By: Matthew Hooker

De Reyes v. Waples Mobile Home Park Limited Partnership

In this case, the Plaintiffs (four Latino couples) had sued the landlord of a mobile home park under the Fair Housing Act (“FHA”). The landlord required all individuals who lived in the park to provide proof of legal status in the United States. The Plaintiffs contended that this policy violated the FHA because it disproportionately impacted Latinos as compared to non-Latinos. In granting the landlord’s motion for summary judgment, the District Court ruled that the Plaintiffs had failed to establish a prima facie case to properly connect the disparate impact to the landlord’s policy. The Fourth Circuit disagreed, noting that the Plaintiffs had provided statistical evidence to demonstrate the disparate impact of the policy on Latinos. The Court also pointed out that while the Plaintiffs’ legal status might cause them to be unable to satisfy the policy, their claim was premised on disparate impact based on race. Thus, the Court clarified that the Plaintiffs’ legal status was essentially irrelevant, although the District Court had suggested otherwise. The Court therefore vacated the District Court’s grant of summary judgment and remanded the case for the District Court to properly consider the burden-shifting analysis under an FHA disparate impact claim.

Sierra Club v. Virginia Electric & Power Company

Here, the Sierra Club had sued Virginia Electric & Power Company d/b/a Dominion Energy Virginia (“Dominion”) under the Clean Water Act. Dominion had stored coal ash in a landfill and in settling ponds. It later detected arsenic leaching from the coal ash and seeping into the surrounding groundwater. Sierra Club alleged that Dominion had unlawfully discharged pollutants into navigable waters (violating 33 U.S.C. § 1311(a)) and violated certain conditions of its coal ash storage permit. After a bench trial, the District Court found Dominion violated § 1311(a) but ruled that Dominion did not violate the permit conditions. Both parties appealed. The Fourth Circuit held that the landfill and settling ponds were not “point sources” under the Clean Water Act, so they were not subject to § 1311(a)’s prohibitions. The Fourth Circuit agreed, though, with the District Court giving deference to the Virginia Department of Environmental Quality’s (VDEQ) interpretation of the permit conditions, since VDEQ issued the permit. Consequently, the Fourth Circuit reversed the District Court regarding the violation of § 1311(a) and affirmed with respect to the District Court’s ruling on the permit conditions.

By: Raquel Macgregor

On March 28, 2018, the United States Court of Appeals for the Fourth Circuit published an opinion for Coley v. DIRECTV. The court affirmed the district court’s[1] decision to grant a motion to “reverse pierce” the corporate veil of Mr. Coley’s three limited liability companies (“LLCs”).

I. Issue

Does Delaware law allow reverse piercing the corporate veil of an LLC when the sole member of an LLC is its alter ego?

II. Facts and Procedural history

Previously, the district court entered a judgment for DIRECTV for $2.3 million after Mr. Coley fraudulently provided DIRECTV services to over 2,500 units in his resort. Mr. Coley had in fact only been licensed to provide the service to 168 units. In addition to running a resort, Mr. Coley was also the sole manager of three LLCs that were created to hold title to various rental properties.

After DIRECTV was unable to collect its judgment against Mr. Coley due to his few personal assets, DIRECTV filed a motion to reverse pierce the corporate veil of the three LLCs to gain access to their assets. The district court granted the reverse piercing motion, and Mr. Coley appealed to the Fourth Circuit.

III. Piercing the corporate veil and applicable law

Generally, an LLC shields its members from personal liability because an LLC has a separate identity, and “those debts are not imputed to the [members].” Yet, courts disregard the legal separation between an LLC and its members when such a separation would “produce injustices or inequitable consequences.” Thus, at times a court will allow a plaintiff to “pierce the corporate veil” that divides a shareholder and an entity (or here reverse pierce) [2] so a plaintiff can collect from an otherwise judgment-proof defendant.

With corporate law issues, courts apply the law of the state of incorporation. Here, the LLCs’ state of incorporation was Delaware, so the court applied Delaware law to determine the validity of the reverse veil piercing. However, Delaware has not yet expressly adopted the remedy of reverse piercing the corporate veil. Thus, the court then had to predict whether Delaware would recognize this remedy.

IV. Determining whether Delaware would recognize the remedy of reverse veil piercing

The court first acknowledged that past Delaware cases strongly indicate that Delaware would allow the remedy of reverse piercing. Under Delaware law, where an LLC has a single member, “the rationale supporting reverse veil piercing is especially strong.” The court observed that Delaware law does not allow an individual to use “a corporate form . . . as a ‘shield’ to hinder creditors from collecting on adjudicated claims.” Moreover, while Delaware has never had a reverse veil-piercing case, in Spring Real Estate, LLC v. Echo/RT Holdings, LLC, the Delaware Court of Chancery noted that when an LLC is a “mere alter ego . . . the Court may engage in ‘reverse veil-piercing.”

The court then considered how a potentially contradictory Delaware charging statute might conflict with the remedy of reverse veil-piercing. The language of the charging statute mandates that a charging order is the “exclusive remedy.” Yet, the court relied on the canon of construction of ejusdem generis and the concern that courts could not “look through these legal fictions” to conclude that the charging statute did not prevent the court from reverse piercing the corporate veil.

V. Conclusion

After concluding that reverse veil piercing would be permitted in Delaware, the court agreed with the district court that reverse piercing was an appropriate remedy in this case. The court noted several veil piercing factors were present, namely: (1) the LLCs were controlled by a sole individual (Mr. Coley); (2) Mr. Coley failed to observe corporate formalities and maintain proper accounting records; and (3) Mr. Coley engaged in significant commingling of assets between the LLCs and his personal finances. Thus, the Fourth Fircuit affirmed the district court’s decision to reverse pierce the veil of Mr. Coley’s LLCs.

[1] The appeal arose specifically from the United States District Court for the Western District of Virginia.

[2] “Piercing the corporate veil” refers to when an individual owner or parent entity is held liable for a judgment against a business entity. In contrast, “reverse piercing the corporate veil” creates “liability to the entity for a judgment against the individuals who hold an ownership interest in that entity.”

Weekly Roundup: 11/6-11/10
By: Tim Day & Jonathan Hilliard

Plotnick v. Computer Sciences Corp.
             In this civil case, the plaintiffs, former executives of Computer Sciences Corporation (“CSC”), filed suit against CSC, alleging they were denied benefits under their Deferred Compensation Plan for Key Executives after an amendment to the plan changed the applicable crediting rate.  The Fourth Circuit affirmed the district court’s grant of summary judgment for CSC, holding that the denial of benefits was proper under any standard of review.


By M. Allie Clayton

On November 15, 2016, the Fourth Circuit released a published opinion in the civil case of United States v. Government Logistics N. V., and held that, while the substantial continuity test for successor corporate liability did not apply, the factual allegations regarding the fraudulent transaction test could not be resolved in this case except by a fact finder, and thus reversed.

Facts and Procedural History

This complex case began over fifteen years ago as a bid-rigging scheme by shipping businesses in order to defraud the United States. The Fourth Circuit has entertained appeals from decisions in this case at three different points throughout the litigation.

This case began in the year 2001, when Gosselin Group N. V. (then known as Gosselin World Wide Moving, N. V.) and at least one other entity, the Pasha Group, implemented a bid-rigging scheme with regard to two government programs—the International Through Government Bill of Lading (“ITGBL”) program and the Direct Procurement Method (“DPM”) program—that facilitate the trans-Atlantic shipping of household goods that belong to military and domestic personnel. The ITGBL program involves the Department of Defense (“DOD”) soliciting bids from domestic freight forwarders, and those domestic forwarders subcontract foreign operations to businesses overseas. The DPM program involves the DOD soliciting bids from international businesses. Both programs were administered by the Army’s Military Transport Management Command (the “MTMC”).

The Gosselin defendants (Gosselin Group N. V., Gosselin World Wide Moving N. V., and Gosselin Group’s CEO and former managing director, Marc Smet) and the Pasha Group (“Pasha”) implemented a bid-rigging scheme in which they increased the prices that the DOD paid to ship goods to and from Europe under the ITGBL and DPM programs. This led to the DOD paying millions of dollars more than it should have paid. Those bid-rigging schemes did not go undetected, and led to the qui tam proceedings in this case, and successful criminal prosecutions. Qui tam proceedings are lawsuits in which a whistleblower brings a civil claim pursuant to the False Claims Act (“FCA”). Under the FCA, 31 U.S.C. § 3730, whistleblowers are rewarded for assisting the United States in recovering any money lost to the defendants, up to 25% of the proceeds if the government participates, and up to 30% of the proceeds if the government does not participate.

The Criminal Prosecutions

In November of 2003, a grand jury returned a two-count indictment against Gosselin Group and Smet that charged each with “conspiracy to restrain trade, in violation of 15 U.S.C. § 1, and conspiracy to defraud the United States, in contravention of 18 U.S.C. § 371.” In February 2004, Gosselin Group and Pasha agreed to be charged and prosecuted by criminal information for the conspiracy offenses. Gosselin Group N. V. and the Pasha Group entered conditional guilty pleas to a pair of criminal conspiracy offenses. Smet signed the plea both for himself and for the Gosselin Group, thereby escaping further criminal prosecution. Pursuant to that plea agreement, both the Gosselin Group and Pasha admitted to various elements of the conspiracy. The plea agreement was accepted on February 18, 2004. As a result of a contemporaneous agreement between Smet and the Army, Smet was barred from doing business with the United States for three years (March 2004-March 2007). A United States Management Team—consisting of four Gosselin Group employees: COO Stephan Geurts St., Stephan Geurts Jr., Timotheus Noppen, and Ludi Bokken—was created within Gosselin Group to allow Gosselin Group to continue working with DOD, in the absence of Smet.

Under the plea agreement, Gosselin Group and Pasha were able to pursue an immunity claim in the district court to seek dismissal of both the charges lodged in the information. The two defendants claimed that the bid-rigging scheme was immune from federal prosecution. In August 2004, the Eastern District of Virginia dismissed one of those charges, finding that certain provisions of the Shipping Act granted Gosselin Group and Pasha immunity from federal prosecution on the antitrust conspiracy. However, the district court also found that the defendants did not have immunity from prosecution on the charge of conspiracy to defraud the United States. Therefore, the two defendants were sentenced only on the latter charge. This decision led to cross appeals from the defendants and the United States. The Fourth Circuit determined that immunity did not apply to either charge, and further held that the defendants were both criminally liable for both conspiracies and remanded to the district court for resentencing. United States v. Gosselin World Wide Moving, N. V., 411 F. 3d 501 (4th Cir. 2005). The resentencing proceedings began in 2006. The district court imposed a $6 million dollar fine on Gosselin Group, and two separate $4.6 million dollar fines on Pasha. The court also ordered both defendants to make restitution to the DOD in the sum of $865,000.

The Qui Tam Proceedings

In 2002, realtors Kurt Bunk and Ray Ammons (the “Realtors”) brought qui tam proceedings against the Gosselin defendants under the FCA. Bunk filed his qui tam action alleging an FCA claim related to the DPM program in the Eastern District of Virginia in August of 2002. Ammons filed his qui tam action alleging an FCA claim related to the ITGBL program (“ITGBL claim”) and to Gosselin Group exerting pressure on Covan International (“Covan claim”) and Cartwright International Van Lines (the “Cartwright claim”) to submit higher ITGBL claims. These cases were sealed, pursuant to 31 U.S.C. § 3730, and remained under seal and pending while the criminal cases were resolved.

Once the criminal proceedings were resolved in 2006, the Department of Justice (“DOJ”) gave the Gosselin defendants notice of the two pending qui tam actions. The DOJ not only detailed the false claims and bid rigging evidence that was underlying the qui tam actions, but also advised the Gosselin defendants that the United States might intervene. In January 2007, the DOJ sent a settlement demand to the Gosselin defendants.

Smet conveyed his frustration regarding the criminal liability and pending civil matters to Geurts Jr. Later Smet approached Jan Lefebure, the Managing Director of International Freight Forwarding Service—the company that handled Gosselin Group’s commercial exports—with a proposal to move Gosselin Group’s business as it related to the United States to another business entity. Lefebure owned another corporation called Brabiver—described as a “company doing nothing” but that had “a license for transportation or freight forwarding.” Smet proposed to Lefebure a scheme to rebrand and reopen Brabiver and move all of his [a.k.a. Gosselin Group’s] government contracts into Brabiver.

On June 27, 2007, Smet made several interest free loans, totaling over €100,000 to the four principles involved in the Brabiver venture, Noppen, Geurts Jr., Lefebure, and Rene Beckers. The loans were not secured, and only repayable on Smet’s demand, but that never occurred. The next day, Smet’s principles used the loans to purchase shares in Brabiver and formalize the change from Brabiver to GovLog. The very next day, GovLog and Gosselin Group entered into a series of agreements that were memorialized by contracts with terms dictated by Smet, not negotiated, and drafted by Smet’s attorneys and presented by Smet to the GovLog principals. These agreements transferred Gosselin Group’s business with the DOD to GovLog, and also committed GovLog to exclusively use Gosselin Group and its related entities to perform said DOD contracts. In exchange for Gosselin Group’s business with DOD, GovLog did not pay, but promised Gosselin Group a percentage of its future net revenue—“all of those revenues received by GovLog . . . minus the amount of the [services] invoiced by [Gosselin Group] to GovLog in connection with the services provided to GovLog by Gosselin Group and its subsidiaries.” Once GovLog obtained Gosselin Group’s DOD contracts, it began its shipping operations on behalf of Gosselin Group on July 1, 2007—approximately four days after Smet made loans to the GovLog Principals.

GovLog consisted of 20 employees, all but one of whom were previous Gosselin Group employees. Their sole business was signing contracts with DOD and arranging shipping services for DOD, but GovLog was not responsible for any actual shipping, nor did it have any warehouses (GovLog leased warehousing facilities from Gosselin Group). All GovLog actually owned was a couple of automobiles, a chair, and a table. GovLog earned no net revenues during 2007 or 2008, and thus was not obligated to pay any funds to Gosselin Group in exchange for Gosselin Group’s business with the DOD. However, GovLog did pay for the leased warehouse facilities and other services provided by Gosselin Group, which essentially meant that any “money that’s going to GovLog is actually ending up being paid to Gosselin.”

Later that year, on November 7, 2007, Ammons’s qui tam action was transferred to the Eastern District of Virginia and consolidated with Bunk’s qui tam action. In 2008, the Realtors’ complaints were unsealed, but on July 18, 2008 Ammons’s qui tam action was superseded by the government’s Complaint in Intervention under 31 U.S.C. § 3730(b)(2). The government did not intervene in Bunk’s qui tam suit. In the Complaint in Intervention, the government named GovLog as a defendant, and alleged that GovLog was “a successor/transferee in interest of Gosselin [Group].” On October 2, 2008, Bunk filed his Second Amended Complaint, which included GovLog as a named defendant and alleged successor corporation liability claim against GovLog.

The Bunk Complaint pleaded numerous FCA theories of liability against the Gosselin defendants and others. Bunk joined several additional complaints, including a 42 U.S.C. § 1985 claim and state law claims. However, only his DPM claim was not superseded by the government’s Complaint in Intervention. In 2011, the government and the Relators moved for summary judgment on the issue of whether GovLog was liable as a successor corporation of Gosselin Group. The district court severed the claims against GovLog from those against the Gosselin defendants, and then proceeded to conduct a trial to first resolve the claims against the Gosselin defendants.

On July 18, 2011, the jury trial for the Gosselin defendants began on the DPM, ITGBL, and Covan claims. At the close of the government’s case, the district court awarded judgment as a matter of law to the defendants on the ITGBL claim, and submitted the DPM and Covan claims were submitted to the jury. On August 4, 2011, the jury returned a verdict against the Gosselin defendants on the DPM claim and in favor of the Gosselin defendants on the Covan claim. Despite evidence establishing that the defendants had submitted over 9,000 false invoices to the DOD, the district court did not impose any civil penalties, reasoning that such an award would be unconstitutionally punitive (each false claim authorized a minimum civil penalty of $5,500, which would have resulted in a cumulative penalty in excess of $50 million dollars).

Both parties appealed. Bunk challenged the district court’s denial of civil penalties, the government challenged the court’s award of judgment on the ITGBL claim, and the Gosselin defendants argued that Bunk lacked standing. The Fourth Circuit rejected the Gosselin defendants’ standing argument, and directed the court to amend its civil penalties judgment and award $24 million dollars in civil penalties on the DPM claim. The Fourth Circuit also vacated the grant of judgment in favor of the Gosselin defendants on the ITGBL claim and remanded the matter for further proceedings.

Once the claims against the Gosselin defendants were resolved, the district court proceeded to determine the successor corporation liability claims pending against GovLog. The district court initially focused on identifying the applicable legal test for successor corporation liability claim. In September 2014, the district court ruled that application of Carolina Transformer’s substantial continuity test would be inconsistent with the Supreme Court’s decision in Bestfoods. United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992); United States v. Bestfoods, 524 U.S. 51 (1998). The court then found that only traditional common law principles governed the issue of GovLog’s liability as a successor corporation.

On November 3, 2014, the Relators and the government moved for summary judgment, relying on the common law’s fraudulent transaction theory of successor corporation liability. Bunk presented two theories of successor corporation liability against GovLog: (1) the substantial continuity theory, and (2) the fraudulent transaction theory. GovLog cross-moved for summary judgment, stating that the theory proposed by the government and the Relators was entirely speculative. On December 23, 2014, the district court granted judgment to GovLog under two theories: (1) neither complaint had properly alleged that GovLog was liable as a successor corporation under any recognized legal theory; and (2) GovLog was entitled to summary judgment for want of a genuine dispute of material fact. The court ruled that the transactions between GovLog and Gosselin Group were not shown to have been pursued with a fraudulent intention because there was “no evidence sufficient to establish any of the recognized ‘badges of fraud’” in regard to the creation or operation of GovLog. On December 29, 2014, the court entered judgment in favor of GovLog. The Relators appealed from the judgment, and the Fourth Circuit has jurisdiction under 28 U.S.C. § 1291.

The Initial Jurisdictional Question

Initially, the Fourth Circuit addressed whether or not the district court had subject matter jurisdiction over Bunk’s successor corporation complaint. The Fourth Circuit found that the court possessed supplemental jurisdiction over Bunk’s claim. Bunk’s FCA claim provided original jurisdiction under 28 U.S.C. § 1331. The question remained whether the successor corporation liability claim revolves around the same central fact pattern as the original FCA claim against the Gosselin defendants. The Fourth Circuit held that GovLog’s successor corporate entity liability is wholly dependent on the Gosselin defendants’ liability. Because the “successor corporation liability question is part and parcel of Bunk’s original qui tam action,” the district court did not err in exercising supplemental jurisdiction on this claim.

The Alleged Errors

The Fourth Circuit had to decide whether or not the district court erred by entering judgment in favor of GovLog on the successor corporation liability issue. Bunk challenged the three rulings of the District Court: (1) that the substantial continuity test is inconsistent with Supreme Court precedent; (2) that Bunk had not adequately pleaded the fraudulent transaction theory; and (3) that the fraudulent transaction theory was without evidentiary support, thus leaving no genuine issue of material fact and entitling GovLog to summary judgment.

Successor Corporation Liability Theories

There are four exceptions from the general rule that a corporation that acquires the assets of another corporation does not acquire its liabilities. Under federal common law, a successor corporation takes on the liabilities of its predecessor if: (1) the successor agrees to assume the liabilities; (2) the transaction is a de facto merger; (3) the successor may be considered a “mere continuation” of the predecessor; or (4) the transaction is fraudulent. United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992).

Under exception (3), the mere continuation theory states that liability can pass to the successor if “after the transfer of assets, only one corporation remains.” This is not applicable to Bunk’s case because two corporations were viable after the transfer of assets. However, there was another theory proposed in Carolina Transformer—the substantial continuity theory. Substantial continuity theory allows a court to look at eight factors to determine whether successor corporation liability should be imposed. However, the Supreme Court stated in United States v. Bestfoods that “‘[i]n order to abrogate a common-law principle, the statute must speak directly to the question addressed by the common law.’” United States v. Bestfoods, 524 U.S. 51 (1998) (quoting United States v. Texas, 507 U.S. 529 (1993)). Because the FCA doesn’t speak to successor corporation liability, it has “no impact on the traditional common law principles governing successor corporation liability.” Therefore, the district court did not err in declining to apply the substantial continuity test.

Bunk also relied on exception (4), the “fraudulent transaction theory of successor corporation liability.” Because this was dismissed on a motion for summary judgment, the Fourth Circuit reviewed whether the pleadings were legally sufficient under a de novo standard of review. The Fourth Circuit did not decide whether the heightened standard of pleading in Fed. R. Civ. P. 9(b) applied because the Court stated that even if there was a heightened standard it was satisfied in this case. The Bunk Complaint sufficiently outlined the dealings between GovLog and Gosselin Group that formed a solid foundation for the fraudulent transaction theory. Therefore, the district court erred in dismissing Bunk’s successor corporation liability claim as insufficiently pleaded.

The Fraudulent Transaction Theory

However, because the district court ruled in the alternative that GovLog was entitled to summary judgment on Bunk’s fraudulent transaction theory, the Fourth Circuit had to also address whether the summary judgment award was warranted.

Because direct evidence of intent to defraud is rare, courts have developed recognized “badges of fraud” that constitute indirect and circumstantial evidence. Those “badges of fraud” include; (1) the conveyance is to a spouse or near relative; (2) inadequacy of consideration; (3) transactions different from the usual method of transacting business; (4) transfers in anticipation of suit; (5) retention of possession by the debtor; (6) transfer of all or nearly all of the debtor’s property; (7) insolvency caused by the transfer; (8) failure to produce rebutting evidence when the circumstances surrounding the transfer are suspicious; or (9) transactions in which the debtor retains benefits.

In this situation the court found that the evidence did not simply fail to dispel the required fraudulent intention, but it could easily establish it. The Fourth Circuit found that “[a]t least four of the badges of fraud are readily apparent on the evidence . . .:” (1) inadequacy of consideration; (2) transactions different from the usual method of transacting business; (3) transactions in anticipation of suit or execution; and (4) transactions through which the debtor retains benefits. The consideration was found to be grossly inadequate because, in effect, GovLog paid nothing for the business interests it received from Gosselin Group. The transaction was made in haste and with little input from GovLog or any GovLog owners, and Smet was in control of every facet of the transaction—which is not something that occurs in the usual mode of transacting business. Also, the Fourth Circuit found that a reasonable juror could find that Gosselin Group continued to reap the benefits of the business that it transferred to GovLog. But the most suspicious aspect, according to the Fourth Circuit, was the timing of the transaction. “[T]he temporal proximity of the Gosselin defendants’ being advised of the qui tam actions and the GovLog transaction being consummated suggests that the transaction was made to defraud Bunk and the United States out of civil penalties.”


According to the Fourth Circuit, the various factual disputes in this case cannot be resolved by anyone except a factfinder. Therefore, the district court erred in awarding summary judgment to GovLog. The Fourth Circuit vacated the judgment and the case was remanded to the district court for further proceedings.

By: Dave Rugani*


The advent of the limited liability company (“LLC”) in the 1980s has had far-reaching implications for how individuals choose to form business entities.  Never before has there existed such a malleable legal entity that provides both limited liability and exemption from double taxation.[1]  Indeed, since the passage of the first LLC act in 1977, all fifty states and the District of Columbia have followed suit.[2]  The LLC is now viewed as the business entity of choice for small operations.[3]  However, while the flexibility offered by an LLC is the source of great appeal for members, it has also posed unique challenges for courts that are, in many cases, deciding issues of first impression in the LLC context.

One especially vexing issue facing the courts is determining just how limited “limited liability” ought to be.  In particular, courts are now determining whether, and to what extent, the equitable doctrine of veil piercing should be carried over from corporate law into the realm of the LLC.  In North Carolina, like in many other states, LLC litigation has been slow to materialize, and the case law is sparse in comparison to the plethora of material on corporate or partnership law.[4]  Nevertheless, it is now rather clear that North Carolina courts have followed every other state in permitting veil piercing in the LLC context, though they have failed to give special consideration to the peculiarities of the LLC, as have the courts of some other states.  This Comment will consider the nature and scope of LLC veil piercing in North Carolina with a particular emphasis on its ineffective implementation and questionable application in certain contexts.

Part I of this Comment will provide background information that is necessary before considering the central issue.  First it will examine the doctrine of corporate veil piercing and the general construction of the North Carolina Limited Liability Company Act’s (“LLC Act’s”) limited liability provision.  This examination will be followed by a short survey of how states and commentators are beginning to treat LLC veil-piercing issues.  Part II will discuss the case law in North Carolina regarding LLC veil piercing.  This discussion will begin with a review of the leading case on corporate piercing in North Carolina, followed by a consideration of the LLC case law.  Part III will critique the variety of factors the courts have used to pierce the veil, as well as the contexts in which the piercing has occurred.  Of central importance is examining how the rationale for piercing in corporate contexts may, or may not, carry over to LLCs.  This Comment will conclude with an argument that greater refinement of North Carolina case law is necessary in order to give effect to the equitable underpinnings of veil piercing in LLCs and to bring North Carolina law into accord with the emerging trends in other jurisdictions.

I.  Background

As has often been observed, the LLC is a hybrid creature that adopts traits of both corporations and partnerships.[5]  In order to encourage business formation, legislatures grafted onto the LLC two important characteristics.  The limited liability provision of corporate law was combined with the pass-through taxation scheme from partnerships to create a unique business entity.  These two features have made the LLC an irresistible option for many business incorporators.  However, it is manifestly clear that providing absolute immunity from liability would be deleterious to the public good.  The rationale underlying limited liability has always been to promote, or at least not punish, risk-taking behavior that is deemed vital to long-term economic prosperity.[6]  Thus, limited liability provides a shield against the misfortunes of enterprise that are all too common in a competitive world.  However, by not checking the reach of the statutory limited-liability provisions, the shield could become the sword of the unscrupulous.

A.     Overview of Piercing the Corporate Veil

Recognizing this peril, courts long ago endeavored to find ways to protect the innocent.  This response, piercing the corporate veil, provided the equitable check against abuse of the corporate form.  Two observations about corporate veil piercing are in order.  First, as an equitable remedy, it is purely a judicially created concoction without any basis in statutory law.[7]  Second, “[t]here is a consensus that the whole area of limited liability, and conversely of piercing the corporate veil, is among the most confusing in corporate law.”[8]

A cursory overview of the doctrine of piercing the corporate veil is necessary before proceeding to a discussion of its application to LLCs.  A leading treatise has observed:

[A]s a general rule, it is often said that the corporation will be viewed as a legal entity unless it is used to defeat public convenience or perpetrate or protect crime or fraud; when those situations occur, the courts will more carefully scrutinize the corporation and may regard it merely as an association of persons and extend liability to them.[9]

Therefore, a court may pierce the corporate veil—and subject the shareholder to personal liability—when there is both unity of interest such that no distinction exists between the corporation and the individual and when recognizing the corporate form would lead to injustice.[10]  This unity of interest necessarily requires a showing that the corporation is the alter ego of the individual or the corporation is a mere instrumentality of the individual.[11]  Almost always, this requires that a shareholder exercise domination or control over the corporation.[12]

The courts consider a litany of factors in determining what constitutes domination and control for the purposes of veil piercing, and these factors may change slightly from state to state.  The principal factors include failure to observe corporate formalities, fraud, inadequate capitalization, illegality and evasion of a duty or obligation, sole shareholder corporations, loans to corporations, tortious or criminal conduct, commingling of assets, insolvency or bankruptcy, and failure to issue stock.[13]  No factor is determinative, and the court must consider all of them holistically.  Again, the factors are used to determine domination and control such that the corporation is but an alter ego of the shareholder.  Moreover, absent an injustice, domination and control alone will never be enough to support a piercing claim.[14]

B.     North Carolina’s Limited Liability Company Act

A detailed examination of the features of an LLC is beyond the scope of this Comment, as is assessing the relative value of using an LLC over other business entities.  For the purpose of this Comment, it is sufficient to note that the limited liability characteristic of an LLC is one of the major benefits to members.  North Carolina’s LLC Act[15] provides:

A person who is a member, manager, director, executive, or any combination thereof of a limited liability company is not liable for the obligations of a limited liability company solely by reason of being a member, manager, director, or executive and does not become so by participating, in whatever capacity, in the management or control of the business.  A member, manager, director, or executive may, however, become personally liable by reason of that person’s own acts or conduct.[16]

This language is typical of other LLC statutes[17] that limit member liability “solely” on the basis of being a member.  The law also contains a fairly common exception that members can be “personally liable by reason of that person’s own acts or conduct.”[18]  It is on the basis of this language that the North Carolina courts have applied the corporate doctrine of veil piercing to the LLC.

At this juncture, it is useful to distinguish North Carolina’s limited liability provision from that of other states that specifically incorporate the doctrine of corporate veil piercing into the language of the statute.  For example, both the Minnesota and Colorado statutes state that the court should use corporate veil piercing case law for determining individual member liability for LLCs.[19]  Most states, including North Carolina, do not have such unequivocal statutory language, and it has fallen to the courts to pick up where the legislatures have left off.  As previously noted, North Carolina has joined every other state in transferring the veil-piercing doctrine from the corporate to the LLC setting.

C.     How Other States Treat LLC Veil Piercing

North Carolina is certainly not the first state to face the challenge of defining the contours of piercing the liability shield, and a cursory assessment of the views of other jurisdictions is helpful in understanding North Carolina’s current status.  In the birthplace of the LLC, the Supreme Court of Wyoming addressed the piercing issue in Kaycee Land & Livestock v. Flahive,[20] where the court held that, though piercing should be permitted, the factors considered would likely differ from factors used in the corporate setting.[21]  In particular, failing to follow formalities would be a poorly-suited factor in the LLC context, given how few formalities are required by statute.[22]  This view has been shared by numerous other legislatures and courts.[23]  Indeed, section 304(b) of the Uniform Limited Liability Act specifically provides that “[t]he failure of a limited liability company to observe the usual company formalities or requirements . . . is not a ground for imposing personal liability on the members or managers for liabilities of the company.”[24]  At least one court has opined that, while the same factors apply to both corporations and LLCs, the factors should be balanced differently.[25]

Another suspect factor seems to be whether domination and control of the LLC by its members should be considered.  This is because most LLC statutes, by their plain terms, specifically allow for a flexible approach to governance.  For example, members may be managers and authorized agents of the LLC—greatly blurring the line between management and ownership.[26]  A treatise on the subject notes that there seems to be a “legislative intent to allow small, one-person and family-owned businesses the freedom to operate their companies themselves and still enjoy freedom from personal liability.”[27]  One commentator has observed that in a member-managed LLC, the member is akin to a corporate shareholder who is also a director.[28]  Just as these shareholders are the most likely targets for a piercing claim in the corporate setting, member-managers have increased exposure.[29]  This would seem a curious result in an LLC.  As one court noted, “Lesser weight should be afforded the element of domination and control . . . because the statute authorizing limited liability companies expressly authorizes managers and members to operate the firm.”[30]

A third factor that is of questionable application to LLC piercing is inadequate capitalization.  Most LLC acts provide for a statutory remedy for creditors who are injured due to the LLC’s inadequate capitalization,[31] thus making undercapitalization as a piercing factor redundant.[32]  Others have taken a more restrained approach, with one court stating that “[u]ndercapitalization is another factor that should be weighed carefully in the L.L.C. context . . . .”[33]

Thus, the prevailing trend seems to be that an LLC should be pierced, but the factors to be considered may require modification from the corporate model.[34]  Nevertheless, there is still a significant body of law that has applied corporate veil-piercing factors to LLCs without modification.[35]  One commentator has gone so far as to suggest that piercing should not be permitted in the LLC context, though no court has adopted that view.[36]  Against this general backdrop the North Carolina law will now be examined.

II.  North Carolina Case Law

Turning to North Carolina, it is clear that LLC veil piercing is ongoing.  It is equally evident that the case law can be broadly divided into two groups: (1) cases that pierce while citing to section 57C-3-30 of the LLC Act[37] and (2) cases that pierce without referring to the statute.  Before considering either group, it will be beneficial to examine the leading corporate piercing case, as that provides the basis for piercing in the latter group of cases.

A.     Corporate Veil Piercing in North Carolina: The Instrumentality Rule of Glenn v. Wagner

North Carolina courts have long given effect to veil piercing in the corporate setting.  Though veil piercing has been recognized in North Carolina since 1899,[38] the leading case is Glenn v. Wagner.[39]  The Supreme Court of North Carolina explained the “instrumentality rule”[40] as “[a] corporation which exercises actual control over another, operating the latter as a mere instrumentality or tool, is liable for the torts of the corporation thus controlled.  In such instances, the separate identities of parent and subsidiary or affiliated corporations may be disregarded.”[41]  The three elements necessary to prevail under the instrumentality rule are:

Control, not mere majority of complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attached so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and

Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of plaintiff’s legal rights; and

The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.[42]

Thus, in North Carolina, control and domination form the critical matter necessary to prevail on a piercing theory.

The court then went on to discuss the factors that are “considered inherent in the instrumentality rule.”[43]  These include inadequate capitalization, failure to follow corporate formalities, complete domination and control such that no independent identity exists, excessive fragmentation of an enterprise, nonpayment of dividends, insolvency of the debtor corporation, siphoning of funds, and the nonfunctioning of officers and directors.[44]  These factors are used to determine the first prong of the instrumentality test.[45]

The Glenn test has been applied in numerous contexts.  In the case itself, the instrumentality rule was used to pierce under a so-called enterprise theory.[46]  At issue were two corporations, one the parent and the other a subsidiary.[47]  The parent’s domination and control of the subsidiary, combined with unjust conduct, was enough to permit a piercing.[48]  In addition, Glenn has been used in the more traditional setting of allowing a third party to sue the individual shareholder of a corporation.[49]  Finally, courts have used Glenn to justify so-called reverse piercings whereby the third parties—usually creditors of the shareholder-debtor—are allowed to recover against the corporation of which the debtor is a shareholder.[50]  The question then becomes whether, and to what extent, Glenn and the subsequent case law on corporate piercings are relevant to LLC piercing.  As already noted, the case law is split between piercing claims that cite to the statute and those that cite to Glenn.

B.     Cases that Cite to Section 57C-3-30

It is less than ideal that the only North Carolina Supreme Court opinion on the issue is also one of the least helpful.  In Hamby v. Profile Products, L.L.C.,[51] the plaintiff was a purported tort victim who brought an action against his employer, Terra-Mulch Products, L.L.C., and Terra-Mulch’s sole member and manager, Profile Products, L.L.C.[52]  The complaint alleged that Profile “dominate[d] and control[ed] Defendant Terra-Mulch and [was] the alter ego of Defendant Terra-Mulch.”[53]  The court went on to state that “when a member-manager acts in its managerial capacity, it acts for the LLC, and the obligations incurred while acting in that capacity are those of the LLC.”[54]  Frustratingly, the court did not take the opportunity to examine the various piercing factors.  Instead, it merely held that Profile’s exercise of managerial control over Terra-Mulch, on its own, was not enough to subject Profile to liability.[55]

Hamby leaves much to be desired.  First, it merely states the obvious: member-managers cannot be held liable based purely on their exercise of managerial powers.[56]  Second, the court did not bother to dwell on what factors would be considered in a viable piercing situation.  Third, the court did not engage in a thorough analysis of the statute and how it contrasts with relevant corporate liability provisions.

In State ex rel. Cooper v. NCCS Loans, Inc.,[57] a case that preceded the Hamby decision, the North Carolina Court of Appeals provided a more substantial consideration of section 57C-3-30.  At issue there was an LLC that provided small loans to customers at rates in flagrant disregard of the state’s usury laws as well as numerous consumer protection statutes.[58]  In permitting the defendant-member to be held personally liable, the court concluded that “Section 57C-3-30(a) clearly anticipates that a member who is also a ‘manager, director, executive, or any combination thereof’ might be made a defendant and ‘become personally liable by reason of [his] own acts or conduct.’”[59]  The court emphasized the word “solely” in the text of the statute as providing a basis for this view.[60]

The court then elaborated on two factors that supported its conclusion that the member should be individually liable.  First, he “entirely owned and controlled” the company.[61]  Second, he used his position as a member to direct unlawful practices and create a number of shell organizations in a deliberate attempt to avoid liability.[62]  While seemingly rational, holding a member individually liable raises two issues.  First, how does complete ownership and control make sense as a piercing consideration in the wake of Hamby?[63]  Second, the court seems to be alluding to inequitable conduct as being a major consideration for piercing; does that mean the court is, at least implicitly, applying the second prong of the instrumentality test articulated in Glenn?[64]

The cases that have cited to section 57C-3-30 are few, and their holdings are unremarkable.  Section 57C-3-30 does not confer absolute immunity, and the courts will pierce the veil when justice so requires.  The finer details of piercing are left undiscussed, and there is no mention of the Glenn test.

C.     Cases that Apply Glenn to Piercing an LLC

Notwithstanding the lack of direction emanating from the Hamby opinion, North Carolina courts have pierced LLCs with zeal.  This is hardly surprising, as every other jurisdiction has done just that.[65]  What is truly remarkable is that the courts are disregarding limited liability without even mentioning section 57C-3-30.  In all of the following cases, the courts have allowed the plaintiff to pierce the liability shield on the basis of the corporate piercing factors discussed in Glenn.

Perhaps the most instructive case on the matter is the North Carolina Supreme Court’s decision in State ex rel. Cooper v. Ridgeway Brands Manufacturing, LLC.[66]  There, Ridgeway Brands Manufacturing, LLC was owned by member-manager James Heflin.[67]  The company produced tobacco and sold it to Ridgeway Brands, Inc., which was owned and managed by Fred Edwards and Carl White.[68]  Ridgeway Brands Manufacturing, LLC sold most of its products to the corporation.[69]  The problem was that, beginning in 2003, Ridgeway Manufacturing, LLC did not maintain a qualified escrow account as required by statute for cigarette producers.[70]  At the same time, Ridgeway Brands Manufacturing, LLC sold its products to the corporation at a cut rate.[71]  The result was that the corporation experienced disproportionately high revenue compared to its competitors, and Ridgeway Brands Manufacturing, LLC did not have enough money to pay into the mandatory escrow account.[72]  At some point in 2003, both the corporation and the LLC entered into a merger; corporate formalities were not observed, but the merger became de facto.[73]

The court began by restating the adage that the corporate form will be disregarded when it is used to “shield criminal wrongdoing, defeat the public interest, and circumvent public policy.”[74]  Next, the court reviewed the instrumentality rule from Glenn and applied it to the case at bar.[75]  Notably, the court did not distinguish between a corporation and an LLC.  The piercing factors cited by the court included directing money to individuals instead of the company, excessively fragmenting the company, destroying “corporate”[76] documents, and directing the movement of funds so as to avoid statutory obligations.[77]  Ultimately, the plaintiff was allowed to pierce the veil.

Ridgeway is a very difficult case to analyze.  The crux of the problem is that the court did not state, and it is by no means clear, whether the plaintiff was piercing an LLC or a corporation.  Both Ridgeway Brands Manufacturing, LLC and Ridgeway Brands, Inc. were named as defendants (along with Heflin, Edwards and White), yet at some point the LLC and the corporation had merged, albeit without observing the statutory strictures for a proper merger.  Throughout the opinion, the court specifically distinguished between “Ridgeway” the LLC, and “Brands” the corporation, but it made clear that the two combined at some point in 2003.[78]  Did the court permit the plaintiff to pierce the veil of the LLC, the corporation, both, or the combined entity that resulted from the merger?[79]

Three possible conclusions may be drawn from Ridgeway.  First, the entity in question was actually a corporation, and thus the application of Glenn was perfectly logical.  Second, the entity was an LLC, and the court intended to apply Glenn to LLCs without modification.  Third, the entity was an LLC, but the court failed to consider the differences between the corporate form and an LLC.  The first and third propositions are certainly plausible and would go a long way toward alleviating the confusion.  The second proposition seems difficult to accept; did the court really intend to allow piercing on the basis of, for example, failing to adhere to corporate formalities?[80]

What is left, then, is a series of lower court decisions that have applied the Glenn factors to LLCs without ever discussing the specific LLC context or section 57C-3-30.  For example, in Anderson v. Dobson,[81] the United States District Court for the Western District of North Carolina quoted the instrumentality test from Glennverbatim and then applied the four factors necessary to show control: inadequate capitalization, failure to follow corporate formalities, lack of an independent identity, and excessive fragmentation.[82]  The court concluded that having no assets, employees, or stock and having one person fill the position of officer, director, and registered agent was not enough to establish control within the meaning of Glenn.[83]

An illustrative case is Bear Hollow, L.L.C. v. Moberk, L.L.C.,[84] decided by the same district court.  At issue there was the sale of real estate from the defendant-LLC to the plaintiff.[85]  The plaintiff was induced to complete the sale on the advice of his confidant and agent.[86]  Unbeknownst to the plaintiff, his agent was actually in the employ of the defendant.[87]  After the completion of the sale, the plaintiff learned of his agent’s conduct and of the unfair price at which he purchased the land.[88]  The plaintiff’s suit included nine causes of action, including fraud and conspiracy, and sought to pierce the veil of the LLC.[89]

In permitting the veil-piercing theory to go forward,[90] the court immediately cited to Glenn and its three-part test and went on to recite all of the corporate factors that are considered in a piercing claim.[91]  Ultimately, the court found the plaintiff’s allegation to be sufficient to withstand dismissal, namely because the defendant-LLC “was inadequately capitalized, failed to comply with corporate formalities, and was completely dominated and controlled by [the two individual members] such that it has no separate mind, will or existence of its own . . . .”[92]

Though decided on a motion to dismiss, the court’s position is still rather remarkable.  The three factors cited by the court—inadequate capitalization, failure to comply with formalities, and complete domination and control—are precisely the three factors that have questionable application to LLCs.[93]

Another particularly vexing problem arises when the courts exclaim that LLC veil piercing is clearly permitted under North Carolina case law and then go on to cite to purely corporate authority for support.  Such was the case in White v. Collins Building, Inc.,[94] where the North Carolina Court of Appeals stated, “It is well settled that an individual member of a limited liability company or an officer of a corporation may be individually liable for his or her own torts, including negligence.”[95]  The court then cited to five cases that all involved corporations, not LLCs.[96]

Similarly, the court in L’Heureux Enterprises, Inc. v. Port City Java, Inc.[97] stated, “It is well established that in certain circumstances North Carolina will disregard the separate and independent existence of a corporation or limited liability company to hold a shareholder or member liable[.]”[98]  The court then cited to American Jurisprudence[99] for support;[100] the cited material does not contain even a single reference to LLCs.  After considering the “well-established” situations in which piercing is permitted, the court applied Glenn and denied the plaintiff’s piercing claim.[101]

In a slightly different setting, the courts are equally muddled about the application of piercing factors in a reverse pierce situation.  For example, in In re AmerLink, Ltd.,[102] the bankruptcy court allowed the plaintiff to pierce through the LLC to reach the assets of the individual member.  What transpired was a myriad of transactions between numerous corporations and LLCs all owned and controlled by the same person.[103]  These transactions had the effect of removing assets from the various entities and enriching the individual defendant to the detriment of creditors.[104]  At the outset, the court, citing Strategic Outsourcing, Inc. v. Stacks,[105] noted that “North Carolina law also recognizes ‘reverse piercing,’ where one entity is the alter ego of another entity, shareholder, or officer, so that the two entities may be treated like one-in-the-same.”[106]  In applying Glenn, the court found that the individual member had “complete control”[107] over AmerLink and used this control to force AmerLink into a series of transactions in “furtherance of wrongs and breaches of duty . . . .”[108]

North Carolina law is thus split along an axis whereby some courts cite to the statute and others to Glenn.  In no case has any court engaged in a meaningful discussion about tailoring piercing claims to an LLC.

