FRAMING THE ISSUES: BOARD DIVERSITY AND CORPORATE PURPOSE
This article makes three key claims. First, Board diversity has a long pedi-
gree and has long involved far more than gender, minority, and LGBTQ+ representation.
Second, corporate purpose–long described by state corporate law concepts
such as those associated with Dodge v. Ford as a primary purpose to generate
profits for shareholders–is wrongly conceived in a period dominated by federal
securities and other statutes with broader social purposes, many of which do not
emphasize shareholder profits. Properly conceived, corporate purpose today is an amalgam of state corporate law’s primary objective of maximizing share-
holder profits and federal social purposes which apply regardless of share-
holder profitability, including wealth and income allocation through the tax system, environmental protection, labor and health laws, and mandatory disclo-
sure, and independent directors on audit and compensation committees require-
ments under federal securities laws.
Third, much of the debate over greater board diversity is best understood
by focusing on the hard question of how much of corporate social objectives is
better achieved through regulatory means rather than changes on the board.
Nonetheless, two types of diversity are most wisely pursued today: first, gender,
minority, and LGBTQ+ representation and second, the creation of corporate
boards in leading United States corporations entirely composed of outside or
SHOULD LABOR ABANDON ITS CAPITAL? A REPLY TO CRITICS
David H. Webber
Several recent works have sharply criticized public pension funds and labor
union funds (“labor’s capital”). These critiques come from both the left and right. Leftists criticize labor’s capital for undermining worker interests by fund-
ing financialization and the growth of Wall Street. Laissez-faire conservatives argue that pension underfunding threatens taxpayers. The left calls for pensions
to be replaced by a larger social security system. The libertarian right calls for
them to be smashed and scattered into individually managed 401(k)s.
I review this recent work, some of which is aimed at my book, The Rise of
the Working-Class Shareholder: Labor’s Last Best Weapon, and some of which is aimed at labor’s capital more broadly. I argue that while critics of labor’s capi-
tal make some reasonable points, none justify a retreat by labor from implement-
ing capital strategies. None justify either wholesale abandonment of the current pension regime, or the smashing and scattering of pensions into individually
Leftist structuralist critiques underestimate new opportunities to advance labor’s capital created by the ideological retreat of shareholder primacy and a newly-emboldened stakeholderism. They also overlook serious but curable errors by unions in permitting their capital to be used against them.
They tend to critique labor’s capital in a vacuum, making heroic assumptions about offstage policy preferences like a comprehensive new social security system or macrofinancial reform, though labor obtained neither when it was more powerful than it is today. Moreover, social security systems, important as they are, do not give workers voice in markets the way pensions do. At the other end of the spectrum, laissez-faire rightist critiques overstate the underfunding threat,
which has subsided as markets have recovered from the Great Recession of 2008 and as forty-nine states have revised their funding formulas. They also exagger-
ate the risks to taxpayers of underfunding and fail to articulate any plausible reason why taxpayers shouldn’t be on the hook to pay-in-full for services rendered by public servants.
Properly organizing its capital to advance worker interests remains a critically important and attainable goal for labor in the 21st century.
SOCIAL GOOD AND LITIGATION RISK
Adam B. Badawi and Frank Partnoy
Questions about corporations and social good have become central in busi- ness law and legal scholarship. Both academics and practitioners are focused on environmental, social, and governance (ESG) issues, and on the the very purpose of corporations. Meanwhile, some commentators and practitioners have begun to hint that these large questions about social good might be linked to litigation risk. We show, for the first time in the literature, that measures of social good and litigation risk are in fact linked, and we explore the important implications of this new finding.
Specifically, we examine how ESG scores purport to capture the degree to which corporations are, or are not, good corporate citizens based on an analysis of the relationship between ESG scores and securities litigation. We develop theories about how ESG might be related to litigation risk, and then we test those theories. We show that firms with poor ESG scores are substantially more likely to be sued and to settle cases. We also show that being sued harms a firm’s ESG reputation, but that settling a case stops the decline. We discuss the mecha- nisms that might account for these relationships, along with their implications for law and policy. We explore interpretations that are based on the behavior of firms, plaintiffs’ lawyers, and regulators, and we discuss how these interpreta- tions relate to recent changes in both federal and state law.
Hillary A. Sale
From Facemash to Facebook to Meta, Mark Zuckerberg’s path and com- pany have been fraught with conflicts, controversy, and even illegality.1 Did he steal the idea from the Winklevoss brothers? Has he invaded people’s privacy? Does he care about privacy? Does he mean what he says?2 Does he respect the law? Does he respect his shareholders? Does he respect his stakeholders? The answer to all of the above appears to be, no.
