it's just as good today as it was then. So actually, it was kind of humorous because it was about phone service to the Democratic National Convention and today phone service is a different thing than it was then.

Wesley Hodges:  Well, excellent. I want to let everyone know that this call is being recorded and being turned into a podcast that will be uploaded to the FedSoc website as well as iTunes and Google Play, where you'll find a full roster of previously recorded calls. We really do encourage you to check out the catalog.

      Seeing no questions from the audience, I guess Charles, Mark, I turn the mic back to you. Do you have any questions or comments you'd like to go through before we'd wrap up today?

Mark Nance:  No, I'd like to thank you, Wes. I appreciate your efforts on this. And I especially thank Charles for taking this time to illuminate a very topical issue, and thank all the listeners out there as well.

Prof. Charles Elson:  Well, I would echo Mark's comments. This is an important issue. Obviously the issue of the day is focused elsewhere, but I think this is an issue that is only going to get much more attention in the months and years to come. And I think it's very important for those who believe in, ultimately, corporate integrity continue to voice their view of the separation, if you will, between the political world and the corporate world. I think as that case said, it goes right to the heart of our political philosophy in this country, which is the right of an individual to express their viewpoint in any way they wish or choose. And when others attempt to force viewpoints on others, that's when your system really gets into trouble. And I think certainly this area, we've begun to sort of move into that as you've had very politically active and controlling execs/CEOS or controlling shareholders begin to use the corporate vehicle as something that is a bit astray from its beginning.

      When these things were created, no one said to the investor, "Hey, we're going to use this to further fervently held beliefs we had. Please invest." That's not really what comes out. It's usually a great business idea, and we're going to do great things with it and hopefully all walk off successful. And when a company morphs into something else, ultimately, I don't think the long-term value of the company is all that assured because once you get off into that arena, you're going to start making decisions that have, if you will, political rationales to them that may not have great economic rationales. And ultimately, you fail and you destroy the whole point of our modern system of -- or current modern and respected and highly successful system of capital formation.

Wesley Hodges:  Excellent. Well, we are very fortunate to have you both here today. On behalf of The Federalist Society, I'd like to thank you for the benefit of your valuable time and expertise. We welcome all listener feedback by email at [email protected]. Thank you all for joining. This call is now adjourned.

Operator:  Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federalist Society multimedia, please visit The Federalist Society's website at fedsoc.org/multimedia.