III.  Analysis of North Carolina Case Law as Applied to Limited Liability Companies

A synthesis of North Carolina law is in order.  Glenn establishes the instrumentality test for piercing the corporate veil.  Among the many factors listed by the court, four are especially probative: inadequate capitalization, noncompliance with corporate formalities, complete domination and control of the corporation so that it has no independent identity, and excessive fragmentation.[109]  In applying these factors, the central consideration is whether the shareholder exercised such complete domination over the corporation that it had no separate existence, and such domination resulted in inequitable conduct.[110]

Cases that interpret section 57C-3-30 provide few details as to how courts should pierce the veil of an LLC.  Only two things can be determined for certain.  First, as should be obvious from reading the statute, the liability shield provided to an LLC is not absolute under North Carolina law and can be disregarded under certain conditions.  For example, courts have held members liable on at least two occasions where the members used the LLC to violate positive statutory law.[111]  Second, a member can be held liable if he assumes an independent duty separate and apart from that of the company.[112]  No court has engaged in an analysis of the relevant piercing factors under section 57C-3-30.

Numerous courts have allowed a plaintiff to pierce the veil of an LLC without considering section 57C-3-30.  These courts have generally applied the instrumentality test articulated in Glenn, as well as the corporate piercing factors considered therein.  In applying Glenn to LLCs, courts have considered inadequate capitalization,[113] complete and total control of the company,[114] failure to follow corporate formalities,[115] excessive fragmentation, and siphoning of funds.[116]  No court has assessed whether these corporate factors are appropriate in the LLC setting.  Similarly, no court has examined the interplay between Glenn and section 57C-3-30.

It would be a fair assessment to say that the courts have thus far failed to view an LCC as fundamentally different from a corporation, notwithstanding their many similar traits.  It is folly to suggest, as the North Carolina courts have implied, that all factors relevant to a corporate piercing analysis should be imported to a discussion on LLC piercing.  When the North Carolina General Assembly passed the Limited Liability Company Act, it created an entity that is different in kind, and not merely degree, from a corporation.  The LLC in North Carolina, like everywhere else, essentially combines the limited liability of a corporation with the flexibility of a partnership.  The result is a highly flexible entity that is not burdened by the confines of corporate formalism and procedure.  The rationale for creating such an entity, and the wisdom in doing so, is not relevant to a court’s analysis.  It is sufficient that the General Assembly has created such an entity, and the courts must tailor their holdings to give effect to the peculiar traits of the LLC.  The applicability of the various Glenn factors will now be considered in turn.

A.     Inadequate Capitalization

It is not difficult to see why courts are concerned with a business entity being deliberately undercapitalized: it allows the individual to engage in nefarious conduct without meaningful consequence.[117]  If courts did not consider this, an individual could engage in any sort of behavior, and the plaintiff’s relief would be limited to the corporate coffers that were deliberately left bare in anticipation of just such an event.  An alternative conceptualization is that limited liability is a privilege created by the legislature, and as a privilege, it should not be abused.[118]

Of particular relevance to the question of undercapitalization is section 57C-4-06 of the North Carolina LLC Act,[119] which provides that an LLC may not make a distribution if doing so would render the company unable to satisfy its debts as they come due or would make assets less than the sum of liabilities and preferential rights of members if dissolution resulted.[120]  The statute then goes on to impose personal liability on any member who votes for a distribution that would violate section 57C-4-06.[121]

As mentioned previously, commentators and courts are divided about whether undercapitalization is a relevant factor for piercing the veil of an LLC.[122]  Nevertheless, this statutory section provides a strong justification for not extending that factor to LLCs in North Carolina.  There is simply no reason to rely on an equitable remedy when there is a statutory remedy for the same wrong.  Veil piercing was created by the courts to prevent the unscrupulous from using the corporate form to abuse innocent third parties.  This justification for piercing, with respect to inadequate capitalization, is greatly undermined when the legislature has set forth its own form of relief.

That said, there are issues that need mentioning.  First, no North Carolina court has given careful consideration to section 57C-4-06.  This raises the spectacle that a court might constrain the language of the statute to provide a lesser remedy than would be the case in a traditional veil-piercing claim.  Second, and more importantly, section 57C-4-06(a) seems to only provide protection to contract creditors, as opposed to tort victims.  The case history is rife with examples of individuals abusing limited liability to the detriment of a third party.[123]  Thus, inadequate capitalization may be a valid factor in certain cases but not others.

B.     Domination and Control by an Individual

In the corporate setting, complete control and domination can occur in two situations.  The first is the case of a dominant shareholder, while the second is the parent-subsidiary relationship.[124]  In either case, the rationale for imposing liability is that the dominant party has disregarded the statutorily required degree of separation from the controlled corporation.[125]  This problem is especially acute when there is a very small number of shareholders who may also occupy a management position.  An empirical study by Professor Robert Thompson is particularly illuminating.[126]  His survey of 297 cases indicated that when the defendant was both a shareholder and a manager, the court pierced the corporate veil in 46.46% of the cases.[127]  Further, the same data revealed that in 186 of those 297 cases there were three or fewer shareholders in total.[128]  Thus, courts are more likely to pierce when the shareholder is also an active manager and when there are few shareholders.

For LLCs, the LLC Act specifies that “[o]ne or more persons may form an LLC . . . .”[129]  Moreover, the organization of an LLC “requires one or more initial members and any further action as may be determined by the initial member or members.”[130]  The LLC Act also provides that, by default, all members are managers.[131]  It seems clear that the LLC Act allows a single individual to own an LLC completely and to simultaneously exercise full control over its management.

On the one hand, it is seemingly logical that an LLC completely controlled by a single member is exactly the sort that is likely to have no separate existence apart from the member and harm third parties.  On the other hand, the statutory language is unequivocal in permitting a single individual to control an LLC.[132]  This distinction cannot be overstated.  A corporation, almost by definition, separates ownership from management.  The active investor is the exception, not the rule.  LLCs do away with this and instead allow a single individual to not only own the enterprise completely but also exert full managerial control.

C.     Excessive Fragmentation

Of particular concern for corporate creditors is the possibility that incorporators will divide the business into multiple entities that serve no useful business purpose but rather are created so as to frustrate creditors’ recovery.[133]  Using multiple corporations creates the specter of lengthy litigation for creditors and thus higher costs.  An individual might, for example, create two corporations in connection with a single business activity.  One corporation would contain the assets, while the other would be saddled with the liabilities.  A creditor of the liability corporation would have no recovery because the assets have all been segregated into the asset corporation.  To avoid this result, North Carolina courts consider fragmentation when confronted with a piercing claim.

The LLC Act provides no direction as to how courts should apply this factor to an LLC.  However, it is reasonable that the same concern present in the corporate realm exists with LLCs.  In order to protect creditors against inequitable results, it must surely be the case that the courts must consider excessive fragmentation.

D.    Failure to Observe Corporate Formalities

Corporate formalities, at least in theory, serve a variety of purposes.  For example, by maintaining segregation of corporate and personal assets, third parties can have greater confidence that they are contracting with the corporation and not the individual.[134]  Formalities may also protect shareholders from insider malfeasance.[135]  For example, by requiring a corporation to keep records of its dealings and minutes of its board meetings, a disgruntled shareholder has a basis for evaluating the directors’ performance.  This documentation will also be critical if the dispute results in litigation.  One commentator put the rationale more directly: if owners do not treat the corporation as a separate entity, why should the courts?[136]

Like most LLC statutes, North Carolina’s imposes very few formalities.  One is that the LLC file with the Secretary of State articles of organization that include the name of the company, life of the entity, address of each person executing the articles, address of the registered office, and address of the principal office, if any.[137]  Another requirement is that the company file with the Secretary of State an annual report, which must contain substantially the same information as the articles of organization, except the annual report must also include a “brief description of the nature of [the] business.”[138]  A third requirement is that the company maintain a registered agent and office that is subject to service.[139]  These few formalities aside, the statute provides great flexibility for members to operate free and clear of statutorily imposed procedures.

Commentators have almost universally maligned the transplant of this factor from the corporate world to the LLC.[140]  In the first instance, LLC statutes, including North Carolina’s, lack the formalism of corporate statutes.[141]  A more practical concern is that LLCs are likely to be small and closely held and thus unlikely to focus on formalities that do not affect the business operation.[142]  Moreover, by imposing corporate formalities on LLCs, courts would be frustrating the intent of the legislature to provide a flexible form of business organization.[143]  Given the paucity of formalities required by the General Assembly, it would seem unreasonable for North Carolina courts to impose them and thus run afoul of the clear will of the legislature.

A rigid application of Glenn would seem to be at odds with the statutory scheme of the LLC Act, and therefore the courts must endeavor to formulate a more appropriate test.  This is not to say that the central holding of Glenn is wrong; it is almost certainly correct.  Business entities should not be permitted to abuse their existence to the detriment of third parties.  The potential for using an LLC to circumvent public policy is just as great as with a corporation.  What is needed is a tailored approach for LLCs that acknowledges that not all factors relevant to a corporate piercing should be applied to an LLC.


An influential article on the subject once analogized piercing to lightning: it is rare, severe, and unprincipled.[144]  In order to ameliorate the tempest (at least with respect to LLC piercing), courts must be cognizant of three realities.  First, the legislature clearly did not intend to confer absolutely limited liability.  Second, the General Assembly has implicitly agreed with the notion of veil piercing in the LLC context.  The General Assembly could have prevented the use of the equitable remedy but chose not to do so, thus granting at least tacit approval for the practice.  Third, an LLC is not a rehashed corporation; it is a fundamentally different creation.  It has its own parlance, statute, forms, requirements, and procedures.  It is only natural that it needs its own independent body of law.

Accordingly, North Carolina courts should place special emphasis on the second element of the Glenn test—whether there was fraud, a violation of a statutory duty, or unjust conduct.[145]  This is, after all, what the legislature wanted to avoid in only providing limited (as opposed to absolute) limited liability.  The first part of the instrumentality test—control and domination such that there is no independent existence—should not be stressed to the same extent.

In evaluating this first prong, the factors need to be reconsidered in application to an LLC.  First, the failure to observe formalities should not be relevant given that the statute requires so few.  Second, allowing a plaintiff to pierce because a single individual completely owns and controls the company would seem odd in light of a statute that permits precisely that.  Lack of adequate capitalization is a more difficult question, but in light of section 57C-4-06 it would make sense to reevaluate its application.  In particular, lack of adequate capitalization should not be a factor in contract piercing actions but should remain a consideration for tort victims who might not have a statutorily created remedy.  Fragmentation of the company into any number of meaningless shells remains a concern, and the courts should be on guard.

It might well be the case that piercing factors become increasingly irrelevant, with the great emphasis being the second element of the test.  Indeed, this may already be the case.  In both Gunnings and NCCS Loans, the piercing was predicated, in large part, on the defendants’ gross violations of consumer protection acts and usury laws, with no treatment of the piercing factors.

Refining, or at least rebalancing, the piercing factors for LLCs would harmonize North Carolina’s law with that of several other states, including Wyoming, Minnesota, Colorado, and California.[146]  Other state courts may be moving in a similar direction, as evidenced by the courts’ thoughtful discussions in both In re Giampietro[147]  (Nevada) and D.R. Horton[148]  (New Jersey).

It seems clear that lower courts are going to continue to decide LLC veil-piercing issues in a haphazard manner unless and until the North Carolina Supreme Court revisits the issue in more a thorough way than it did in Hamby.  What is needed is a tailored approach to LLCs that recognizes their uniqueness and distinctiveness from corporations.  By reconsidering piercing factors in light of the LLC Act and the General Assembly’s intent in creating LLCs, a more sound principle of equity will be achieved to the benefit of all.

        [1].   See generally Larry E. Ribstein & Robert R. Keatinge, Ribstein and Keatinge on Limited Liability Companies § 1:2 (2d ed. 2011).

        [2].   Id.

        [3].   See David L. Cohen, Theories of the Corporation and the Limited Liability Company: How Should Courts and Legislatures Articulate Rules for Piercing the Veil, Fiduciary Responsibility and Securities Regulation for the Limited Liability Company?, 51 Okla. L. Rev. 427, 429 (1998) (discussing the significance of the LLC in Delaware).

        [4].   See William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 18 (2012).

        [5].   Russell M. Robinson, II, Robinson on North Carolina Corporate Law § 34.01 (7th ed. 2006) (noting that an LLC “combines characteristics of business corporations and partnerships”); Geoffrey Christopher Rapp, Preserving LLC Veil Piercing: A Response to Bainbridge, 31 J. Corp. L. 1063, 1066 (2006) (“An LLC is frequently described as a ‘hybrid’ entity . . . .”).

        [6].   For example, Judge Easterbrook and Professor Fischel argue that, in the corporate setting, limited liability provides six key benefits: it decreases the need to monitor, reduces the cost of monitoring, incentivizes manager efficiency, allows for the impounding of additional information about the value of the firm, allows for efficient diversification, and facilitates optimal investment decisions.  Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. Chi. L. Rev. 89, 94–97 (1985).

        [7].   This is true in the corporate context.  Some LLC statutes, however, specifically incorporate veil piercing.  See infra note 18.

        [8].   Easterbrook & Fischel, supra note 6, at 89.

        [9].   Fletcher, supra note 4, § 41.

      [10].   Id. § 41.30.

      [11].   Id. § 41.10.

      [12].   Id.

      [13].   Id. §§ 41.30, 41.34.  For a detailed discussion of each of these factors, see id. §§ 41.31–.60.

      [14].   See id. § 41.30.

      [15].   North Carolina Limited Liability Company Act, N.C. Gen. Stat. § 57C (2011).

      [16].   Id. § 57C-3-30.

      [17].   Professor Karin Schwindt groups North Carolina’s statute with Alaska, Kentucky, Mississippi, Missouri, Nebraska, New Hampshire, New Jersey, New York, Ohio, Oregon, South Carolina, and Washington, D.C.  Karin Schwindt, Limited Liability Companies: Issues in Member Liability, 44 UCLA L. Rev. 1541, 1554 n.60 (1997).

      [18].   N.C. Gen. Stat. § 57C-3-30.

      [19].   Colo. Rev. Stat. § 7-80-107 (2011); Minn. Stat. § 322B.303(2) (2012); see also Jeffrey K. Vandervoort, Piercing the Veil of Limited Liability Companies: The Need for a Better Standard, 3 DePaul Bus. & Com. L.J. 51, 65 (2004) (discussing the various treatments that statutes give to the existing body of corporate veil-piercing case law with respect to LLCs).

      [20].   46 P.3d 323 (Wyo. 2002).

      [21].   The court stated:

Certainly, the various factors which would justify piercing an LLC veil would not be identical to the corporate situation for the obvious reason that many of the organizational formalities applicable to corporations do not apply to LLCs.  The LLC’s operation is intended to be much more flexible than a corporation’s.  Factors relevant to determining when to pierce the corporate veil have developed over time in a multitude of cases.

Id. at 328.

      [22].   Id.

      [23].   See, e.g., Cal. Corp. Code. § 17101(b) (West 2012) (stating that failure to follow formalities is not a ground for imposing individual liability); D.R. Horton Inc.–New Jersey v. Dynastar Dev., L.L.C., No. MER-L-1808-00, 2005 WL 1939778, at *36 (N.J. Super. Ct. Law Div. Aug. 10, 2005) (“It is sufficient for this court to conclude that in this case, [the defendant’s] failure to scrupulously identify the entity through which he was acting . . . should not loom as large as it might were the entity a corporation.”).

      [24].   Revised Unif. Ltd. Liab. Co. Act § 304(b) (2006).

      [25].   In re Giampietro, 317 B.R. 841, 848 n.10 (Bankr. D. Nev. 2004) (“It may very well be that while the same principles used in corporate alter ego cases may apply to limited liability companies, they may apply with different weight.”).

      [26].   Vandervoort, supra note 19, at 70 (“[G]enerally speaking, members are normally authorized agents and/or managers of LLC’s for the purpose of conducting its affairs.”).

      [27].   Stephen B. Presser, Piercing the Corporate Veil § 4:2 (2011).

      [28].   Schwindt, supra note 17, at 1559.

      [29].   Id.

      [30].   D.R. Horton Inc.–New Jersey v. Dynastar Dev., L.L.C., No. MER-L-1808-00, 2005 WL 1939778, at *31 (N.J. Super. Ct. Law Div. Aug. 10, 2005).

      [31].   Ribstein & Keatinge, supra note 1, § 12:3.

      [32].   Cf. Vandervoort, supra note 19, at 72 (“[U]ndercapitalization appears to be directly applicable to LLC’s with little or no modification.”).

      [33].   D.R. Horton Inc., 2005 WL 1939778, at *36.

      [34].   See, e.g., In re Giampietro, 317 B.R. 841, 848 n.10 (Bankr. D. Nev. 2004) (“It may very well be that while the same principles used in corporate alter ego cases may apply to limited liability companies, they may apply with different weight.”); Kaycee Land & Livestock v. Flahive, 46 P.3d 323, 328 (Wyo. 2002)(“Certainly, the various factors which would justify piercing an LLC veil would not be identical to the corporate situation . . . .”).

      [35].   See In re Giampietro, 317 B.R. at 847 n.9 (citing various cases that treat veil piercing the same in both the LLC and corporate context).

      [36].   Stephen M. Bainbridge, Abolishing LLC Veil Piercing, 2005 U. Ill. L. Rev. 77, 79 (2005).

      [37].   See supra note 16 and accompanying text.

      [38].   Robinson, supra note 5, § 2.10.

      [39].   329 S.E.2d 326 (N.C. 1985).

      [40].   Id. at 330.

      [41].   Id. (quoting B-W Acceptance Corp. v. Spencer, 149 S.E.2d 570, 575 (N.C. 1966)).

      [42].   Id.

      [43].   Id. at 332.

      [44].   Id. at 330–32.

      [45].   Id. at 332.

      [46].   Id. at 333.

      [47].   Id. at 329.

      [48].   Id. at 330.

      [49].   See, e.g., L’Heureux Enter., Inc. v. Port City Java, Inc., No. 06 CVS 3367, 2009 WL 4644629, at *8–9 (N.C. Super. Ct. Sept. 4, 2009).

      [50].   See, e.g., In re AmerLink, Ltd., No. 09-01055-8-JRL, 2011 WL 874140, at *3 (Bankr. E.D.N.C. Mar. 11, 2011).

      [51].   652 S.E.2d 231 (N.C. 2007).

      [52].   Id. at 232–33.

      [53].   Id. at 233.

      [54].   Id. at 236.  The Hamby court was applying the law of Delaware, but the analysis would be the same for North Carolina.  Importantly, the court stated:

North Carolina’s third-party liability statute, N.C.G.S. § 57C-3-30(a), is substantially similar to that of Delaware, Del.Code Ann. tit. 6, § 18-303(a).  Both statutes state that members or managers cannot be held liable for the obligations of an LLC “solely by reason of” being members or managers or participating in management of an LLC.  Del.Code Ann. tit. 6, § 18-303(a); N.C.G.S. § 57C-3-30(a).  The North Carolina statute also states that members or managers may be held personally liable for their “own acts or conduct.”  See N.C.G.S. § 57C-3-30(a).  However, this language appears to simply clarify the earlier principle: the liability of members or managers is not limited when they act outside the scope of managing the LLC.

Id. at 236 n.1.

      [55].   Id. at 236; see also Spaulding v. Honeywell Int’l, Inc., 646 S.E.2d 645, 649 (N.C. Ct. App. 2007) (“[I]n the absence of an independent duty, mere participation in the business affairs of a limited liability company by a member is insufficient, standing alone and without a showing of some additional affirmative conduct, to hold the member independently liable for harm caused by the LLC.”).  The failure of a member to investigate a fellow member for malfeasance is insufficient, absent actual knowledge of the malfeasance, to establish personal liability under section 57C-3-30.  Babb v. Bynum & Murphrey, PLLC, 643 S.E.2d 55, 57 (N.C. Ct. App. 2007).

      [56].   In an earlier case it was held that it was improper under Rule 11 of the North Carolina Rules of Civil Procedure to name a member of an LLC as a defendant in an action against the LLC without any evidence to support the claim.  Page v. Roscoe, L.L.C., 497 S.E.2d 422, 428 (N.C. Ct. App. 1998).  This case, the first to reference section 57C-3-30, arguably was the first to open the door to an LLC piercing claim because it seemingly limited the holding to instances where there is no evidence to support an individual claim.  It is implicit that, had there been appropriate evidence, the outcome would have been different.

      [57].   624 S.E.2d 371 (N.C. Ct. App. 2005).

      [58].   Id. at 373.

      [59].   Id. at 379–80.

      [60].   Id. at 379.  In a later case brought in federal court, the court, in applying the test from NCCS Loans, held that individual liability would attach to members who exerted control over the companies and who were “directly and personally involved in the fraudulent scheme.”  Gunnings v. Internet Cash Enter. of Asheville, No. 5:06CV98, 2007 WL 1931291, at *6 (W.D.N.C. July 2, 2007).  This court also noted that ownership of the LLC is enough; the defendant-member does not need to control the day-to-day operations to be held liable.  Id.

      [61].   NCCS Loans, 624 S.E.2d at 380.

      [62].   Id.

      [63].   Recall that the Hamby court did not think complete ownership and control was relevant in the LLC context because the statute clearly allowed member-managers to control the LLC.  Hamby v. Profile Prods., L.L.C., 652 S.E.2d 231, 236 (N.C. 2007).

      [64].   The NCCS Loans opinion never cites to Glenn.

      [65].   Rapp, supra note 5 (“[C]ourts have universally embraced veil piercing in the LLC context . . . .”).

      [66].   666 S.E.2d 107 (N.C. 2008).

      [67].   Id. at 109.

      [68].   Id.

      [69].   Id.

      [70].   Id. at 109–10.

      [71].   Id. at 109.

      [72].   Id.

      [73].   Id.

      [74].   Id. at 113.

      [75].   Id.

      [76].   Id. at 114.  Note that the court uses the phrase “corporate” even though it is referring specifically to Ridgeway Brands Manufacturing, LLC.

      [77].   Id.

      [78].   The court clarified:

In early 2003 Heflin, Edwards, and White announced the merger of Ridgeway and Brands.  Although the formalities were never concluded, the merger became a de facto reality.  In early 2003, Brands became the sole purchaser of cigarettes manufactured by Ridgeway.  Ridgeway allegedly became “a corporation without a separate mind, will or existence of its own[,] . . . operated as a mere shell to perform for the benefit of . . . [Brands], Edwards, White and Heflin.”

Id. at 109–10 (alterations in original).  Later, the court states, “[t]o support its effort to pierce the corporate veil, plaintiff alleged in the amended complaint that Heflin, Edwards, and White exhibited control over Ridgeway . . . .”  Id. at 110.  This is doubly confusing.  The court makes absolutely clear that “Ridgeway” refers to the LLC, yet also states that only Heflin was a member of the LLC.  Edwards and White were the shareholders in the corporation.

      [79].   Again, it is not clear what type of entity resulted from the merger.

      [80].   As previously mentioned, the court did not list failure to adhere to formalities as one of the factors.  However, it is a Glenn factor that was not explicitly disclaimed.

      [81].   No. 1:06CV2, 2006 WL 1431667 (W.D.N.C. 2006).

      [82].   Id. at *6.

      [83].   Id. at *7.

      [84].   No. 5:05CV210, 2006 WL 1642126 (W.D.N.C. 2006).

      [85].   Id. at *1.

      [86].   Id. at *2.

      [87].   Id.

      [88].   Id.

      [89].   Id.

      [90].   The issue was before the court on a motion to dismiss.  The court specifically noted that the complaint alleged enough facts to withstand the defendant’s Rule 12(b)(6) motion.  Id. at *13.

      [91].   Id. at *17.

      [92].   Id.

      [93].   As previously mentioned, there is significant debate about whether inadequate capitalization is a valid piercing factor in the LLC context.  See supra notes 30–32.

      [94].   704 S.E.2d 307 (N.C. Ct. App. 2011).

      [95].   Id. at 310.

      [96].   Id.  The proposition that a member may be held individually liable for his own tortious conduct is supported by the language of section 57C-3-30 itself.  What is problematic is that the court in this case failed to distinguish LLCs from corporations.

      [97].   No. 06 CVS 3367, 2009 WL 4644629 (N.C. Super. Ct. Sept. 4, 2009).

      [98].   Id. at *8.

      [99].   18 Am. Jur. 2d Corporations § 47 (2012).

    [100].   L’Heureux Enter., 2009 WL 4644629, at *8.

    [101].   Id. at *8–9.

    [102].   No. 09-01055-8-JRL, 2011 WL 874140 (Bankr. E.D.N.C. Mar. 11, 2011).

    [103].   Id. at *1–2.

    [104].   Id.

    [105].   625 S.E.2d 800 (N.C. Ct. App. 2006).

    [106].   In re AmerLink, 2011 WL 874140, at *3.

    [107].   Id. at *4.

    [108].   Id.

    [109].   Glenn v. Wagner, 329 S.E.2d 326, 330–31 (N.C. 1985).

    [110].   Id. at 330.

    [111].   See, e.g., Gunnings v. Internet Cash Enter. of Asheville, No. 5:06CV98, 2007 WL 1931291, at *6 (W.D.N.C. July 2, 2007); State ex rel. Cooper v. Ridgeway Brands Mfg., LLC, 666 S.E.2d 107, 116 (N.C. 2008).

    [112].   Spaulding v. Honeywell Int’l, Inc., 646 S.E.2d 645, 649–50 (N.C. Ct. App. 2007).

    [113].   Bear Hollow, L.L.C. v. Moberk, L.L.C., No. 5:05CV210, 2006 WL 1642126, at *17 (W.D.N.C. 2006).  Inadequate capitalization was considered inL’Heureux Enter., but the court concluded there was not a sufficient allegation by the plaintiff to merit further inquiry.  L’Heureux Enter., Inc. v. Port City Java, Inc., No. 06 CVS 3367, 2009 WL 4644629, at *9 (N.C. Super. Ct. Sept. 4, 2009).

    [114].   Bear Hollow, 2006 WL 1642126, at *17.  In Anderson, the company had one person who acted as the officer, director, and registered agent.  Anderson v. Dobson, No. 1:06CV2, 2006 WL 1431667, at *7 (W.D.N.C. 2006).  The court concluded that such a showing, without more, is insufficient to pierce the corporate veil.  Id.

    [115].   Bear Hollow, 2006 WL 1642126, at *17.

    [116].   Ridgeway, 666 S.E.2d at 114.

    [117].   See, e.g., Commonwealth Mut. Fire Ins. v. Edwards, 32 S.E. 404, 406 (N.C. 1899) (“One of [the] great dangers is the risk of insolvency arising from the want of any personal liability of their stockholders, and the uncertain, and perhaps fictitious, nature of their assets.  Some are afflicted with what may be called ‘congenital’ insolvency.  They are born insolvent, capitalized into insolvency at the moment of their creation, and eke out a precarious existence in an apparent effort to solve the old paradox of living on the interest of their debts.  Such corporations are not only intrinsically dangerous, but lay the foundation for an unjust suspicion of all other corporate bodies.”); Stephen B. Presser, Thwarting the Killing of the Corporation: Limited Liability, Democracy, and Economics, 87 Nw. U. L. Rev. 148, 165 (1992) (“If the shareholder or shareholders deliberately incorporate with initial capital they know to be inadequate to meet the expected liabilities of the business they intend to be doing, they are engaging in an abuse of the corporate form, and ought to be individually liable when those liabilities actually occur.”).

    [118].   Robinson, supra note 5, § 2.10(b).

    [119].   North Carolina Limited Liability Company Act, N.C. Gen. Stat. § 57C-4-06 (2011).

    [120].   The statute notes:

No distribution may be made if, after giving effect to the distribution:

(1) The limited liability company would not be able to pay its debts as they become due in the usual course of business; or

(2) The limited liability company’s total assets would be less than the sum of its total liabilities plus, unless the operating agreement provides otherwise, the amount that would be need, if the limited liability company were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of members whose preferential rights are superior to the rights of the member receiving the distribution.

Id. § 57C-4-06(a).  A notable criticism of using undercapitalization as a piercing factor for LLCs is that it is difficult to determine what level of capitalization is adequate.  Vandervoort, supra note 19, at 73.  Section 57C-4-06(a) effectively provides the solution.

    [121].   N.C. Gen. Stat. § 57C-4-07.

    [122].   See supra notes 31–33 and accompanying text.

    [123].   See, e.g., State ex rel. Cooper v. NCCS Loans, Inc., 624 S.E.2d 371 (N.C. Ct. App. 2005) (explaining that the defendant was charging interest in excess of 400% while engaging in conduct in disregard of consumer protection laws).

    [124].   Robinson, supra note 5, § 2.10(b).

    [125].   Vandervoort, supra note 19, at 62.

    [126].   See generally Robert B. Thompson, The Limits of Liability in the New Limited Liability Entities, 32 Wake Forest L. Rev. 1 (1997).

    [127].   Id. at 10 tbl.1.

    [128].   Id. at 10 tbl.2.

    [129].   North Carolina Limited Liability Company Act, N.C. Gen. Stat. § 57C-2-20(a) (2011).

    [130].   Id.

    [131].   Id.

    [132].   See Presser, supra note 27 (“Most limited liability company statutes allow members to manage the LLC.  This provision illustrates a legislative intent to allow small, one-person and family-owned businesses the freedom to operate their companies themselves and still enjoy freedom from personal liability.”).

    [133].   Robinson, supra note 5, § 2.10(b).

    [134].   See id.

    [135].   See Vandervoort, supra note 19, at 60.

    [136].   Robinson, supra note 5, § 2.10(b).

    [137].   North Carolina Limited Liability Company Act, N.C. Gen. Stat. § 57C-2-21(a) (2011).

    [138].   Id. § 57C-2-23.

    [139].   Id. § 57C-2-40.

    [140].   Vandervoort, supra note 19, at 67.

    [141].   For example, there are usually requirements to hold annual meetings, elect directors and officers, maintain records, and issue stock certificates.  Eric Fox,Piercing the Veil of Limited Liability Companies, 62 Geo. Wash. L. Rev. 1143, 1162 (1994).

    [142].   John H. Matheson & Raymond B. Eby, The Doctrine of Piercing the Corporate Veil in an Era of Multiple Limited Liability Entities: An Opportunity to Codify the Test for Waiving Owners’ Limited-Liability Protection, 75 Wash. L. Rev. 147, 175 (2000).

    [143].   Vandervoort, supra note 19, at 68.

    [144].   Easterbrook & Fischel, supra note 6, at 89.

    [145].   Glenn v. Wagner, 329 S.E.2d 326, 330 (N.C. 1985).

    [146].   See supra notes 19–20.

    [147].   See supra notes 25, 34–35 and accompanying text.

    [148].   See supra notes 23, 30 and accompanying text.

      *   J.D. Candidate, May 2013, Wake Forest University School of Law.


By: Leo E. Strine, Jr.*

This Essay addresses an issue that, to be candid, perplexes me. That issue is the continuing dismay evidenced in Western, capitalist nations when public corporations that pursue profit for their stockholders take actions that adversely affect the nation’s economic stability, the corporation’s employees, or the environment.

When a corporation’s ardor for profits leads it to take excessive risks that endanger the firm’s solvency, commentators react with shock and dismay.  How can corporate managers be so blinded by the immediate prospect of profit that they would ignore what, in hindsight, seem like such obvious risks?  Likewise, we rent our garments in anger and chagrin when energy companies take environmental shortcuts in drilling for oil or mining coal, surprised that profit-maximizing firms have been less than optimally protective of the environment and their workers, that they did not go beyond what was simply necessary to ensure that regulators allowed them to operate.  Similarly, we anguish when the board of a venerable homeland corporate icon reacts receptively to a premium takeover bid from a foreign acquirer.  How could the board sell out and undermine the traditional values the firm stands for?  It cannot be that the long-term stockholders would put their desire for a one-time, short-term profit ahead of the continued independence of a nationally important institution?

Although I am sympathetic to many of the sentiments and policy concerns that motivate these dismayed reactions, I confess to being weary of the naïveté they manifest.  More importantly, the continued failure of our societies to be clear-eyed about the role of the for-profit corporation endangers the public interest.  Instead of recognizing that for-profit corporations will seek profit for their stockholders using all legal means available, we imbue these corporations with a personality and assume they are moral beings capable of being “better” in the long-run than the lowest common denominator.  We act as if entities in which only capital has a vote will somehow be able to deny the stockholders their desires, when a choice has to be made between profit for those who control the board’s reelection prospects and positive outcomes for the employees and communities who do not.

In this Essay, I identify some recent instances that reflect our continued inability to view the for-profit corporation with a gimlet eye.  These examples track recurrent patterns.  I begin with a couple stories in the headlines of corporate greed at BP in connection with the Deepwater disaster in the Gulf of Mexico and at the U.S. banks that were bailed out by the federal government.  I then proceed to less obvious stories where courts have affirmed the preeminence of stockholders in the for-profit corporation, the first in an older case challenging Henry Ford’s stated preference for employees over stockholders and the second in a recent one challenging Craigslist’s attempt to protect its online community from stockholders selling in a takeover.  Next, I consider how stockholders have fared in other capitalist countries, looking at Kraft’s successful takeover of Cadbury in the United Kingdom and BHP Billiton’s failed bid to acquire the Potash Corporation of Saskatchewan.  In the end, policy makers should not delude themselves about the corporation’s ability to police itself; government still has a critical role in setting the rules of the game.

I.  Oil Spills and Bailed-Out Banks: Relearning Obvious Lessons of History

The first situations I address exemplify the tendency to underestimate the extent to which firms subject to pressures to deliver short-term profits for their stockholders pose a serious risk of generating societally destructive externalities.  I will only briefly discuss these examples because they are, at least in my estimation, so obvious.

A.     Risk Taking with Underwater Drilling

The first story is the BP oil spill disaster in the Gulf.  In the wake of the spill, there was widespread outrage about corporate callousness.[1]  How could a corporation drill so deep with no reliable plans as to how to address a leak in the well?[2]  How could so many safety features be inoperable?[3]  To me, it is to be expected that a corporation that stands to gain large profits from aggressive drilling activity would less than optimally consider the environmental risks and occupational hazards that novel drilling activity posed.[4]  BP, after all, stood to gain all the profits from its activities, while the risks to the environment would be borne largely by others.[5]

Not only do corporations have incentives to disregard risks for the sake of profits, but there is a natural tendency to pay attention to short-term profits over long-term risks.  In fact, most of us place a higher value on immediate satisfaction than on the long-term risks created by such satisfaction.[6]  If we can get all the benefits of the immediate satisfaction for ourselves, and know that the longer-term costs will be shared with a lot of others, we go for today over tomorrow even more.  And, when an industry is among the leaders in having lobbyists precisely for the purpose of minimizing governmental regulation of its activity,[7] trusting that industry to balance environmental concerns and worker safety responsibly against the prospect of immediate profit would seem even more naïve.

B.     Risk Taking with Now Underwater Mortgages

The other rather obvious example of silly surprise is the recent financial crisis.  This crisis was in no small measure caused by the signing of trillions of dollars in risk-shifting transactions, the bulk of which had at their root packages containing subprime mortgages.[8]  The parties who wrote these mortgages did not act or think as typical lenders.[9]  They did not expect the borrowers to pay off the mortgage contracts as written.[10]  Instead, the idea was that the mortgages would be refinanced again as already inflated real estate prices continued to rise.[11]  Even better, of course, the loans were securitized so the underwriters—the first-instance “lenders”—could pass the risk down the line.[12]  Buyers of these securities were plentiful.  Most of these transactions were motivated by a desire to make speculative trading profits, not to hedge risks.[13]  And the willingness of rating agencies to give the packages a triple-A rating[14] allowed fiduciaries[15]—so-called “sophisticated investors”—to buy them for pension funds.[16]

Now, how any loan tranche dependent on subprime loans could be rated triple A—the very best—is difficult for a definitionally disciplined mind to grasp, but men and women of finance, making bets largely with other people’s money, did not hesitate over the linguistic or even financial illogic of such labeling.  Nor mind you, did very real risk indicators give them pause, such as the need for the American credit card industry to secure the passage of a bill making it harder for their increasingly defaulting clients to file for bankruptcy.[17]  Nay, that bill encouraged this risk-taking as sub-prime mortgages were marketed to people on the idea that the new mortgage would provide cash needed to pay off credit card debt, buy a new big screen TV, and come with a great feature—no need to pay principal for five years at a time of unprecedentedly low interest rates.[18]  This was the real blue-chip stuff, the obvious triple A.  But on top of it was built an Everest of money, much of it backed in the end by AIG, which at one point was contractually responsible for $2.7 trillion in potential risk.[19]

As Professor Lynn Stout has recently pointed out, there was an even bigger warning sign.  In 2008, the $67 trillion credit default swap market was made up almost exclusively of credit default swaps written on mortgage-backed bonds in a market in which the total value of all underlying asset-backed and corporate bonds in the United States that year was a mere $15 trillion.[20]  Rank speculation was thus the rule, not the exception.[21]

In hindsight, this is the kind of stuff Planters® honey roasts and sells in a can.  There were many who knew enough financial history to be very nervous about a system that combined core banking with speculative trading, that hid greatly relaxed capital requirements, and that allowed outright speculative gambling in the form of unregulated credit default swaps.[22]  In the typical credit default swap, a kind of insurance contract, the party providing the insurance neither had to have an insurable interest in the matter[23] nor, more importantly, sufficient capital to make good on the insurance protection it had sold.  As it turns out, AIG’s riskiest insurance operation was its writing of trillions of credit default swaps, contracts it was not capitalized to fulfill and which were outside the province of state regulators.  Similarly absurd was the idea that swap protection was purchased from hedge funds,[24] whose only obligation to make good was to issue capital calls to its investors.  Good luck with that.

The mismatch between immediate reward and the bearing of ultimate risk could not have been more extreme, as speculation ran wild in the wake of the erosion of key legal barriers to gambling of this kind.[25]  But legislators and regulators had become drunk on their own cocktails, having naïvely (or worse) assumed that markets would “price” these risks.  So, indeed, had many academics, such as many of my law and economics scholar-friends in the academy who confidently told me in the years before the meltdown that my worries over the credit bubble and increased leverage in the financial sector reflected my inadequate appreciation of the keen ability of current financial and capital markets to price risks accurately.

Nor, of course, did one need worry that financial institutions that had regularly received government bailouts because of their systemic importance would be less than optimally incentivized to prudently assess risks.  And the growing complexity of financial institutions themselves was no worry, again, for the same reasons.  Markets would take care of it and price it, ignoring of course that the capital markets themselves had grown in complexity and churned like a meth-fueled gerbil’s wheel.[26]  Whatever these capital markets were driven by, a deep examination of the long-term risks of transactions generating large short-term profits did not, in the end, turn out to be high on the list.[27]

And when it all crashed down, the first to receive treatment were those who had profited most.  No doubt they felt pain, but not enough that one can confidently believe they are worse off today than if they had not behaved recklessly.  Most obviously, though, the importance of these institutions to our economies made it impossible not to bail them out.  And bailed out they were, given huge subsidies, partly comprised of free money to borrow in order to make profitable trades and return to health.[28]

The borrowers, who share a good deal of responsibility, too, but whose need to take risks was perhaps easier to rationalize as moral—a house to live in and bills paid off versus the ability to buy an even cooler sports car—got a rawer deal.  Rawest of all, though, was the deal for millions of hard working people who were paying their bills until the calamity destroyed economic growth and resulted in double-digit, persistent unemployment.[29]  They continue to suffer as do many others who have retained their jobs but endured furloughs, benefit cuts and pay freezes, and seen their local taxes increase as services by budget-crunched governments diminish.

For now, however, the important lesson is simple.  For-profit businesses have incentives toward current profit-maximization that make them poorly positioned to evaluate risk and be safe regulators. The environmental wreckage in the Gulf of Mexico and the global human wreckage caused by the financial sector’s imprudence should be rather plain evidence of that truth.

II.  “Community Values” on the Assembly Line and in Online Classifieds: Recognizing the Incentives in the Stockholder-Financed Corporation

Another enduring myth is that there exist “special” for-profit corporations, ones that will behave differently from others over the long-run because they are controlled by visionaries who will place some idea of the public good ahead of profit.  In saying this is a myth, I don’t mean to imply that there are not very talented entrepreneurs who figure out how to do well by doing good.  There are, thankfully, a number of businesses that do pay good wages, provide safe working environments and livable weekly hours, treat the environment with respect, and play the competitive game fairly.  Instead, my point is that managers in stockholder-financed corporations are inevitably answerable to the stockholders, whatever the “community values” articulated by the corporation’s founders or others, which is why regulations designed to protect against the externality risks inherent in profit-seeking are critical.

A.     A Taste of History: Henry Ford’s Social Vision for Ford Motor Company

Ultimately, any for-profit corporation that sells shares to others has to be accountable to its stockholders for delivering a financial return.  This is not a new notion.  An American entrepreneur by the name of Henry Ford tested that proposition and lost some ninety-three years ago in a famous case.[30]  In that case, Ford brazenly proclaimed that he was not managing Ford Motor Company to generate the best sustainable return for its stockholders.[31]  Rather, he announced that the stockholders should be content with the relatively small dividend they were getting and that Ford Motor Company would focus more on helping its consumers by lowering prices and on bettering the lives of its workers and society at large by raising wages and creating more jobs.[32]

To simplify, the Michigan Supreme Court held that Ford could not justify his actions that way, and that although he could help other constituencies such as workers and consumers, as an instrument to the end of benefiting stockholders, he could not subordinate the stockholders’ best interest.[33]  This holding was central, in my view, to the court’s embrace of what we call the business judgment rule.[34]  Under that rule, the judiciary does not second-guess the decision of a well-motivated, non-conflicted fiduciary.[35]  Fundamental to the rule, however, is that the fiduciary be motivated by a desire to increase the value of the corporation for the benefit of the stockholders.[36]  By confessing that he was placing his altruistic interest in helping workers and consumers over his duty to stockholders,[37] Henry Ford made it impossible for the court to afford him business judgment deference.