Zuckerberg has never played by the rules. Instead, from the beginning, he appears to have operated as if he were above the rules, not subject to regulation, and outside the zone where other people’s concerns about privacy or false information were infringements on his rights instead of the reverse. His response, time and again, is to apologize, pay a fine if required, and then repeat the process. Yet, the harm created by Facebook is real and exten- sive—from human rights violations to election outcomes to teenage girls contemplating suicide—Facebook’s reach is massive and its choices seeming unchecked. Zuckerberg apparently ignores the law, his fiduciary duties, the harm his choices create, and the role of social license. He operates Facebook as if it were his own private company, emphasizing growth, scale, and prof- its over the law, stakeholders, and safety. He appears to operate without candor and appears to run roughshod over the norms and internal controls designed to ensure both that the company’s corporate governance mecha- nisms are functioning and that it achieves sustained, profitable, and compli- ant growth.
WAGE WARS: THE BATTLE OVER HUMAN CAPITAL ACCOUNTING
Colleen Honigsberg and Shivaram Rajgopal
Over the past few decades, we have seen an explosion of so-called “human capital firms”—that is, firms that generate value due to the knowledge, skills, competencies, and attributes of their workforce. Yet, despite the value generated by employees, U.S. accounting principles provide virtually no information on firm labor. Barely fifteen percent of firms disclose information as basic as labor costs.
In today’s economy, human capital is likely the biggest asset missing from firms’ balance sheets. Human capital is omitted because employees are not as- sets for accounting purposes; after all, employees can leave the firm. Yet, the lack of disclosure on labor costs under accounting principles causes a signifi- cant gap in financial reporting for firms that are reliant on their employees. The lack of disclosure also leads to difficulty when valuing the growing number of loss firms; in 2020, for the first time, the number of public companies reporting a net loss exceeded the number of firms reporting a profit. These loss firms are valued based on future profitability, necessitating more information on labor and other operating costs.
In the absence of movement by accounting standard-setters, a series of human capital disclosures have sprung up in voluntarily- disclosed sus- tainability reports and under Regulation S-K. These disclosures have largely focused on metrics, however, and are not a substitute for disclosures under ac- counting standards. Moreover, as noted by prior literature, these disclosures lack consistency, comparability, and reliability. As an illustration, we collected all human capital disclosures for four European issuers and found that they collectively disclosed seventy different metrics; only one metric was disclosed by all four issuers.
This Article argues that human capital should be integrated with account- ing standards. First, we propose that labor costs be treated pari passu with research and development costs, meaning that labor costs be expensed for ac- counting purposes but disclosed. We propose a standardized grid to be disclosed in the notes to the financial statements. Second, we advocate that managers be required to discuss what portion of their labor costs should be considered an investment in future firm profitability. Finally, we argue that the income state- ment should be disaggregated to show what portion of major expenses are at- tributable to labor costs. These changes would not violate the accounting principle of conservatism but would allow investors to capitalize human capital in their own valuations, initiating the modernization of accounting principles.
DOES MANDATORY BOARD GENDER-BALANCING REDUCE FIRM VALUE?
B. Espen Eckbo, Kanut Nygaard, and Karin S. Thornburn
Mandated board gender balancing is a social-policy instrument, which in principle is unrelated to concerns about firms’ economic performance. Nonethe- less, imposing such a policy may have unintended consequences (positive or negative) for firm value, which is important for all of the firm’s constituencies— not only shareholders. In this paper, we highlight and extend our recent re- search on the economic effects of Norway’s pioneering gender-quota law, which forced board gender balancing of all domestic public limited corporations by early 2008. This research subsumes and econometrically corrects controversial conclusions of extant studies. Most important, our research shows that quota- induced changes in market valuations and operating performance were both ec- onomically and statistically negligible. Furthermore, we show that corporate conversions to a legal form that prevents the firm from raising public equity capital—but does not require gender balancing—were unrelated to the com- pany’s pre-quota female director shortfall. We also present new evidence that boards managed to preserve directors’ large-firm CEO experience without in- creasing director busyness. We conclude that the supply of qualified female di- rector candidates was sufficiently large to avoid board concentration and negative economic effects of the quota restriction.
BOARD COMMITTEE CHARTERS AND ESG ACCOUNTABILITY
Lisa M. Fairfax
In the last few years, we have witnessed a sharp increase in corporate attention on environmental, sustainability, and governance (“ESG”). This increase has been propelled and buttressed by pressure from an ever-widening array of large and influential shareholders, as well as non-shareholder stakeholders, prompting many to assert that ESG has gone “mainstream.” The steep rise in corporate focus on ESG has inevitably prompted discourse around accountability as we seek to ensure that corporations deliver on their ESG goals and commitments. A wide range of accountability measures has been discussed, proposed, and even implemented, from increased ESG disclosure to tying ESG goals to CEO compensation.