B.     History Repeats Itself: Craigslist as a “Community” Corporation

In 2010, Chancellor Chandler decided a case in Delaware with some striking similarities to Dodge v. Ford Motor.  The case[38] pitted the founder of Craigslist, the online classifieds firm, against eBay, the well-known online auction giant.  As with the Dodge brothers and Ford, eBay (the suing stockholder) was also a competitor of the firm being sued.  Also, as in Dodge v. Ford Motor, the firm being sued had a leader who openly argued that he was running the firm primarily to the end of something other than stockholder wealth, subordinating stockholders’ financial well-being to his own unique social perspective.  At Craigslist, according to this argument, the superior interest was the supposed community of users of its services, services the firm had been selling cheaply or giving away, when higher prices seemed to be readily attainable.[39]

But that core issue was not the subject of eBay’s lawsuit, which instead focused on the measures Craigslist’s founder took to ensure that he and his heirs would control Craigslist and to cement his vision that Craigslist be a community-oriented and community-driven corporation, not a cold-blooded profit machine.  To that end, Craig Newmark (the Craigslist founder, controlling stockholder, and director) and Jim Buckmaster (the other controlling stockholder and director on Craigslist’s three-member board) implemented actions aimed at stopping or slowing eBay’s ability to acquire Craigslist, or otherwise disrupt what Craig and Jim called Craigslist’s “corporate culture.”[40]

The most important antitakeover measure was the adoption of a shareholder rights plan that would have diluted eBay’s ownership of Craigslist upon even a minor increase in eBay’s minority stockholding position.  In defending their decision in court, Jim and Craig did not argue that they employed the poison pill to protect the economic interests of the company’s stockholders.  No, instead Jim and Craig argued that the pill was justified by their heartfelt desire to protect Craigslist’s coveted social values and community-centered culture from the disruption an eBay acquisition might have on those values and culture.[41]

Echoing what I view as a standard notion behind the business judgment rule, Chancellor Chandler rejected Jim and Craig’s argument.  In so ruling, he stated, “Directors for a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistently with the directors’ fiduciary duty under Delaware law.”[42]  This, to my view, rather expected statement, drew fire from both ends of our corporate law political spectrum, if there be such a thing.

A group promoting a new form of for-profit corporation, the charter of which indicates that other ends, such as philanthropic or community-aimed ends, can be put ahead of profit, reacted with hyperbole, urging corporations to leave Delaware.[43]  If, they said, you remain incorporated in Delaware, your stockholders will be able to hold you accountable for putting their interests first.[44]  You must go elsewhere, to a fictional land where you can take other people’s money, use it as you wish, and ignore the best interests of those with the only right to vote.[45]  In this fictional land, I suppose a fictional accountability mechanism will exist whereby the fiduciaries, if they are a controlling interest, will be held accountable for responsibly balancing all these interests.  Of course, a very distinguished mind of the political left, Adolph Berle, believed that when corporate fiduciaries were allowed to consider all interests without legally binding constraints, they were freed of accountability to any.[46]  Equally unrealistic is the idea that corporations authorized to consider other interests will be able to do so at the expense of stockholder profits if voting control of the corporation remains in the stock market.[47]  Just how long will hedge funds and mutual funds subordinate their desire for returns to the desire of a founder to do good?

From a different political perspective come those who seem to take umbrage at plain statements like the Chancellor’s for unmasking the face of capitalism.  These commentators seem dismayed when anyone starkly recognizes that as a matter of corporate law, the object of the corporation is to produce profits for the stockholders and that the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation.  Maxwell Kennerly, in his review of the eBay decision, noted what he perceived to be a triad of conservative academic commentators who were unhappy with Senator Al Franken’s statement that “it is literally malfeasance for a corporation not to do everything it legally can to maximize its profits”—a statement, that in Kennerly’s view, encapsulates a material portion of the holding in the eBay opinion.[48]

One suspects that this vein of commentary does not fear the unmasking because these commentators believe that courts would actually prevent corporations from pursuing profit in an enlightened manner.[49]  To the contrary, one senses that they may be uncomfortable with a plain acknowledgment that corporate managers’ primary duty is to seek as much profit as can be achieved within the limits of the law, precisely because to do so emphasizes the importance of the law in channeling corporate behavior.  Preferable is suggesting that corporate managers themselves while seeking to maximize corporate profits will take care of the public interest, and that government should leave it to corporate managers.[50]

The consternation at Chancellor Chandler’s eBay decision is surprising for another related reason.  The whole design of corporate law in the United States is built around the relationship between corporate managers and stockholders, not relationships with other constituencies.  In the corporate republic, only stockholders get to vote and only stockholders get to sue to enforce directors’ fiduciary duties.[51]  The natural focus of the managers in such a system is therefore supposed to be on advancing the best interests of the stockholders, subject to the legal constraints within which the firm operates.[52]  Precisely because it is ultimately the equity market that is the primary accountability system for public firms, efforts to tinker around with the margins of corporate law through initiatives like constituency statutes, the so-called Corporate Social Responsibility movement, and antitakeover provisions have been of very little utility in insulating corporate boards from stockholder and stock market pressures.[53]

The eBay case also points out again the idiosyncratic nature of a reliance on special founders.  The founder of Craigslist apparently cares about users of online classifieds, but who knows about his other views.  Henry Ford said he cared about labor, but was responsible for one of the most violent crack-downs on labor in American history during the “Battle of the Overpass” at Ford’s River Rouge plant in Dearborn, Michigan in 1937.  Other entrepreneurs have unique religious or social views, which they seek to spread to their workers and customers.[54]  As many have noted, the legitimacy of such managers to use others’ money to advance their own view of the good is suspect.[55]  And over time, as transitions in industries like the newspapers show, the ability of a founder to sustain a vision after having taken investors’ money is extremely limited.  The point here is not that views on these matters are not contestable, but that the idea of a public corporation with outside investors pursuing a controversial political or moral agenda is intrinsically problematic because that is not why investors invest nor is that the basis on which boards are elected.

The public interest, in the end, depends on protection by the public’s elected representatives in the form of law.  The well-intentioned efforts of many entrepreneurs and company managers, who have a duty to their investors to deliver a profit, to be responsible employers and corporate citizens is undoubtedly socially valuable. But it is no adequate substitute for a sound legally determined baseline.

By so stating, I do not mean to imply that the corporate law requires directors to maximize short-term profits for stockholders.  Rather, I simply indicate that the corporate law requires directors, as a matter of their duty of loyalty, to pursue a good faith strategy to maximize profits for the stockholders.  The directors, of course, retain substantial discretion, outside the context of a change of control, to decide how best to achieve that goal and the appropriate time frame for delivering those returns.[56]  But, as I have noted in other writings, the market pressures on corporate boards are making it more difficult for boards to resist the pressure to emphasize the delivery of immediate profits over the implementation of longer-term strategies that might yield more durable and more substantial benefits to stockholders, as well as society in general.[57]  In these other writings, I have suggested some modest initiatives to better align the corporate governance system so that the shared interests of the end-user providers of capital and the interests of talented managers and societies in sound, long-term wealth creation are given greater weight.[58]

III.  National Interests in Community Icons: Some Instructive Lessons from Abroad

The power of stockholders’ ardor for profits shows up especially in corporate takeovers, where the benefits to stockholders are on full display and the costs to other corporate constituencies can be stark.  The tension revealed in a takeover is highlighted when the corporation is an icon with a long history of presence and responsibility in a community.  How does corporate and takeover law choose?  Two interesting answers come from outside the United States.  In Kraft’s takeover of the iconic Cadbury, long-standing U.K. law tilted decidedly in favor of stockholder interests, but U.K. politicans found the logical consequences of their own settled law dismaying.  By contrast, when the Australian mining firm BHP Billiton sought to acquire the Potash Corporation of Saskatchewan, the Canadian government had the legal authority to express its objection in full conformity with the law, and did so.  It turns out that even in capitalist societies whose economies are premised on profit-seeking, the full implications of giving stockholders the power to make societally-important decisions remains controversial.

A.         Frustrations of Nonfrustration: Lessons from the Odd Case of Cadbury

Perhaps the most surprising manifestation of political naïveté about the nature of the corporation comes from England and the controversy over Kraft’s acquisition of Cadbury, the maker of very sweet, nearly chocolate products.[59]  The idea that the maker of Dairy Milk would be acquired by a maker of boxed macaroni and cheese was seen as a threat to a British icon, and to British jobs, rather than as a natural alliance of culinary co-travelers.  Despite the fact that Kraft was already an employer of many in England[60] and had a good reputation as a quality employer responsive to environmental and free trade concerns,[61] opposition to a Kraft takeover was widespread in the United Kingdom.

A wide range of commentators, the British public, and Members of Parliament from not just the Labour party, but also the Tory and Liberal Democrat parties, voiced objection to the idea that an English icon would be owned by an American company.  Even though the current British ownership was already well on its way to shutting down some of the company’s most historic operations and shipping production to lower wage Poland,[62] U.S. ownership was thought to make the prospect of even more moves of this kind possible.  Despite the fact that Cadbury was itself a company that had prospered by buying up other nation’s icons—remember A&W Root Beer,[63] or Dr. Pepper, or Canada Dry Ginger Ale[64]—its Chairman, Sir Roger Carr, was aghast that so-called short-term stockholders had taken shares from the company’s long-term investors when Kraft made its bid public.[65]  How could these long- term stockholders have abandoned the company, and why should these new short-termers decide the fate of a 200 year old British treasure?[66]

What surprised me about this was not that the English would wish Cadbury could remain independent.  As an American, I get that.  Our largest American beer company is now the Boston Beer Company, brewers of Samuel Adams,[67] a former upstart microbrewery founded only twenty-seven years ago![68]  But what makes the Cadbury situation so odd is that the United Kingdom has long trumpeted its approach to corporate takeovers.  The British have boasted that their legal regime—which prohibits corporate boards from taking any action to frustrate a fully financed, firm offer like Kraft’s[69]—is the best model.  The United Kingdom supported adoption of similar laws by the European Union[70] and has touted its model as being superior to that of the United States,[71] where boards are entitled to defend against bids they believe are inadequate.[72]  The U.K. regime leaves no real room for a board to block a financed bid except by convincing its stockholders that the price is too low.  If the stockholders believe the price is right, they get to accept the bid.

Given that reality, it was hardly surprising to see Kraft eventually succeed in its bid.  After all, the whole focus of the U.K. approach is that if the stockholders like the price of a takeover bid, they get to take it.[73]  And all market evidence has long made clear that, absent board or government interposition, stockholders will sell out into any bid offering a substantial premium.[74]  What was more surprising was to see politicians of all the major parties in the United Kingdom bemoan the foreordained result that followed from the United Kingdom’s long-standing approach,[75] especially given that Cadbury could have had a lot of suitors less savory than Kraft.[76]

The world’s most venerable parliamentary assembly even issued a hand-wringing report deploring the situation[77] but failed to identify any tangible policy proposal to address future situations like it, which are inevitable under the long-standing nonfrustration rule.  The new Tory-Liberal coalition government then commissioned an inquiry to explore certain proposals made by Roger Carr,[78] including requiring that a supermajority of stockholders decide whether to accept a takeover bid and disenfranchising short-term holders.  But the key regulatory body—the Takeover Panel—has already looked at and rejected those proposals,[79] and its response to the Cadbury takeover actually seems likely to make it even more difficult for targets to resist a hostile bid.[80]  The Cadbury takeover confirms how deeply rooted the power of the stockholder profit motive is in the for-profit corporation.

It is revealing to consider the aftermath of the Cadbury takeover.  After the Code of the Takeover Panel rejected all three of Carr’s proposals, it instead offered its own proposals as to how the Takeover Code might be amended to prevent future Cadbury-like hostile takeovers.  I offer a couple of the most material proposals as examples.  First, the Code Committee recommended that the formal offer period—the period in which an interested acquirer may make an offer or bid for the target—be shortened by requiring a potential offeror to make a bid within twenty-eight days of announcing its interest to make a bid.[81]            Second, the Code Committee proposed a prohibition of certain deal protection devices currently legal under the Code—very limited termination fees and matching rights.[82]

Upon a preliminary inspection of the Code Committee’s proposals, however, it appears that were the Takeover Code modified as proposed, it might actually make hostile takeovers more, not less, likely, at least insofar as the proposed changes would make it more difficult for U.K. target companies to negotiate and secure a friendly acquisition over a hostile one.  That is, for those in England who decried the result in the Cadbury/Kraft saga as the tragic end of British Dairy Milk at the sword of a cheesy American JELL-O-molded company, and who would presumably have been less outraged by an acquisition of Cadbury by British Hob Nobs,[83]          the proposed changes to the Takeover Code seem likely to make it even easier for future hostile foreign takeovers of U.K. corporations.

For instance, take the proposal that would truncate the put-up or shut-up time period and require that target companies make public the identity of any potential offeror that has expressed an interest in making a bid.  Although the purpose of this change is to dissuade the practice of making so-called “virtual bids”—ones where a would-be hostile acquirer announces that it is interested in making a bid well before that potential acquirer has any intention of doing so in order to: (i) alter the stockholder makeup of the target company by attracting hedge funds and other short-term investors (recall Carr’s lament about the rapid influx of short-term stockholders in Cadbury after Kraft made its bid public); and (ii) put pressure on the target management—the Committee’s proposal to make mandatory the reporting and public disclosure of the interested bidder’s identity might have the unintended consequence of dissuading overtures from would-be friendly acquirers, particularly friendly strategic acquirers, who would rather remain anonymous and maintain the confidentiality of merger negotiations with the target until a binding contract is inked.[84]

The Code Committee’s second material proposed modification, the prohibition of termination fees and matching rights, poses a similar deterrent to would-be friendly acquirers that would—if the proposal is adopted—be unable to secure any, even trivial, deal protections to offset the risks posed to a friendly bidder who has made its intentions public and therefore has put itself in a compromised position as to its employees, suppliers and creditors, and as to hungry competitors eager to make a hostile bid for the now weakened friendly bidder.[85]         Viewed differently, a friendly bidder is less likely to negotiate an acquisition with a target if it is unable to secure assurances from the target that the target is serious about doing a deal, and more crucially to the friendly bidder, serious about doing the deal proposed by the friendly bidder.  Without the availability of modest deal protection devices, friendly acquisition partners may be even more reluctant to emerge than now, where the current regime already leaves strategic partners and private equity funds with very little compensation if they get topped.[86]

For an American, the Cadbury situation is, as our philosopher Yogi Berra put it, like déjà vu all over again.  For over thirty years in the United States, a variety of palliatives, such as state constituency statutes allowing boards to block bids harmful to other constituencies,[87] and the infamous poison pill, have done little but give target boards some room to get a better deal from a so-called white knight if a hostile bid loomed.[88]  The pressures boards faced from their stockholders to accept lucrative bids made resistance in most cases futile.[89]  As a result, U.S. communities have seen icon after icon fall into foreign hands, and our own major stock exchange may soon be a subsidiary of a merger vehicle formed by the owners of the German Boerse.[90]

But in our case, the United States, for all its capitalist leanings, never embraced takeovers with anything but deep ambivalence.  Our British friends across the pond all the while trumpeted these contrary, nakedly pro-takeover policies.  The acquisition of the beloved maker of Dairy Milk has, however, revealed that underneath the cold, simplistic, and single-minded, short-term focus of stockholders on stock price may result in outcomes that, from a broader societal perspective, are deeply uncomfortable.

B.     Candid Canada: The Refreshing Honesty of the Potash Decision

By comparison, I come now to the Canadian government’s decision to block the $40 billion bid of an Australian corporation, BHP Billiton, Ltd. (“BHP”), to acquire the Potash Corporation of Saskatchewan.  As I have learned, potash is not an illicit admixture to add to brownies, but a valuable crop nutrient and with a capital letter, for our purposes, a company.  And Saskatchewan is the Saudi Arabia of potash with a little “p” and the current home of Potash with a capital “P.”[91]  As I have further learned, the province has an economic strategy to leverage its advantage in potash (and the resulting stream of governmental royalties) into a better overall economic position.  Potash Corporation was already managed from the United States and BHP made certain assurances that it would protect provincial interests.  But the provincial government was dubious that under BHP’s ownership, Potash would maintain its commitment to the province’s version of OPEC, Canpotex.  Canpotex is an industry-wide marketing initiative fostered by the province.[92]  Rather, the provincial government concluded that BHP’s commercial interests as a profit-maximizing firm might lead it to cut prices, reduce royalties to the province, and otherwise be less likely to generate royalties and jobs for the province than if Potash remained independent.[93]

The Investment Canada Act was the tool used by the province to get its way.  Under that statute, the Canadian government can block any transaction above C$312 million if the transaction does not promise “net benefits” to Canada.[94]  After extensive advocacy by the Provincial government, Canadian Industry Minister Tony Clement blocked BHP’s bid, finding that it would not produce a net benefit for Canada.[95]  That this action was taken by a conservative government that generally advocates for a more open form of capitalism had special resonance.[96]

For present purposes, however, I wish to focus only on one refreshing aspect of the application of the Investment Canada Act to the Potash situation, which is its total lack of pretense or sham.  The statute is a naked grant of power to the national government to block a takeover when it believes Canada will be better off without it.  Obviously, there are legitimate questions to be asked about the overall utility of such a statute and I do not intend to comment one way or the other on the wisdom of the decision to use the statute to block the BHP bid.  But I do think that the statute’s candor deserves applause because it forces Canadian society to ask genuine questions about what is in the public interest.  In other analogous situations, governments have twisted their antitrust rules, come up with situation-specific corporate law rules, or taken a strained view of what was a national security (i.e., military-terrorist) threat in order to find a basis to block transactions that were, in reality, feared to be economically injurious to the target company’s nation.[97]

Although Australians may have been chagrined by the Canadian government’s blockage of BHP’s bid, Aussies could not claim shock because their nation has a similar statute.[98]  Moreover, the reality that another possible bidder for Potash was a Chinese-government-owned firm highlights the difficult reality of the so-called global market.[99]  Canada faced a situation in which a corporation that controlled an important national resource could pass into the hands of owners who either (in the case of BHP) were deemed more likely to be driven by market forces to reduce the benefits to Saskatchewan of the company’s operations or (in the case of a potential Chinese-government-owned bidder) would have been free to take actions not directed primarily at producing benefits for stockholders, but rather for advancing the self-interest of another nation.

C.     Globalized Capital and Product Markets Make Regulation in the Public Interest More, Not Less, Vital

The candor of the Canadian government’s Potash decision highlights the most critical issue before us.  We have globalized capital markets.  These capital markets put more intense pressure than ever on corporations to deliver short-term profits.  In almost all the Organization for Economic Cooperation and Development (“OECD”) nations,[100] only capital has a vote on who comprises the board of directors.  With increasing institutional ownership and greatly decreased holding periods, corporate electorates are more demanding than ever and unlikely to give serious thought to the long-term, given that few stockholders hold their shares for longer than a year at a time.

Although we have globalized capital markets and have opened our product markets to exports, we have done little to effectively globalize the regulatory structures that ensure that for-profit corporations do not generate unacceptable levels of harm to others in their pursuit of profit.[101]  Although the World Trade Organization does in fact at times act as an effective club in keeping nations from preventing exports from entering their markets,[102] no similarly powerful international body ensures that all corporations participating in international commerce must meet minimally decent standards of labor treatment or environmental safety and respect.[103]  Likewise, although financial institutions can and do take actions that affect the stability of all nations, their safety and soundness is remitted to a patchwork of national regulation.[104]

We have opened up global capital and product markets and forced our corporations to compete in such markets, without simultaneously extending the regulatory protections that enabled the West to implement an enlightened form of capitalism that helped defeat communism and fascism.  As a result, strong pressure has been exerted to diminish national protections in these areas.  Nations fear that if they require fair treatment of workers, protection of the environment, the payment of taxes to support the nation’s needs, and sound capital requirements for financial institutions, corporate activity will flee to other nations where there is little or no regulation.[105]

The examples I have discussed above are not designed to convince you that any particular level of regulation is optimal.  But they are designed to point out this reality: if, as I do, you believe that the temptations of profit can lead to corporate behavior that can harm society, you should be skeptical about claims that corporations are better-positioned to regulate themselves now than they used to be.

In many ways, the opposite is in fact true.  Corporations increasingly have no genuine connection to any particular community or even nation.  A huge disconnect has arisen between the wealth, lifestyle, daily experiences, and interests of the top corporate managers and that of most of the employees in the various nations in which their corporations have operations.[106]  Corporate managers are increasingly subject to removal at the instance of highly aggressive institutional investors who do not hold shares or think long-term.[107]  The actual long-term providers of capital are more and more divorced from the ownership of the shares of particular companies, and have largely yielded their votes to money managers compensated largely on short-term metrics.  Providers of debt are also less well positioned to act as monitors, as corporate debt is syndicated and trades largely like equity capital, leading to far less stable lender-borrower relationships and less intensive, long-term monitoring of corporate risk-taking.[108]

To deliver profits, corporations must endure competition from competitors willing to locate jobs in nations without labor or environmental protection.  That creates incentives to reduce wage rolls and pay, particularly in the European Union or in nations like Canada and the United States that have responsible regulatory standards, and to take fewer product safety and environmental precautions.  When their competitors seem to be making large, short-term profits by suspect means that have substantial long-term risk—see the subprime debacle discussed above—corporate managers face strong pressure from the capital markets to get in the game, regardless of whether they personally believe the game to be just another form of gambling.

Concluding Thoughts: Rules for the Global Game

Milton Friedman is a person who has written a lot of things I don’t necessarily agree with.  But he wrote a famous article in which he said that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game . . . .”[109]  When the pressure to deliver profits becomes, as it has, more intense, the rules of the game become even more important.  Human nature, the founders of my nation teach,[110] should be taken into account in designing those rules, and we should not assume that men and women of commerce are somehow better than average.

To ensure that for-profit corporations do not generate excessive externalities, strong boundaries remain critical.  To address externality risk and fundamental concerns about appropriate protection of workers and the environment in globalized capital and product markets, the rules of the game must ultimately become global, too.[111] But in the meantime, enlightened societies must resist the temptation to roll back the societal protections that spread the blessings of capitalism more broadly, ended child labor, gave workers safe places to work, protected consumers from harmful products, provided decent wages and humane working hours, and ensured that the pursuit of profit would not pollute the world in which we live.  After all, it was speedy national, not international, action that kept the financial crisis from being even worse.[112]  We cannot dispense with the protections provided by the nation-state until we come up with an effective replacement.

The coalition- and consensus-building required to develop an effective global (or at the least, OECD-wide) scheme of externality regulation will require enormous leadership and dedication.  But it cannot even begin if we delude ourselves into believing that corporations will effectively regulate themselves.  That is not what they are built to do and enormous harm will result if we pretend otherwise.  All you have to do is look at the unemployment rate or the Louisiana marshlands to know that that is true.


*            Leo E. Strine, Jr. is Chancellor of the Delaware Court of Chancery; Austin Wakeman Scott Lecturer on Law and Senior Fellow, Program on Corporate Governance, Harvard Law School; Adjunct Professor of Law, University of Pennsylvania Law School and Vanderbilt University Law School; Special Judicial Consultant to the Corporate Laws Committee of the American Bar Association; Henry Crown Fellow, Aspen Institute.  This Essay was adapted from The Beattie Family Lecture in Business Law, delivered at the University of Western Ontario on March 8, 2011.  The original title of the speech was “Bailed Out Bankers, Oil Spills, Online Classifieds, Dairy Milk, and Potash: Our Continuing Struggle with the Idea that For-Profit Firms Seek Profit.”

   [1].           After being criticized for a tepid response toward BP in the wake of the spill, President Obama came out strong against BP as the oil spill neared its third month. See Mail Foreign Service, ‘Furious’ Obama Blasts BP Again as Tony Hayward Gets Set to Shell Out Billions to Investors, Mail Online (June 5, 2010),
-Barack-Obama-BP-felt-anger-Gulf-Mexico-oil-disaster.html (reporting that Obama, when asked whether he was “angry at BP,” responded that he was “furious at this entire situation because this is an example where somebody didn’t think through the consequences of their actions”).  Other U.S. politicians of both parties also skewered BP’s embattled then-CEO, Tony Hayward, and other BP executives in the weeks that followed the spill.  See Rep. Cau Suggests BP Exec Commit ‘Hara-Kiri’ Over Spill, (June 16, 2010),‑cao‑suggests‑bp‑exec‑commit‑hari-kari-spill/ (quoting Louisiana Republican House Representative Joseph Cao as telling BP America President Lamar McKay that “in the Asian culture, we do things differently.  During the Samurai days, we’d just give you the knife and ask you to commit hara-kiri . . . .”); Kim Landers, US Congressional Panel Roasts BP Chief, ABC News (June 18, 2010),
/stories/2010/06/18/2930221.htm (quoting Michigan Democratic House Representative Bart Stupak) (“Mr. Hayward I’m sure you’ll get your life back and with a golden parachute back to England, but we in America are left with the terrible consequences of BP’s reckless disregard for safety . . . .”); Holbrook Mohr, et al., BP’s Gulf Oil Spill Response Plan Lists the Walrus as a Local Species. Louisiana Gov. Bobby Jindal is Furious, Christian Sci. Monitor (June 9, 2010),
-oil-spill-response-plan-lists-the-walrus-as-a-local-species.-Louisiana-Gov.-Bobby-Jindal-is-furious (“Look, it’s obvious to everybody in south Louisiana that they didn’t have a plan, they didn’t have an adequate plan to deal with this spill. . . . They didn’t anticipate the BOP [(blowout preventer)] failure.  They didn’t anticipate this much oil hitting our coast.  From the very first days, they kept telling us, ‘Don’t worry, the oil’s not going to make it to your coast.’” (quoting Louisiana Republican Governor Bobby Jindal)).

   [2].           My use of the word “reliable” here seems measured in light of public reports about the plans BP apparently had in place to deal with an oil spill in the Gulf.  See Mohr, supra note 1 (noting that BP’s 2009 response plan for a Gulf of Mexico oil spill—among numerous other material deficiencies and inaccuracies—included the contact information of a national wildlife expert, Professor Peter Lutz, who died in 2005, and included, under a heading entitled “sensitive biological resources,” marine mammals such as walruses, sea otters, sea lions, and seals, “[n]one of which lives anywhere near the Gulf”).

   [3].           Daniel Bates, Oil Worker ‘Alerted BP About Rig Fault’—But Bosses Feared Cost of Halting Production, He Says, Mail Online (June 25, 2010),‑1288242/Gulf‑oil‑spill‑BP‑told-faulty-drill-safety-equipment-weeks-disaster.html (recounting the story of a BP rig worker who claims he told managers that a key blowout preventer was improperly leaking fluid but was ignored, purportedly because it would cost too much to shut down production to deal with the problem); Ian Urbina, Documents Show Earlier Fears About Safety of Wells, N.Y. Times, May 30, 2010, at N1, N18 (noting that internal BP emails and inspection reports show that the blowout preventer and casing had several problems that would have limited their effectiveness in the event of an actual blowout).

   [4].           See Little Spent on Oil Spill Cleanup Technology, ABC Action News (June 26, 2010),
-oil-spill-cleanup-technology (reporting that BP spent $29 million on safer drilling operations research in the prior three years while BP and four other major oil drilling companies in the United States spent $33.8 billion on oil exploration over the same time period).

   [5].           See, e.g., Henry N. Butler & Jonathan R. Macey, Externalities and the Matching Principle: The Case for Reallocating Environmental Regulatory Authority, 14 Yale L. & Pol’y Rev. 23, 29 (1996) (noting that the “goal of government regulation of pollution is to force polluters to bear the full costs of their activities,” rather than allowing those costs, or “externalities,” to be borne by society at large); Margaret Tortorella, Will the Commerce Clause “Pull the Plug” on Minnesota’s Quantification of the Environmental Externalities of Electricity Production?, 79 Minn. L. Rev. 1547, 1549 n.15 (1995) (“Economic theory provides insight into the need for governmental regulation of externalities . . . [in the energy industry because w]hen economic activity affects the external environment, the market mechanism fails to reach the social optim[al allocation of resources] because society, rather than the economic actor, bears the cost of production.” (citing Wilfred Beckerman, Pricing For Pollution 24, 25 (2d ed. 1990)).

   [6].           This phenomenon is perhaps most easily observed at crowded American fast-food drive-thru lanes where Big Macs are, in comparison to those who frequently order and consume them, not so big at all.

   [7].           John M. Broder, Coal Industry Spending to Sway Next Congress, N.Y. Times, Oct. 29, 2010, at A12 (reporting that the coal industry is spending millions of dollars in lobbying and campaign donations to influence the makeup of the next Congress in an effort to stave off tightened health and safety regulations); Dan Eggen & Kimberly Kindy, Three of Every Four Oil and Gas Lobbyists Worked for Federal Government, Wash. Post, July 22, 2010, at A1 (“With more than 600 registered lobbyists, the [oil and gas] industry has among the biggest and most powerful contingents in Washington.”); Anne C. Mulkern, Obama’s SOTU Nod Unleashes Lobbying on Clean-Power Goal, N.Y. Times Greenwire (Jan. 26, 2011),
/26greenwire‑obamas‑sotu‑nod‑unleashes‑lobbying‑on‑clean‑pow‑3140.html?pagewanted=1 (reporting that the American Coalition for Clean Coal Electricity’s lobbying efforts have focused on stopping the U.S. EPA from regulating greenhouse gas emissions); see also Lobbying: Oil and Gas Industry Profile,,
=E01&year=a (last updated Dec. 11, 2011) (reporting, based on publicly available information from the Senate Office of Public Records, that oil and gas lobbyists spent a mere $146,296,424 on lobbying efforts in 2010, down from nearly $175 million in 2009).

   [8].           See, e.g., William Poole, Causes and Consequences of the Financial Crisis of 2007–2009, 33 Harv. J.L. & Pub. Pol’y 421, 424–26 (2010) (describing collateralized debt obligations backed by subprime mortgages as the leading cause of the financial crisis); see generally Atif Mian & Amir Sufi, The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis, 124 Q.J. Econ. 1449 (2009) (conducting an analysis of the mortgage default crisis in the United States by empirically examining subprime mortgages in the years leading up to the financial crisis, and observing the sharp increase in mortgage defaults in areas of the country that represent a disproportionately large share of subprime borrowers and that the period between 2002 and 2005 is the only time in the last eighteen years when income and mortgage credit growth were negatively correlated).  But see Lynn A. Stout, The Legal Origin of the 2008 Credit Crisis 24–25 (UCLA Sch. of Law, Working Paper No. 11-05, 2011), available at (admitting that subprime mortgages often undergirded the derivatives whose value plummeted, but making the point that the value of all U.S. subprime mortgages was only slightly over $1 trillion and noting that it was the writing of speculative contracts worth many times that amount related to those mortgages that required the U.S. government to make emergency loans of over $3 trillion and to take other actions to alleviate some of the harm and economic dislocation arising when the value of those contracts plummeted).

   [9].           Cf. Giovanni Dell’Ariccia et al., Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market (Int’l Monetary Fund, Working Paper No. 08/106, 2008), available at
?abstract_id=1153728 (associating the rapid expansion in the subprime mortgage market predating the financial crisis with relaxed lending
standards and further observing that the areas hardest hit by the crisis were those where lending standards declined the most); Ken Kupchik, Regrets of a Subprime Mortgage Lender, Salon (Feb. 1, 2011),
/mortgage_crisis/?story=/mwt/pinched/2011/02/01/confessions_of_a_subprime_lender_open2011 (chronicling the author’s experience working for a subprime mortgage company and confessing that company policy was to make the sale, regardless of whether the loan put the borrower in a better financial position, which in the author’s opinion, it rarely did).

   [10].         See The Fin. Crisis Inquiry Comm’n, 111th Cong., The Financial Crisis Inquiry Report xxiii (2011) [hereinafter Fin. Crisis Report] (“Many mortgage lenders set the bar so low that lenders simply took eager borrowers’ qualifications on faith, often with a willful disregard for a borrower’s ability to pay.”) (emphasis added); id. (noting that in 2005, 68% of so-called “option ARM” loans (Adjustable Rate Mortgage) originated by Countrywide and Washington Mutual had “low- or no-documentation requirements”).

   [11].         See, e.g., William W. Bratton & Michael L. Wachter, The Case Against Shareholder Empowerment, 158 U. Pa. L. Rev. 653, 717 (2010) (observing that the burst of the housing bubble in 2007 exposed banks that were heavily invested in the residential mortgage sector to severe losses and that the initial reason for the banks’ decision to invest heavily in that market was the “assumption that the price of real estate securing the loans would continue to rise,” an assumption based in part on the “increasing demand for housing fueled by ever-riskier real estate financing”); Peter Grier, Commission: Three Reasons Why the Financial Crisis Happened, Christian Sci. Monitor (Jan. 14, 2010),‑three‑reasons‑why‑the‑financial-crisis-happened (noting that the financial industry in the United States, in the years leading up to the financial crisis, “did not consider that it was possible housing prices could decline”); Brent T. White,Underwater and Not Walking Away: Shame, Fear, and the Social Management of the Housing Crisis, 45 Wake Forest L. Rev. 971, 988 (2010) (arguing that homeowners in the years before the crisis suffered from “selective perception” that caused them to fail to see evidence that the value of their home was not rising but falling, and that “many homebuyers . . . ignore[d] signs of the impending housing-market collapse in the first place, and optimistic overconfidence may have caused many homeowners to take out interest-only adjustable-rate mortgages . . . in the misplaced belief that they . . . would refinance as their home’s value grew exponentially”).  But not everyone was drinking the home price Kool-Aid.  Indeed, some, years before the crisis, almost prophetically questioned the propriety of the assumption that housing prices would continue an upward climb indefinitely.  See, e.g., House Prices: After the Fall, The Economist, June 18, 2005, at 11 (observing that American and global house prices “have reached dangerous levels” and that a devastating drop in prices is inevitable that “could decide the course of the entire world economy over the next few years”).

   [12].         Private securitization, or structured finance securities, had two key benefits from both the standpoint of the financial institutions creating and selling them and the investors that bought them: pooling and tranching. Fin. Crisis Report, supra note 10, at 43.  By pooling many mortgage loans, a few defaults would have minimal effect.  By tranching the same loans, sellers of the securities could fine tune them to meet particular investor preferences based on the investor’s desired level of risk it wished to take on.  Id.  At the same time, however, pooling and tranching greatly reduced an investor’s ability to understand and price these securities because to do so required the calculation of the statistical probability that certain types of mortgages would default and the lost revenues attributable to those defaults.  Id.  This difficulty, according to the National Commission on the Causes of the Financial and Economic Crisis in the United States, brought the leading credit rating agencies—Standard & Poor’s, Moody’s, and Fitch—to prominence.  Id.  It became a common practice by the packagers of these mortgage-backed securities, i.e., financial institutions, to pay “handsome fees to the rating agencies to obtain the desired ratings.”  Id. at 44.

   [13].         See Stout, supra note 8, at 20–21 (observing that most of the OTC derivative trading in the years leading up to the financial crisis was “dominated by speculative trading,” not by investors seeking to hedge their market positions).

   [14].         “From 2000 to 2007, Moody’s rated nearly 45,000 mortgage-related securities as triple-A.  This compares with six private-sector companies in the United States that carried this coveted rating in early 2010.  In 2006 alone, Moody’s put its triple-A stamp of approval on 30 mortgage-backed securities every working day. . . . 83% of the mortgage securities rated triple-A that year ultimately were downgraded.”  Fin. Crisis Report, supra note 10, at xxv.  Of course, Moody’s and the rest of the ratings agencies made nice profits for their services.  In 2005, 2006, and 2007, for example, the rating of structured finance products made up nearly half of Moody’s rating revenues, representing a fourfold increase from levels in 2000.  Id. at 118.

   [15].         See John C. Coffee Jr., Gatekeepers: The Professions And Corporate Governance 303 (2006) (“[F]or over a century institutional investors have been found by courts to have satisfied their due diligence obligation as fiduciaries when they relied on ‘investment grade’ ratings from the ratings agencies.”).

   [16].         See Margarita S. Brose & Bill Nichols, Toxic Assets: Untangling the Web, BYU Int’l L. & Mgmt. Rev., Winter 2009, at 1, 16 (“In a process that now looks to be a tragic combination of magic and wishful thinking, some of these tranches somehow ended up with AAA investment ratings and were marketed as high quality investments, which dramatically broadened the base of potential investors to include pension funds and asset managers.”); Charles W. Murdock, Why Not Tell the Truth?: Deceptive Practices and the Economic Meltdown, 41 Loy. U. Chi. L.J. 801, 868 (2010) (observing that many investors in mortgage-backed securities were “fiduciaries subject to fiduciary standards as to the instruments in which they could invest” and that therefore, “[t]he only way these investments could be sold was to receive the imprimatur [i.e. a triple AAA stamp] of the credit agencies”); Greg Farrell, SEC Slams Credit-Rating Agencies over Standards, USA Today, July 11, 2008, at 3B (“Because many institutional investors [and pension funds] can put money into only investment-grade bonds (i.e., bonds with a rating of ‘AAA’), investment banks scrambled to win the highest rating for the mortgage-backed securities they developed during the real estate bubble.”).

   [17].         The bill was named the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  Pub. L. No. 09-8, 119 Stat. 23 (codified as amended in scattered sections of 11 U.S.C.).

   [18].         See, e.g., Kevin T. Jackson, The Scandal Beneath the Financial Crisis: Getting a View from a Moral-Cultural Mental Model, 33 Harv. J.L. & Pub. Pol’y 735, 762 (2010) (noting Countrywide Financial Corporation’s “practice of predatory lending, which involves entering into unsound secured loans for inappropriate purposes” through the use of “a bait-and-switch technique, advertising low interest rates for home refinancing[s]” that would tout a 1% or 1.5% interest rate but swap out an adjustable rate mortgage contract at closing that would allow the homeowner “to make interest-only payments, yet the interest charged is more than the amount of interest paid”); see also Mark Brown, Countrywide Wasn’t Really on Your Side, Chi. Sun-Times, June 26, 2008, at 8 (reporting that one of Countrywide’s most popular mortgage products was the “PayOption ARM,” an adjustable rate mortgage, that allowed consumers to “pay the monthly minimum on their credit cards as the balance owed g[ot] bigger and bigger and bigger” and that Countrywide, in selling these mortgages, was “indifferent to whether homeowners could afford to repay its loans,” often “ignoring the fact that the borrowers . . . didn’t make enough money to repay the loans, especially the higher payments that would later come due on adjustable rate mortgages”).

   [19].         Carol J. Loomis, AIG’s Wind-Down Has $1.6 Trillion Left, CNNMoney (Mar. 26, 2009),
.fortune/index.htm (noting that AIG’s exposure on derivatives was, at its height in 2008, $2.7 trillion); Rick Newman, 7 Surprises Buried Beneath AIG Bonuses, U.S. News & World Rep. (Mar. 20, 2009),
/flowchart/2009/03/20/7-surprises-buried-beneath-the-aig-bonuses (noting that at its highest point before the bailout, AIG faced exposure on its derivatives in the amount of $2.7 trillion).  Interestingly, AIG’s public disclosures noted that AIG was on the hook for a shockingly large $527 billion.  Am. Int’l Grp., Inc., Annual Report (Form 10-K) (Dec. 31, 2007), available at

   [20].         See Stout, supra note 8, at 21 (noting that the value of all asset-backed securities and corporate bonds in the United States was $15 trillion in 2008 and yet there were $67 trillion in outstanding credit default swap (“CDS”) contracts written that were backed only by a small fraction of those bonds).

   [21].         See id. at 19–25 (arguing that reductions in legal regulations that limited the ability to use hedging contracts for the purpose of speculation fueled the huge increase in speculative trading in credit default swaps and other derivatives that resulted in the financial crisis).

   [22].         E.g., Elaine Lafferty, The Woman Who Predicted the Mortgage Crisis Goes on the Record About the Future, Women’s Voices For Change (Apr. 30, 2008),
-mortgage-crisis-goes-on-the-record-about-the-future.htm (reporting on Karen Weaver, a Wall Street analyst who voiced concern in 2005 about the artificial and unsustainable rise in home prices underlying many mortgage-backed securities); Cyrus Sanati, How Value Investing Paid Off in the Crisis, N.Y. Times Dealbook (Mar. 16, 2010),
-value-investing-paid-off-in-the-meltdown/ (reporting that Michael Burry of Scion Capital made $100 million by betting against mortgage-backed securities (i.e., purchasing credit default swaps on pools of mortgages), and that Burry did so because “he knew [subprime mortgage-backed securities] were troubled”).

   [23].         See, e.g., Stout, supra note 8, at 5 (“Neither the ‘buyer’ nor the ‘seller’ of a CDS contract on a particular corporate or mortgage-backed bond needs to actually own the underlying bond in question.” (citing Michael Lewis, The Big Short: Inside The Doomsday Machine 29 (2010)).

   [24].         See David Evans, Hedge Funds in Swaps Face Peril With Rising Junk Bond Defaults, Bloomberg (May 20, 2008),
/news?pid=newsarchive&sid=aCFGw7GYxY14 (noting that although hedge funds have provided 31% of all credit default swap protection, such protection is not likely to be of any value because few hedge funds have the cash available to meet bankers’ requests and the law does not require sellers of protection to set aside reserves).

   [25].         See Stout, supra note 8, at 19–25 (arguing that reductions in legal regulations that limited the ability to use hedging contracts for the purpose of speculation fueled the huge increase in speculative trading in credit default swaps and other derivatives that resulted in the financial crisis).

   [26].         As I observed in an earlier article dealing with activism by institutional shareholders:

Responsible commentators estimate hedge fund turnover at around 300 percent annually.  What is even more disturbing than hedge fund turnover is the gerbil-like trading activity of the mutual fund industry which is the primary investor of Americans’ 401(k) contributions.  The average portfolio turnover at actively managed mutual funds, for example, is approximately 100 percent a year. Median turnover is in the 65 percent range. . . . [The] annual[] turnover of stocks traded on the New York Stock Exchange [is] well over 100 percent, with turnover approaching 138 percent in 2008.  And . . . market capitalization data from the U.S. Statistical Abstract reveals that turnover across all U.S. exchanges reached approximately 311 percent in 2008.

Leo E. Strine, Jr., One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term?, 66 Bus. Law. 1, 10–11 (2010) (footnotes omitted).

   [27].         See generally Bratton & Wachter, supra note 11, at 653–54, 720–21 (demonstrating that financial institutions that engaged in the speculation activities that triggered firm failures and the financial crisis had received a stock market premium over institutions that had not in the years before the crisis).

   [28].         Binyamin Appelbaum, Bailout Overseer Says Banks Misused TARP Funds, Wash. Post, July 20, 2009, at A6 (noting that according to a report from the special inspector general charged with overseeing the government’s financial rescue program, many banks that received federal TARP money that was supposed to be used for increased lending instead used a portion of that money to make new investments, repay debts, or buy other banks).

   [29].         At its high point, U.S. unemployment reached 10.1% in October 2009.  As of December 2011, it remains at 8.5%, a figure that may be understated due to the way unemployment statistics are calculated. U.S. Bureau of Labor Statistics, (last visited Feb. 27, 2012); see alsoVincent Del Giudice & Thomas R. Keene, U.S. Unemployment Probably Higher Than Reported, Silvia Says, Bloomberg (Oct. 2, 2009), (noting that the unemployment rate in the United States is probably higher than reported because many laid off people who have been out of work for a long period of time have given up the search for jobs and are therefore no longer factored in to the unemployment calculation).

   [30].         Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919).

   [31].         Id. at 683–84.

   [32].         Id. at 671; see also Thomas A. Edison, Henry Ford Explains Why He Gives Away $10,000,000, N.Y. Times, Jan. 11, 1914, § 5, at 3, available at‑free/pdf?res=F2091EFE355D13738DDDA80994D9405B848DF1D3 (explaining that Henry Ford advocated for a more direct role for businesses to play in improving social welfare not by paying higher wages, but by “dividing profits with his employees”).  Ford is also quoted as having said that he “believe[s] it is better for the nation, and far better for humanity, that between 20,000 and 30,000 should be contented and well fed than that a few millionaires should be made.”  Id.  Of course, given that his litigation adversaries were the Dodge brothers, Ford’s desire to deny them dividends that could be used to fund their own eponymous car manufacturing operations might have also contributed to Henry Ford’s high-mindedness.

   [33].         Dodge, 170 N.W. at 684 (“A business corporation is organized and carried on primarily for the profit of the stockholders.  The powers of the directors are to be employed for that end.  The discretion of directors is to be exercised in the choice of the means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.”); see also M. Todd Henderson,Everything Old Is New Again: Lessons from Dodge v. Ford Motor Company, in Corporate Law Stories 37, 66 (J. Mark Ramseyer ed., 2009) (noting that the Michigan Supreme Court’s concern in Dodge was that a majority stockholder might use his control to “divert[] resources [of the corporation] to self-serving ends”).

   [34].         It is, of course, accepted that a corporation may take steps, such as giving charitable contributions or paying higher wages, that do not maximize corporate profits currently.  They may do so, however, because such activities are rationalized as producing greater profits over the long-term.  See, e.g., Shlensky v. Wrigley, 237 N.E. 776, 780 (Ill. App. Ct. 1968) (rejecting a plaintiff shareholder’s allegation of mismanagement against the corporation’s directors for their refusal to install lights at Wrigley Field because the court was “not satisfied that the motives assigned [to the directors] are contrary to the best interests of the corporation and the stockholders” when adding lights for night baseball games might have reduced surrounding property values and that the “the long run interest of the corporation in its property value at Wrigley Field might demand all efforts to keep the neighborhood from deteriorating”); Melvin Aron Eisenberg, Corporate Conduct That Does Not Maximize Shareholder Gain: Legal Conduct, Ethical Conduct, The Penumbra Effect, Reciprocity, The Prisoner’s Dilemma, Sheep’s Clothing, Social Conduct, and Disclosure, 28 Stetson L. Rev. 1, 14–15 (1998) (explaining that sometimes business decisions that appear to be profit-nonmaximizing, such as charitable donations, can in fact be justified on a “straight maximizing basis” and in fact, “frequently a corporation can earn greater profits by appearing to be philanthropic than by appearing to maximize [profits]”); Ian B. Lee, Efficiency and Ethics in the Debate About Shareholder Primacy, 31 Del. J. Corp. L. 533, 555–56 (2006) (“Similarly, few would disagree . . . with the claim that eliminating . . . discretion [to make profit-sacrificing decisions] would be counterproductive even from the standpoint of shareholder profit-maximization.”).  The Delaware Supreme Court’s contrasting treatment of the consideration directors can give to other constituencies in its famous Unocal andRevlon decisions makes this point.  When a corporation is ongoing, it may consider the interests of other constituencies in pursuing a long-term course to maximize profits.  Unocal v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (holding that a board, in considering a threat that a hostile bid poses to the corporation, may consider “the nature of the takeover bid and its effect on the corporate enterprise” which entails, among other things, an analysis of “the inadequacy of the price offered, [the] nature and timing of the offer, questions of illegality, the impact on ‘constituencies’ other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally), the risk of nonconsummation, and the quality of securities being offered in the exchange”).  But when there is no long-term, as when a sale is inevitable, directors must maximize value for the stockholders immediately.  Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) (“A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.  However, such concern for non-stockholder interests is inappropriate when an auction among active bidders is in progress, and the object no longer is to protect or maintain the corporate enterprise but to sell it to the highest bidder.”) (emphasis added) (internal citation omitted).  These cases, when read together, mean stockholders’ best interest must always, within legal limits, be the end.  Other constituencies may be considered only instrumentally to advance that end.

   [35].         Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (“[The business judgment rule] is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”); see also Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971) (“A board of directors enjoys a presumption of sound business judgment, and its decisions will not be disturbed if they can be attributed to any rational business purpose.  A court under such circumstances will not substitute its own notions of what is or is not sound business judgment.”).

   [36].         See, e.g., Kelli A. Alces, Revisiting Berle and Rethinking the Corporate Structure, 33 Seattle U. L. Rev. 787, 792 (2010) (“[In Delaware, a] strong business judgment rule is coupled with strong, though rarely enforced, fiduciary rhetoric to try to keep managers faithful to shareholder wealth maximization . . . .”); Steven L. Schwarcz, Fiduciaries With Conflicting Obligations, 94 Minn. L. Rev. 1867, 1909 (2010) (“In the corporate decisionmaking process, the business judgment rule encourages qualified directors to serve by limiting liability risk, [and] encourages inherently risky but value-maximizing transactions . . . .”); see also Revlon, 506 A.2d at 182 (“A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.” (emphasis added) (citing Unocal, 493 A.2d at 955)).

   [37].         In reaching its conclusion, the Michigan Supreme Court observed the “attitude and . . . expressions of Mr. Henry Ford,” quoting part of Ford’s testimony: “My ambition . . . is to employ still more men; to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes.  To do this we are putting the greatest share of our profits back in the business.”  Dodge, 170 N.W. at 683.

   [38].         eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010).

   [39].         Id. at 8.

   [40].         Id. at 15–16.

   [41].         Id. at 32.

   [42].         Id. at 35.

   [43].         See Jay Coen Gilbert, What eBay’s Court Fight With Craigslist Reveals, Forbes (Sept. 21, 2010, 10:56 AM),
/what-ebays-court-fight-with-craigslist-reveals/ (“If you want to maintain the social mission of your company, don’t incorporate in Delaware.”).

   [44].         Id.  Although he believes that “in general, a shareholder invests in a for-profit Corporation for the purpose of maximizing their returns,” Maxwell S. Kennerly, a liberal commentator and lawyer, believes that that general principle must be “considered in light of the specifics of each company.”  Maxwell S. Kennerly, eBay v. Newmark: Al Franken Was Right, Corporations Are Legally Required To Maximize Profits, Litig. & Trial (Sept. 13, 2010),‑law/for‑lawyers/ebay‑v‑newmark‑al‑franken‑was‑right‑corporations‑are‑legally‑required‑to‑maximize‑profits/.  In that vein, Kennerly believes that because eBay bought its shares in Craigslist in an arms-length transaction and knew that Craigslist, for better or worse, had a “tangibly different idea of ‘for-profit,’” eBay should not be able to complain that Jim and Craig had no “sound business reasons for their decision to protect the highly successful, if idiosyncratic, corporate culture at craigslist, and that decision should be protected by the business judgment rule.”  Id.  See also Joshua P. Fershee, The Wake of the eBay Decision: Is Ben & Jerry’s Next?, Bus. L. Prof Blog (Dec. 6, 2010),
_law/2010/12/the-wake-of-the-ebay-decision-is-ben-jerrys-next-.html (“I still find myself troubled by the determination that, by embracing its ‘community service mission,’ craigslist was being run improperly as [a] corporate entity.”).

   [45].         The new B Corporation movement is an interesting attempt to address constituency concerns within corporate law.  The idea is that the B Corporation would have a charter that would permit or even require the directors to consider interests, such as the public interest or more specific constituency concerns, and not just the interests of stockholders.  Legal Requirement, Certified B Corp., (last visited Feb. 27, 2012).  The problem with the B Corporation, though, is that the only stakeholders with a vote would continue to be the stockholders, who by electing a new board who supported a change, could presumably change the charter. See, e.g., Del. Code Ann. tit. 8, § 242(a) (2010) (allowing corporation to amend its certificate of incorporation in any manner which would have been lawful in the first instance); id. § 242(b)(1) (setting forth procedural requirements for amending the certificate of incorporation and requiring, in addition to a stockholder vote, a resolution adopted by the board of directors setting forth the amendment and declaring its advisability).  Moreover, it is not clear to what extent the B Corporation concept is designed to give standing to other constituencies to sue to enforce the directors’ duty to them.  The weight to be given to other constituencies would seem to be a matter entrusted to the judgment of the directors (albeit a calculus not so easily called a “business judgment”) and would be difficult for courts to second guess.  This reality, of course, is reflected in a long-standing concern that by permitting directors to justify their actions by reference to virtually everything, they will not be accountable to any constituency for anything.  Adolf A. Berle, Jr., For Whom Corporate Managers Are Trustees: A Note, 45 Harv. L. Rev. 1365, 1367 (1932).

   [46].         See Berle, supra note 45, at 1367 (“When the fiduciary obligation of the corporate management and ‘control’ to stockholders is weakened or eliminated, the management and ‘control’ become for all practical purposes absolute.”).  Berle was not entirely against a corporate governance regime in which corporate managers could consider the interests of a larger polity outside the stockholders, but was steadfast in arguing that until a sensible system emerges—one that prudently monitors and constrains managers, even while they balance a wider host of interests—we must not deviate lightly from the status quo.  See id. at 1372 (“Unchecked by present legal balances, a social-economic absolutism of corporate administrators, even if benevolent, might be unsafe; and in any case it hardly affords the soundest base on which to construct the economic commonwealth which industrialism seems to require.  Meanwhile, as lawyers, we had best be protecting the interests we know, being no less swift to provide for the new interests as they successively appear.” (emphasis added)).

   [47].         The “practical consequence” of an adherence to the so-called “property model” of the corporation is that the board of directors will, when faced with a conflict among the corporation’s stockholders and other corporate constituencies, almost always favor the stockholders’ interests because “in the intra-corporate republic, only capital has the right to vote!”  Leo E. Strine, Jr., The Social Responsibility of Boards of Directors and Stockholders in Charge of Control Transactions: Is There Any “There” There?, 75 S. Cal. L. Rev. 1169, 1186–87 (2002).

   [48].         Kennerly, supra note 44.  As recounted by Kennerly, Professor Todd Henderson argued that although “the duty to maximize shareholder value may be a useful shorthand for a corporate manager to think about how to act on a day-to-day basis, this is not legally required or enforceable.”  Id. (quoting Todd Henderson, The Shareholder Wealth Maximization Myth, Truth on the Market (July 27, 2010),
-shareholder-wealth-maximization-myth/).  Professor Stephen Bainbridge agreed, positing that “[t]he fact that corporate law does not intend to promote corporate social responsibility, but merely allows it to exist behind the shield of the business judgment rule, becomes rather significant in—and is confirmed by—cases where the business judgment rule does not apply.”  Stephen Bainbridge, Al Franken, Shareholder Wealth Maximization, and the Business Judgment Rule, (July 27, 2010),  Finally, Professor Larry Ribstein was also quick to contest Franken’s comment: “The Franken misconception is widely espoused by those in the radical anti-corporate camp. . . . This is why the corporate social responsibility debate is largely empty.  While many corporate social responsibility proponents argue for giving managers more legal freedom to serve society’s needs, managers already have that freedom.”  Larry Ribstein, The Shareholder Maximization Canard, Truth on the Market (July 28, 2010),
-shareholder-maximization-canard/.  Kennerly attributed this dismissal of Franken’s views to an underappreciation of what he describes as a legal requirement that corporations, even if allowed to engage in certain philanthropic efforts, undertake to maximize profits.  See Kennerly, supra note 44 (“[T]he duty to maximize profits isn’t, as Henderson said, a ‘canard.’  It’s an enforceable . . . legal doctrine, and it was just enforced against craigslist.”).

   [49].         This sense comes from the conservative response discussed supra in note 48, in which the commentators appear to argue that corporations already enjoy the prerogative to pursue philanthropic ends to the extent that those who would argue, as Al Franken does, that corporations are legally required to maximize profits, underemphasize the wide latitude managers already enjoy under the business judgment rule.

   [50].         To this extent, this position echoes the “just trust the business leaders” approach of Merrick Dodd, in his debate with Adolph Berle.  E. Merrick Dodd, Jr.,For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145, 1153 (1932) (“If, however, as much recent writing suggests, we are undergoing a substantial change in our public opinion with regard to the obligations of business to the community, it is natural to expect that this change of opinion will have some effect upon the attitude of those who manage business.  If, therefore, the managers of modern businesses were also its owners, the development of a public opinion to the effect that business has responsibilities to its employees and its customers would, quite apart from any legal compulsion, tend to affect the conduct of the better type of business man.  The principal object of legal compulsion might then be to keep those who failed to catch the new spirit up to the standards which their more enlightened competitors would desire to adopt voluntarily.  Business might then become a profession of public service, not primarily because the law had made it such but because a public opinion shared in by business men themselves had brought about a professional attitude.”).  By contrast, Berle believed that corporate managers needed to be subject to regulation in the public interest.  See, e.g., Berle, supra note 45, at 1368 (“Either you have a system based on individual ownership of property or you do not.  If not—and there are at the moment plenty of reasons why capitalism does not seem ideal—it becomes necessary to present a system (none has been presented) of law or government, or both, by which responsibility for control of national wealth and income is so apportioned and enforced that the community as a whole, or at least the great bulk of it, is properly taken care of.  Otherwise the economic power now mobilized and massed under the corporate form, in the hands of a few thousand directors, and the few hundred individuals holding ‘control,’ is simply handed over, weakly, to the present administrators with a pious wish that something nice will come out of it all.” (internal citations omitted)).

   [51].         See Strine, supra note 47, at 1187 (observing that in the “intra-corporate republic,” only stockholders have the right to vote); see also Franklin Balotti & Jesse A. Finkelstein, Delaware Law Of Corporations & Business Organizations § 13.11 (3d ed. 2009) (“Thus, a plaintiff who is not a stockholder, or who ceases to be a stockholder during the pendency of his [derivative] suit, loses standing to maintain a derivative action.”); 5 William Mead Fletcher et al., Fletcher Cyclopedia of the Law of Corporations § 2025 (perm. ed., rev. vol. 2009) (“Generally, the right to vote is a right that is inherent in and incidental to the ownership of corporate stock . . . .”); cf. J. Travis Laster, Goodbye to the Contemporary Ownership Requirement, 33 Del. J. Corp. L. 673, 681 (2008) (“[B]ecause the selling stockholder no longer has stockholder status, the right to sue [derivatively] with respect to those shares is extinguished by the sale.”).

   [52].         See, e.g., Strine, supra note 47, at 1187 n.35 (“‘I’m gonna take two weeks, gonna have a fine vacation/I’m gonna take my problem to the United Nations/Well I called my congressman and he said, quote/’I’d love to help you, son, but you’re too young to vote.’” (quoting Eddie Cochran, Summertime Blues (Liberty Records 1958))).

   [53].         See, e.g., Marcel Kahan & Edward B. Rock, How I Learned To Stop Worrying and Love the Pill: Adaptive Responses to Takeover Law, 69 U. Chi. L. Rev. 871, 909 (2002) (citing statistics which show takeover activity in the United States has actually increased over time); Robert E. Spatt, The Four Ring Circus–Round Twelve: A Further Updated View of the Mating Dance Among Announced Merger Partners and an Unsolicited Second or Third Bidder, Simpson Thacher & Bartlett LLP 1 (Mar. 24, 2008), (cataloging numerous instances of “deal jumping” in which additional bids are made for a target by third parties after the signing of a merger agreement, and noting that such instances have “become a standard execution risk of getting a deal done, and tend[] to reflect the ebb and flow of hostile acquisition activity”).

   [54].         Take Chick-fil-A, for example.  Its founder, Truett Cathy, has closed all of its restaurants on Sundays since he opened the first restaurant in 1946 to enable its employees to attend church.  Melissa Lee, Chick-fil-A Does Business with Religious Conviction, CNBC (Dec. 6, 2007),
/22114420/Chick_Fil_A_Does_Business_With_Religious_Conviction.  Recently, there has been concern about the company’s subsidy of groups that believe that homosexuality is immoral.  Alex Pareene, Koch Brothers, Christian Chicken-Sellers Besieged by Thuggish Liberal Criticism, Salon (Feb. 3, 2011),

   [55].         See, e.g., William T. Allen, Our Schizophrenic Conception of the Business Corporation, 14 Cardozo L. Rev. 261, 275 (1992) (“[M]any people would find . . . disturbing [the proposition] that directors know what is better for shareholder[s] than they themselves do. . . . May [directors] act to protect others (and themselves) from claims of shareholder exploitation?”); Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 Wash. & Lee L. Rev. 1423, 1445 (1993) (arguing against displacing the shareholder wealth maximization model with a model that allows corporate managers to consider various nonshareholder interests in line with their own ethical preferences because of the “very real risk that some corporate directors and officers will use nonshareholder interests as a cloak for actions taken to advance their own interests”); Milton Friedman, The Social Responsibility of Business is to Increase Its Profits, N.Y. Times Mag., Sept. 13, 1970, at 33 (arguing that the notion that corporations have a “social responsibility” impermissibly displaces the democratic political process with a doctrine that permits minorities to effect extra-political changes that may or may not be the best policies); Mark E. Van Der Weide, Against Fiduciary Duties to Corporate Stakeholders, 21 Del. J. Corp. L. 27, 54–55, 69–70 (1996) (arguing against displacing the shareholder wealth maximization norm with one that allows more leeway to corporate directors, whose ability to redistribute wealth between different social groups is “doubtful,” and that the ability to consider and balance a host of nonstockholder constituencies and personal views of the good would, among other undesired results, create a system where protection from managerial self-interest would “dissolve” because managers could in effect “reallocate the costs of the duty of loyalty among stakeholders groups”); cf. City Capital Assocs. Ltd. P’ship v. Interco Inc., 551 A.2d 787, 796 (Del. Ch. 1988) (“[H]uman nature may incline even one acting in subjective good faith to rationalize as right that which is merely personally beneficial.”).

   [56].         Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1154 (Del. Ch. 1989) (“Delaware law confers the management of the corporate enterprise to the stockholders’ duly elected board representatives.  The fiduciary duty to manage a corporate enterprise includes the selection of a time frame for achievement of corporate goals. . . . Directors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy.” (internal citations omitted)).

   [57].         See Strine, supra note 26, at 16–17 (citing various sources); Leo E. Strine, Jr., Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance, 33 J. Corp. L. 1, 15 (2007) [hereinafter Strine, Toward Common Sense]; Leo E. Strine, Jr., Why Excessive Risk-Taking is Not Unexpected, N.Y. Times Dealbook (Oct. 5, 2009),
/2009/10/05/dealbook-dialogue-leo-strine/ [hereinafter Strine, Risk-Taking].

   [58].         See, e.g., Strine, Toward Common Sense, supra note 57, at 15; Strine, supra note 26, at 18–19; Strine, Risk-Taking, supra note 57.

   [59].         Cadbury’s signature product, Dairy Milk, is made from 26% cocoa solids, which qualifies it to be called “Milk Chocolate” in the European Union, but not “Chocolate.”  See Products, Cadbury,
/Products/Blocks-of-Chocolate/Dairy-Milk-Block/Dairy-Milk-Ingredients.aspx (last visited Feb. 27, 2012); Council Directive 2000/36, Annex I, 2000 O.J. (L 197) 19, 22 (requiring that “Milk Chocolate” contain at least 25% cocoa solids and “Chocolate” contain at least 35% of the same).  But, the name “Dairy Milk” long pre-dates the European Union’s naming convention, having been used since the bars were introduced in 1905 as a testament to the fact that there has “always [been] a glass and a half of fresh, natural milk in each half pound of chocolate.”  Cadbury Dairy Brands, Kraft Foods, (last visited Feb. 27, 2012).

   [60].         See Amy Wilson & James Quinn, Kraft Moves Fast to Silence the Doubters, The Telegraph, Jan. 23, 2010, at 8 (reporting that even before the purchase of Cadbury, Kraft employed about 1500 workers in the United Kingdom).

   [61].         See, e.g., Press Release, Kraft Foods, Kraft Foods Makes Dow Jones Sustainability Index Sixth Year in a Row (Sept. 9, 2010), available at (noting that Kraft Foods was named to the Dow Jones Sustainability Index for the sixth year in a row, received the food industry’s leading scores in operational eco-efficiency for the third year in a row, and received leading scores in corporate citizenship/philanthropy).

   [62].         See Roger Carr, Chairman, Cadbury, Distinguished Speaker Seminar at Said Business School at University of Oxford (Feb. 9, 2010) [hereinafter Carr Speech], available at
_1845_NMLT_Roger_Carr.mp3 (noting that some of Cadbury’s “most recent and material manufacturing investments” in the years before the Kraft acquisition had been in Poland with an eye towards replacing U.K. production); Cadbury Factory Closure by Kraft “Despicable”, BBC (Feb. 10, 2010), (“Plans to close the Keynsham plant, at the cost of 400 jobs, were announced by Cadbury in 2007.  Kraft said it had only become aware of how advanced plans for the new Poland factory were after the takeover deal had been agreed.”).

   [63].         A&W Root Beer was founded as an American company in 1919 by founder Roy Allen.  A&W History, A&W Root Beer,
/history/ (last visited Feb. 27, 2012).  The name A&W comes from Allen’s business partner, Frank Wright, with whom Allen partnered in 1922.  Id.

   [64].         In 1986, Cadbury Schweppes, plc, purchased Canada Dry from RJR Nabisco, Inc.  Richard Stevenson, Cadbury Will Buy RJR Nabisco Units, N.Y. Times, June 3, 1986, at D4, available at

   [65].         Carr Speech, supra note 62 (“In the final analysis, it was the shift in the register that lost the battle for Cadbury—the owners were progressively not long-term stewards of the business but financially motivated investors, judged solely on their own quarterly financial performance.  At the end of the day, there were simply not enough shareholders prepared to take a long term view of Cadbury and prepared to forego short term gain for longer term prosperity. . . . At the end of the day, individuals controlling shares which they had held for only a few days or weeks determined the destiny of a company that had been built over almost 200 years.”).  Others in the U.K. political establishment in place at the time of the Kraft-Cadbury acquisition were also upset by short-termism’s alleged evils.  See Blanaid Clarke,Directors’ Duties during an Offer Period—Lessons from the Cadbury Plc Takeover 5–6 (UCD Working Papers in Law, Criminology & Socio-Legal Studies, Research Paper No. 44/2011), available at (quoting Lord Mandelson, Sec’y of State for Bus., Innovation and Skills, Speech at the Trade and Indus. Dinner, Guildhall, the Mansion House, London (Mar. 1, 2010))  (“Lord Mandelson, the Business Secretary at the time of the [Kraft] takeover complained that ‘In the case of Cadbury and Kraft it is hard to ignore the fact that the fate of a company with a long history and many tens of thousands of employees was decided by people who had not owned the company a few weeks earlier, and probably had no intention of owning it a few weeks later.’”); id. at 6 (“Vince Cable[, the current Business Secretary,] subsequently referred to ‘short term investors and financial gamblers [who] value a quick buck above all else.’” (quoting Press Release, Dep’t of Bus., Innovation, and Skills (Sept. 22, 2010))).

   [66].         Our Story, Cadbury,
/ourstory/Pages/ourstoryFlash.aspx (last visited Feb. 27, 2012).

   [67].         After Anheuser-Busch was sold to Belgian-based InBev in 2008, Boston Beer Co., the makers of Sam Adams, became the largest, independent, publicly traded brewery in the United States.  Beth Kowitt, Meet the New King of Beers, CNN Money (Aug. 8, 2008),

   [68].         In 1984, “Better Beer” Did Not Exist, Samuel Adams, (last visited Feb. 27, 2012).  Larger American beer companies, like Anheuser-Busch and Miller Brewing Company, are now owned by foreign companies.  Clementine Fletcher, SABMiller Spurning Femsa Means Higher Foster’s Price: Real M&A, Bloomberg (Feb. 24, 2011),
-02-24/sabmiller-spurning-femsa-means-increased-price-for-foster-s-beer-real-m-a.html (noting that South African Breweries Plc, a South African company, purchased Miller Brewing Company in 2002); William Spain & Steve Goldstein, Anheuser-Busch Accepts $52 Billion InBev Offer, Wall St. J. Marketwatch (July 14, 2008),

   [69].         City Code on Takeovers and Mergers r. 21 (Panel on Takeovers & Mergers 2011) [hereinafter Takeover Code], available at

   [70].         Cf. Panel on Takeovers & Mergers, The European Directive on Takeover Bids 2 (2005) (lamenting the fact that the United Kingdom was unable to secure passage of an EU directive that would have required EU member states to adopt a nonfrustration provision in their takeover codes like Rule 21 of the U.K.’s Takeover Code).

   [71].         See, e.g., Paul Davies, Shareholder Value, Company Law and Securities Markets Law: A British View 22–24 (Oct. 2000) (unpublished manuscript),available at (observing that the U.S. takeover rules are “clearly less responsive to the conflicts of interest to which target boards are subject in hostile bids and more responsive to the argument that setting business strategy is the preserve of centralised management rather than of the shareholders” and questioning “whether the U.S. rules do more than permit the entrenchment of target management under the guise of protecting target shareholders against bidder opportunism or protecting the interests of non-shareholder groups”); see also John C. Coates, IV, M&A Break Fees: US Litigation vs. UK Regulation 30 (Harvard Law Sch. Public Law & Legal Theory Working Paper No. 09-57, 2009), available at (“The UK’s regulatory approach exhibits clear benefits.  It generates little or no litigation, provides clear guidance for market participants, keeps fees low, and increases bid competition. . . . [I]t may make it harder for target fiduciaries to favor bidders for private benefits . . . .”).  But others disagree.  Lipton and Rowe point out that since 1985 and Delaware’s embrace of the poison pill, the volume of merger activity in the United States has increased.  Martin Lipton & Paul K. Rowe, Pills, Polls, and Professors: A Reply to Professor Gilson, 27 Del. J. Corp. L. 1, 20–21 (2002).  They also highlight two J.P. Morgan & Co. studies that show that “premiums paid to firms with pills were forty-two percent higher than the market price of the acquired firm’s shares five days prior to the initial offer, while companies that did not adopt pills received an average premium of only thirty percent[,]” and they reject as lacking empirical support the proposition that hostile takeovers “either increase aggregate returns to shareholders or effectively ‘discipline’ corporate management[.]”  Id.

   [72].         See, e.g., eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 29 n.86 (Del. Ch. 2010) (citing Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)) (noting that Delaware has recognized the propriety of a board’s adoption of a rights plan in order to counter the threat posed by a hostile takeover at a price that the board reasonably concludes is below the corporation’s intrinsic value).

   [73].         John Armour & David A. Skeel, Who Writes the Rules for Hostile Takeovers, and Why?, 96 Geo. L.J. 1727, 1729 (noting that in the U.K., poison pills and other defensive measures that “will have the effect of impeding target shareholders’ ability to decide on the merits of a takeover offer” are strictly forbidden).

   [74].         Cf. Stephen M. Bainbridge, Unocal at 20: Director Primacy in Corporate Takeovers, 31 Del. J. Corp. L. 769, 816 (2006) (rejecting the proposition that directors should be precluded from interfering with a stockholder’s desire to tender his stock because it would allow the bidder, instead of bargaining hard with the target board for a merger, to acquire stock at a “low-ball tender offer” at a premium to market price); Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110, 118 (1965) (“The shareholders should ordinarily be willing to accept any offer of a tax-free exchange of new marketable shares worth more than their old shares.”); Guhan Subramanian, Bargaining in the Shadow of Takeover Defenses, 113 Yale L.J. 621, 643 (2003) (noting that in the absence of takeover defenses, stockholders will accept a bid at a premium to market price).

   [75].         See, e.g., Clegg Attacks Brown over RBS Funding for Cadbury Bid, BBC (Jan. 20, 2010), (noting that British politicians from the Labour Party and the Liberal Democrat Party expressed anger over Kraft’s acquisition of Cadbury and reporting former Business Secretary Lord Peter Mandelson’s declaration that the British government would mount a “huge opposition” to Kraft’s takeover of Cadbury); Sarah O’Grady, Famous Chocolate Factory Cadbury’s Gets Chop, Express (Jan. 15, 2011),
-Cadbury-s-gets-chop (noting Conservative Party member Jacob Rees-Mogg’s anger at the Kraft takeover and Kraft’s decision, despite its promises, to close a Cadbury production plant in Somerdale).

   [76].         See supra notes 60–61 and accompanying text.

   [77].         See Business, Innovation, and Skills Committee, Mergers, Acquisitions, and Takeovers: the Takeover of Cadbury by Kraft, 2009–10, H.C. 234.

   [78].         Robert Hutton, Cable Slams Finance Industry, Pledges Takeover Probe, Bloomberg Businessweek (Sept. 22, 2010), http://www.globe‑
/quixplorer/filestorage/Interfocus/3‑Economie/31‑Europe/31‑SRCNL‑BusinessWeek_com_‑‑_Europe/201009/Cable_to_Continue_Finance_Attack_With_UK_Takeover_Pay_Probe.html (reporting that U.K. Business Secretary Vince Cable, a Liberal Democrat member of the governing coalition, announced an “inquiry into corporate-governance rules, with takeovers and pay both in the spotlight,” and denied that his outspoken stance against the finance industry had created a rift with his Tory colleagues in the coalition government).

   [79].         Roger Carr, the chairman of the Cadbury board of directors and one of the leading figures in the British corporate arena, made three key proposals in the wake of Kraft’s acquisition of Cadbury, all of which were rejected by the U.K. Takeover Panel, whose Code Committee conducted a review of certain provisions of the Takeover Code in late 2010.  First, Carr proposed that the threshold stock ownership that triggers a stockholder’s disclosure obligation under Rule 8.3 of the Takeover Code be reduced from 1% to 0.5%.  Carr Speech, supra note 62.  Rule 8.3(a) currently requires a stockholder owning 1% of the target company’s stock to publicly disclose such holdings following the commencement of the offer period (which begins after a “proposed or possible” offer is made by the hopeful acquirer).  Takeover Code, supra note 69, at r. 8.3(a).  Rule 8.3(b), in turn, requires a stockholder who owns, or comes to own during the offer period, 1% of the target company’s stock to disclose the details of any transaction involving the target company’s stock.  Id. r. 8.3(b).  Carr also proposed what even he called “a more radical move,” which was to raise the acceptance threshold from 50.1%, as currently required under Rule 9.2 of the Code, to 60% of the target corporation’s voting stock voting in favor of the proposed acquisition.  Carr Speech, supra note 62.  Finally, Carr suggested “an even more radical move”: disenfranchising stockholders who acquire their shares during the formal offer period in order to, in Carr’s words, “ensure short term money does not determine long term futures.”  Id.

   [80].         After receiving an “unprecedented number of responses” to its Consultation Paper (an official public request for commentary on suggested proposals), on October 21, 2010, the U.K. Takeover Panel Code Committee published its statement of the proposed changes to the Takeover Code it recommended.  Code Committee, Panel on Takeovers & Mergers, Review of Certain Aspects of the Regulation of Takeover Bids (Oct. 21, 2010) [hereinafter Committee Report], available at

   [81].         Under the Takeover Code as it is now written, if a potential bidder announces an interest in making a bid to purchase the target company, but does not commit to doing so, the target company may go to the Takeover Panel and request that the Panel impose a deadline on the potential bidder, the so-called “put-up or shut-up” date.  Takeover Code, supra note 69, at r. 2.4(b).  When the “put-up or shut-up” deadline arrives, the potential bidder either has to “put-up” a bid or “shut-up” and is forbidden to make any further bid for the target for a period of six months as a sanction.  Id. r. 2.8.  The amount of time given to the potential acquirer varies case by case, but is typically six to eight weeks.  Committee Report, supra note 80, at 4.  Although the purpose of the put-up or shut-up mechanism was to protect the target from being under “protracted siege,” in practice there were many instances where the target board would decline to ask the Panel to impose a put-up or shut-up deadline when approached by a potential acquirer because of pressure exerted by stockholders eager to allow the potential acquirer to have all the time it desired to formulate an offer.  Id. at 6–7.  Thus, in practice, the put-up or shut-up deadline was much less potent than what was originally contemplated.  Id.  Under the Code Committee’s proposal, however, it will no longer be up to the target company whether or not to approach the Panel and seek the initiation of the put-up or shut-up clock.  Rather, under the Code Committee’s proposal, as soon as the potential offeror is identified—and under the proposal the potential offeror must be made known, even if it wishes to remain anonymous in a friendly deal—the put-up or shut-up clock begins to tick and the potential offeror has 28 days to either make a bid, announce a firm intention to make a bid, or announce its intention not to make a bid and subject itself to the restrictions in Rule 2.8 of the Code.  Id. at 11.

   [82].         Committee Report, supra note 80, at 15.

   [83].         Hob Nobs are a popular “biscuit” or cookie in England manufactured by the U.K. multinational, McVitie’s.

   [84].         See In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 603–04 (Del. Ch. 2010) (“It is no small thing for a strategic acquirer to come public about its desire to buy another industry player.  Although management-side doctrinal junkies will cry that a board’s interest in buying another industry competitor does not mean that the company would be well served by a similar transaction in which it is the seller—i.e., that the company is ‘in play’—the reality is that the announcement of interest in a strategic transaction does signal that some other business strategy rather than the status quo would, in the board’s judgment, be optimal.”).

   [85].         See NACCO Indus. v. Applica Inc., 997 A.2d 1, 19 (Del. Ch. 2009) (“Bidders in particular secure rights under acquisition agreements to protect themselves against being used as a stalking horse and as consideration for making target-specific investments of time and resources in particular acquisitions.”).

   [86].         Others in the United Kingdom agree that the proposed changes are unlikely to have a meaningful effect in changing how takeover bids turn out in the United Kingdom.  See Richard Lambert, Takeover Code Tweaks Won’t Affect Corporate Behaviour, The Guardian (July 28, 2010),
/commentisfree/2010/jul/28/takeover-panel-corporate-behaviour (arguing that “in the end, tweaking the [T]akeover [C]ode will not make any substantial difference to corporate behaviour in the UK,” and that instead, the United Kingdom should focus on regulatory and tax changes that would encourage and make more permanent long-term investments by holders such as pension funds).

   [87].         A majority of American states, but not Delaware, have such statutes.  See William J. Carney & George B. Shepherd, The Mystery of Delaware Law’s Continuing Success, 2009 U. Ill. L. Rev. 1, 35–36 (2009) (noting that thirty states in the United States have adopted “other constituency statutes” that “effectively give directors carte blanche discretion by allowing them to consider other constituencies, which effectively makes them unaccountable to shareholders”).

   [88].         See supra note 53 and accompanying text; see also John C. Coates, IV, Takeover Defenses in the Shadow of the Pill: A Critique of the Scientific Evidence, 79 Tex. L. Rev. 271, 312 (2000) (stating that the “principal finding” of an early study about the poison pill’s effectiveness has held up over time: “firms that have adopted pills before a bid or other acquisition receive higher premiums than firms that have not” (citing Georgeson & Co. Inc., Poison Pill Impact Study (Mar. 31, 1988))); Martin Lipton, Pills, Polls, and Professors Redux, 69 U. Chi. L. Rev. 1037, 1054 (2002) (“The pill and the proxy contest have proved to yield the perfect balance. . . . A board cannot say ‘never,’ but it can say ‘no’ in order to obtain the best deal for its shareholders.”).

   [89].         See, e.g., Marcel Kahan & Edward B. Rock, supra note 53, at 897–98 (noting the high level of M&A activity despite the various protections, including poison pills, that corporate law affords target boards and arguing that shareholders will apply pressure to boards that do not effectively use takeover defenses to enhance shareholder value rather than entrench management); Coates, supra note 71 (showing, on the basis of empirical data from the years 1990–2008, that there is a higher incidence of bids for control of U.S. companies than there is for U.K. companies).

   [90].         Ken Sweet, NYSE, Deutsche Boerse Agree to Merge, CnnMoney (Feb. 15, 2011),

   [91].         The Canadian Press, Potash Corp. Making Good on Pledge Made to Saskatchewan in Bitter Takeover Battle, (Feb. 14, 2011), (noting that Saskatchewan is the world’s leading producer of potash and accounts for approximately 25–30% of world production).

   [92].         See Canpotex Company Profile, Canpotex, (last visited Feb. 27, 2012) (“[Canpotex’s] sole marketing focus is overseas, and [Canpotex’s] main objectives are to maximize exports and efficiently serve [Canpotex’s] customers to the benefit of [Canpotex’s member producers] and the Province of Saskatchewan.”).

   [93].         E.g., Rob Gillies, Canada Wary of Potential Foreign Takeover of Potash, (Sept. 21, 2010),
/LawArticleFriendlyIntl.jsp?id=1202472308213 (noting that the premier of Saskatchewan, Brad Wall, expressed doubt as to whether the Saskatchewan people would be better off after a BHP acquisition); James Wood, Say No BHP Takeover of PotashCorp, Saskatchewan Legislature Urges Federal Government, Leader-Post (Oct. 29, 2010),
+PotashCorp+Saskatchewan+legislature+urges+federal+government/3742049/story.html (reporting that the Saskatchewan provincial legislature unanimously passed a resolution calling on Ottawa to not approve the BHP bid for Potash Corporation).

   [94].         Investment Canada Act, R.S.C. 1985, c. 28 § 16; Thresholds, Industry Canada, (last modified Dec. 21, 2011).

   [95].         Ian Austen, Canada Blocks BHP’s Purchase of Potash, N.Y. Times, Nov. 4, 2010, at B14; Alexander Deslongchamps & Greg Quinn, BHP May Fail to Save Potash Bid in Politicized Rebuff, Bloomberg (Nov. 5, 2010),‑11‑05/bhp‑may‑fail‑to‑save‑potash‑bid‑after-canada-s-highly-politicized-rebuff.html.

   [96].         See, e.g., Founding Principles, Conservative Party Of Can., (last visited Feb. 27, 2012) (“The Conservative Party will be guided in its constitutional framework and its policy basis by the following principles: . . . A belief that the greatest potential for achieving social and economic objectives is under a global trading regime that is free and fair.”).

   [97].         See, e.g., I. Serdar Dinc & Isil Erel, Economic Nationalism in Mergers & Acquisitions (June 28, 2010) (working paper), available at
/dinc/www/research/assets/Dinc%20and%20Erel%20‑‑%20Nationalism%20in%20Corporate%20Mergers.pdf (observing that “[g]overnment interventions are very effective in preventing foreign bidders from completing the merger and in helping domestic bidders succeed”); id. at 12 (describing a situation that took place in 2006 in Spain in which the Spanish government, in response to a German hostile bid for a Spanish energy company, “laid down onerous requirements for the [German company’s] bid through its influence over the supposedly-independent Spanish energy regulator”); see also Bernard S. Black, The First International Merger Wave (and the Fifth and Last U.S. Wave), 54 U. Miami L. Rev. 799, 808 (2000) (observing that although it is an “exception[] to a more liberal general rule,” national governments still block mergers when doing so would “stop a major company from falling into foreign hands”); Will Germany Control Europe’s Power Switch?, TheTrumpet (Mar. 1, 2006), (reporting that the Spanish government denounced the German hostile takeover bid of the Spanish energy company Endesa as a “national security threat”).

   [98].         Foreign Acquisitions and Takeovers Act 1975 (Cth) (Austl.), available at

   [99].         Dinny McMahon et al., Chinese Investors Mull Bid for Potash, Wall St. J., Aug. 24, 2010, at B1.

   [100].        I use the OECD label as a rough proxy for the United States, Canada, the EU nations, Australia, New Zealand, Japan, and South Korea.  The United States, Canada, Australia, New Zealand, Japan, and South Korea are all currently members of OECD as are twenty-one of the twenty-seven member states of the European Union (Bulgaria, Cyprus, Latvia, Lithuania, Malta, and Romania are members of the European Union but not OECD).  List of OECD Member Countries, OECD,,2340,en_2649
_201185_1889402_1_1_1_1,00.html (last visited Feb. 27, 2012).

   [101].        For a succinct and provocative discussion of the perils of globalizing markets without globalizing effective and just regulatory institutions, see Dani Rodrik, Hooray for Nation States, The New Republic, Feb. 17, 2011, at 12, 13.

   [102].        Donald McRae, Measuring the Effectiveness of the WTO Dispute Settlement System, (Working Paper, 2008), available at
=1140452 (citing William J. Davey, The WTO Dispute Settlement System: The First Ten Years, 8 J. Int’l Econ. L. 17, 50 (2005)) (hailing the WTO’s success in channeling disputes into its highly regarded dispute resolution mechanism and noting that WTO-authorized sanctions are not compensatory, but instead retaliatory measures that can incentivize countries to comply with WTO Dispute Settlement Body reports); see, e.g., Press Release, European Commission, European Union Welcomes Suspensions of US Sanctions Following Resolution of WTO Banana Dispute (July 2, 2001) (IP/01/930) (announcing that in consideration for the European Union’s agreement to loosen import restrictions on bananas coming from the United States, the United States had agreed to suspend the increased duties it was assessing on certain EU exports that had been authorized by the WTO as a sanction against the EU).

   [103].        Kenneth W. Abbott & Duncan Snidal, Strengthening International Regulation Through Transnational New Governance: Overcoming the Orchestration Deficit, 42 Vand. J. Transnat’l L. 501, 501 (2009) (noting the failure of traditional international law mechanisms such as treaties and intergovernmental organizations to adequately regulate international business and observing that “[n]ongovernmental organizations, business firms, and other actors, singly and in novel combinations, are creating innovative institutions to apply transnational norms to business”); Patrick Macklem, Labour Law Beyond Borders, J. Int’l Econ. L. 605, 605 (2002) (noting that despite the fact that international organizations, such as the International Labour Organization, have articulated core principles which firms ought to comply with as a matter of public international law, “these developments [still] primarily relate to international efforts to hold states accountable to public international labour standards when devising domestic labour market policy” and further that privately adopted “[c]orporate codes of conduct potentially enable transnational implementation of international labour standards in ways that do not rely on traditional modes of international legal authority”); Chantal Thomas, Should the World Trade Organization Incorporate Labor and Environmental Standards?, 61 Wash. & Lee L. Rev. 347, 350–57 (characterizing both international labor law and international environmental law as severely lacking in their enforcement capabilities); Charles Sabel et al., Ratcheting Labor Standards: Regulation for Continuous Improvement in the Global Workplace (John F. Kennedy Sch. of Gov’t Harvard Univ., Faculty Res. Working Paper No. RWP00-010, 2000) (noting that in the absence of an international organization charged with monitoring working conditions many have proposed the creation of such international organization responsible for promulgating universal minimum working standards, but that “the machinery to compel global producers to adopt those standards does not exist and will be quite difficult to build”).

   [104].        See Carl Felsenfeld & Genci Bilali, The Role of the Bank for International Settlements in Shaping the World Financial System, 25 U. Pa. J. Int’l Econ. L. 945, 1017 (2004) (observing that although all major banks engage in international, cross border activity, “each bank has a strong domestic orientation” and is subject to each country’s domestic regulation, which “do not match each other”); R. Michael Gadbaw, Systemic Regulation of Global Trade and Finance: A Tale of Two Systems, 13 J. Int’l Econ. L. 551, 563 (2010) (“The international financial regulatory system became a fragmented, complex, multi-tiered, multi-dimensional, resource-oriented system that accommodates the different domains and regulatory prerogatives of financial officials, central bankers, and bank regulators as well as the private financial community by creating a variety of different organizations . . . .”).

   [105].        E.g., Alvin K. Klevorick, Reflections on the Race to the Bottom, in 1 Fair Trade And Harmonization 459, 459–60 (Jagdish N. Bhagwati & Robert E. Hudec eds., 1996) (“[G]overnments will choose policies—for example, environmental standards, occupational health and safety standards, competition policy—that entail suboptimal requirements, which afford their citizens too little protection—whether from environmental hazards, unsafe or unhealthy working conditions, or cartel behavior.  The idea is that to make its country a hospitable location in which to do business, a government would establish lax standards to be imposed upon those it wishes to draw.”); Chris Brummer, Post-American Securities Regulation, 98 Cal. L. Rev. 327, 333 (2010) (observing that securities regulators and lawmakers compete globally by fashioning regulatory regimes to attract capital).

   [106].        E.g., Chrystia Freeland, The Rise of the New Global Elite, The Atlantic, Jan.–Feb. 2011, at 44, 44 (“Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth.  Its members are hardworking, highly educated, jet-setting meritocrats who feel they are deserving winners of a tough, worldwide economic competition—and many of them, as a result, have an ambivalent attitude toward those of us who didn’t succeed so spectacularly.  Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home.  Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today’s super-rich are increasingly a nation unto themselves.” (emphasis added)); Randall S. Thomas & Harwell Wells, Executive Compensation in the Courts: Board Capture, Optimal Contracting, and Officers’ Fiduciary Duties, 95 Minn. L. Rev. 846, 862 (2011) (reporting that in 2007 the average U.S. CEO of a major company earned 275 times more than a typical worker (citing Lawrence Mishel et al., The State of Working America 2008/2009, at 220 (2009))).  Current CEO pay and the gap between that pay and the salary of ordinary workers is much larger today than it has been in the past.  See, e.g., Shanon Lynn, CEO Salaries: What is the Average Salary of a CEO?, Payscale (July 31, 2008),
-salaries—1.html (reporting that in 1970, the average CEO salary was around $700,000 and that that number represented a salary 25 times the salary of an average production worker).

   [107].        Marcel Kahan & Edward Rock, Embattled CEOs, 88 Tex. L. Rev. 987, 1007, 1031 (2010) (observing that the rise in institutional shareholder activism has led to decreased CEO power and a correspondent tendency, on the part of boards of directors, to be increasingly willing to remove CEOs even in mere anticipation of poor future performance); Murali Jagannathan & A.C. Pritchard, Does Delaware Entrench Management? 23 (Univ. of Mich. Law and Econ., Olin Working Paper No. 08-024, 2011), available at
/papers.cfm?abstract_id=1313274 (arguing that Delaware CEOs experience greater turnover in part because large institutional investors exert pressure on board members to be active monitors of management performance).

   [108].        Cf. Lawrence E. Mitchell, Financialism: A Lecture Delivered at Creighton University School of Law, 43 Creighton L. Rev. 323, 332 (2010) (“Traditional small lending institutions thus became further removed from their clients, and banks sought greater profits in the process of securitization, which brought higher profits than mere lending and allowed banks to evade capital restrictions.  Securitization . . . [also] allowed loan officers to pay less attention to the safety of their loans, since they were promptly to be sold off and removed from banks’ balance sheets (although not entirely from the risk assumed by the banks).”).

   [109].        Milton Friedman, The Social Responsibility of Business is to Increase its Profits, N.Y. Times Mag., Sept. 13, 1970 (quoting Milton Friedman, Capitalism and Freedom 134 (University of Chicago Press 2002) (1962)).  Others in the academy have harbored similar misgivings toward the notion that corporations, nonhumans, can have a “social responsibility.”  See, e.g., Michael Jensen & William Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, in The Economic Nature of the Firm 209, 215–16 (Louis Putterman ed., 1996) (“Viewing the firm as the nexus of a set of contracting relationships among individuals also serves to make it clear that the personalization of the firm implied by asking questions such as ‘what should be the objective function of the firm’, or ‘does the firm have a social responsibility’ is seriously misleading.  The firm is not an individual.  It is a legal fiction which serves as a focus for a complex process in which the conflicting objectives of individuals (some of whom may ‘represent’ other organizations) are brought into equilibrium within a framework of contractual relations.  In this sense the ‘behavior’ of the firm is like the behavior of a market; i.e., the outcome of a complex equilibrium process.  We seldom fall into the trap of characterizing the wheat or stock market as an individual, but we often make this error by thinking about organizations as if they were persons with motivations and intentions.”).

   [110].        See The Federalist No. 51 (James Madison) (“If men were angels, no government would be necessary.  If angels were to govern men, neither external nor internal controls on government would be necessary.  In framing a government which is to be administered by men over men, the great difficulty lies in this: You must first enable the government to control the governed; and in the next place, oblige it to control itself.  A dependence on the people is no doubt the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.”).

   [111].        Leo E. Strine, Jr., Human Freedom and Two Friedmen: Musings on the Implications of Globalization for the Effective Regulation of Corporate Behaviour, 58 U. Toronto L.J. 241, 272–73 (2008) (arguing that the globalization of capital in recent decades counsels strongly in favor of establishing a globalized regulatory system capable of monitoring responsible corporate behavior that “advances social welfare”).

   [112].        Dani Rodrik, Hooray for Nation States, The New Republic, Feb. 17, 2011, at 12.



By: Wendy E. Wagner*


Corporations have been criticized for their environmental misdeeds for over a century,[1] so it is not surprising that many view corporate approaches to sustainability with skepticism.[2]  Reports of green-washing and other forms of misleading advertising by a handful of corporations only serve to reinforce this negative perception.[3]

Based on this evidence of poor corporate behavior, a number of analysts have concluded that sustainability should be regulated in the same way as other industrial polluting activities.[4]  Just as laws require corporations to disclose information on their polluting activities because these activities are wrongs to society, so the thinking goes, corporations should be required to engage in an internal accounting of their unsustainable practices.  Specifically, corporations should be required to assess the sustainability of their operations in standardized disclosures and take their resulting, publicly-administered medicine, whether it involves being shamed in the marketplace or subjected to greater regulatory control with respect to resource use or disposal practices.[5]

This Article argues that addressing corporate sustainability by putting the onus on corporations to assess the sustainability of their operations may get the solution exactly backwards, at least at this early stage in advancing sustainability.  Rather than view the lack of sustainability efforts as another corporate bad that individual corporations should be required to redress,[6] this Article advocates that corporate sustainability should be treated instead as a public good that becomes the government’s responsibility.  Information about an industrial sector’s sustainability profile—for example, a life cycle analysis of a typical facility—has clear public good qualities associated with it.  This type of assessment allows for cross comparisons between competitors, identifies areas for possible synergies among producing companies, and highlights areas that may ultimately deserve further regulatory oversight.[7]  Equally important, if sustainability analyses concerning various production processes and services are produced in the first instance by publicly funded, third-party experts rather than extracted from private actors, the resulting reports are more likely to be reliable, complete, and accessible to a wide-range of stakeholders who can use them in public-benefitting ways.

The argument for treating corporate sustainability as a public good, rather than as a corporate bad, unfolds in four Parts.  Part I details the need for much greater information on the sustainability of corporate practices.  At present, there appears to be little dispute that rigorous sustainability assessments of major corporate production processes are a valuable tool for directing change, and that life cycle analyses excel in providing this kind of comprehensive assessment.  Part II outlines how these life cycle assessments nevertheless face numerous informational and related obstacles that impede their usefulness when they are produced by corporations.  Part III then argues that sustainability life cycle analyses, at least at this early stage, are better viewed as public goods that should be conducted by a neutral third party and subsidized by the public, rather than treated as an extension of pollution disclosures that are the sole responsibility of the firm.  This public good characterization also manages to dodge the landmine of issues that ordinarily afflict the reliability of information provided by regulated parties with a stake in the outcome.  Part VI offers specific suggestions for how corporate sustainability assessments might be prepared by public experts and financed through a collective tax on corporations.

I.  Informed Sustainability

There are multiple avenues for advancing corporate sustainability, but a key component to all of these methods is greater information about corporate practices.[8]  Individual corporate decisions about production processes, when amalgamated, yield a global market of goods and services which may be badly inefficient from an ecological point of view.  Yet, until the relevant information is gathered and synthesized, the overall impact of corporate practices and the areas for the most promising gains with regard to sustainability are obscured.[9]  As Professor Gaines notes, “shared information and mechanisms of social response to that information” are some of the primary keys to sustainable development.[10]  This Part outlines the critical role that information plays in making progress toward corporate sustainability.

A. The State of Information on Corporate Sustainability

Top commentators on corporate sustainability agree that information is not just an important ingredient, but it is also essential to establishing a meaningful sustainability program.[11]  At the most basic level, rigorous information on corporate sustainability informs the market—not simply downstream consumers, but also insurers, investors, corporate partners, and others who ultimately keep the corporation in business.[12]  Rigorous information on corporate sustainability informs internal practices as well: Enhanced corporate self-assessment is touted as one of the primary virtues of mandating information disclosures.[13]  Corporate sustainability information also identifies corporate practices that are most likely to benefit from greater regulatory oversight or market intervention.[14]

Yet current regulatory programs provide only limited information on corporate sustainability.[15]  The Right-to-Know Act in the United States requires annual disclosures of corporate use and disposal of large amounts of hazardous substances.[16]  The resulting Toxic Release Inventory (“TRI”) disclosures provide useful information about corporate sustainability with regard to handling and disposal of hazardous substances, but these load estimates offer little insight into meaningful opportunities for a facility to reduce natural resource use, to minimize pollution, or to otherwise decrease a facility’s ecological footprint.[17]

The Global Reporting Initiative (“GRI”), established by the United Nations Environment Programme (“UNEP”) and the Coalition for Environmentally Responsible Economies (“CERES”), provides a more robust measure of a corporation’s ecological footprint because it measures not only outputs, but natural resource use as well.[18]  The GRI offers external parties, like investors and customers, an even stronger basis for evaluating a corporation’s commitment to and progress toward sustainability as compared with the TRI disclosures.[19]  GRI reporting is voluntary, however.  Thus, while a number of Fortune 500 companies have conducted self-audits over the last fifteen years, participation in GRI still remains the exception rather than the rule.[20]

GRI and TRI provide useful barometers to measure corporate sustainability, but because both are exclusively input and output focused, they miss opportunities to focus corporations on the ways that production operations can be altered to provide significant sustainability advances.[21]  GRI and TRI also allow firms to be self-referencing in benchmarking their progress, a focus that neglects to reward ecologically-innovative business practices.[22]  Indeed, because both measures simply report on input and output over time, they are indifferent to the possibility that some types of processes or firms are unsustainable relative to competitors and need to be phased out.[23]  In addition, rather than keeping a firm focused on sustainability goals, a “good score” in the GRI risks becoming an end in itself which can distract firms from searching for design and other process innovations that may make more significant progress in the firm’s sustainability profile.[24]

B. The Unparalleled Virtues of Life Cycle Analysis

Although life cycle analysis is more information-intensive, it offers a substantially improved measure of corporate sustainability relative to the input and output measures embodied in the GRI and TRI reports.[25]  Life cycle analysis, which originated in industrial ecology, begins at the “cradle,” where raw materials are produced, and follows that production process through transport and manufacturing to the ultimate disposal, often by the consumer.[26]  The goal of this analysis is to identify materials and burdens at each stage of the production process that are not recycled in a closed loop, paralleling natural processes.[27]  See Figure 1.  Such a holistic view of the process allows for a greater range of options for minimizing a facility’s ecological footprint, including redesigning the process entirely.[28]  By focusing on the design of production processes, rather than simply the end-of-the-pipe or output adjustments, much greater environmental gains, as well as cost-savings, are possible.[29]

Figure 1: Example Flow Diagram of a Hypothetical Bar Soap System[30]


Because the virtues of life cycle assessment (“LCA”) enjoy strong consensus among experts, the methods for conducting these assessments are becoming standardized by organizations such as the International Standards Organization (“ISO”).[31]  A typical life cycle assessment begins with a qualitative inventory of each stage of the process,[32] which can provide useful information for decision making in and of itself.[33]  Most life cycle assessments are quite rigorous, however, and take the form of computational models that measure environmental burdens—often through a single unit—which can then be used to identify the most promising areas for redesign or process adjustments.[34]

To the extent that there is proof in the pudding, life cycle analyses boast of concrete victories.  A life cycle approach helped Tropicana learn that it was not the transportation of its juice, but the agricultural inputs that led to its larger-than-necessary carbon footprint.[35]  As a result, Tropicana focused its primary efforts on reducing fertilizer use rather than dedicating the same resources to increasing the energy efficiency of its vehicles.[36]  In a life cycle analysis of coal-fired power plants, Department of Energy (“DOE”) consultants compared cleaner coal-fired plants with older plants.[37]  This analysis not only quantitatively identified the additional environmental burdens associated with the older plants, but pinpointed those costs to specific features within the life cycle.  This analysis also identified design changes that might improve the environmental performance of the older coal-fired systems.[38]

From a regulatory standpoint, life cycle analysis can also pinpoint occasions when adverse environmental impacts are simply shifted within a production process—for example, how end-of-the-pipe controls may reduce one source of pollution only to move the problem elsewhere in the production process where it might be more difficult to address.[39]  A life cycle assessment of offshore drilling waste disposal, for example, revealed how strict prohibitions on the discharge of cuttings extracted with certain drilling fluids may have precluded opportunities to identify ways to convert the resulting hazardous waste (disposed in hazardous waste landfills) into a useful product.[40]  This internal recycling would have ultimately done much more to limit waste, production costs, and environmental risk than flat prohibitions on the generation of the waste.[41]

Given the virtues of life cycle analysis, coupled with what has now become a relatively robust methodology for conducting the assessments, it is no wonder that many commentators are clamoring for greater use and incorporation of life cycle analysis into sustainability calculations.[42]  There has even been a movement to use life cycle analysis for a wide range of environmentally intensive practices, and not simply the design, packaging, or manufacture of products.[43]  Life cycle analysis is so highly regarded that its methods are also being expanded to encompass more than purely environmental concerns.[44]

II.  Impediments to Corporate Self-Assessments of Sustainability

Just as life cycle assessments offer great potential for advancing corporation sustainability, the information-intensive quality of these assessments introduce some formidable challenges.  The most significant impediment, by far, is that a great deal of the information needed to conduct facility-specific or even industry-wide life cycle assessments lies in the hands of the companies.  And, for a variety of reasons, these firms often lack the incentives to collect, analyze, or even share this basic information in a complete or comprehensive way.[45]  While some corporations may receive accolades for their forward-looking sustainability practices revealed in life cycle assessments, many more are likely to view these assessments as yet another opportunity for the public release of unflattering internal information about their environmental problems.  Much like environmental audits, and even basic TRI and GRI disclosures, corporations may be wary of conducting these assessments and, if they are required, may resist conducting them in a rigorous or comprehensive way.[46]  Indeed, the challenges associated with self-conducted life cycle analyses are more significant than TRI and GRI since the data collection and methods are difficult to prescribe in advance.

This Part identifies several impediments to the production of reliable life cycle analyses when the analyses are conducted by corporations that have a stake in the outcome.

A. Reliability of Data

A life cycle assessment requires a great deal of data about a large range of inputs (including water usage and various chemicals) and outputs (including pollutant streams and discharges) at each stage of the production process, from natural resource extraction to disposal.[47] Yet, since this data is largely in the hands of the corporation, it can be difficult to collect.[48]  A number of other environmental programs have relied, out of necessity, on corporations to produce much of the basic information about their compliance with laws and regulations,[49] and in these cases the EPA has often found itself in a cat-and-mouse game with regulated parties in its effort to acquire reliable information.

Over time, additional regulatory innovations have helped increase the reliability of some self-produced information from regulated parties.  For example, to gather accurate information about the pollutant emissions emanating from large utility stacks, Congress required that continuous monitors be installed on the stacks,[50] and the EPA promulgated supplemental rules that penalize facilities when their continuous monitors break down.[51]  The EPA has also experimented with the use of external auditors who, like financial auditors, inspect companies to assess their violations and help bring them into compliance.[52]

Unfortunately, most of the tools developed to collect more reliable information from regulated parties are only useful in a narrow set of circumstances that do not extend to the data-intensive needs of sustainability life cycle assessments.  Expensive continuous monitors at the end of discharge pipes provide only a fraction of the internal data needed to produce a meaningful life cycle assessment.  Deploying external auditors to oversee data production is both expensive and incomplete in providing a rigorous accounting of industrial practices over time.[53]  Some of the information on processes and inputs can even be trade secret protected and therefore disclosed to only a few agency officials.[54]  In fact, even GRI reporting, which is far more standardized because of GRI’s emphasis on input and output quantities and indicators, has encountered challenges in ensuring the reliability of the reported information.[55]

As a result, there are substantial challenges in ensuring the reliability of corporate-conducted life cycle assessments.  Compared with GRI, life cycle assessments allow for even more error and bias in extracting basic internal data since there is much greater discretion for the corporation in identifying the types of data to collect, selecting the units of analysis (both in time and scale), and assembling the requisite information from company operations.[56]

B. Disinterested Methods

Beyond problems with ensuring the reliability of the input data, the methods for conducting a life cycle analysis also afford the analyst considerable discretion in how to conduct the assessment.  This too presents problems when the company conducting the assessment has a stake in the outcome.[57]  For example, there are numerous discretionary points that arise in framing the scope of a life cycle assessment, developing the methods, and interpreting the data.[58]  When a company is conducting its own LCA, this remaining methodological discretion raises a risk that it might select the most beneficial assumptions in conducting its assessment and ignore others that might cast the company in a less positive light.  The resulting self-assessment could thus be prepared in ways that are afflicted with systemic biases that tilt in favor of the firm, but these biases will remain difficult to detect without careful review.

The development of rigorous methods for other types of open-ended assessments, like risk assessments, have posed similar challenges to environmental regulators.[59]  For example, there is evidence of sponsor-bias in manufacturers’ assessments of the chronic hazards of their products and waste streams.[60]  In the biomedical literature, this systemic bias has been dubbed “the Funding Effect” since privately sponsored research is more likely to produce results favorable to the sponsor than research that is financed by disinterested parties, like the federal government.[61]  Even more standardized sustainability disclosures, like GRI, have suffered from some of these challenges, since they too provide wiggle room for firms that prefer to highlight successes and downplay failures in applying the GRI indicators.[62]

This discretion in methods has also been a continuing problem for life cycle assessments.  Relatively blatant evidence of self-serving biases in corporate life cycle self-assessments was discovered in the 1990s which, in turn, sparked greater attention to the development of more rigorous methods for conducting these assessments.[63]  UNEP, ISO and SETAC all worked to improve the methods for life cycle analyses in ways that guard against sponsor discretion to the extent possible.[64]  Nevertheless, the dynamic features of LCA make it difficult to develop a prescriptive method that guards against all forms of discretion.[65]  Methods that are too rigid run the risk of sacrificing innovation and creativity in the drive for reduced analyst discretion.

Precisely for that reason, ISO attempts to increase reliability by encouraging the external peer review of a corporation’s life cycle assessment.[66]  Yet this external review is simply voluntary and, at least in 2005, there were indications that this review was not being used comprehensively or uniformly by corporations in their self-assessments.[67]  For example, even when peer review is conducted, it may not be rigorous—either because the reviewers are biased themselves (and selected accordingly) or because reviewers face inadequate resources or incentives to engage in robust analyses of a firm’s LCA.[68]  Obviously, too, if there are not corresponding audits of the data-inputs, then shoring up the assessments may win the battle on methods but still lose the larger war on reliable assessments.

When a company has considerable discretion to determine the methods for its life cycle self-assessment and when that assessment can affect the company negatively if it reveals unflattering information, then this discretion may translate into systemic, self-serving biases that undermine the reliability of the assessment.[69]  Unless regulators have substantial resources to scrutinize the models used for self-assessments, significant discretion in a company’s life cycle assessment will remain.

C. Comprehensibility

A critical, third feature of a robust life cycle assessment is its comprehensibility to a wide range of users.[70]  Because multiple stakeholders will use the assessments, it is important that the assessments be understandable to those outside the life cycle assessment field.[71]

When left to the discretion of an interested party who produces the report, however, the comprehensibility of life cycle assessments can be controlled or even manipulated.[72]  If a corporation conducts a life cycle analysis that reveals embarrassing information, for example, it enjoys considerable discretion to obscure the negative findings by writing the analysis in as technical a way as possible or obfuscating the most incriminating revelations.[73]

GRI reporting would seem immune from this comprehensibility problem given its emphasis on comparable, input and output calculations in generic tables.  Yet even GRI reports can be “cluttered with information of little apparent use to readers, while missing out on the big picture risks and opportunities.”[74]

Life cycle assessments magnify these comprehensibility challenges several-fold since the assessments are complex and give considerable discretion to the assessors to determine how the results ought to be communicated.  It is thus difficult, if not impossible, to prescribe the comprehensibility of a life cycle assessment in advance.  Even when results are communicated clearly, however, the comprehensibility of life cycle analysis may be impaired if the reports cannot be cross-compared among competitor firms.[75]  Yet in most cases, this cross-comparison will only occur when facilities use the same models for their assessments, which they may not be inclined to do without external pressure.

III.  Corporate Sustainability as a Public Good

Extracting reliable life cycle analyses from corporations is fraught with difficulty,[76] but one simple move can help avoid this impasse: sustainability analysis can be reconceived as a public good rather than a responsibility that should be shouldered by corporations.  Reconceptualizing life cycle assessments as public information helps sidestep the impediments to collecting reliable and comprehensible information identified in the prior section.  It also manages to produce considerably more relevant, accurate, and hopefully path-breaking types of analyses and recommendations in forms that would not occur if individual firms, who have a clear stake in the findings, were the primary source of  this information.

Admittedly, a reconceptualization of sustainability assessments as public goods is at odds with conventional wisdom.  In most national and international circles, sustainability reporting is understood to be a natural extension of pollution reporting that discloses negative externalities and other bads that a corporation extracts from society.[77]  Yet this conception seems to be based more on analogies to TRI reporting and other corporate disclosures than on a thorough analysis of the unique features of sustainability assessments.  Such a close analysis reveals a number of ways that life cycle assessments fall closer to the public good side of environmental information than to regulating corporate bads.

There are at least four features of industrial life cycle analyses that are more closely associated with public goods, at least at this early stage in improving corporate sustainability.  First, and perhaps most important, it is not clear what a life cycle analysis will reveal for any given industrial sector, and thus a life cycle analysis may not identify the excessive use of natural resources or polluting activities (i.e., negative externalities) in need of intervention.  For some manufacturing sectors it is possible that there are no environmentally smarter options available.  As such, life cycle analysis may often be informational and exploratory—identifying areas in need of innovation—rather than exposing corporate dereliction of core environmental responsibilities.

Second, and along these same lines, conducting life cycle analyses and developing innovative solutions for more sustainable approaches in the future constitutes a type of intellectual property or public good for which a firm is unlikely to be able to capture its investment.[78]  Because the methods for LCA are constantly evolving, one corporation’s bright idea for how to conduct a life cycle analysis or capture sustainability gains through facility-based innovations may quickly become a good that its competitors can copy.  Without patents, copyrights, or other ways to convert these intellectual discoveries into property, sustainability innovations can be co-opted by competitors without compensating the originator of the idea.[79]  Firms could even copy and embellish on another facility’s life cycle assessment and enjoy reputational gains without doing the initial work associated with conducting the basic assessment.

Ironically, at the same time that first-mover firms who conduct LCAs and identify ways to improve the sustainability of their operations may be providing competitors with a ready template for copying their green advancements, they may also be providing a playbook for competitors to capitalize on their weaknesses.  If the life cycle analysis reveals inefficient or excessive waste in a manufacturing system, for example, then this internal self-evaluation can be used against the company before it has had an opportunity to make improvements.  Ironically, some firms may contribute to their own demise by providing this type of admission against interest through voluntarily produced LCAs.[80]

Third, just as the benefits of LCA are broadly dispersed toward public goods, the costs are concentrated on individual firms and can be quite high.[81]  Unlike other types of disclosures, like TRI or even Security Exchange Commission (“SEC”) disclosures, life cycle assessments can consume considerable resources.[82]  Data collection can be extremely costly[83] and applying the models or methods of LCA requires expertise.[84]  From the firm’s perspective, then, conducting this detailed, introspective sustainability analysis is not a simple or inexpensive exercise.[85]

Utilizing the outputs of LCA also requires an organizational structure that can act on the results, a feature that adds still more costs to the LCA process.  Some firms, and perhaps many, lack the internal management structures that allow for the internal cross-fertilization that LCA demands.[86]  In one case study, for example, Toyota Motor Sales lacked the internal capacity to conduct the assessment and contracted with UCLA to develop a model for its system.[87]  Ultimately, Toyota enjoyed considerable environmental and cost savings by eliminating a particular packaging feature of its process;[88] yet without this investment, the areas for improvement would not have been brought to light.[89]

Last but not least, the large-scale costs associated with developing methods, models, and databases and viewing the problem more synoptically, rather than at an individual level, all favor a public good approach to life cycle analysis.  Publicly produced assessments can identify areas for cross-fertilization and better allow for the diffusion of information as compared with private assessments, which might not only lack this broader perspective, but might deliberately avoid sharing internal information since it could undermine a firm’s competitive edge.

IV. Reform

Expert, neutral assessments of a manufacturing process are critical ingredients to a rigorous life cycle assessment and help pave the way to the development of sustainable innovations in processes, technologies, and even product lines.  Yet it seems naïve to expect corporations will conduct these types of expensive analyses voluntarily, particularly when their own innovations can be easily co-opted by competitors.  Even if LCA was mandatory for corporations, the unavoidable discretion afforded to the analyst makes it difficult to ensure that the resulting assessments are reliable and comprehensible.  This final Part proposes that a public entity should conduct these assessments and describes how this might be done.  The Part closes by considering what the public good qualities of LCA suggest about other types of environmental information.

A. Step 1: Public Life Cycle Assessments

Since life cycle assessments come closer to being public goods than the straightforward disclosure of negative externalities, a disinterested public organization is the most appropriate entity to produce life cycle assessments.[90]  The resulting LCAs would be based on an average firm within a particular industrial sector, much as is currently done by the EPA in setting technology-based air and water pollution standards under the Clean Water and Clean Air Acts.[91]  If this generic assessment reveals reasonable areas for improvements, then consumers, investors, shareholders, and even regulators may begin to demand sustainability progress from firms.  Individual facilities themselves will also learn of ways they can operate more sustainably, thanks to these public assessments.

Under this public good view of sustainability assessments, life cycle assessments would be done by respected experts who are completely independent of the companies, but have access to internal corporate information.  Ideally, much of the analysis would be done cooperatively with firms since the goal is to identify areas for improvement and possibly cost savings.  To the extent that the life cycle analysts face opposition from some firms, information extraction tools—like EPA’s authority to request information under its various statutory mandates—would be needed to secure internal records or to ensure that the voluntarily provided records are complete.[92]  Indeed, because it has legal authority to access private records, the EPA is perhaps best situated to conduct these life cycle assessments,[93] or it could subcontract the work to a respected nonprofit body like CERES.[94] The resulting, industrial-sector life cycle assessments would ideally be peer reviewed and subjected to comments from the affected industry, although the expert assessor group would have complete independence in how to respond to comments.  Much like technology-based standards, the life cycle analyses would also be updated at regular intervals[95] or could be subject to more informal updating processes (for example, the expert assessor could post a website that invited comments on revisions over time).

In conducting the assessment, the expert assessor should produce two different, bookend life cycle analyses for each industrial sector: (1) a reasonable worst case life cycle assessment, and (2) the very best life cycle assessment for each industrial sector.  The reasonable worst-case analysis would present the assessment for a typical facility that falls in the bottom third relative to its competitors with respect to the sustainability of its operations.  The very best case analysis would be based on the sustainability profile of an imaginary facility that employs all of the best sustainable innovations and process inventions that are reasonably available.  This best case sustainability profile serves not only to set a high bar, but to showcase the types of innovations that are possible.[96]

Publicly-prepared life cycle assessments would operate much like penalty defaults: using the worst case assessment as a baseline, corporations would be able to distinguish their processes or boast of accomplishments that go well beyond the laggard facilities in their sector.[97]  The corporations can then use this positive comparison in the market to gain a competitive edge with insurers, investors, and the public at large.  Unlike a full-blown life cycle analysis, however, this distinguishing effort would limit the opportunities for worrisome discretion since the firm would be forced to compare specific industrial processes against a centralized, detailed model.  Nevertheless, a process for validating a corporation’s claims in making these positive distinctions should also be established to provide added reliability to the firm’s efforts to compare its processes against the publicly produced sustainability assessments.

Ultimately, a more reliable process for benchmarking and validating a corporation’s sustainability claims could go a long way towards improving available, environmental information in the current marketplace.[98]  One of the difficulties that front-mover firms currently face is the challenge of distinguishing themselves in the marketplace in ways that can be trusted by outsiders.[99]  As one leading sustainability consultant notes, “[i]ronically, green marketing has become one of the greatest threats to the success and scale of corporate sustainability practices.  Ubiquitous (and often unsubstantiated) green claims have created a green-washed, eco-cluttered and eco-saturated marketplace.”[100]  The public assessments suggested here should help limit the ability of facilities to exaggerate or “green-wash,” since they offer specific baselines against which a firm’s boasting can be more readily compared.

A central entity could also use these public life cycle assessments to identify innovations across multiple industrial sectors more generally,[101] as well as gain a bird’s-eye view of American production processes.[102]  “Ecological rucksacks,” material flows, and other ecological accounting tools are also facilitated by life cycle analyses that are conducted by a central organization.  These analyses can be used to provide a more systematic view of production and service processes that facilitate the redesign of larger systems as well as firms.[103]  The assessments are also likely to identify blind spots that are otherwise missed by regulatory approaches or voluntarily incentives.  For example, the assessments may highlight goods or services that are so costly to the environment that they should be significantly curtailed or even eliminated.  Finally, centralized LCA can help identify and compare national differences in the sustainability of industrial operations.  One study compared United States and Canadian industries and identified differences in energy use, import and transit inputs, and other features that were specific to the company of origin that might otherwise be lost in an individualized LCA.[104]

There are a variety of other, supplemental LCA tools that could be developed by a centralized expert analyst body to reduce the costs to firms of conducting their own facility-based assessments.[105]  For example, a web-based model for a facility-specific LCA could be developed with user-friendly interfaces that allow corporations to insert a few parameters and then run the model.[106]  Commentators observe that “companies frequently look for simplified assessment tools that offer quick, approximate results,” such as checklists and simplified calculators, and this type of model could fill a needed niche.[107]  Guides and other learning materials, including workshops and symposia, might also be provided to help firms use the generic, industry-specific LCA for their facility as a springboard to improving sustainability processes.  The EPA has already made progress in preparing these types of guidelines,[108] but further outreach and education is needed since “[m]any companies [in the United States] do not see how life-cycle thinking can be applied to their specific operations—or even the benefits of doing so.”[109]

With strong public leadership, LCA models can also be improved and expanded.  Since there have been relatively few validation checks on LCA models to ensure that they are robust, a central body like EPA or CERES could develop ways to match LCA models against the outputs of real systems to enhance the validity of the models.[110]  This central organization could also expand the range of features included in life cycle analyses to encompass adverse social and ecological impacts.[111]  Finally, the EPA or CERES could develop ways to improve the comprehensibility of the results of LCA and related sustainability assessments.[112]

B. Step 2: Regulatory Incentives to Do Better

In order to produce meaningful incentives for firms to take sustainability seriously, the life cycle assessment could also be used as a baseline for imposing additional regulatory controls that encourage or even require specific sustainability improvements from corporations.  Firms might be “commanded” to reach certain sustainability goals in ways that parallel something like the technology-based standards of the Clean Water and Clean Air Acts.  For example, all firms would be required to reach some mid- or best-available level of sustainability within their industrial sector, likely required through legislation.

Alternatively, all firms in a given industrial sector could be charged a sustainability tax based on the total resource use and waste production of the reasonable worst-case life cycle for their industrial sector (perhaps further adjusted by the size or production volume of the facility).  Facilities that provide validated accounts of how they accomplish sustainability gains above this baseline could then earn tax credits.  Companies that go further and actually pioneer innovations in sustainable technologies or operations might not only enjoy even greater tax credits, but also reputational benefits—for example, being officially certified by the EPA, or another nonprofit, as a corporate leader in sustainable innovation.

Identifying meaningful distinctions between individual firms and the default worst-case sustainability life cycle will require a detailed review of a company’s submission and thus will necessitate the dedication of considerable agency resources.  One way to finance these important facility-specific evaluations is through the sustainability tax itself.  The sustainability tax would operate simultaneously as an incentive for companies to innovate or do better (hence lowering the tax) and as a mechanism to fund the ability of an external party, like the EPA, to certify differences between firms that warrant recognition.

It is ultimately possible that some sustainable innovations will be valued as intellectual property due to the high research costs involved in developing the product.  At the same time, however, it is counterproductive to reward innovation in sustainable practices with patents that then allow firms to charge others a licensing fee in order to become more sustainable themselves.[113]  Since innovations in sustainability should be shared with the larger community, barriers to the diffusion of sustainable innovation due to patents and other forms of corporate intellectual property need to be monitored closely.  Ultimately, more targeted subsidies may need to be developed to encourage still greater private innovation.

C. Information as a Public Good

Traditionally, information disclosures have been used to force firms to disclose their negative externalities; yet this narrow view of information disclosures may be foreclosing opportunities for advances in corporate sustainability.[114]  Indeed, a “public good” dimension to environmental information may be a perspective that has been lacking in the design of environmental programs more generally.  Professor Biber, for example, has argued that a rigorous ambient monitoring regime should not be established piecemeal, but instead benefits from a single, collective entity that oversees the data collection so that the data is reliable and amenable to cross-comparisons across regions and over time.[115]  In drug regulation there in fact appears to be a shift occurring that depends more substantially on the Food and Drug Administration to collect and analyze all publicly available information, including adverse effects reports, and use that information to supplement the research submitted by drug manufacturers.[116]  Even historically, the first, often noncontroversial, step toward enacting pollution standards began with an agency like EPA that identifies what the better pollution control technologies could accomplish within various industrial sectors.[117]  In these programs, firms were expected to meet publicly established targets but were not required to conduct their own research and development to discover what these targets should be.[118]

Figure 2 provides a re-conceptualization of different types of information-based disclosures according to their public good qualities.  Sustainability life cycle analyses for industrial sectors, at least initially, fall closer to the public good axis because they have only a limited assurance of highlighting negative externalities and a much greater probability of introducing information on sustainable innovation that will benefit other firms.  Other types of environmental programs might similarly benefit from attention to the fundamental public good qualities of the underlying information.  For example, the creation of environmentally superior substitutes, such as green chemistry, is not currently encouraged through regulatory processes even though the development of these innovations primarily benefits the general public.[119]  Even some of the green chemistry inventions that receive presidential awards are patented and presumably must be purchased through licenses, thus impeding companies from adopting the inventions.[120]  Identifying the public goods qualities of this environmental information helps focus analysts on the need to subsidize certain research and development while at the same time ensuring the rapid and low-cost diffusion of the information into the marketplace.

Figure 2


This analysis of the public good features of sustainability may only be a start in identifying ways in which reframing some intractable information problems as public goods begins to break up the information logjam that has stalled progress in environmental law.[121]  Developing a strong base of public information builds on the expert capabilities of the administrative state and approaches particularly intractable information-based challenges in a more collaborative way.  Once information is developed on these environmental practices, complementary political, economic, and related market forces can use the information as a springboard to encourage greater sustainability and related gains in the future.


The United States still “does not have a sustainability strategy.”[122]  The most promising proposals in the current economically and politically fragile climate are those that can be accomplished without political warfare and that build on progress in incremental ways.[123]  The proposal here—to assign to regulators or neutral third-party institutions the task of developing facility-specific life cycle analyses—seems to be a modest first step in this long march towards corporate sustainability.  This information-generation approach also develops a partnership with business that is in line with larger goals for enhancing corporate social responsibility in ways that go beyond what specific legal requirements can accomplish standing alone.[124]

While the proposal advanced here will by no means produce perfect information, by trading off detail and specificity in individual firm LCAs on the one hand for comprehensiveness and more general illumination of the sustainability of diverse processes and practices through industry-wide LCAs on the other, progress can be made on the sustainability front more quickly.[125]  By producing large amounts of fresh and relevant information about corporate sustainability, consumers, investors, and other actors will be better able to compare and evaluate the sustainability of corporations and, if necessary, demand change.

* Joe A. Worsham Centennial Professor, University of Texas School of Law.  Many thanks to Gabriel Markoff for his able research assistance and to the students and faculty at the Wake Forest Law Review Symposium for their helpful comments on an earlier draft.  Contact: [email protected].

[1]. See, e.g., Morton Mintz, At Any Cost: Corporate Greed, Women, and the Dalkon Shield (1985) (describing A.H. Robins Company’s decisions to market dangerous products and to suppress research indicating that the products could kill users); Paul Brodeur, Outrageous Misconduct: The Asbestos Industry on Trial (1985) (describing similar issues in the asbestos industry); Devra Davis, When Smoke Ran Like Water: Tales of Environmental Deception and the Battle Against Pollution (2002) (describing the same for polluting industries); Stanton A. Glantz et al., The Cigarette Papers (1996) (describing the same for the tobacco industry); Gerald Markowitz & David Rosner, Deceit and Denial: The Deadly Politics of Industrial Pollution (2002) (describing the same for lead industry).

[2]. See, e.g., Cynthia A. Williams, Corporate Law and the Internal Point of View in Legal Theory: A Tale of Two Trajectories, 75 Fordham L. Rev. 1629, 1631 (2006). Professor Williams reports, for example, how energy traders chortle with delight at out-of-control fires in California, which from their standpoint mean only greater revenues in energy sales as a result of the decreased supply.  Id. at 1658.

[3]. See, e.g., Markus J. Milne et al., Wither Ecology? The Triple Bottom Line, the Global Reporting Initiative, and the Institutionalization of Corporate Sustainability Reporting 11 (unpublished manuscript) (on file with authors), available at
-sustainability-reporting-pdf-d81243137 (observing that “while some companies have been quick to publicize their high [Global Reporting Initiative] scores . . . , in some cases this may have been less about gaining credibility and more about deflecting attention from poor social and environmental performance per se”); Williams,supra note 2, at 1643 (noting that “[o]f the twenty-seven organizations comprising the charter group [that endorsed the Global Reporting Initiative], only five were companies . . . [and] four of those five companies have pretty clear public relations reasons to want to be associated with a corporate accountability initiative [because of concerns about stricter regulation or a preexisting reputation for being a bad corporate citizen]”); see generally Jacob Vos, Note, Actions Speak Louder than Words: Greenwashing in Corporate America, 23 Notre Dame J.L. Ethics & Pub. Pol’y 673 (2009) (discussing greenwashing more generally).

[4]. See, e.g., infra note 77 and accompanying text; see also Regulation Eclipses Innovation as Main Driver in Sustainability, Business Green (Apr. 29, 2010),

[5]. See infra Part I.A.

[6]. This approach seems, at least superficially, to help circumvent some of the barriers to sustainability identified by Professor Sjåfjell. See generally Beate Sjåfjell,Regulating Companies as if the World Matters, 47 Wake Forest L. Rev. (forthcoming 2012).

[7]. See infra Part III.

[8]. See, e.g., Judd Sneirson, The Sustainable Corporation and Shareholder Profits, 46 Wake Forest L. Rev. 541, 556 (2011) (discussing Jensen’s theories and the critical role of information in sustainability); see also Beate Sjåfjell, Regulating Companies as if the World Matters, 47 Wake Forest L. Rev. (forthcoming 2012) (discussing the barriers to sustainability, which include accessing critical information).

[9]. For a superb discussion of the tyranny of small decisions in the environmental context, see William E. Odum, Environmental Degradation and the Tyranny of Small Decisions, 32 BioScience 728 (1982), available at

[10]. Sanford Gaines, Reflexive Law as a Legal Paradigm for Sustainable Development, 10 Buff. Envtl. L.J. 1, 9 (2002).  Gaines goes further to suggest “the social functions of information disclosure and discourse between subsystems serve the core ideals of reflexive law because they enhance learning by all the participants and foster re-examination of (reflection on) attitudes and assumptions in all subsystems, not just the subsystem that generated the information.”  Id.

[11]. See, e.g., id. at 21–22; see also John C. Dernbach, Navigating the U.S. Transition to Sustainability: Matching National Governance Challenges with Appropriate Legal Tools, 44 Tulsa L. Rev. 93, 113–14 (2008) (discussing the importance of information on sustainability, although focusing primarily on sustainability indicators as a way to provide information to multiple audiences and advance policy, market, and legal reforms simultaneously).  Arguably, this type of information may even be a prerequisite to some of the shifts in corporate thinking advocated by scholars like Professor David Millon.  See generally David Millon, Two Models of Corporate Social Responsibility, 46 Wake Forest L. Rev. 521 (2011). Information is needed both to focus the corporation itself on possible gains as well as to empower external parties to pressure for change from without.

[12]. See, e.g., Bradley C. Karkkainen, Information as Environmental Regulation: TRI and Performance Benchmarking, Precursor to a New Paradigm?, 89 Geo. L.J. 257, 346 (2001) (discussing the range of stakeholders that will use information disclosures and exert pressure on corporations to do better); see generally Virginia Harper Ho, “Enlightened Shareholder Value”: Corporate Governance Beyond the Shareholder-Stakeholder Divide, 36 Iowa J. of Corp. L. 59 (2010) (discussing the role of informed investors and shareholders in altering choices made by corporations); Grant M. Hayden & Matthew T. Bodie, One Share, One Vote and the False Promise of Shareholder Homogeneity, 30 Cardozo L. Rev. 445 (2008) (discussing the possibility for corporate partnerships to encourage more sustainable practices by leveraging one corporation’s social responsibility to alter other corporations’ conduct).

[13]. See, e.g., William M. Sage, Regulating Through Information: Disclosure Laws and American Healthcare, 99 Colum. L. Rev. 1701, 1778 (1999) (arguing that information disclosures can exert a powerful influence on internal decision making and can reveal valuable information that changes these internal decisions).

[14]. The TRI disclosures revealed very high levels of air toxic emissions, which in turn produced public pressure for greater regulation and led to much more stringent regulations in the 1990 Amendments to the Clean Air Act.  See, e.g., Sidney M. Wolf, Fear and Loathing About the Public Right to Know: The Surprising Success of the Emergency Planning and Community Right-to-Know Act, 11 J. Land Use & Envtl. L. 217, 300 (1996).

[15]. See generally Jeff Civins & Mary Mendoza, Corporate Sustainability and Social Responsibility: A Legal Perspective, 71 Tex. B. J. 368 (2008) (discussing limited legal regulation to encourage sustainability).

[16]. Emergency Planning and Community Right-To-Know Act, 42 U.S.C. §§ 11002–11003, 11022–11023 (2006) [hereinafter EPCRA] (requiring covered facilities to self-identify; to report their storage, use, and disposal of hazardous substances; and to prepare an emergency response plan).

[17]. Other regulatory requirements restrict the amount of pollution that a firm can discharge into air, water, or onto land.  See, e.g., Clean Water Act, 33 U.S.C. § 1321(a)(2) (2006) [hereinafter CWA] (prohibiting the point source discharge of pollution without a permit that, in turn, is based on the capabilities of the best available technology); Resource Conservation and Recovery Act, 42 U.S.C. § 6922 (2006) [hereinafter RCRA] (requiring generators to test their wastes to determine whether they are hazardous); id. §§ 6923–25 (2006) (requiring transporters and treatment, storage, and disposal units handling hazardous wastes to self-identify and follow regulatory requirements); Clean Air Act, 42 U.S.C. § 7412(i) (2006) [hereinafter CAA] (prohibiting the emissions of large amounts of air toxins without a permit specifying emissions limits for the source). These regulatory programs reduce the facility’s footprint, but they do not regulate the overarching consumption and output of a company.  Thus, if a company elects to use the dirtiest input and produce high quantities of waste for disposal, there are no regulatory impediments except for the costs of pollution control.

[18]. See Global Reporting Initiative,
/Home (last visited Aug. 30, 2011); see also David W. Case, Corporate Environmental Reporting as Informational Regulation: A Law and Economics Perspective, 76 U. Colo. L. Rev. 379, 395–401 (2005); Global Reporting Initiative, Year in Review 2008–2009, available at‑1A29‑4154‑A6DA‑F14E6F71A2C9/3830/GRI_Year_In_Review_241209.pdf.  For sample reports, see Duke Energy, Environmental Indicators, available at; The Coca-Cola Company, 2008/2009 Sustainability Review, available athttp://www.thecoca‑‑2009_sustainability_review.pdf.  See generally Williams, supra note 2, at 1640–61 (describing the development of the GRI as well as other voluntary initiatives by corporations to minimize their environmental impacts).

[19]. See, e.g., Case, supra note 18, at 429–34 (describing these benefits). Other voluntary developments continue along this disclosure path, although they produced fewer success stories, at least in the literature.  The slowest progress may be occurring on the investment front; investors show interest in sustainability but appear, in the United States at least, to be making only limited accommodations for sustainability considerations in making important investment decisions.  See Alan Hecht, The Next Level of Environmental Protection: Business Strategies and Government Policies Converging on Sustainability, 8 Sustainable Dev. L. & Pol’y 19, 24 (2007) (describing the slow trends in the investment community to act on sustainability goals); see also Williams, supra note 2, at 1640–42 (providing a more optimistic picture of investor commitment to sustainability in some sectors, including banks and other finance organizations that follow the banking industry’s “Equator Principles” to encourage sustainable development in project finance); id. at 1645 (describing the growth of socially responsible investors “whose information needs are broader than those of typical ‘financial’ investors”).  Some insurers have developed green insurance programs that offer reduced premiums to qualifying companies that are in turn based, at least in part, on a demonstrated commitment to sustainability.  See Domani and Garnet Offer ‘Sustainable’ Insurance Program, Greenbiz (May 15, 2007),
/2007/05/14/domani-and-garnet-offer-sustainable-insurance-program.  There are even accounting requirements in the United States that require businesses to identify assets that may cause long-term damage and to identify how to reduce these risks.  See Hecht, supra.

[20]. By 2009, over one thousand companies had voluntarily conducted GRI reports.  See, e.g., Facts and Figures about GRI Reports, Global Reporting Initiative, (last visited Aug. 30, 2011).  See also Williams, supra note 2, at 1640–41.

[21]. See, e.g., Raine Isaksson & Ulrich Steimle, What Does GRI-Reporting Tell Us About Corporate Sustainability?, 21 TQM J. 168 (2009), available at (examining the GRI reports of five cement plants and concluding that they do not provide this type of information about sustainability practices; specifically the reports do not allow for easy comparisons between firms nor in relation to the actual capabilities of the firm’s actual production process); Penny Sinclair & Julia Walton, Environmental Reporting within the Forest and Paper Industry, 12 Bus. Strategy Env’t 326, 335, (2003) available at (criticizing firms’ GRI reports for failing to provide the larger context within which they operate, which highlights the gains they are theoretically capable of making in advancing sustainability goals); Mark Stoughton & Elizabeth Levy, Voluntary Facility-Level Sustainability Performance Reporting: Current Status, Relationship to Organization-Level Reporting, and Principles for Progress, 21 Pace Envtl. L. Rev. 265, 269 (2004) (identifying the lack of facility-based information and reporting as a major weakness in voluntary initiatives).

[22]. See, e.g., Milne et al., supra note 3, at 9 (raising this concern).

[23]. See, e.g., id. at 17–18.

[24]. See, e.g., id. at 11 (raising this concern).

[25]. See, e.g., D. Elcock, Life-Cycle Thinking for the Oil and Gas Exploration and Production Industry 72 (2007), available at (stating that “[s]ustainable development is the ultimate goal of the application of all life-cycle approaches”).

[26]. See, e.g., Robert J. Klee, Enabling Environmental Sustainability in the United States: The Case for a Comprehensive Material Flow Inventory, 23 Stan. Envtl. L.J. 131, 143 (2004) (defining environmental sustainability in a narrower and more precise sense of carrying capacity based on materials flow, where the limits to the ecosystems’ ability to assimilate loading and material flows help identify the biggest burdens that threaten the limited carrying capacity).

[27]. See, e.g., id. at 145–46 (describing this cycling ideal for industrial processes as revealed through life cycle assessments and material flow analysis).

[28]. Facility-based assessments can also be tailored to individual plants and, thus, involve community groups and other stakeholders with a close relationship to the plant.  See generally Stoughton & Levy, supra note 21.

[29]. Nike, for example, redesigned shoes to reduce the use of glues or solvents.  See, e.g., Deloitte, Lifecycle Assessment: Where Is It On Your Sustainability Agenda? 2 (2009), available at

[30]. Scientific Applications International Corporation, Life Cycle Assessment: Principles and Practice 15 (May 2006), [hereinafter SAIC], available at

[31]. The ISO has developed standards for LCA. ISO, Environmental Management: The ISO 14000 Family of International Standards (2009), available at  The Society of Environmental Toxicology and Chemistry (“SETAC”) and UNEP are exploring ways to utilize LCA more extensively in their programs and recommendations.  See, e.g., UNEP/SETAC International Life Cycle Initiative Process on “Global Guidance for LCA Databases,” available at

[32]. See supra Figure 1.  See also D. Elcock, supra note 25, at 3.

[33]. See D. Elcock, supra note 25, at 3; see also Walter Kloepffer, Life Cycle Sustainability Assessment of Products, 13 Int. J. LCA 89, 93 (2003) (observing that “the assessment methods used [for LCA] should be simple and not always quantitative”).

[34]. See, e.g., European Environment Agency, Life Cycle Assessment (LCA): A Guide to Approaches, Experiences and Information Sources 55 (1998) available at
/O16F34323.pdf (describing the importance of identifying a single functional unit that is used throughout the assessment).

[35]. Deloitte, supra note 29.

[36]. Andrew Martin, How Green Is My Orange?, N.Y. Times, Jan. 21, 2009,‑22pepsi.19583527.html.

[37]. See, e.g., Pamela L. Spath, Margaret K. Mann, & Dawn R. Kerr, Life Cycle Assessment of Coal-Fired Power Production i–iv (June 1999), available at

[38]. See id. at iv.

[39]. See, e.g., D. Elcock, supra note 25, at 37, 75.

[40]. See id. at 48–52.

[41]. See id. at 75, 49–52 (discussing a Paulsen study from 2003 that reaches this conclusion).

[42]. See, e.g., id. at 6 (touting benefits of life cycle analysis when conducted appropriately); SAIC, supra note 30; see also Celia Campbell-Mohn et al., Sustainable Environmental Law 1367–71 (1993) (calling for more sustainability-based strategies in environmental law that consider production processes from resource extraction through consumption to disposal).

[43]. See, e.g., D. Elcock, supra note 25, at 44; Claire Early et al., Informing Packaging Design Decisions at Toyota Motor Sales Using Life Cycle Assessment and Costing, 13 J. of Indus. Ecology 592, 594 (2009) (describing how forty percent of LCA are used to assess packaging processes).

[44]. Some analysts are attempting to sweep social and economic features of production into the methods and comparative assessments of sustainability. These features  have traditionally resisted a life cycle methodology.  See Evan Andrews et al., Life Cycle Attribute Assessment, 13 J. of Indus. Ecology 565 (2009) (developing LCA analysis to measure number of worker hours in a greenhouse tomato supply plant in order to identify some of the social costs of production); see also Kloepffer, supra note 33.

[45]. See generally Wendy E. Wagner, Commons Ignorance: The Failure of Environmental Law to Produce Needed Information on Health and the Environment, 53 Duke L.J. 1619 (2004) (making the argument that environmental law often ignores the asymmetrical quality of information that favors regulated parties).

[46]. See infra notes 55 and 62 and accompanying text.

[47]. See, e.g., D. Elcock, supra note 25, at 38 (discussing the challenges associated with data collection); European Environment Agency, supra note 34, at 59–60 (discussing the steps to data collection); SAIC, supra note 30, at 22–45 (describing the steps involved in identifying useful data and developing a data collection plan).

[48]. See, e.g., Wagner, supra note 45 at 1632–59 (discussing, generally, the problems that have arisen in collecting information from regulated parties).

[49]. See, e.g., id. at 1663–70.

[50]. 42 U.S.C. § 7651k(a) (2006).

[51]. EPA Acid Rain Program, 58 Fed. Reg. 3590, (Jan. 11, 1993).  Congress initially required the EPA to issue rules that addressed monitoring breakdowns.  See 42 U.S.C. § 7651k(d) (2006).

[52]. See, e.g., Pork Producers Clean Water Act Compliance Incentive Program, EPA,
.html (last visited Aug. 30, 2011) (utilizing independent auditors to audit compliance problems for pork producers that signed a voluntary agreement to be audited and agreed to conduct needed remedial work in return for reduced penalties); see also Williams, supra note 2, at 1642 (describing the growth of this auditing and nonfinancial rating industry); see infra notes 66–68 and accompanying text.

[53]. There are internal checks that can be instituted on data collection to ensure the reliability of the data.  See, e.g., European Environment Agency, supra note 34, at 70–71.  To determine whether these steps have been followed faithfully, however, some type of peer review or oversight is still necessary.

[54]. Confidential business information (“CBI”) claims are regularly used to limit access to health information on toxic substances and pesticides, including information on exposure risks, and on chemical identity and ingredients.  Confidential Business Information, EPA,
.htm (last visited Aug. 21, 2011).  Such claims may even be used to protect information collected by inspectors in the course of environmental compliance inspections.  See EPA Definitions, 40 C.F.R. § 2.201 (2003) (defining a business confidentiality claim).

[55]. GRI specifies a number of indicators and measures but some discretion is necessarily involved in application.  See, e.g., Case, supra note 18, at 435–46 (discussing these features of GRI); see also UNEP/SustainAbility, Risk & Opportunity: Best Practice in Non-Financial Reporting 39 (2004) (identifying a lack of clarity in how the reporting principles work in practice).

[56]. See, e.g., D. Elcock, supra note 25, at 12, 13, 39.  Elcock describes how life cycle analysis was manipulated initially, and this led to a lack of confidence in its approach.  He also notes how methods are becoming more standardized but identifies a number of ways that the standardization cannot eliminate all important areas of user discretion and remains rather “general”.  Id.  See also SAIC, supra note 30, at 6 (noting the judgment and multiple methods that are available to conduct LCA).

[57]. See supra note 56 (identifying the discretion involved in life cycle analysis methods); see also SAIC, supra note 30 (summarizing some of the discretion in conducing life cycle analysis).

[58]. See, e.g., SAIC, supra note 30.  By their very nature, life cycle analysis methods need to be flexible and adaptive, improving with experience and broader application.  A curse for devising a one-size fits all comprehensive model is the need for flexible assessments that are constantly changing, improving, and adapting to the needs of the locale (the stream), the operations (a particular type of plant), and the transit system.  Some of this can be built into computer methods, but a single model cannot identify all of these decision trees adequately.  See, e.g., D. Elcock, supra note 25, at 13, 39.

[59]. See, e.g., Thomas O. McGarity & Wendy E. Wagner, Bending Science: How Special Interests Corrupt Public Health Research 50–54 (2008) (discussing how there is room for manipulation in these types of assessments).

[60]. See, e.g., id. at Chapter 4 (providing numerous examples of how sponsors shaped research to suit their predetermined ends); see generally Sheldon Krimsky, Science in the Private Interest: Has the Lure of Profits Corrupted Biomedical Research? (2003) (discussing this problem throughout the book with considerable support).

[61]. See, e.g., Justin E. Bekelman, Yan Li & Cary P. Gross, Scope and Impact of Financial Conflicts of Interest in Biomedical Research, 289 JAMA 454 (2003) (conducting a meta-review of the literature and identifying a strong positive correlation between the outcome of research and the beneficial interests of the sponsor).

[62]. See, e.g., Milne et al., supra note 3, at 8 (summarizing the literature which suggests a “gap between the benchmarks provided by guidelines like the GRI and UNEP/SustainAbility and what companies actually report”) (emphasis in original); id. at 9 (noting the tendency of firms to “cherry pick” successes and ignore major social issues).

[63]. See, e.g., D. Elcock, supra note 25, at 12.

[64]. See, e.g., id.

[65]. See, e.g., id. at 13 (noting that because the ISO standard for LCA “must be applicable to many industrial and consumer sectors, it is rather general”); id. at 39 (elaborating on these issues).

[66]. See Environmental Management, supra note 31.  See also SAIC, supra note 30, at 59–60 (describing the importance of a rigorous peer review process for life cycle analysis).

[67]. See, e.g., Joyce Smith Cooper & James A. Fava, Life-Cycle Assessment Practitioner Survey, 10 J. Indus. Ecology 12, 13 (2006) (noting that 45% of the respondents said they have conducted or contributed to LCA with no peer review; in response to another question, 38% had used internal company peer review, 33% had used one person external peer review, and 28% has used an external peer review panel).

[68]. Cf. Daryl E. Chubin & Edward J. Hackett, Peerless Science: Peer Review and U.S. Science Policy (1990) (identifying in detail the practical limitations of peer review in ensuring reliability and accuracy).

[69]. See, e.g., Thomas O. McGarity & Ruth Ruttenberg, Counting the Cost of Health, Safety, and Environmental Regulation, 80 Tex. L. Rev. 1997, 2042 (2002) (discussing the inflated estimates of the costs of compliance that are common in cost-benefit analyses and attributing some of this inflation to industry worst-case estimates); see generally McGarity & Wagner, supra note 59 (describing how a variety of sponsors, but particularly industries, “bend” science to predetermined ends to advance their interests).

[70]. See, e.g., Herbert A. Simon, Administrative Behavior: A Study of Decision-making Processes in Administrative Organizations 242 (4th ed. 1997) (criticizing organizations’ information systems as generally not being designed “to conserve the critical scarce resource—the attention of managers”).

[71]. See supra notes 12–14 and accompanying text (referencing this broader audience).  Even a simple pictorial of the life cycle costs of a production process can provide consumers with immediately accessible and valuable information that may alter their consumption patterns.  Investors, regulators, policymakers, and other more sophisticated audiences can digest well-drafted executive summaries, summary graphics, and tables in order to ascertain where the greatest insults to the environment lie within the larger network of production phases and processes and then they can begin to demand changes.

[72]. See, e.g., Stoughton & Levy, supra note 21, at 281 (noting the “entry barrier” to stakeholders that is often associated with sustainability reporting, particularly reporting at the facility level).

[73]. See, e.g., Bruce M. Owen & Ronald Braeutigam, The Regulation Game: Strategic Use of the Administrative Process 4–5 (1978) (describing these and other types of information-based strategies for controlling the message).

[74]. See, e.g., UNEP/SustainAbility, supra note 55, at 34.

[75]. See, e.g., J. Emil Morhardt, Scoring Corporate Environmental Reports for Comprehensiveness: A Comparison of Three Systems, 27 Envtl. Mgmt. 881, 891 (2001).

[76]. Cf. Gaines, supra note 10, at 21 (noting that “mechanisms for dealing with uncertainty, ambiguity, and inequity in the distribution of information are poorly developed in both theory and practice”).

[77]. TRI and GRI seem to be based on this model of placing responsibility on corporations to provide sustainability disclosures not only because firms possess superior control over much of this information, but because these inventories provide evidence of negative externalities and firms then must bear the primary responsibility for collating and producing this information.  See supra Part I.A. (discussing these programs).  Much of the scholarly commentary on sustainability disclosures seems to repeat this basic “social responsibility” basis for disclosure.  See, e.g., Case, supra note 20.  In earlier work, I also argue that these generic types of information disclosures are justified by the firms need to explicate the extent of their negative externalities.  See Wagner, supra note 45, at 1632.

[78]. See, e.g., Stoughton & Levy, supra note 21, at 280 (recognizing the proprietary information that might be revealed through facility level sustainability audits).

[79]. In the past, the public good features of required information provisions in environmental law arose most pointedly with required testing of pesticide products.  Manufacturers proposing new pesticides were concerned that their tests would be used by other companies who did not have to pay to produce them.  See H.R. Rep. No. 92-511, at 1–2 (1971).  In response to this concern, Congress created a compensation program that allows companies to be compensated for the use of their test data by others.  See Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), 7 U.S.C. § 136a(c)(1)(F) (2006) (providing the original applicant a right to “exclusive data use” for registration of pesticides after 1978).  Analogously, the patent system protects drugs and other unique products from this theft of expensive public health assessment simply by providing a blanket product right to the product itself.  See Benjamin N. Roin, Pharmaceutical Innovation and Limits of the Patent System, Petrie-Flom Center for Health Law and Policy, Biotechnology and Bioethics, Harvard Law School (Aug. 31, 2007),

[80]. See, e.g., Williams, supra note 2, at 1644 (discussing how the GRI reports set up “a dynamic where companies are potentially more susceptible to environmental or social political pressures” and thus may be worse off, in the end, by voluntary reporting).

[81]. See, e.g., Cooper & Fava, supra note 67 (listing as the three major barriers: “1. Time and resource requirements for the collection of data.  2. Complexity of the LCA method.  3. Lack of clarity as to the relevant benefits compared to the costs of conducting the LCA studies, including lack of apparent downstream interest or demand.”).

[82]. See, e.g., Early et al., supra note 43, at 595 (noting that “[a] comprehensive LCA can take months to prepare, costs thousands of dollars, and provides data on only one product rather than the suite of options that are of interest to decision makers”).

[83]. In 2005, almost 70% of the survey participants identified this as the most costly feature of LCA.  See Cooper & Fava, supra note 67.

[84]. The development of off-the-shelf models has helped to keep these costs under some control, although expertise in applying the methods is still necessary.  See, e.g., id. at 13–14.  In a survey of LCA experts in 2005, only 20% percent listed the methodological applications as the most costly part of the exercise.  Id. at 13 (also noting that 15% listed application of the methods as the most time-consuming part of the process).

[85]. See, e.g., D. Elcock, supra note 25, at 5–6, 38 (noting the costs as a major barrier to LCA); Early et al., supra note 43, at 593 (noting the same).

[86]. For example, one firm may recognize the need for LCA of packaging systems that may present both environmental wastes and process inefficiencies, but they may lack the expertise and time to carry out such an assessment.  Early et al., supra note 43, at 593.

[87]. Id. at 600.

[88]. See id. at 595 (reporting on other similar types of collaborations for conducting LCA, such as the collaboration between McDonald’s and Environmental Defense Fund on packaging).

[89]. See, e.g., id. at 604 (describing the environmental gains from changes in packaging).

[90]. Cf. Stoughton & Levy, supra note 21, at 282–83 (emphasizing the need for facility-based reporting that derives “both from the intrinsic differences between facilities and the organizations of which they are a part and from the differences between organization and facility-level stakeholders”).

[91]. For the complete list of industrial sectors for which EPA developed air toxic emission standards under the Clean Air Act, see 40 C.F.R § 63 (2011). See alsoEPA, National Emission Standards for Hazardous Air Pollutants (NESHAP),  For the discharge standards promulgated by the EPA for industrial sectors under the Clean Water Act, see 40 C.F.R. §§ 400–471.

[92]. The EPA, for example, has extensively used its information collection power under Section 114 of the Clean Air Act to obtain internal, industry information about processes that inform its selection of best technologies under the Clean Air Act.  42 U.S.C. § 7414(a) (2006).  See, e.g., Wendy Wagner, Katherine Barnes & Lisa Peters, Rulemaking in the Shade: An Empirical Study of EPA’s Air Toxic Emission Standards, 63 Admin. L. Rev. 99, 125 (2011) (counting, on average, over eighty “formal” communications initiated through Section 114 between industry and the EPA per air toxic emission rule).

[93]. The EPA’s establishment of technology-based standards involved some of this internal process analysis, so the EPA is not new to this type of internal assessment.  See, e.g., D. Bruce La Pierre, Technology-Forcing and Federal Environmental Protection Statutes, 62 Iowa L. Rev. 771, 810–11 (1977) (specifying three steps in setting technology-based standards: (1) categorizing industries; (2) identifying the contents of their respective wastewaters; and (3) identifying the range of control technologies available, all of which parallel the types of operational study that will be needed to conduct life cycle analysis).  See also Sanford E. Gaines,Decisionmaking Procedures at the Environmental Protection Agency, 62 Iowa L. Rev. 839, 853 (1977) (discussing the EPA’s study of the effectiveness of pollution control technologies under various plant ages, sizes, and manufacturing conditions in each industrial sector).

[94]. CERES consists of a mix of all affected stakeholders committed to advancing sustainability.  Specifically, “Ceres is a nonprofit organization that leads a national coalition of investors, environmental organizations and other public interest groups working with companies to address sustainability challenges such as global climate change and water scarcity.”  CERES, (last visited Aug. 21, 2011).

[95]. See, e.g., 42 U.S.C. § 7411(b)(1)(B) (2006) (giving the Clean Air Act revision expectations for new source performance standards) (“The Administrator shall, at least every 8 years, review and, if appropriate, revise such standards . . . .  [T]he Administrator need not review any such standard if the Administrator determines that such review is not appropriate in light of readily available information on the efficacy of such standard.”); 33 U.S.C. § 1316(b)(1)(B) (2006) (giving the Clean Water Act expectations for revision of technology-based discharge standards and declaring that the EPA “shall, from time to time, as technology and alternatives change, revise such [new source performance] standards following the procedures required by this subsection”).

[96]. Ideally, profiling the advances will also change the “strategic thinking of companies. . . . [by] demonstrat[ing] that the next level of environmental protection will arise not only from disincentives to pollute, but also from the positive vision of sustainability that is acceptable to business operation.”  Hecht, supra note 19, at 24.

[97]. See generally Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 91 (1989) (“[P]enalty defaults are purposefully set at what the parties would not want—in order to encourage the parties to reveal information to each other or to third parties.”).

[98]. See, e.g., Williams, supra note 2, at 1648 (describing the incentives of corporations to distinguish themselves in the market, beyond what the law requires, in order to enhance their reputation in the market and with investors).

[99]. See, e.g., Markus J. Milne et al., The Five Principles of Sustainable Branding, (Sept. 25, 2008),

[100]. See, e.g., id.

[101]. See, e.g., Milne et al., supra note 3, at 15 (describing a variety of tools that can link to LCA).

[102]. As the Department of Energy report notes:

Results from existing LCA studies could be reviewed to identify common areas of concern, i.e., those processes or life-cycle stages that consistently produce higher impacts . . . .  For example, transportation emissions are major contributors to aquatic toxicity, acidification, and CO2 loading.  Thus, transportation may be an important consideration in decisions to build small process or disposal sites rather than centralized sites.

D. Elcock, supra note 25, at 76.

[103]. See, e.g., id. at 17; Klee, supra note 26, at 172 (describing the advantages of a Material Flow Inventory, which could be based in part on the results of individual LCAs).

[104]. See, e.g., D. Elcock, supra note 25, at 40.

[105]. Databases that contain LCA software programs and even inventory data could be made available to firms in ways that enable more expansive and useful LCA to be prepared.  See, e.g., Cooper & Fava, supra note 67, at 14 (calling for “greater development of and funding for life-cycle inventories . . . [and]  databases”).  These databases have already been initiated in other countries, therefore some of the preliminary work is already underway and the EPA may only need to follow the lead of these other countries in identifying the kinds of information that is useful and link that information to other publicly available LCA databases that have already been created.  See, e.g., D. Elcock, supra note 25, at 38 (identifying Europe, Japan, and Korea as having developed publicly shared databases on specific parts of the life cycle, such as energy systems, transportation, waste management, and production of bulk materials).  The development of simplified LCA that reduce the costs and time and begin with EPA’s generic assessments could also greatly accelerate the use of LCA by individual firms.  See, e.g., Cooper & Fava, supra note 67, at 14 (noting that “anything that can be done to simplify the conduct of an LCA and reduce the costs and time required to complete the study” will be useful).

[106]. See, e.g., Early et al., supra note 43, at 595.

[107]. Id.

[108]. See, e.g., SAIC, supra note 30.  See the EPA’s web site dedicated to providing guidance to those interested in LCA at

[109]. See, e.g., D. Elcock, supra note 25, at 41; Cooper & Fava, supra note 67, at 14 (advocating for “an internal champion for the promotion of LCA within an organization, development and dissemination of the value that LCA provides”).

[110]. See, e.g., D. Elcock, supra note 25, at 39–40.

[111]. A number of efforts are afoot to expand and develop the social features of LCA.  See, e.g., id. at 73–74.  To the extent that the EPA becomes an important developer of the methods of LCA, it would seem to have valuable expertise to contribute to these efforts.  See, e.g., id. at 73 (recommending greater attention to developing these socially based assessments).

[112]. The results of LCA and related reports should be accessible to a wide range of stakeholders and, thus, the communication may need to be tiered in detail to reflect this diverse audience.  See, e.g., Stoughton & Levy, supra note 21, at 280–81 (emphasizing the importance of comprehensibility in these reports).  At base, however, the reports should be clear and as simple as possible to maximize their value to these constituencies.  See, e.g., Raphael Bemporad & Mitch Baranowski,Branding for Sustainability, Package Design Mag. (Dec. 2008), available at
/ (discussing the need to create “opportunities for multiple stakeholders to help shape, realize and share the benefits of products and services based on a seamlessly integrated business and sustainability strategy”).

[113]. See supra notes 79–80 and accompanying text.

[114]. Cf. Sulaiman A. Al-Tuwaijri, et al., The Relations Among Environmental Disclosure, Environmental Performance, and Economic Performance: A Simultaneous Equations Approach, 29 Acct., Orgs. and Soc’y 447, 469 (2004).

[115]. See, e.g., Eric Biber, The Problem of Environmental Monitoring, U. Colo. L. Rev. (forthcoming 2011), available at

[116]. See, e.g., Pasky Pascual, Liz Fisher & Wendy Wagner, FDA Modernization and the Revolutionization of Collective Science in Public Health Law (forthcoming) (on file with author); see generally Title IX of the Food and Drug Administration Amendments Act of 2007, Pub. L. No, 110-85, 121 Stat. 823.

[117]. See, e.g., Clean Water Act, 33 U.S.C. § 1311(b)(2)(C)–(D) (2006) (stating that the EPA is required to set technology-based standards for water toxins from point sources); Clean Air Act, 42 U.S.C. § 7412(b) (2006) (listing 189 air toxins for which technology-based standards must be promulgated).  This collective, public information baseline then serves as the benchmark against which firms are measured to ensure that they were doing their “best” or, more accurately, doing their legally required reductions in pollution control.  See Julie Thrower, Adaptive Management and NEPA: How a Nonequilibrium View of Ecosystems Mandates Flexible Regulation, 33 Ecology L. Q. 871, 879 (2006).

[118]. See 33 U.S.C. § 1311(m)(1)(G) (2006) (stating that research and development of water pollution control technology is only required if an applicant is permitted to abide by differing standards than those listed in the rest of the section for industrial discharges into deep seas).  Research and development is not mentioned anywhere else in the Clean Water Act.

[119]. Because of its public good character, the EPA has a team of researchers that are dedicated to green chemistry innovation.  See Green Chemistry and Engineering, EPA,  The EPA also has a grant program that funds green chemistry innovation.  See Grants and Fellowships, EPA,  But the EPA does not actively encourage green chemistry through its regulation of private activity (nor is this contemplated in the authorizing legislation passed by Congress).

[120]. The EPA has an annual Presidential Green Chemistry Challenge Award that is given to several recipients and is awarded by the President.  Both universities and industry members are eligible to enter.  While there is an emphasis on broad applicability in terms of both transferability to other sectors and economic feasibility, most of the entries have already been patented, trademarked, and commercialized by the time they are entered.  See Presidential Green Chemistry Challenge, EPA,

[121]. Cf. Bradley C. Karkkainen, Bottlenecks and Baselines: Tackling Information Deficits in Environmental Regulation, 86 Tex. L. Rev. 1409, 1410 (2008) (stating that environmental assessments have not led to any significant impact).

[122]. Hecht, supra note 19, at 23.

[123]. See, e.g., United States Government Accountability Office, Globalization: Numerous Federal Activities Complement U.S. Business’s Global Corporate Responsibility Efforts 15 (2005).

[124]. The GAO report on corporate responsibility identified four ways to enhance corporate social responsibility: (1) endorsing or rewarding good behavior, (2) facilitating improvements through outreach and education, (3) partnering with voluntary and collaborative partnerships, and (4) mandating through the law.  See id. at 23–25.

[125]. Cf. Gaines, supra note 10, at 21 (noting the need to accept imperfections in information collection almost as a prerequisite to developing robust information disclosure strategies).


By: David Millon*


There are many ways to think about the nature of business corporations.  They can be seen as mere aggregations of natural persons or as entities in their own right.  As entities, they have been described as either natural or artificial,[1] and the idea of the corporation as a person is itself fraught with ambiguity.[2]  This Article focuses on two perspectives and traces their respective implications for notions of corporate social responsibility (“CSR”).  One is familiar and has impeded efforts to argue that corporations should be managed with attention to their obligations to society.  The other, less familiar perspective draws on the concept of sustainability and offers potentially more promising prospects for those concerned about CSR.

The first perspective regarding the nature of the corporation is structural.  Its focus is on the corporation’s constituent elements.  These elements include senior management, shareholders, employees, creditors, consumers, and communities in which the corporation operates.  Each of these constituencies has its own interests and these interests often conflict with those of other constituencies.  For example, shareholders’ desire for profit may be at odds with workers’ desire for high wages.  The primary normative question presented by this vision of the corporation is the amount of weight that should be given to the interests of each of these constituencies.  In a particular case of conflict, whose interests should take priority?

The second approach is temporal.  The focus is on the corporation as an entity existing in time.  Rather than an aggregation of numerous constituencies, the corporation is itself a distinct person.  The primary emphasis then is on the various external relationships that determine its long-term survival.  Here the key question is how the corporation should interact with its various stakeholders in order to ensure its long-run viability.

The structural approach ignores this temporal dimension and instead attends to the immediate impact of particular choices to favor the interests of one constituency over those of others.  This assessment is typically made without reference to possible long-term considerations.  So, for example, the possibility of economic benefits to the corporation accruing in the future will not necessarily justify expenditures that reduce profits in the short term.

These different ways of thinking about the corporation support two different ways of thinking about CSR.  The first speaks in structural terms, emphasizing the broad range of interests that the corporation’s management should take into account.  The main challenge is balancing potentially conflicting interests implicated by particular business decisions.  In particular, CSR under this view requires that management be willing to subordinate the shareholders’ desire for profit maximization to the claims of nonshareholder stakeholders.  Because it conceives of CSR in terms of the conflicting interests of shareholder and nonshareholder constituencies, this view might be referred to as the “constituency” model of CSR.

The second model is temporal in focus, with the key question being the corporation’s success over the long run.  Long-run sustainability depends crucially on the viability of the various stakeholders that determine the corporation’s success.  These include workers, suppliers, and customers, as well as investors, and even the environment.[3]  Decisions of corporate management often affect the well-being of these stakeholders in positive or negative ways.  Further, management has the ability to improve stakeholders’ well-being through investment of corporate funds.  If the corporation’s long-run sustainability is a serious objective, management must cultivate and nurture these relationships.  My main point in this Article is that a long-run orientation to corporate management will achieve many of the objectives favored by CSR advocates.  This model might therefore be referred to as the “sustainability” model of CSR.  Because the corporation must earn profits in order to survive, the interests of shareholders and nonshareholders do not unavoidably conflict with each other under this model.  For this reason, this way of thinking about CSR can overcome the primary conceptual and political obstacle to the constituency model, which is the assumption that shareholder interests should predominate over those of nonshareholders.

This Article first considers the constituency model of CSR, which is the more familiar way of thinking about these issues.  I discuss its status in law and practice.  I then turn to the sustainability model, which offers a new and potentially fruitful perspective on CSR, and provide illustrations to highlight its contrast with the constituency model.  I close with some thoughts on the prospects for a sustainability approach to CSR.

I.  The Constituency Model of CSR

A.            The Model

The constituency model of CSR sees the corporation as an organization consisting of a number of different groups of people, in which the members of each group share more or less common interests.  Shareholders, for example, generally seek maximal return on their investments.  Employees want rewarding work, satisfactory working conditions, and good wages.  Creditors expect that they will be paid according to the terms of their contracts.  Often, conflicts exist among these and other constituencies’ interests.  High returns for shareholders can mean low wages for workers.  Increased leverage may be good for shareholders but bad for bondholders.  Conflicts like these mean that those in charge must make trade-off judgments.  These choices are assumed to be zero-sum games.

According to this view of the corporation, CSR requires management to balance shareholder and nonshareholder interests.  Strict shareholder primacy—the idea that shareholder interests should enjoy priority over those of nonshareholders—is rejected because of the costs it can inflict on nonshareholders.  For example, profit maximization, even when pursued within the boundaries of the law, can lead to plant closings that harm workers and local communities, environmental damage, and human rights violations in developing countries.[4]  Socially responsible leadership therefore necessitates that management temper its pursuit of profit with regard for such considerations.

The constituency model of CSR largely takes for granted the trade-off or zero-sum assumption that sees benefit to nonshareholders coming at the expense of shareholders.  Proponents must therefore rely on moral or ethical arguments, conceding the economic critique.  Thus, for example, so-called corporate law progressives justify the balancing approach to CSR on fairness grounds, arguing that nonshareholders should not be required to rely on their own contractual bargaining capabilities to protect their interests.[5]  Balancing has also been defended on efficiency grounds.[6]  According to this view, management’s role is to mediate among the conflicting interests of the corporation’s various constituencies in order to encourage firm-specific investment and discourage opportunism.  For the most part, however, the constituency model of CSR—which has long been the standard way of thinking about CSR[7]—makes no effort to appeal to shareholder interests.

B.            Current Legal Status

Corporate law endorses the constituency model of CSR, although only permissively.  As of 2003, forty-one states had enacted “constituency statutes” that authorize management to take into consideration a range of nonshareholder interests in addition to those of shareholders.[8]  Importantly, however, these statutes only permit balancing of interests rather than requiring it.  Corporate boards would thus be free to pursue CSR policies but cannot be sanctioned for choosing not to do so.

Delaware—the state of incorporation for nearly two-thirds of U.S. publicly traded companies—has not enacted a constituency statute.[9]  Nevertheless, Delaware law is not committed to shareholder primacy.  Management’s duties are owed to “the corporation and its stockholders,”[10] rather than to the shareholders alone.  Delaware courts have done little to explicate the meaning of this distinction but at least this formulation must indicate that the corporation is something other than—and presumably more than—simply the shareholders alone.  It could, for example, be thought of as an entity existing separately from its shareholders and other stakeholders, or perhaps as an aggregation of its various constituencies.

Although the Delaware Chancery Court has stated that directors are obligated “to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders,”[11] the Delaware courts have never stated plainly that management’s fiduciary responsibilities—the duties of care and loyalty—imply a general duty to maximize profits without regard to competing nonshareholder considerations.  Even the quoted language, with its reference to “long-run interests,” is vague enough to accommodate policies that favor nonshareholder interests as long as there may be some plausibly asserted long-run benefit to the shareholders.  In any event, such pronouncements are of no practical importance, because shareholders lack the ability to challenge management policies that favor nonshareholder interests even if the result is reduction of profits.  Under the business judgment rule, courts will not second-guess decisions—including decisions that appear to benefit nonshareholders at the expense of shareholders—as long as management can assert some plausible connection with the corporation’s long-run best interests.[12]  Further, unless a complaining shareholder can show that the decision in question was not based on adequate information or was tainted by conflict of interest, they will defer to management’s claims about benefit to the corporation rather than insisting on production of evidence.[13]

In the one situation in which the Delaware Supreme Court has directly addressed management’s authority to consider nonshareholder interests, the court has declined to endorse shareholder primacy.  Hostile takeover bids typically present a clear conflict between the interests of shareholders (in unrestricted access to takeover premia, which are typically of substantial value) and those of nonshareholders (in defeat of an offer that threatens their well-being, for example, due to major cost-cutting initiatives).

Defining the circumstances under which a target company’s management can lawfully defend against a hostile bid, the court stated in Unocal Corp. v. Mesa Petroleum Co. that management can take into account “the impact on ‘constituencies’ other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally).”[14]  The court will require maximization of shareholder value only if management voluntarily chooses to abandon its own long-run business strategy by undertaking a transaction that will result either in change of corporate control or break-up of the corporate entity.[15]  Otherwise, management may resist a hostile bid that would threaten management’s plans for the corporation’s future, however attractive the bid might be to the corporation’s shareholders.[16]  Thus, the Delaware Supreme Court has refused to embrace shareholder primacy in the one context in which it might have mattered most.  In short, although it is often assumed that corporate law mandates shareholder primacy,[17] there is in fact very little doctrinal basis for such claims.[18]

C.            Current Practice

Although not required to do so by law, management of U.S. corporations typically pursues short-term profit maximization as measured by quarter-to-quarter earnings.  The objective is enhancement of share price, which depends on a reliable stream of regular earnings; failure to meet earnings targets usually results in immediate share price decline.[19]  Because the constituency model of CSR envisions expenditures—in the form of cash outlays or foregone revenues—that are designed to benefit nonshareholders, such policies would mean lower net income and therefore would conflict with management’s emphasis on the currently accepted short-term conception of shareholder value.  In other words, current practice generally embraces shareholder primacy and rejects CSR.

There are several explanations for current practice, which as explained above, is not required by law.  Today’s shareholders typically adopt a short-term perspective that manifests itself in a strong preference for immediate results measured in terms of current share price.[20]  Management thus finds itself under scrutiny to deliver results on a quarter-to-quarter basis and goes to great lengths to achieve accounting results that meet or exceed earnings targets.[21]  Certain institutional investors are especially likely to exert significant pressure on corporations to generate steady profit streams.  For example, in order to meet their own obligations to their beneficiaries, the California Public Employees Retirement System and other state pension funds must achieve annual returns on their investments of eight percent.[22]  In the face of such demands, patience is not an option.

Management compensation also encourages concentration on current share price.  Stock and stock option grants are significant elements of senior officer compensation at most U.S. corporations.[23]  The justification is alignment of shareholder and management interests in order to reduce agency costs.  The effect is to encourage a short-term focus on profits in order to boost the value of shares and options awarded to executives of the corporation.

Social norms shape an environment in which management tends to understand its role in terms of maximization of current share prices.  Business schools, apparently misapprehending the law, preach this ethic at the expense of a richer, more complex conception of responsibility.[24]  Corporate lawyers charged with advising boards on their responsibilities typically take shareholder primacy for granted.[25]  The business press insists on the same idea,[26] and prominent corporate law academics—most of whom tend to embrace a conservative law-and-economics agenda—likewise assume that shareholder primacy rather than CSR is legally mandated.[27]

II.  The Sustainability Model of CSR

A.            The Model

The sustainability approach to CSR is based on the idea that the corporate entity should remain economically viable over the long run.  The corporation must generate profits because survival requires it, but survival most emphatically does not require short-term profit maximization.  In fact, a short-term time horizon may impede the corporation’s long-run sustainability because it can result in policies that sacrifice future earnings for current net income.

The connection between sustainability and CSR is simply the realization that the corporation’s long-run prosperity depends on the well-being of its various stakeholders, including workers, suppliers, and customers.  Sustainability also requires ongoing availability of natural resources and a natural environment in which the corporation and its various constituencies can survive and flourish.  Well-functioning markets and stable and supportive governments are also essential.  Because the corporation itself has a significant role to play in determining the welfare of these stakeholders and in nurturing productive, reliable relations with them, a sustainability approach to business success has the potential to achieve many of the goals that CSR proponents advocate.

The sustainability model of CSR differs from the constituency model sketched above in a fundamental way.  The constituency approach sees attention to nonshareholder interests as a cost that comes at the expense of profit and therefore of shareholder value.  This is the trade-off or zero-sum assumption.  In contrast, the sustainability perspective sees attention to nonshareholders—including investment in their well-being—as essential to the viability and success of the firm and therefore also to the enhancement of shareholder value.  The key difference is the relevant time horizon.  Constituency CSR emphasizes the negative impact of expenditures on nonshareholders on the corporation’s bottom line in the accounting period in which the costs are incurred.  Sustainability CSR looks beyond the current quarter or year and factors in long-run benefit as a potential offset to short-term cost.  It therefore does not necessarily pose the threat to shareholders assumed by critics of constituency CSR and may actually be in their long-run best interests.

B.            Illustrations

The sustainability approach to corporate management accommodates CSR expenditures because it takes into account long-term payoffs that benefit the corporation and thereby its shareholders as well.  For transnational corporations doing business in developing countries, sustainability may require investment in community-level infrastructure development projects, technological innovation, education, and health care.  As these investments lead to greater productivity and better product quality, workers and producers can earn higher incomes, allowing the local population to enjoy a higher standard of living.  An example is Nestlé’s entry into milk production in the Moga district of India.[28]  Investments in refrigeration, well drilling, veterinary medicine, and training have vastly increased output; enhanced product quality has allowed Nestlé to pay higher prices to farmers.[29]  The result is higher incomes for farmers and their employees, and the region now has a significantly better standard of living compared to neighboring communities.

In a similar vein, the Norwegian company Yara International ASA, the world’s largest chemical fertilizer company, has sponsored public/private partnerships to develop storage, transportation, and port facilities that will serve African regions with significant untapped agricultural potential.[30]  The objective is to facilitate increased yields through lower-cost access to markets, which allows entry into commercial farming.  This provides new jobs while also improving incomes and living standards for farmers.  At the same time, Yara benefits through increased demand for its fertilizer products.[31]

By spending money on projects like these, corporations incur immediate costs that reduce current profits.  Longer-run benefits, however, have the potential to generate net gains in the form of enhanced productivity, greater skills and knowledge, commitment, increased consumer demand, political and social stability, and long-run viability.  The corporation and its shareholders benefit—but so too do the local communities in which its workers and producers live.  In contrast, a narrow, short-term orientation seeks simply to locate production in developing countries in order to take advantage of low wages and lax regulations.  Current expenses are reduced, but long-run productivity and sustainability considerations are ignored.

Closer to home, many U.S. companies have invested heavily in employee health through wellness and anti-smoking initiatives.[32]  Such programs are expensive and therefore stand in contrast to short-term profit enhancement strategies based on minimizing wages and benefits.  Johnson & Johnson, for example, estimates that its Wellness & Prevention program has saved the company $250 million in employee health care costs over the past decade.[33]  The savings represent a return of $2.71 on every dollar spent.[34]  There also appears to be a connection between employer-sponsored wellness programs and employee loyalty; companies with effective programs experience significantly lower voluntary attrition.[35]  Greater productivity and higher morale may also result.[36]

Investment in research and development (“R&D”) is another example of an upfront cost with potential longer-term payoffs.  Despite the crucial importance of R&D for corporate sustainability, corporations have been reducing expenditures in order to maintain short-term earnings.[37]  A reversal of this trend would be socially beneficial because it would facilitate the development of new products and services, including those that address consumer demand for environmentally responsible offerings.[38]  Proctor & Gamble’s development of cold-water clothes-washing detergents is one example.[39]  Toyota’s invention of hybrid gasoline/electric automobiles is another; the failure of U.S. automakers to make similar R&D investments has left them at a competitive disadvantage, forced to license Toyota’s technology.[40]  Similarly, GE has invested billions in order to develop its “ecomagination” line of energy efficient products and now predicts that revenues from these products will grow at twice the rate of total company revenues over the next five years.[41]  All of these are examples of products that will provide social benefits as well as profits to the corporation and its shareholders, but such results are only achieved if companies are willing to spend money on projects that will earn returns in the future, if at all.

C.            “Strategic” versus “Philanthropic” CSR

The examples sketched above share a strategic emphasis on investments that serve the interests of key stakeholders in order to bolster the corporation’s long-term sustainability.  As a result, nonshareholder constituencies can benefit in important ways.  However, because such policies are justified in economic terms—in terms of the corporation’s long-run profitability—there is no need to resort to moral or ethical arguments, as is the case with the constituency model of CSR.  The whole point is to generate net gains in the future from expenditures incurred in the present—benefits to nonshareholders come not at the expense of shareholders but rather are deployed for their ultimate advantage.

For this reason, this approach to CSR objectives can be labeled “strategic.”[42]  In contrast, the notion that CSR requires firms to forego profits—and therefore reduce shareholder wealth—in order to spend corporate funds to benefit nonshareholder constituencies might be termed “philanthropic” CSR.  An example would be refusal to immediately close a plant generating subnormal returns because of concerns about the harsh impact the closure would have on the labor force, the local community, and perhaps also on the company’s reputation among consumers, investors, and the general public.  Such a decision could be characterized as “philanthropic” in the sense that corporate management has chosen voluntarily to forego profits in order to benefit nonshareholder constituencies.  These benefits come at the expense of the shareholders.  From that perspective, the decision is analogous to a charitable donation to a nonprofit organization.

Typically no serious effort is made to defend philanthropic CSR in economic terms.  There may be assertions of long-run goodwill or reputational advantages but such claims are virtually impossible to document and the evidence of actual positive effects of CSR policies on worker, consumer, or investor attitudes is uncertain.[43]  Indeed, the key idea is not economic at all.  It is instead based on a claimed moral or ethical imperative requiring that corporations perform good works regardless of their possible negative impact on profits.  This is why this notion of CSR has made only limited headway beyond left-leaning academics and political activists for whom the profit motive may be suspect at best and shareholders are to be tolerated but no more than that.

Because sustainability CSR insists on corporate profitability over the long run, and benefits to key nonshareholder constituencies are designed ultimately to generate payoffs to the corporation and its shareholders, it need not rely on moral or ethical argument alone.  Instead, strategic CSR should be understood as promoting the corporation’s financial interest and therefore those of the shareholders too.  This approach avoids objections to the effect that management is “spending someone else’s money”[44] when it uses corporate funds to improve the well-being of nonshareholder stakeholders.  For this reason, strategic CSR ought to have significantly broader appeal than the constituency or philanthropic model has had.

While sustainability CSR has the potential to benefit nonshareholders substantially, it is important to note that it is not a complete solution to the problem of the social responsibilities of business.  Because it is driven by strategic business considerations, this approach to CSR includes built-in limitations on what corporations are likely to do.  Specifically, they cannot be expected to engage social issues unless they have the potential to improve the long-run bottom line.  Thus, for example, a corporation may decline to address environmental impacts or labor-force problems, even though doing so could serve the corporation’s business interests, if in management’s view the long-run benefits to the corporation do not justify the short-term costs.

Further, pressure from shareholders for immediate returns is likely to skew the cost-benefit calculus.  Management’s awareness that shareholders prefer current earnings may lead it to discount the value of future payoffs more heavily than it otherwise would.  In other words, management may assume that a higher rate of return is necessary to justify current expenditures designed to benefit nonshareholders.  This would discourage some investments that might be endorsed if shareholders were more patient than they typically are today.

Seen solely through a cost-benefit lens, CSR initiatives are not likely to go as far as some would advocate.  The moral or ethical case for, say, environmentally responsible policies, or attention to human rights issues, may therefore continue to provide justification for business policies that cannot be defended solely in economic terms.  CSR may require attention to nonshareholder interests even when doing so is not in the long-run interests of the shareholders.

Further, if CSR is limited solely to strategic considerations, corporations will not contribute to efforts to solve social problems that are unrelated to their long-run economic interests.  Purely charitable expenditures therefore would require justification on other grounds, and moral or ethical arguments for CSR would be relevant here too.  Large corporations make significant cash and noncash contributions to a range of educational, health, community development, environmental, and cultural organizations.  One survey found that the median total giving amount for sixty-one Fortune 100 companies exceeded $56 million in 2009.[45]  These gifts often have no direct connection to the donor’s business and are made for essentially philanthropic reasons.[46]  They provide needed financial support for worthy causes that otherwise might not receive sufficient funds to be effective.  Attractive as the argument for sustainability CSR may appear to be, a philanthropic conception of CSR, unmotivated by business considerations, therefore continues to be important in its own right.  Sustainability CSR is not a complete substitute.

III.  The Prospects for Sustainability CSR

The economic argument for sustainability CSR ought to have broad appeal.  Because it is not based on purely moral or ethical considerations, it avoids standard objections raised against the constituency CSR model based on the interests of shareholders and their claims of privilege vis-à-vis the corporation’s various nonshareholder groups.  Further, unless blinded by short-term myopia, corporate executives should appreciate the importance of the corporation’s long-run viability.  They therefore should be receptive to the idea that investment in the well-being of key stakeholders can generate significant financial returns.  Indeed, the examples sketched above—and there are many others that illustrate the same idea[47]—indicate that many executives understand this point and are incorporating it into their business strategy.  Because these developments are driven by economic self-interest, there may be no need for law to encourage it further.  Even acknowledging, however, that acceptance of the sustainability model would not fully discharge a corporation’s social responsibilities, there are significant impediments to its widespread adoption as a basic element of corporate strategy.

A.            Sustainability CSR’s Problematic Appeal

As discussed above, today’s shareholders—particularly the large institutions that increasingly dominate the stock markets—typically prefer immediate maximization of share value over a more patient approach that is willing to wait for potentially greater returns in the future.  This preference leads management to prioritize short-term profits over longer-run considerations.  This approach obviously discourages constituency CSR because, under this model, benefits to nonshareholders reduce short-term profits and therefore have a negative impact on current share price.  Management’s catering to shareholder preferences also impedes thinking about long-run objectives because the corporation’s future performance depends in part on expenditures that are made today.  The impact on short-term earnings tends to overwhelm considerations based on future returns.  Accordingly, CSR policies based on a commitment to sustainable profits are also a casualty of the current obsession with short-termism embraced by shareholders and management.

As explained above, management compensation practices that typically include stock and stock options also encourage a short-term focus.  So too do social norms that encourage concentration on quarterly earnings as the relevant metric by which management is to be evaluated.  As long as corporate executives prioritize short-term results over long-run value, sustainability considerations will be of only secondary importance.  So too will be the idea that CSR policies can contribute importantly to a corporation’s long-run viability.

Even if corporate management appreciates the importance of sustainability as a business strategy, it will not necessarily appreciate the potential strategic benefits of CSR policies.  Initiatives that require significant investments in the well-being of nonshareholders may be suspect because of their perceived association with constituency CSR policies, which are assumed to come at the expense of corporate profits and not to benefit the corporation.  Among executives who assume that shareholder primacy is the relevant metric, there may therefore be a strong tendency to bridle even at CSR policies that are based on strategic, rather than philanthropic, motivations.

B.            Accounting Conventions

Current accounting conventions generally do not express the future value of strategic investments in the well-being of nonshareholder constituencies.[48]  This does not explain why shareholders generally focus on current earnings without regard to longer-term considerations; as explained above, there are other reasons for that phenomenon.  Nor does it explain why corporate management remains focused primarily on short-term earnings.  The point instead is that an investor who seeks information about the potential future payoffs of current expenditures that are designed to generate sustainable profits by promoting the interests of nonshareholders will find it difficult to obtain that information from the corporation’s financial disclosure.  Similarly, corporate executives who approve expenditures benefiting nonshareholders may be frustrated at their inability to express the future value of those expenditures in the corporation’s financial statements.

According to Generally Accepted Accounting Principles, expenditures designed to benefit nonshareholders so as to create future value typically must be reported as expenses that reduce net income in the accounting period in which they are paid.[49]  The fact that they are supposed to generate future profits potentially extending over many years is not reflected on the income statement or balance sheet—instead they are accounted for as current expenses just as are, say, rent or salary or interest payments.[50]  So, for example, a corporation that spends money training farmers in more productive, less environmentally damaging agricultural practices or encouraging its employees to pursue healthier life choices will have to account for those costs on its income statement when the expenditures are made, reducing net income by the amount of the expenditure, even though the goal is to produce value in the future.  Although these might better be thought of as investments rather than expenses, their value is not expressed on the balance sheet.

Compare in this regard expenditures made to acquire fixed assets, that is, assets that are expected to contribute value to the corporation over a number of years.  The cost of these assets is allocated over their useful lives, rather than treated as an expense to be assigned entirely to the period in which they are purchased.[51]  The theory is that the cost of these assets should be accounted for over the entire period during which they generate value.[52]  Further, the value of fixed assets is included on the balance sheet, expressed in terms of historical cost.[53]

For an investment community obsessed with quarterly earnings, these accounting conventions arguably fail to capture accurately the worth of the expenditures designed to produce sustainable future benefits.  They therefore overstate the expenditures’ cost to the corporation.  A thoughtful analyst could no doubt distinguish costs that generate immediate value—rent and wages, for example—from the kinds of expenditures that are designed to produce future value.  He or she could then discount the latter category of expense accordingly, thus reducing the impact on the corporation’s net income.  Instead, however, shareholders’ current focus on earnings—on the “bottom line”—without regard for whether the corporation’s expenses may create possible longer-term value amounts to an uncritical acceptance of the validity of current accounting conventions as the basis for valuation of a corporation’s stock.  Even if management wished to do so, it may be reluctant to correct, through its financial disclosure, misleading information based on these conventions.[54]


The orthodox model of CSR—which I have termed in this Article the “constituency” model—envisions the corporation as composed of a number of constituencies whose interests often conflict.  Policies that are designed to benefit a nonshareholder constituency are assumed to reduce profits and therefore affect shareholder interests adversely.  Similarly, strict adherence to profit maximization, while in the shareholders’ interest, can impose costs on nonshareholders.  As management attempts to mediate among these conflicting interests, zero-sum trade-offs are assumed to be inevitable.  So, for example, faced with an underperforming plant, management must decide whether to shut it down or continue operations for the sake of workers and the local community.  Seen in this light, CSR has enjoyed limited traction among business leaders, academics, lawyers, and policymakers because it is widely taken for granted that shareholder primacy is the relevant benchmark.[55]  In fact there is no legal warrant for that assumption, but its widespread acceptance renders the constituency model of CSR fundamentally problematic in the eyes of many.

The “sustainability” model of CSR sketched in this Article rejects the zero-sum trade-off assumption of the constituency model and instead embraces the idea that the corporation’s long-run sustainability depends in part on the long-run viability of key stakeholders.  The corporation has a role to play in ensuring that viability.  Examples mentioned above include infrastructure investments in developing countries that will enhance the productivity of local farmers, benefiting the corporation as buyer of their produce and the farmers themselves and their local communities.  Many U.S. companies have spent significant sums on wellness and anti-smoking initiatives for their employees, resulting in a healthier workforce as well as improved loyalty and productivity.  The point is that investment in the well-being of key nonshareholder constituencies—even though costly in the short run—can generate payoffs in the future that justify those expenditures.  Indeed, failure to attend to such considerations may threaten the corporation’s long-run competitiveness.  Seen in this light, a commitment to sustainability has the potential to accomplish significant objectives favored by CSR proponents.

The sustainability model of CSR avoids the standard objections to the constituency model based on shareholder primacy.  Long-run sustainability requires economic success over time.  Strategic investments beneficial to nonshareholders are thus designed ultimately to enhance profits.  The long-run perspective facilitates appreciation of the relevance of future returns on current investments and their potential to promote shareholder value.

Conceived in this way, CSR grounded in sustainability concerns can produce real benefits for nonshareholders.  It is nevertheless important to bear in mind that it still may not do enough to satisfy fully the corporation’s responsibilities to society.  Because it is grounded on cost-benefit analysis, the arguably legitimate interests of nonshareholders will not be served unless, in the long run at least, the corporation will profit from current expenditures.  Furthermore, an approach to CSR that is limited to the corporation’s strategic concerns will not justify philanthropy that cannot be firmly linked to the corporation’s own economic interests.  Accordingly, depending on one’s views about the extent of the business corporation’s social responsibilities, sustainability CSR may not go far enough.

Even accepting these possible shortcomings, there is reason to doubt whether corporate self-interest can be sufficient to generate significant investment in CSR initiatives motivated by sustainability concerns.  The contemporary preference of most shareholders for current returns means that they are likely to be unreceptive to expenditures that reduce quarterly earnings for the sake of potential future payoffs.  In addition to possible questions of speculativeness, this impatience means that investors will discount heavily the value of any such future returns.  This will discourage potentially profitable CSR investments that might otherwise have been made.

* J.B. Stombock Professor of Law, Washington and Lee University.  An earlier version of this Article was presented at the symposium on “The Sustainable Corporation” held at Wake Forest University School of Law in April 2011.  The author is grateful to the symposium participants for their many helpful comments.

[1]. See generally David Millon, Theories of the Corporation, 1990 Duke L.J. 201.

[2]. See David Millon, The Ambiguous Significance of Corporate Personhood, 2 Stan. Agora: Online J. Legal Persp. 39 (2001); David Millon, Personifying the Corporate Body, 2 Graven Images: J. Culture, L. Sacred 116, 116 (1995).

[3]. For a discussion of the concept of the environment as a stakeholder, see generally Robert A. Phillips & Joel Reichart, The Environment as a Stakeholder? A Fairness-Based Approach, 23  J. Bus. Ethics 185 (2000).

[4]. Einer Elhauge, Sacrificing Corporate Profits in the Public Interest, 80 N.Y.U. L. Rev. 733, 763 (2005).

[5]. See, e.g., Da vid Millon, Communitarianism in Corporate Law: Foundation and Law Reform Strategies, in Progressive Corporate Law 1 (Lawrence E. Mitchell ed., 1995).

[6]. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 Va. L. Rev. 247, 280–81 (1999).

[7]. See, e.g., E. Merrick Dodd, Jr., For Whom are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145, 1157 (1932) (arguing that management should have regard for the interests of workers and customers as well as those of shareholders).

[8]. For a description of some of these statutes, see Kathleen Hale, Corporate Law and Stakeholders: Moving Beyond Stakeholder Statutes, 45 Ariz. L. Rev. 823, 833 (2003).  For further discussion, see, for example, David Millon, Redefining Corporate Law, 24 Ind. L. Rev. 223 (1991); Lawrence E. Mitchell, A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes, 70 Tex. L. Rev. 579 (1992).

[9]. Hale, supra note 8, at 833.

[10]. See, e.g., Loft, Inc. v. Guth, 2 A.2d 225, 238 (Del. Ch. 1938), aff’d sub nom. Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939).

[11]. Katz v. Oak Indus., Inc., 508 A.2d 873, 879 (Del. Ch. 1986); see also eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010) (stating that duties of directors “include acting to promote the value of the corporation for the benefit of its stockholders”).

[12]. See Stephen M. Bainbridge, Corporate Law 221–23 (2d ed. 2009).

[13]. Id.

[14]. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985).  In a later case, the Delaware Supreme Court said that benefits for nonshareholders must be “rationally related” to shareholder interests.  Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 183 (Del. 1986) (“A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.”).  Even so, this formulation is vague enough to provide substantial discretion.  For example, management might defend a decision to protect workers by reference to long-run goodwill considerations.

[15]. Paramount Commc’ns, Inc. v. QVC Network Inc., 637 A.2d 34, 48 (Del. 1994).

[16]. Paramount Commc’ns, Inc. v. Time, Inc., 571 A.2d 1140, 1154 (Del. 1989).  For discussion, see Lyman Johnson & David Millon, The Case Beyond Time, 45 Bus. Law. 2105 (1990).

[17]. See, e.g., Stephen M. Bainbridge, Corporation Law and Economics 419–21 (2002); Robert Charles Clark, Corporate Law 17–19, 677–81 (1986); Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439, 441 (2001); Jonathan R. Macey, An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties, 21 Stetson L. Rev. 23, 23 (1991).

[18]. The well-known case of Dodge v. Ford, 170 N.W. 668 (Mich. 1919), appears to endorse shareholder primacy in strong terms but in fact this decision has had very little influence on corporate law.  For discussion, see Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford, 3 Va. L. & Bus. Rev. 163 (2008).

[19]. See, e.g., Michael C. Jensen, Agency Costs of Overvalued Equity, 34 Fin. Mgmt. 5, 8 (2005) (“CEOs and CFOs know that the capital markets will punish the entire firm if they miss analysts’ forecasts by as much as a penny.”).

[20]. See, e.g., The Aspen Inst. Bus. & Soc’y Program, Overcoming Short-Termism: A Call for a More Responsible Approach to Investment and Business Management 2 (2009); Matteo Tonello, The Conference Bd., Report No. R-1386-06-RR, Revisiting Stock Market Short-Termism (2006); CFA Ctr. for Fin. Mkt. Integrity & Bus. Roundtable Inst. for Corporate Ethics, Breaking the Short-Term Cycle (2006).  For a thorough analysis of the short-termism phenomenon that draws on a broad range of economic, business, and legal literature, see Lynne Dallas, Short-Termism, the Financial Crisis and Corporate Governance (Univ. of San Diego Sch. of Law, Research Paper No. 11-052, 2011), available at

[21]. This practice is referred to as earnings management or managerial myopia.  See, e.g., Sanjeev Bhojraj & Robert Libby, Capital Market Pressure, Disclosure Frequency-Induced Earnings/Cash Flow Conflict, and Managerial Myopia, 80 Acct. Rev. 1 (2005); Daniel A. Cohen et al., Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods, 83 Acct. Rev. 757 (2008); David Millon, Why is Corporate Management Obsessed with Quarterly Earnings and What Should be Done About It?, 70 Geo. Wash. L. Rev. 890, 897–900 (2002); Natalie Mizik, The Theory and Practice of Myopic Management, 47 J. Marketing Res. 594 (2010).

[22]. Roger Lowenstein, The Next Crisis: Public Pension Funds, N.Y. Times, June 27, 2010, at MM9.

[23]. See Herbert Kraus, Executive Stock Options & Stock Appreciation Rights 1–2 (1994).

[24]. See generally Rakesh Khurana, From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession (2007).

[25]. For a recent example, see Charles M. Nathan, A 12-Step Program to Truly Good Corporate Governance, The Harv. L. Sch. F. on Corp. Governance & Fin. Reg. (May 18, 2011, 9:26 AM),
/05/18/a-12-step-program-to-truly-good-corporate-governance/ (asserting that the goal of corporate governance is to enhance shareholder value).

[26]. See, e.g., Aneel Karnani, The Case Against Corporate Social Responsibility, Wall St. J., Aug. 23, 2010,

[27]. See, e.g., sources cited supra note 18.

[28]. See Michael E. Porter & Mark R. Kramer, Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility, Harv. Bus. Rev., Dec. 2006, at 11, available at

[29]. Id.

[30]. For Yara’s description of these initiatives, see Agricultural Growth Corridors and African Partnerships, Yara International ASA, (last visited Aug. 30, 2011).

[31]. Id.

[32]. Leonard L. Berry et al., What’s the Hard Return on Employee Wellness Programs?, Harv. Bus. Rev., Dec. 2010, at 104, 105.

[33]. Id. at 105.

[34]. Id; see also Rachel M. Henke et al., Recent Experience in Health Promotion at Johnson & Johnson: Lower Health Spending, Strong Return on Investment, 30 Health Aff. 490 (2011).

[35]. Berry et al., supra note 32, at 106.

[36]. Id. at 112.

[37]. See, e.g., William R. Baber et al., The Effect of Concern About Reported Income on Discretionary Spending Decisions: The Case of Research and Development, 66 Acct. Rev. 818, 818 (1991) (finding significantly lower R&D spending where it would affect reported earnings).

[38]. Ram Nidumolu et al., Why Sustainability is Now the Key Driver of Innovation, Harv. Bus. Rev., Sept. 2009, at 57, 61–62.

[39]. Id. at 62.

[40]. Porter & Kramer, supra note 28, at 88–89.

[41]. Michael E. Porter & Mark R. Kramer, Creating Shared Value: How to Reinvent Capitalism—and Unleash a Wave of Innovation and Growth, Harv. Bus. Rev., Jan.–Feb. 2011, at 62, 67.  For GE’s description of the “ecomagination” initiatives, see Ecomagination, General Electric, (last visited Aug. 30, 2011).

[42]. See Porter & Kramer, supra note 28, at 88.

[43]. Id. at 83.

[44]. Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, N.Y. Times, Sept. 13, 1970 (Magazine), at 33, 33.

[45]. Comm. Encouraging Corp. Philanthropy, Giving in Numbers 2010 Edition 7, available at

[46]. Id.

[47]. See, e.g., Porter & Kramer, supra note 41; Porter & Kramer, supra note 28.

[48]. See Generally Accepted Accounting Principles in the United States, U.S. GAAP, (last visited Aug. 30, 2011).

[49]. See id.

[50]. See id.

[51]. See Stanley Siegel & David A. Seigel, Accounting and Financial Disclosure: A Guide to Basic Concepts 50–51 (1983).

[52]. See id.  Fixed assets include machinery, buildings, and vehicles. Id. at 50.  The process by which the cost of such assets is allocated over their useful lives is termed “depreciation.”  Id.  A similar process is applied to assets that are actually consumed over time, such as oil reserves or timber, and is referred to as “depletion” rather than depreciation.  Id. at 50–51.  For certain intangible assets like patents, the allocation process is termed “amortization.”  Id. at 51.

[53]. See id. at 52.

[54]. In particular, concerns about uncertainty or materiality may discourage inclusion of forward-looking assertions in the Management’s Discussion and Analysis (“MD&A”) section of the corporation’s annual report.  See generally SEC Focus on MD&A Disclosure, Fenwick & West LLP 1 (2002) (discussing heightened scrutiny of MD&A disclosures of public companies), available at

[55]. See, e.g., D. Gordon Smith, The Shareholder Primacy Norm, 23 J. Corp. L. 277, 277–78 (1998).


By: José Gabilondo*


The financial sector has by now mostly sprung back from the crisis that began in 2007, as have corporate profits; but the labor market still sags, mortgage credit is scarce, and the future prospects for the economy, while not bleak, are not rosy either.  Seeing this ongoing harm to the real economy caused by financial activities, Congress enacted the Dodd-Frank Act (“Act”) with an eye to limiting future financial instability.[1]  The Act hopes to do this by updating financial regulation and creating better incentives for the private sector.

To see how the crisis developed and whether the Act will work, we need to understand how financial instability develops in capitalist market systems like ours.  Economist Hyman Minsky claimed that the financial sector in capitalist market systems tends to chase returns by gorging on risk until its own financial structure becomes unstable, leading to a crisis like the last one that started in 2007.[2]  The claim—known as the financial instability hypothesis—merits our attention because, though critical of the financial sector, evidence for it is derived from observing how banks actually operate over the business cycle.

I use the hypothesis in Part I to show what animated the last corporate leverage cycle: escalating expectations for profit financed on progressively riskier credit terms.  In fact, the hypothesis belongs to a larger critique of conceptual approaches that deny the intrinsic instability of capitalist market systems, so I also use Minsky’s work to challenge claims made by nabobs of neoliberal negativism who are resisting the implementation of the Act.  Part II addresses two aspects of the Act that bear directly on how the financial sector creates potentially destabilizing liabilities: (i) new requirements that leverage caused by financial swaps be margined and cleared; and (ii) a new mandate that federal regulatory capital requirements go in the opposite direction of the boom-bust dynamics characteristic of the business cycle.

I.  Liability Structures Do Matter

Hyman Minsky was an economist trained at Harvard in the 1940s under economic historian Joseph Schumpeter.[3]  His theoretical work on the financial system was informed not only by the then recent memory of the Depression but by his service as a bank director.[4]  Minsky observed that “[i]t turns out that the fundamental instability of a capitalist economy is a tendency to explode—to enter into a boom or ‘euphoric’ state,” followed by a bust.[5]  When times were good, he said, firms took on riskier debt to invest in speculative assets, an unsustainable strategy that would lead, in time, to a crash.[6]  He believed that government policy could contribute to the long term viability of capitalism by slowing down these boom-bust cycles.[7]  Doing this would mean going against prevailing market sentiment.

Minsky’s conceptual framework was not widely received by the academic establishment of his day, which followed the direction of Platonic quantitative modeling that assumed away the grittiness of economic life.[8]  The last crisis painfully illustrated the financial instability hypothesis, which is now being reappraised and adopted more widely.  As before, though, the idea that the government should actively intervene in the financial market faces renewed political opposition.

A.            Borrowing by Firms

Minsky’s analysis starts by looking at a firm’s balance sheet, an accounting report that estimates a firm’s net worth for a given moment in time by subtracting what the firm owes to creditors from what the firm owns and is owed by others.  Assets are the firm’s claims on others.  Liabilities are what the firm owes to others.  Assets minus liabilities leaves what belongs to owners, called “equity.”  In the analysis, liability structure as a whole is central because it suggests how much and when the firm will face demands for payment, which must be settled with liquid resources or refinanced with another liability.[9]

Among firms in general, the liability structure of those that borrow to lend—so called “financial intermediaries”—is particularly telling of potential troubles because these firms influence how nonfinancial firms fund themselves.  A manufacturing or a services firm will have financial items—liability and equity—on the right-hand side of its balance sheet, but a financial intermediary has financial claims on both sides of its balance sheet because it invests borrowed money in the liabilities of other firms.

Commercial banks are the typical example of a firm that borrows to lend, but if we define lending functionally then investment banks, hedge and private equity funds, pension funds, sovereign wealth funds, and other pools of investment capital are also financial intermediaries.  Like all firms, they leverage themselves, borrowing to increase their ability to invest in other firms, both financial and nonfinancial ones.  Leveraging is a fact of business life, but when a firm borrows too much, it risks its solvency and its ability to honor contracts to others, because the firm’s liability structure becomes unsustainable.

Minsky saw a troubling pattern in the liability growth of firms that borrow to lend.  Again and again, their balance sheets would become more fragile because they took on more debt and borrowed on deteriorating credit terms.[10]  This cycle took place during good times as firms would borrow at more speculative rates so as to hunt for return in riskier investments, adding fragility to both sides of the balance sheet.  The rub was that these firms had to re-enter the credit market to refinance liabilities.  This was fine when interest rates were stable, but tighter money meant certain loss when refinancing at higher rates.  Now that serial refinancing and secondary trading are more common in the credit market, this analysis is more relevant than ever.

He classified debt into three types based on its propensity to require future refinancing, even in a rising interest rate environment: hedged, speculative, and Ponzi.[11]  In hedged borrowing, the borrower could pay all maturing interest and principal payments from the cash flow proceeds of the investment made with the borrowed funds.[12]  In speculative borrowing, the borrower could pay only interest from investment proceeds without refinancing, having to re-enter the market to refinance some amortization of principal.[13]  The riskiest of the three was Ponzi borrowing because the initial terms of the debt meant that the borrower would have to re-enter the credit market for all contractual payments of interest or principal.[14]  So there is nothing shady per se about Ponzi finance—it simply assumes that investment return will keep escalating, which can be true for a while but not forever.  The distinction matters because many financial assets have useful lives longer than an investor’s holding period, so the asset’s longer-term value matters, especially on re-transfer.[15]

This classification focuses on the borrower to emphasize its liability structure.  But it can also sort the lender’s loan assets by their risk from refinancing.  For an asset to be deemed hedged, it would have to be serviced from a dedicated income stream produced by the investment of the loan proceeds.  If the lender assumed that the borrower would have to refinance some of the principal payments—perhaps by further borrowing from the lender, as is common with home equity lines of credit when the principal begins to amortize—then the loan would be a speculative asset on the lender’s balance sheet.  If the lender knew that the borrower would need to refinance during each scheduled payment period, then the loan asset would be Ponzi to both the lender and the borrower.

As the cycle accelerated during the last crisis, firms borrowed and lent at increasingly speculative and Ponzi terms, setting up their balance sheets for loss in the event that market prices ever stopped escalating, which they always do.  And when they did, this fragility would devolve into a crisis in which financial promises could not be kept on a grand scale, a so called “Minsky moment.”[16]  Citigroup’s chief executive officer Charles Prince said it best: “As long as the music is playing, you’ve got to get up and dance.”[17]  The result was borrowing and lending yourself (and others) into financial instability.

The fragility cycle in the financial crisis of 2007 emerges in time series data of the Securities Industry and Financial Markets Association.[18]  Figure 1 compares gross corporate debt issuance from 1990 to 2009 by firms, both financial and nonfinancial.  The increase in debt issuance starts in 2000.  After peaking in 2006 (the last full year before the crash), issuance dropped, with the low numbers in 2008 and 2009 reflecting the challenges firms faced in raising new debt capital after the crash.

Figure 1



Gross debt issuance tells only part of the story. A firm with enough equity can sustain a corresponding debt load, even during periods of financial stability.  It is rising leverage that adds up to financial instability.[19]  So Figure 2 tracks leverage trends by dividing the amount of debt that corporations issued by the equity capital raised during the same period.  Between 1990 and 2001, the leverage ratio ranged from between 4:1 and 6:1, suggesting the “old normal.”  During 2001, the Federal Reserve began to tamp down interest rates,[20] and from then on, easy money fed the cycle, which peaked in 2006.  That year, corporations issued fourteen dollars of debt for every dollar of equity—double and, in some cases, triple the leverage ratios of the old normal.

Figure 2



The financial correction originated during the third quarter of 2007 as markets began to be spooked, and by the end of that year the leverage ratio had dropped to 10:1.  During the heart of the financial crisis, in 2008 and 2009, the ratio was back to the old normal, although it feels like deprivation after the bubble.

Insofar as they were securitized into private-label mortgage-backed securities bought by commercial banks, some of these liabilities ended up on the balance sheet of the Federal Reserve (“Fed”).  Doing just what a central bank should, the Fed lent money against collateral and bought bank assets outright during the crisis, although the ultimate quality of some of these acquisitions remains to be seen.[21]  As a result, the Fed’s financial structure morphed.  Figure 3 compares its balance sheet in March 2007[22] (before the trouble started) with those of March 2009[23] and March 2010,[24] after the Fed’s liquidity and credit programs had been largely completed.  During this period, the Fed’s leverage ratio increased from 27:1 to 44:1.

Figure 3

Trends in Fed Balance Sheet Composition (in millions)





Total Assets




Securities held outright




U.S. Treasuries




Total Liabilities




Deposits from depository institutions




Total Capital




Leverage Ratio
(Leverage ratio is calculated by comparingTotal Capitalto Total Assets)




During this period, the asset portfolio of the Fed more than doubled, while the credit quality and liquidity of the assets declined.  In 2007, U.S. Treasury securities were almost 90% of the Fed’s asset portfolio.[25]  By 2010, they made up only 33% as the Fed acquired investments in private-label mortgage-backed securities (“MBS”), which were then trading at a steep discount.[26]  Though riskier than Treasury securities, these investments are not themselves subprime, as they tend to be super-senior investment-grade rated tranches of MBS.[27]  This means that junior tranches in these MBS will be the first to shoulder losses if borrowers default on the underlying loans.  Time may show that the market discounted their value too much, giving the benefit of the bargain to the Fed.[28]  In this case, it will be the taxpayer who benefits—the Fed is a proxy for the country’s general fund because each year, the central bank transfers its net profit to the Treasury, which, in a corporate finance sense, is the Fed’s residual claimant.[29]

As the Fed took on these new assets, its own leverage spiked since it funded its balance sheet growth by borrowing, mainly through taking deposits of commercial banks.  In 2007, these deposits made up just over 2% of the Fed’s liability base.[30]  By 2010, they had increased sixty-fold, amounting to 50% of the institution’s liability base.[31]  In large part, these deposits represent resources that the Fed had made available to banks through stabilization programs.  Even commercial banks know that few things feel as good as money in the bank, so they deposited these resources rather than making new loans to firms and individuals, which would have created new loan assets for these banks.

Though it seems to be a monolith, the new Fed is best understood as a complex of separate balance sheets, each with its own distinct asset-liability schedule and an ad hoc governance regime that serves different public purposes.[32]  With respect to the special-purpose balance sheet created by taking on the private label MBS of commercial banks, the central bank lent its balance sheet to the banks by letting them substitute a Fed-backed asset with no credit risk but some inflation risk (the bank’s Fed deposit) for the private label MBS about which a panicked market was being finicky.  In effect, this on-balance sheet venture takes the place of a free-standing resolution vehicle, like the Resolution Trust Corporation used after the savings and loan crisis.[33]

In Minsky’s analysis, the Fed validated the speculative and Ponzi investment decisions of banks by buying their assets closer to par than to their then-impaired market value.[34]  This probably made the Fed the last bank in the cycle to do a speculative Ponzi trade, albeit for the public interest.  Although these credit terms are unsustainable for private firms, a central bank can depart more freely from hedged borrowing and lending because it has a monopoly on the production of legal tender and, hence, faces no short-term pressure to be profitable in a real sense.  And because the Fed can hold debt to maturity more freely than private banks, it has time to ride out the troughs of economic cycles.

Overall, the financial sector has been substantially mended through this Fed initiative, other efforts to recapitalize the banking system by shoring up assets, and troubled asset relief program (“TARP”) support for the liability side of bank balance sheets.  What has not worked as well is the spreading of this recovered stability onto consumers and other firms, as banks remain cautious about lending.  This bottleneck of liquidity in the financial sector may reflect that chastened banks have yet to reenter the early stage of the cycle, in which more hedged borrowing and lending takes place.  More research is needed to understand the links between the financial sector and the real economy—the topic of the Levy Economics Institute’s 2011 Minsky Conference.[35]

B.            Contesting Market Primacy in the Age of Ideology

Minsky’s financial instability hypothesis addressed how individual firms borrow and invest and how these behaviors—in the aggregate—lead to sectoral tendencies.[36]  As noted above, this was so because, left to their own devices, financial markets tended to overheat, leading the public sector to intervene as needed against the confidence (panic) cycle.  At the same time, the public sector could precipitate instability by removing regulatory restraints on speculative and Ponzi financial activity.  Implicated in this are political economy questions about whether real markets work as theorized, how much state influence over economic life is justified, whether individuals are rugged enough to go it alone or whether unavoidable human vulnerabilities call for systematic state action, and who should pay for non-private costs of bailouts.

So around the core of the financial instability thesis, we can imagine criticism of ideologies that promote financial instability by hamstringing the public sector’s efforts to counter the cycle.  For example, some economic orthodoxies may deny that financial crises recur, insisting on inaction because, like the common cold, these cycles will work themselves out in time.[37]  Moreover, ideological orthodoxy in economic matters from anywhere on the spectrum can exacerbate crises by not being flexible when what is needed is pragmatism.  For example, the Community Reinvestment Act[38]— pushed by Democrats and progressives—encouraged commercial banks to originate subprime mortgage loans.[39]  Because of their foreseeable exposure to interest rate risk from refinancing, when underwritten, many of these loans would almost certainly have been classified as speculative or Ponzi assets.  The subprime market grew in tandem with deregulation of financial markets,[40] a view promoted from across the aisle but which, converging on federal efforts to promote homeownership, intensified the trends toward financial instability.

While ideologies that promote financial stability can come from either side of the aisle, the Right has largely captured the terrain of finance.  Since the 1980s, the United States has witnessed a flowering of anarcho-capitalist, libertarian, neoconservative, and reactionary social formations that, despite other differences, unite against financial regulation.[41]  We have yet to appreciate how these networking successes have rezoned our political imagination Right-ward, even that of liberals and supporters of financial regulation.  Because Minsky died as these formations were quickening, he did not get much of a chance to contest them using the financial instability thesis.  For example, many who would shudder at the label “Keynesian” have referred to a “Minsky moment” without owning the wider context for the financial instability thesis.  It is ironic because Minsky sought to give a fuller account of John Maynard Keynes’ radicalism, which he thought had been excised by the economics establishment of Keynes’ day when it accepted his work.  Minsky wanted to integrate the excluded elements.[42]

This latent dimension of Minsky’s work deserves extending because its technical credibility could counter some of the ideological posturing advanced in the name of capitalism.  In fact, there is more than one conception of capitalism, and his views might help elaborate alternative forms.  This point matters because, despite the debt overhang from the last crisis, neoliberal hostility toward financial regulation is back in arguments based on market primacy.[43]  This is the view that the uncoordinated, self-propelled actions of unregulated private actors will lead to better outcomes for them and for society than would state coordination.[44]

Markets are said to be better than the state for utilitarian and categorical reasons.  First, the market is alleged to produce more than the state would with the same resources.[45]  And the market is better than the state on moral grounds because it stands in for pure freedom.[46]  Adding the modifier “free” to “market” intensifies this devotional quality, sacralizing the market.

In theoretical accounts of the financial system based—explicitly or not—on market primacy, liabilities are no big deal.  In a market, it is assumed price mechanisms will adjust by themselves to reflect the risks and effects of these liabilities.  If a firm fails, creditors will devour it.  This is the take on liabilities in Merton Miller’s acceptance speech for the Nobel Prize, which he received for the capital irrelevancy thesis.  He said there was no such thing as an “overleveraged” firm because market price mechanisms would adjust its cost of debt and equity capital to reflect its risk.[47]  Lenders would evaluate risk, bargain for an appropriate rate of return, demand collateral as needed, and, if necessary, sue for breach.  There is no systemic risk here because all risk stays private.

True enough, if one stays inside of an abstraction that, necessarily, assumes away actual liabilities, real financial risks, and losses in the real world.  So, in the market primacy narrative, there was no “problem” with the 2007 crash.  It was a routine repricing of credit by forces of supply and demand, though the growth of the Fed is not ideal.

C.            Enter Reality Stage Right

However, market primacy faces some challenges.  First, financial crashes always spill over into the public sector.  In the now familiar script, an adventurous financial sector borrows itself into a crisis that threatens innocent bystanders, drawing in even advocates of market primacy.  The Federal Reserve Act of 1913 grew out of the 1907 Knickerbocker Trust Company crisis;[48] the New Deal’s financial architecture responded to speculative overinvestment, intensified by easy margin credit;[49] and the 1989 Financial Institutions Reform, Recovery, and Enforcement Act responded to the savings and loan crisis of the 1980s.[50]  The Act is merely the last iteration of this political economy cycle.  So models that turn a blind eye to obvious, foreseeable public impact should be taken with a grain of salt.

Second, it was supply and demand—the self-adjusting hydraulics of market primacy—that contributed to the financial crisis.  After all, it was devotees of deregulation—George W. Bush in the White House and Alan Greenspan at the Fed—who let subprime debt mushroom thanks to easy money and, it would come to light later, systematic mortgage fraud.[51]  The risk to the financial system originated not in the state but—to further refute market primacy—from innovation in an overheated private sector whose private-label MBS came to displace the other MBS issued by government-sponsored agencies like Fannie Mae and Freddie Mac.[52]

The government’s error was to validate this innovation by investing in some of these private-label securities.[53]  Lenders in markets were wrong.  And the quantitative financial models were wrong too because they did not predict how markets act in a panic, so called “extreme liquidity events.”  It is only the latest example of mistaking unsustainable practices for benign financial innovation.[54]

Were the marketplace of ideas and reputation to work as its libertarian custodians claim, we could have shorted market primacy and captured the spread as brand names like Alan Greenspan, Friedrich Hayek, and Milton Friedman went down in a bear raid.  Instead, the spirit of deregulation has survived a financial crisis that it had a hand in creating.  It is not as odd as it sounds because, like limited liability for corporations, market primacy is a potent distillation of exclusions, erasures, and omissions of facts that might compromise its theoretical integrity.  It saves face by ignoring corporate insolvencies, credit scarcity, unemployment, foreclosures, losses in retirement funds, growth in the federal deficit, incipient inflation of energy and food, and sagging real estate values—in other words, other people’s problems.  Indeed, it is these efficiencies of externalization that have allowed corporate profits to rebound despite other weaknesses in the economy.[55]

An example of market primacy about the Act is the street’s hue and cry against the Act’s mandate that regulators bear down more on the swap markets.  Swaps are financial bets about future price movements that banks and other large firms place with each other, acting as “counterparties.”  The Act requires the Commodity Futures Trading Commission and the banking agencies to establish margin requirements and collateral policies to reduce the risk of default on these bets.[56]  Doing so, it is thought, will reduce the risk not only to the counterparties but to the financial system as a whole.[57]

However, the prospect of regulation has been met with objections by many firms, including nonfinancial ones that use swaps for hedging rather for speculative investment.[58]  In part it is because swaps are the poster child of imaginaries of the market.  Since Wendy Gramm, then head of the Commodities Futures Trading Commission, secured a major exemption from their regulation in 1993,[59] swaps have been sacralized as financial play in the libertarian forest primeval, away from the grasping hands of the state.  The resistance from firms seems to have worked given the broad exemptions that have been given to noncommercial end-users of swaps.[60]

Once put in focus, market primacy shows up as an attack on the very notion that there could be such a thing as a public interest and, insofar as it is recognized to exist, justifying it only insofar as a public function serves private interests.  This is what lies behind challenges to how the state provides services that have been the hallmark of the public sector.

Consider the new reach of market logic into higher education and state government.  A narrow cost logic is at work in legal education through the American Bar Association’s recent proposals on security of position, reforms that would reduce the agency costs of having faculty.[61]  A similar cost logic is at play in reform proposals about state government.  The proposals to allow states to declare bankruptcy would allow them to cleanse their balance sheets of liabilities for the pensions of public employees.[62]  Like the perennial anti-hero of the Nightmare on Elm Street, Freddie Kreuger is back, this time in the citadels of the public.

The attack is old news.  What is new and worth attention is how the discursive formations of reactionary thought are maturing.  By “discursive formation” I mean the way that institutions, individuals, and political narratives move in tandem to form a new consensus of reality, one that amplifies neoconservative values by erasing those of others.  At the institutional level, this is evidenced by the rise of foundations and advocacy groups whose influence reaches deep into private enterprise, the federal courts, and state government.[63]  These activist networks produce and market—and are in turn legitimated by—narratives, symbols, and social scripts that create a conceptual framework for understanding reality through a reactionary lens.  On economic matters, Minksy’s theory can help to contest these discursive formations of the Right.

II.  Internalizing Liabilities Through the Dodd-Frank Act

If we believe, as did Minsky, that capitalist market systems could be enhanced by mitigating leverage cycles, then we judge the Act by whether it does so.  Because it was passed during a window of financial ruin that temporarily muffled some libertarian activists, the Act does take some steps to limit financial instability caused by liability financing.  While market primacy shifts some of the costs of overleveraging onto strangers, the Act tries to do the opposite, allocating more of the total effect of liabilities onto those who generate the debt.  Below I discuss two examples of this internalization: risk management rules for leverage created by financial swaps and regulatory capital requirements that slow down, rather than intensify, boom-bust cycles.

A.            Limiting Swap-Induced Leverage

As explained here, many financial swaps include contingent leverage that springs into effect when the market moves against a bank.  These sudden market moves can turn a swap from an asset to a liability or from a small liability to a giant one.  An example illustrates the problem.  Assume that Party A and Party B enter into an interest-rate swap.  If the market moves against Party A, the swap becomes an out-of-the-money position, with Party A owing money to Party B as a net swap payable.[64]  To Party B, the swap is an asset because it is in-the-money and, hence, a net swap receivable.

As this example shows, a swap can fluctuate between being an asset or a liability based on market movements and contingencies that are built into the swap.  (Such was the case at AIG when swap commitments made by its financial products unit became liabilities rather than assets.)  These market contingencies are the heart of the bargain that is entered into every time someone enters into a swap position.  Moreover, because many swap counterparties waive margin for an entity with a good credit rating, swaps can produce uncollateralized debt that can suddenly increase a firm’s effective leverage.

The moral of the story is that the unintended—though foreseeable—liabilities that can arise through swap contracts also need provisioning and risk management.  The Act reduces the growth of speculative and Ponzi liabilities that might arise from swaps activities—especially by financial firms—by requiring that standardized swaps be settled through a clearinghouse that would impose margin requirements to eliminate the risk that a liability would lack adequate collateral.[65]

Once swaps clear on a central counter party, each member will have to post initial margin, post variation margin based on market changes, and make a contribution to the guarantee/clearing fund as it begins to accumulate a liability with respect to a swap position.  Centralized clearing of swaps and margining generally may also reduce the funding liquidity of some firms.  Not all swaps will have to be cleared centrally.  To create a kind of parity, the Act also imposes margin and collateral rules on swaps that remain on the books of the original counterparties.[66]  The margin rules for uncleared swaps may also reduce the funding liquidity of swap counterparties who post margin.

From the perspective of the financial instability hypothesis, do the new clearing and margin rules for swaps increase or decrease financial fragility?  To apply Minsky’s debt classification to the new swap rules, first convert the margin or collateral into an income stream that backs the interest payments and amortization of principal on the debt.[67]  The analysis is different for cleared and uncleared swaps.

The margin requirements keep the individual clearing members from accumulating uncollateralized liabilities to the clearing house.  This limits the risk that swaps will add speculative and Ponzi exposure to the liability structure of a clearing member.  The swaps clearing house will be subject to strict risk management rules that limit its overall risk.[68]  Assuming, then, that it behaves like clearing houses for other asset classes, the swaps clearing house will not generate speculative or Ponzi risk.

The implications of margin on an uncleared swap, that is, one that stays on the books of the counterparties, follow below using the example from above.  As suggested, Party A is short on the swap and would have to post margin to cover his liability to Party B.  By collateralizing this debt, Party A’s liability structure moves toward hedged borrowing from speculative and Ponzi positions.  Posting margin may reduce Party A’s borrowing cost because Party B should accept a lower interest rate on collateralized debt.  If Party A posts cash collateral, however, its balance sheet also becomes less liquid and it is left with less unpledged collateral.  Less potential collateral limits Party A’s ability to invest in the other firms (including in the liabilities) and its own ability to borrow on a collateralized basis.

The leverage and liquidity implications are the converse to Party B, who receives margin from Party A.  By reducing counterparty credit risk to Party A, the margin shifts Party B’s asset structure toward hedged from a potentially more speculative or Ponzi position.  If Party B can re-hypothecate the margin collateral, he has two more options.  First, he can collateralize his own debts, making his own liability structure more hedged.  Second, he could do the opposite by using the collateral to borrow more and use the proceeds to acquire a new asset, whose value would reflect the leveraged demand made possible by borrowing.

Given that margin can directly affect a firm’s access to liquid resources and its ability to leverage itself, the new margin rules—both for cleared and uncleared swaps—give regulators another tool that can be used counter-cyclically against the confidence (crisis) cycle.  A tight collateral policy during good times would slow down growth, but a loose collateral policy on the downside of a credit bubble would take pressure off firms.[69]

The effects are more variable in the case above of an uncleared swap, because margin redistributes risk, liquidity, and leverage between the payor and payee.  Because neither the market nor regulation require all liabilities to be margined, the ultimate effect of imposing margin on leverage created by uncleared swaps will depend on the opportunity costs to the payor of posting margin and the reinvestment opportunities to the payee.

Two other provisions of the Act that further limit the risk of sudden leverage from financial swaps by limiting the amount of swaps activity that certain financial institutions engage in are the Volcker Rule[70] and the swaps pushout rule.[71]  Both require divestiture by many banks of certain derivatives activity.  The Volcker Rule limits the amount of swaps activity that a bank can conduct.  Separately, the swaps pushout rule limits the ability of banks to enter into swap agreements for their own account, although some important exceptions remain, including entering into swaps positions to accommodate customer interest.  Together, these provisions may cleanse much springing and contingent leverage out of the bank.

B.            Countercyclical Capital Requirements

The Act also nods to Minsky by calling for capital requirements that go against rather than with the prevailing direction of the business cycle.[72]

Federal law requires a bank’s capital structure to meet certain prudential standards for its balance sheet.[73]  Potential investors may apply more stringent standards, but federal law establishes the minimum.  These standards promote solvency by measuring the bank’s assets conservatively and ensuring that the bank has enough equity capital free from the contractual constraints that creditors impose on debt financing.  The standards do this by subjecting the bank’s balance sheet to various solvency and liquidity tests, each of which must be satisfied for the bank to remain in the best standing with its federal regulator.

For example, the tests promote conservative valuation when determining the bank’s net worth (reflected in its equity capital) by aggressively discounting assets to reflect what they might fetch in a distressed market.[74]  These asset discounts reduce the bank’s net worth on a dollar-for-dollar basis, a loss that is born first and wholly by the bank’s equity.  So a bank’s net worth calculated for its regulatory capital requirements will often be lower than its net worth based on generally accepted accounting principles.  This is how the conservative valuation is accomplished.  The federal government wants to have this conservative measure because the federal promise to insure certain bank deposits leaves the government on the hook as a back-up source of downside risk capital if the bank fails.

To complement this conservatism, other tests apply to the right-hand side of the bank’s balance sheet.  These rules are conservative because they limit how much the bank can leverage itself with borrowed money, including federally-insured deposits.  The limit is expressed as a multiple of the equity that determines the maximum amount of debt that the bank can take on.[75]  Capping debt leverage increases the bank’s financing costs because the interest costs of debt are deductible, while equity investors demand a higher rate of return for investing as owners.  Hence, a bank—like any firm—tends to pay more for equity capital than for debt capital.  Although there is no limit to how much owners can make from a successful company, lenders can, at best, expect to receive only their contractual entitlement.  As a result, lenders have more contractual rights to protect their expectancy in the firm than do its owners.  Enough equity reassures regulators that the bank has an adequate resource cushion free from the contractual rights that, if breached, give the creditor rights to interfere in how the bank is run.  One effect of ensuring a minimum amount of owner’s capital is to limit the overall size of the bank’s liability base with respect to which the bank owes contractual duties that limit its freedom of action.

At present, these regulatory capital requirements have the unintended effect of amplifying the credit cycle.[76]  When interest rates are low and the bank can easily make loans, its assets increase, marking up the bank’s net worth and making it easier for the bank to borrow more, replenishing its ability to repeat the asset growth-equity-growth-borrowing growth cycle.  More credit means more dollars chasing the same assets, which means that prices go up in the aggregate.  The discounts used to haircut assets do not take into account the risk that assets are rising because a credit bubble may be underway, based on unsustainable escalation of market values.  As a result, the intended conservatism of regulatory capital is somewhat offset by inflated asset, equity, and debt values.  So the capital tests do nothing to slow down this inflation and, instead, by continuing to signal that the bank is solvent and liquid, give a green light as the bubble inflates.

The opposite kind of amplification happens as the bubble deflates.  This time, the market value of outstanding loan assets begins to drop, shrinking the bank’s balance sheet as the market applies a haircut of its own.  Regulatory capital makes matters worse by adding another asset haircut, one that may be less justified because the market is already discounting.  Every time an asset loses a dollar of value, the bank’s net worth (its equity capital) drops by a dollar.  As the equity base shrinks this way, the bank loses its ability to keep borrowing because of the leverage limits keyed to the bank’s equity.  To avoid losing regulatory status by becoming over-leveraged, the bank will begin contracting.  If this means cutting its leverage, then the bank may have to dispose of assets to pay a liability.

Unfortunately, the asset may fetch less than par in a hasty sale, so the bank may face a nasty cycle of deleveraging leading to fire sale prices, leading to more deleveraging.[77]  Moreover, during this cycle credit is harder to get because the bank is pickier about investing in loan assets, the more attractive ones being those not subject to a regulatory asset haircut because they boost the bank’s net worth most directly.  Less credit means fewer dollars chasing the same assets, which drives prices down.  So, on the downside of the cycle, regulatory capital rules discourage lending just when the market could use a boost from more credit.

One way to mitigate the tendency of regulatory capital to amplify the direction of the boom-bust cycle in asset prices would be by taking account of whether asset prices were rising or falling and, consequently, whether the market was overestimating or over-discounting an asset’s ultimate value.  On the upswing of the cycle as banks expand their balance sheets with new loans—adding inflationary momentum by financing more demand—banks should be subject to higher rates of required equity on the right-hand side of the balance sheet.  Because equity capital is more expensive and generally harder to get, increasing the equity bite delays the bank’s ability to keep growing with borrowed funds.  This pause in financing on the upside is likely to slow down asset growth.

The opposite happens on the downswing.  As the value of outstanding loan assets begins to drop, the regulatory discounts on the asset values should be relaxed, avoiding a direct dollar-for-dollar reduction in net worth for every loss in a loan asset.  Preserving the bank’s net worth this way keeps it from having to quickly deleverage by shedding impaired assets into an already illiquid market.  This cannot stop the cycle, but it slows it down and tries to produce a softer landing.

This is what is meant by countercyclical requirements.  Reducing the unintended and highly undesirable amplification of the boom-bust cycle caused by regulatory capital rules goes to the heart of Minsky’s advice for reducing the growth of fragility and slowing down the contraction of debt-financed consumer demand.  Banking regulators have recommended that regulatory capital eliminate this procyclicality by building in additional counter-cyclical capital requirements.[78]  Many implementation issues remain but it is an important step in the right direction.


New financing arrangements will always require original analysis to determine how they affect the financial system as a whole.  That analysis should draw on liquidity and leverage axioms derived from Minsky’s framework about financial instability.  Doing so would help to forecast an individual firm’s financial future, especially if it must refinance.  This kind of analysis also sheds light on how firm borrowing impacts the stability of the financial system as a whole.  Now more than ever, perspectives like this matter because the ultimate impact of the Dodd-Frank Act still hangs in the balance.  If implemented in good faith, the Act could enhance our capitalist system by mitigating financial cycles.  Whether or not it will live up to this promise remains to be seen.

* Associate Dean for Academic Affairs and Associate Professor of Law, College of Law, Florida International University, Miami, [email protected].  My thanks go to Alan Palmiter and Kent Greenfield for including me in the Symposium, “The Sustainable Corporation.”  As always, I am overleveraged to Charles Pouncy for his valuable comments on this Article.  I would also like to thank and praise the Wake Forest Law Review staff for their extraordinarily fine contributions to this piece.

[1]. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified in scattered sections of the U.S. Code).

[2]. John Cassidy, The Minsky Moment, New Yorker, Feb. 4, 2008, at 19.

[3]. See James S. Earley, Joseph Schumpeter: A Frustrated “Creditist,” in New Perspectives in Monetary Macroeconomics: Explorations in the Tradition of Hyman P. Minsky 337, 338 (Gary Dymski & Robert Pollin eds., 1994).

[4]. Cassidy, supra note 2.

[5]. Hyman P. Minsky, Financial Instability Revisited: The Economics of Disaster, in Can “It” Happen Again?  Essays on Instability and Finance 117, 118 (1982).

[6]. See id. at 122–24.

[7]. See Hyman P. Minsky, Capitalist Financial Processes and the Instability of Capitalism, in Can “It” Happen Again?, supra note 5, at 71, 86.

[8]. See generally Gary Dymski & Robert Pollin, Introduction, in New Perspectives in Monetary Macroeconomics, supra note 3, at 1–18.

[9]. See Hyman P. Minsky, Stabilizing an Unstable Economy 165–67 (1986).

[10]. Id. at 213–20; see José Gabilondo, Leveraged Liquidity: Bear Raids and Junk Loans in the New Credit Market, 34 J. Corp. L. 447, 475–76 (2009).

[11]. See Minsky, supra note 9, at 206; Gabilondo, supra note 10, at 471–74.

[12]. See Minsky, supra note 9, at 206–07.

[13]. Id. at 207.

[14]. Id. at 207–08.

[15]. Id. at 174.

[16]. Justin Lahart, In the Time of Tumult, Obscure Economist Gains Currency, Wall St. J., Aug. 18, 2007, at A1.

[17]. The whole quote is even more troubling because it knowingly discounts the liquidity crashes that are in the making: “When the music stops, in terms of liquidity, things will be complicated.  But as long as the music is playing, you’ve got to get up and dance.” Michiyo Nakamoto & David Wighton, Bullish Citigroup is ‘Still Dancing’ to the Beat of the Buy-Out Boom, Fin. Times, July 10, 2007, at 1.

[18]. U.S. Corporate Issuance, Sec. Indus. & Fin. Mkts. Ass’n,‑US‑Key-Stats-SIFMA.xls (last visited Aug. 30, 2011).  Borrowing by households and government units also contributed to these conditions, but this Article focuses only on borrowing by private business units.

[19]. See, e.g., Minsky, supra note 9, at 220–21.

[20]. Historical Changes of the Target Federal Funds and Discount Rates, Fed. Res. Bank of N.Y. (last visited Aug. 30, 2011),

[21]. Sudeep Reddy & Anusha Shrivastava, Fed’s Lending Ebbs as Crisis Subdues, Wall St. J., July 20, 2009, at A2.

[22]. Bd. of Governors of the Fed. Reserve Sys., Consolidated Statement of Condition of All Federal Reserve Banks, in Federal Reserve Statistical Release H.4.1 (Mar. 29, 2007), available at

[23]. Bd. of Governors of the Fed. Reserve Sys., Consolidated Statement of Condition of All Federal Reserve Banks, in Federal Reserve Statistical Release H.4.1 (Mar. 26, 2009), available at

[24]. Bd. of Governors of the Fed. Reserve Sys., Consolidated Statement of Condition of All Federal Reserve Banks, in Federal Reserve Statistical Release H.4.1 (Mar. 25, 2010), available at

[25]. Bd. of Governors of the Fed. Reserve Sys., supra note 22 (percentage derived by dividing current “U.S. Treasury” securities by “Total assets”).

[26]. Bd. of Governors of the Fed. Reserve Sys., supra note 24 (percentage derived by dividing current “U.S. Treasury” securities by “Total assets”).

[27]. See generally Mkts. Grp. of the Fed. Reserve Bank of N.Y.ork, Markets Group of the Federal Reserve Bank of New York, Domestic Open Market Operations During 2010, at 11–16 (Mar. 2011), available at (describing the Fed’s complete portfolio at the close of 2010).

[28]. Jerry Markham, Regulating Credit Default Swaps in the Wake of the Subprime Crisis 19 (2009) (unpublished working paper for Int’l Monetary Fund Seminar on Current Dev. in Monetary and Fin. Law) (on file with author).

[29]. 12 U.S.C. § 290 (2006).  See generally Jeffrey Rogers Hummel, Federal Reserve Accounting and Its Solvency, History News Network (Mar. 10, 2011), (discussing Fed changes to its accounting for remittances to Treasury).

[30]. Bd. of Governors of the Fed. Reserve Sys., supra note 22 (percentage derived by dividing current “deposits” of “Depository institutions” by “Total liabilities”).

[31]. Bd. of Governors of the Fed. Reserve Sys., supra note 24 (percentage derived by dividing current “deposits” of “Depository institutions” by “Total liabilities”).

[32]. See, e.g., Peter Stella, The Federal Reserve System Balance Sheet: What Happened and Why It Matters (Int’l Monetary Fund Working Paper WP/09/120, 2009),available at (arguing that assets acquired due to financial rescue interventions are “policy” assets as distinguished from the ordinary monetary ones acquired during routine central bank operations).

[33]. On the Resolution Trust Corporation, see generally Lee Davison, The Resolution Trust Corporation and Congress, 1989–1993 (pts. 1 & 2), 18 FDIC Banking Rev., no. 2, 2006 at 38, no. 3, 2006 at 1.

[34]. See Minsky, supra note 9, at 206–08.

[35]. Press Release, Levy Economics Institute, Leading Economists and Policymakers to Discuss Ongoing Impact of the Global Financial Crisis at the Levy Economics Institute’s 20th Annual Hyman P. Minsky Conference (Apr. 11, 2011), available at

[36]. See generally Hyman P. Minsky, The Financial Instability Hypothesis (Levy Economics Inst. Working Paper No. 74, 1992), available at

[37]. See, e.g., Gabilondo, supra note 10, at 247–54 (giving examples of objection to financial cycle theory).

[38]. Community Reinvestment Act of 1977, 12 U.S.C. §§ 2901–2908 (2006).

[39]. See Markham, supra note 28, at 4–7 (noting that large banking organizations seeking approval for mergers from the Federal Reserve pledged to allocate credit to borrowers who may not have otherwise met credit underwriting standards).

[40]. Philip Ashton, Troubled Assets: Financial Emergencies and Racialized Risk 7 (May 2009) (unpublished working paper for Great Cities Inst.), available at

[41]. These political alliances against regulation flow out of the generic mobilization of the new Right that began in 1968 with Richard Nixon and reached its apotheosis through the “emerging Republican majority” theorized by Kevin Phillips.  José Gabilondo, When God Hates: How Liberal Guilt Lets The New Right Get Away With Murder, 44 Wake Forest L. Rev. 617, 618–21 (2009).

[42]. See generally Éric Tymiogne, Minsky and Economic Policy: “Keynesianiasm” All Over Again? (Levy Economics Institute Working Paper No. 547, 2008), available at (contrasting Minsky’s Keynesianism with mainstream Keynesianism).

[43]. See, e.g., Todd Zywicki, Dodd-Frank and the Return of the Loan Shark, Wall St. J., Jan. 4, 2011, at A17 (“Congress can pass all the laws it wants, but it can’t repeal the law of supply and demand and the law of unintended consequences.”).

[44]. Ironically, given its role in promoting neoliberal values, it was a paper on government securities by the International Monetary Fund that made me see the inevitable role of the state in influencing market structure.  See Peter Dattels, The Microstructure of Government Securities Markets (Int’l Monetary Fund Working Paper WP/95/117, 1995).  The paper analyzes the choices that governments have when setting up markets for their own public debt markets, e.g., auction pricing, specialist versus market-makers.  That there are choices to be made by public officials negates any “naturalness” of market structure.  A second example came while at the U.S. Securities and Exchange Commission on an inspection of the specialist system at the New York Stock Exchange.  This arrangement gives a monopoly on all the order flow for a security to one trader (the specialist) in exchange for his duty to make a fair and orderly market.  The specialist does this by crossing the buy or sell orders of customers or, as needed, by using his own capital to effect a trade.  An aesthetic of price is at work that favors incremental changes—in either direction—to swings.  Issuers of the specialist’s securities could complain when—in their profoundly interested opinion—the specialist had not “made markets” appropriately by creating a bumpy price path.  An investigation and market reconstruction would follow.  Here again were policy decisions at work rather than the canonical idea of forces of supply and demand meeting at a clearing price—so wide-eyed claims that markets are “free” suggest, to me, that the speaker is either profoundly naïve or disingenuous.

[45]. See, e.g., F.A. Hayek, The Use of Knowledge in Society, 35 Am. Econ. Rev. 519 (1945) (emphasizing the importance of disbursed, localized knowledge in the economy).

[46]. See, e.g., Robert Norzick, Anarchy, State, and Utopia (1974).

[47]. Merton H. Miller, Leverage, Nobel Prize Lecture (Dec. 7, 1990), in 1990 Econ. Sci. 291, 298–300, available at
/economics/laureates/1990/miller-lecture.pdf (arguing that unregulated market forces can regulate the pricing of liabilities through interest rates).

[48]. See Steven A. Bank, Origins of a Flat Tax, 73 Denv. U. L. Rev. 329, 379–80 (1996).

[49]. See A.C. Pritchard & Robert B. Thompson, Securities Law and the New Deal Justices, 95 Va. L. Rev. 841, 847–57 (2009).

[50]. Tim Curry & Lynn Shibut, The Cost of Savings and the Loan Crisis: Truth and Consequences, 13 FDIC Banking Rev. no. 2, 2000 at 26.

[51]. See, e.g., S. Permanent Subcomm. on Investigations, 112th Cong., Wall Street and the Financial Crisis: Anatomy of a Financial Collapse 95–103 (2011).

[52]. An industry journal of the time noted the development with glee:

Now, issuers of private-label residential MBS are holding the aces that were once held by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.  Once a junior—but powerful—player in the market, private-label residential mortgage backed securities (RMBS) are now the leading force driving product innovation and the net overall volume of mortgage origination.

Robert Stowe England, The Rise of Private Label, Mortgage Banking, Oct. 2006, at 70, 70.

[53]. Theresa R. DiVenti, Fannie Mae and Freddie Mac: Past, Present, and Future, 11 Cityscape 231, 237 (2009) (“The private-label securities contributed significantly to the GSEs’ losses in 2008; in many cases, the value of the securities fell as much as 90 percent from the time of purchase.”).

[54]. Legal scholarship, in particular, has a duty to evaluate these practices carefully, although it has not done so enough.  See Charles R. P. Pouncy, Contemporary Financial Innovation: Orthodoxy and Alternatives, 51 SMU L. Rev. 505, 508 (1998) (“Legal scholarship has not produced critical examinations of financial innovation as an economic process. . . .  The products generated [by financial innovation] are readily accepted and adjudged good.”).

[55]. See Luca Di Leo & Jeff Bater, New Jobless Claims Cloud Economic Outlook, Wall St. J., May 27, 2011, at A3 (reporting increasing corporate profits).

[56]. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §§ 701–754, 124 Stat. 1376, 1641–1754 (2010) (to be codified in scattered sections of 7, 11, 12, and 15 U.S.C.).

[57]. See generally Michael Greenburger, Overwhelming a Financial Regulatory Black Hole with Legislative Sunlight: Dodd-Frank’s Attack on Systemic Economic Destabilization Caused by an Unregulated Multi-Trillion Dollar Derivatives, 6 J. Bus. & Tech. L. 127 (2011).

[58]. Victoria McGrane, Risk Rule Riles Main Street: U.S. Wants Car Makers, Brewers to Back Derivatives Bets with Cash; Cost at Issue, Wall St. J., Apr. 13, 2011, at A1 (summarizing objections by nonfinancial users of swaps to CFTC’s margin and collateral proposals).

[59]. See Carolyn H. Jackson, Have You Hedged Today?  The Inevitable Advent of Consumer Derivatives, 67 Fordham L. Rev. 3205, 3221–22 (1999).

[60]. Cheyenne Hopkins & Joe Adler, Regulators Give Banks Win on Key Derivatives Proposal, Am. Banker, Apr. 13, 2011, at 1 (noting that pressure from Congress resulted in ongoing exemptions from margin and collateral rules for corporate end-users).

[61]. Mark Hansen, Too Much Momentum?, A.B.A. J., May 2011, at 55.

[62]. See Lisa Lambert, State Bankruptcy Bill Imminent, Gingrich Says, Reuters, Jan. 21, 2011, available at

[63]. See generally Lester M. Salamon, The Resiliant Sector: The State of Nonprofit America, in The State of Nonprofit America 3 (2002).

[64]. This is what out-of-the-money credit swaps did to AIG.  See Mary Williams Walsh, Risky Trading Wasn’t Just on the Fringe at A.I.G., N.Y. Times, Jan. 31, 2010, at B1.

[65]. For those swaps that are cleared bilaterally rather than being moved to a central clearing house, an additional regulatory capital charge may apply on the theory that this nonstandard position imposes more systemic risk than a position that has been moved to a CCP.  See Margin and Capital Requirements for Covered Swap Entities, 76 Fed. Reg. 27564 (proposed May 11, 2011) (to be codified at 12 C.F.R. pts. 45, 237, 324, 624, 1221); Capital Requirements of Swap Dealers and Major Swap Participants, 76 Fed. Reg. 27802 (proposed May 12, 2011) (to be codified at 17 C.F.R. pts. 1, 23, 140); Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 76 Fed. Reg 23732 (proposed Apr. 28, 2011) (to be codified at 17 C.F.R. pt 23).

[66]. Pub. L. No. 111-203, § 731, 124 Stat. 1376, 1703–12 (2010).

[67]. Though not explicit, Minsky’s classification appears to assume uncollateralized borrowing.  The following discussion applies the leveraged liquidity framework developed in my article on leveraged loans.  Gabilondo, supra note 10, at 474–76.

[68]. Pub. L. No. 111-203, § 725(D), 124 Stat. 1376, 1688–89 (2010).

[69]. This is what the Fed did by expanding the kinds of acceptable collateral that banks could use for discount window borrowing.  See Steve Goldstein, Fed Expands Auction, Accepts Wider Collateral, Marketwatch (May 2, 2008),‑expands‑auction‑accepts‑wider‑collateral-to-boost-liquidity-200852105100.

[70]. See Megan Davies & Svea Herbst-Bayliss, Volcker Impact Sends Shivers Through Banks, Reuters, Aug. 9, 2010, available at

[71]. Annette L. Nazareth, Dodd-Frank Act Finalizes Swap Pushout Rule, Harv. L.F. on Corp. Governance & Fin. Reg., (July 7, 2010, 9:13 AM),‑frank‑act‑finalizes‑swap‑pushout-rule.

[72]. Michael Kowalik, Countercyclical Capital Regulation, Fed. Res. Kan. City Econ. Rev., 2d Quarter 2011, at 63, 63–64, available at

[73]. For an example, see 12 C.F.R. § 3 (2011) for the regulatory capital rules that apply to national banks.

[74]. See Kowalik, supra note 72, at 66.

[75]. For example, banks are generally required to hold 4% of their financial capital, i.e., debt and equity capital, in relatively permanent forms of risk capital designed to bear residual loss known as Tier 1 capital, e.g., common stock and noncumulative preferred stock.  Id. at 80 n.6.  Disregarding for the moment other capital ratio rules that apply, that requirement would limit the bank’s potential debt to equity ratio to 25:1.  In practice, it is lower because of concurrent requirements that apply to less residual forms of financing like subordinated debt.

[76]. See generally James B. Thomas & Joseph Haubrich, Keeping Banks Strong: Countercyclical Capital Requirements, Forefront, Winter 2011, at 16, available at

[77]. See, e.g., Adrian Blundell-Wignall, The Subprime Crisis: Size, Deleveraging and Some Policy Options, 2008 Fin. Market Trends 29 (examining deleveraging of subprime mortgages).

[78]. See Kowalik, supra note 72, at 66–69; see also Basel Comm. on Banking Supervision of the Bank for Int’l Settlements, Countercyclical Capital Buffer Proposal (July 2010), available at


By: Matthew T. Bodie*


Slowing down and ultimately reversing global warming is the preeminent global challenge of our time.[1]  The evidence seems clear: the climate is gradually but undeniably heating up, leading to the melting of polar ice caps, rising sea levels, and dramatic changes in global climate patterns.[2]  The global reforms necessary to reduce greenhouse emissions and ameliorate the detrimental effects of rising global temperatures are staggering in scope.[3]  As described by one commentator, preventing disastrous climate change requires us to “fundamentally change business operations in virtually every economic sector as well as individual behavior in many aspects of daily life.”[4]  Given the challenges inherent in such a task, it would seem prudent to follow an “all hands on deck” approach.[5]  Changes in environmental regulations would be the first priority.  But can other areas of law have an impact as well?

The “sustainability” movement looks to incorporate norms of intergenerational equity and balance into our everyday behavior.[6]  On the most basic level, sustainability merely means the capacity to endure.  The sustainability movement seeks to evaluate our capacity to endure as a species and a planet, both now and into the future.  The United Nations report, Our Common Future (commonly called the Brundtland Report[7]), offered the first synopsis of sustainability as follows: “meet[ing] the needs of the present without compromising the ability of future generations to meet their own needs.”[8]  Sustainability is usually thought to focus on environmental issues, and sustainability advocates seek to intertwine environmental concerns with agricultural, land development, and industrial practices.[9]  But there is also some element of social justice to sustainability, as sustainability efforts have focused on developing local agriculture in third-world communities as well as giving workers more of a voice in their employment.

Sustainability proponents argue that corporations should be tasked with integrating these principles into their organizational ethos.[10]  It is not enough that corporations follow the letter of environmental regulations; they must be more proactive in seeking to effectuate beneficial environmental change.  The role of the law is to require, facilitate, or, at the very least, not hamper efforts to develop sustainability practices within corporations.  Rather than requiring strict obeisance to the shareholder primacy norm, corporate law should permit corporations to devote themselves to sustainability in ways large and small.  By encouraging change at the individual corporation level, proponents argue, sustainability is much more likely to grow organically and take root over the longer term.

The purpose of this Symposium contribution is to use an example of one company’s sustainability efforts to fill out the promise and puzzles of bringing sustainability not just to corporations, but to corporate law as well.  The company in question is the National Association for Stock Car Auto Racing, or NASCAR.  NASCAR operates perhaps the most theoretically unsustainable sport in the country: high-performance automobiles racing around a track burning gasoline, oil, and rubber.[11]  But NASCAR has embraced a series of initiatives devoted to sustainability efforts, including using ethanol fuel, planting acres of trees, and implementing a new recycling program.[12]  The company and the sport seem invested in making their collective image more “green.”[13]

NASCAR’s sustainability efforts raise immediate questions about their depth and efficacy.  This Article cannot and will not resolve them.  But the questions are useful in pointing out the difficulties that sustainability proponents will have when it comes to implementing a sustainable corporate law.  Is it enough that a company says it wants to have a focus on sustainability?  If not, how are we to judge the company’s efforts?  If sustainability is to be a component of our corporate law, we need legal standards for sustainability.  One of the features of shareholder primacy that has contributed to its success is its measurability, at least in the short term: the share price shows how the corporation’s agents are doing at returning value to the core constituency.  If sustainability is to replace shareholder primacy, some measure of success (and failure) will be necessary to provide an assessment.  Otherwise, there will be no grounds for legally challenging a company’s rhetoric.

This Article also seeks to press a little harder on the scope of sustainability beyond environmental matters.  As someone who is relatively new to the literature, I see sustainability as a way of conceiving our obligations to the planet and to future generations.  This conception is most meaningfully promoted through efforts aimed at reducing pollution and greenhouse gases, improving recycling, and conserving resources.  However, the sustainability literature also purports to include social justice components beyond environmentalism, such as caring for other stakeholders in the corporation.[14]  The focus on “future generations” is read to imply an obligation to create a better world—not just environmentally, but socially as well.  In the corporate law context, sustainability advocates have thus far linked up with the “stakeholder theory” of corporate governance to argue against shareholder primacy.[15]

The example of NASCAR points to some of the tensions in this marriage of theories.  NASCAR is a closely held corporation.  It is well known for the lack of participation in its internal governance.[16]  On the other hand, NASCAR is incredibly participatory when it comes to working with its external corporate partners.[17]  The success (however defined) of its green initiatives has come from its ability to leverage its position in the sport to bring in other participants, such as tracks, teams, and particularly sponsors.  The upshot is that perhaps sustainability advocates should be less concerned about sustainability efforts within a firm and more concerned with sustainability efforts across industries.  By making sustainability an interfirm endeavor, rather than an intrafirm endeavor, sustainability is more likely to sustain itself over the long term.

I.  Sustainability and Structure

At its core, sustainability seems to be simply about the ability to sustain—or, perhaps, survive.  It is about taking a long-term approach to culture and economics.  It calls upon the present generation to consider the next generation, as well as the one after that, and after that.[18]  The concept of sustainability is most naturally applicable to environmental issues.  Environmental regulations seek to protect and preserve natural resources for our own use as well as the use of future generations.[19]  There are, to some extent, varying goals within the environmentally “friendly” community: some environmentalists seek to preserve vast tracts of land for their natural beauty, while others may seek to preserve natural resources for future consumption.  When we speak about environmental law, however, we generally mean those legal regimes that concern the state of the air, land, and water.[20]  Environmentalists seek to preserve these natural places and resources so that they may be enjoyed now and on into the future.  This orientation toward the future is at the heart of sustainability.

The extent to which sustainability goes beyond environmental issues is unclear.  Some descriptions of sustainability sound very much like simply a “green” or environmental program.[21]  Most conceptions of sustainability, however, go beyond that.  The “triple bottom line” approach to business asks companies to look at three ways of calculating their success: traditional financial performance, social responsibility, and environmental responsibility,[22] or “profit, people, and planet.”[23]  The inclusion of social responsibility fosters a sense that sustainability is also about sustaining a vibrant human community.  Thus, organizations like the Fair Trade movement seek to support not only organic and environmentally friendly farming but also farmers in third-world countries who engage in sustainable farming practices.[24]  Poverty wages, child labor, and the prohibition of unions are seen as “unsustainable” because they do not contribute to long-term human flourishing.[25]  People must not only have a safe and healthy environment; they must also be able to provide for themselves and their families within that environment.

In the context of corporate law, sustainability has to this point been closely associated with the ideas of corporate social responsibility (“CSR”) and stakeholder governance.[26]  Both CSR and stakeholder governance are oppositional concepts to shareholder primacy, which asserts that the only purpose of the corporation is to return profits to its shareholders.  CSR looks more naturally to the world outside the corporation, particularly the community and environs.[27]  The treatment of the environment would generally be included within any definition of social responsibility.[28]  While the CSR movement asks the corporation to look outside of itself, stakeholder governance looks to bring these outside concerns into the organization.[29]  The stakeholder approach asserts that the corporation must allocate its governance among those groups with a stake in the corporate proceedings.  But both CSR and stakeholder governance theorists assert that the corporation must look beyond the return to shareholders in judging its success.[30]  And both groups have more structural concerns about how corporations and other business entities should be managed and run.

The “weak” end of the CSR and stakeholder governance spectrum simply asserts that shareholder primacy is not required under corporate law.  Although acknowledging the noise generated by Milton Friedman[31] and Dodge v. Ford Motor Co.,[32] there is relatively little corporate law substance that can be said to require a shareholder primacy approach.[33]  CSR and stakeholder theorists wish only to amplify this notion and to ensure that the corporation and its board govern with the various constituencies in mind.  The primary legal instantiation of the constituency model has been the state corporate constituency statute.  These statutes, adopted in over half of the jurisdictions, expressly allow boards to consider the needs of constituencies other than shareholders in making corporate decisions.[34]  However, these statutes do not require that boards take these other groups into account; there is no legal accountability for failing to do so.[35]  From a legal perspective, these statutes simply insulate boards from derivative actions claiming the boards have failed to account for shareholder interests.[36]  As a result, even progressive scholars have expressed doubt about their efficacy.[37]  Other than constituency statutes, there has been little in the positive corporate law that directly seeks to advance the cause of CSR or constituency theory.[38]

When it comes to defining their purposes, corporations are largely allowed to conduct their own internal affairs without oversight or second-guessing in the form of a lawsuit.[39]  There are important but limited exceptions—for example, when the board has committed to the sale of the company and entered “Revlonland.”[40]  By and large the battlefield is not in the courts, but in the boardrooms.  And shareholder primacy had been making gains there since the 1980s.[41]  It may have been accurate in the 1980s to claim that the shareholder primacy norm “often means little in the complex reality of governance.”[42]  Recent studies of director behavior, however, have found that most directors now see enhancing shareholder value as their primary role at the company.[43]  This research echoes the academic and popular conception that shareholder primacy is now the dominant mindset of the boardroom.[44]

And of course, shareholders have several important structural features to their advantage.  Even if directors need not—as a legal matter—pursue the best interests of the shareholders above all else, they are elected by those shareholders.  Although much of twentieth century corporate law was spent lamenting the separation of ownership and control, that separation has narrowed.  It is still exceedingly difficult for disgruntled shareholders to mount an election campaign, but there has been considerable movement on efforts to make this easier.[45]  In addition, shareholders can signal their displeasure with a vote to “withhold.”[46]  Although bereft of legal effect, a substantial vote to withhold can achieve its intended results through shame.[47]  Shareholders are also the only parties with standing to bring derivative actions against the board or officers.[48]  Fiduciary duties may extend to the corporation as a whole, but only shareholders can sue to enforce those duties.  Finally, shareholders can sell their voting rights en masse in the market for corporate control.  Although many states, including Delaware, have given the board the ability to erect defenses against hostile takeovers, the ultimate voting control of the shareholders will push many companies into sales even with an initially reluctant board.[49]

Thus, the CSR and stakeholder rights advocates are currently at a crossroads.  They must choose between a weak but easier-to-swallow agenda that corporate law does not meaningfully constrain corporate actors to maximize share value or a more radical approach that would provide actual legal powers to nonshareholder constituents.[50]  This weaker agenda appears to be a correct assessment of current corporate law: the rational apathy of shareholders, combined with the business judgment rule, allows directors and officers to manage the corporation within a wide range of permitted activity.  However, even if shareholder primacy is not required, corporate permissiveness is a rather thin gruel as a program for changing the world.  Even so, the alternative—enacting substantive changes to corporate law that favor corporate stakeholders other than shareholders—seems daunting.  There have been recent examples of stakeholder successes: the adoption of constituency statutes in new states,[51]as well as the creation of the B Corporation.[52]  But these approaches are largely toothless, while the major reform statutes such as Sarbanes-Oxley and the Dodd-Frank Act have provided for greater substantive shareholder power.[53]

Looking at the muddled state of the CSR movement, sustainability advocates have a dilemma as well.  Do they link up with the CSR and stakeholder rights theorists and push for the inclusion of environmental and social concerns as part of the stakeholder agenda?  Or do they carve out their own path and establish a new “brand” within corporate law?

II.  NASCAR and Sustainability

Some corporations have sustainability in their DNA: Whole Foods, Patagonia, Green Mountain Coffee Roasters.[54]  NASCAR would not be one of those.  But if sustainability is to become important in our economy and society, it must move beyond the niche businesses and into the mainstream.  The example of NASCAR shows not only the potential for sustainability successes but also the challenge for sustainability moving forward.

A.            NASCAR History and Structure

NASCAR can trace its roots to moonshine.[55]  In the early twentieth century, moonshine runners began using modified stock cars to transport their illegally-produced whiskey and outrun government agents in hot pursuit.[56]  These moonshine runners were skilled drivers, and they became interested in competing with each other; soon, stock car races began popping up around the South.[57]  These high-speed races began to draw significant crowds, and promoters offered purses to get the drivers to race at their tracks.[58]  However, the sport was extremely disorganized, with different rules at each track and shady promoters left to their own devices.[59]  “Big” Bill France Sr., a Daytona Beach service station operator and track promoter, changed all that.  France wanted to create a national sanctioning body to oversee the sport, create uniformity between the tracks, and look out for the interests of the participants as well as the spectators.[60]  In December 1947, France organized a meeting of thirty-six race promoters in Daytona Beach,[61] and after three days of meetings, the National Association for Stock Car Automobile Racing was born.[62]  NASCAR held its first race on the hard- packed sands of Daytona Beach two months later.[63]  Within a week NASCAR became officially incorporated, with Big Bill serving as both President and majority stockholder.[64]

In the beginning, similar to other sanctioning bodies of the day, NASCAR allowed races that included “modified” cars, or older model cars that had been fitted with newer and better parts for racing.[65]  However, France wanted to set NASCAR apart from the competition by sanctioning stock car races which featured production models that any fan could buy at a local dealer.[66]  With modifications to the cars no longer allowed, the NASCAR stock races would emphasize driver skill instead of better machinery.[67]  In 1949, NASCAR’s first race dedicated solely to stock cars took place on a dirt track in Charlotte, North Carolina, at what would become Charlotte Motor Speedway.[68]  In an early show of organizational muscle, the first driver to cross the finish line was disqualified for modifying his car with illegal rear springs.[69]

NASCAR continued to grow in the 1950s and 1960s, with the opening of the first paved speedway in Darlington, South Carolina,[70] as well as the expansion of its races north into Michigan and west to Arizona and California.[71]  The major automobile manufacturers began pumping money into the sport in what would become known as the “factory wars.”[72]  Ford, GM, and Chrysler thought having successful NASCAR entrants would help sales, and they spent millions trying to make sure their cars were the best.[73]  Detroit’s support helped legitimize the sport in the eyes of major corporate sponsors.[74]  Although the factory wars had grown more peaceable by the end of the decade, in 1971 the tobacco company R.J. Reynolds sponsored NASCAR’s premier division, and the name was changed to the Winston Cup.[75]  The title sponsorship was worth $100,000, and R.J. Reynolds spent another $150,000 on the race at Talladega, which became the Winston 500.[76]  R.J. Reynolds’s involvement ushered in the strong corporate presence in NASCAR that remains today.[77]

NASCAR has grown into one of America’s most popular sports.  Its fan base is estimated to be seventy-five million strong, placing it second only to the NFL.[78]  Six million people attend NASCAR races each year with another 275 million watching on television.[79]  In 2005, NASCAR signed an eight year, $4.8 billion TV deal with Fox/SPEED Channel, ABC/ESPN, and TNT.[80]  And Nextel recently paid $750 million for the naming rights to NASCAR’s premier division,[81] now called the Sprint Cup.[82]

Although “NASCAR” is often used as a term to describe the sport of U.S. stock car racing, it is actually a privately held company that serves as the sport’s sanctioning body.  In this capacity, NASCAR sanctions the races that make up the stock car season and sets the rules and regulations of the sport.[83]  NASCAR’s governance of the sport is characterized by absolute control, which has drawn comparisons to a dictatorship.[84]  This tight control of the sport comes from the limited control and participation in the NASCAR decision-making process.[85]  Participants in NASCAR’s stock car racing series must pay a membership fee to NASCAR; however, membership does not give them any share in control of NASCAR or participation in decision-making processes.[86]  Instead, NASCAR—which is still owned and controlled by the France family—has the final and exclusive say over every aspect of the sport.[87]  The company controls the schedule of sanctioned races;[88] the rules, including not only the rules for races but also exact specifications for car design and equipment;[89] sponsorship for the sport as a whole, including certain exclusive sponsors;[90] and broadcasting and licensing rights.[91]  This combination of a very small ownership group (essentially, the France family) and a very big scope of authority is unprecedented in major U.S. sports.[92]

NASCAR sits at the center of a constellation of relationships that make up the sport as a whole.  Track owners provide the physical locations for the races, and they manage ticket sales, concessions, racing accommodations, and prize money.[93]  There are three major corporations that own tracks that host Sprint Cup races: Dover Motorsports, Speedway Motorsports Inc. (“SMI”), and International Speedway Corp. (“ISC”).  ISC is the biggest, owning thirteen major racetracks which hosted twenty-one Sprint Cup races in 2010.[94]  It is also controlled by members of the France family; ISC’s president is the sister of Brian France, the current president of NASCAR.[95]  In fact, the two companies even share the same office building in Daytona, Florida.  These close associations have led to several antitrust suits against NASCAR and ISC.[96]

Although NASCAR races are competitions between individual drivers, the drivers themselves are hired by teams to compete on the teams’ behalf.  A NASCAR race has forty-three starting spots and in 2011, those spots were filled by cars coming from thirty-one different team owners.[97]  Some owners field only one team or car while others have multiple cars.[98]  Unlike many of the major professional sport leagues, there are no franchises in NASCAR; instead, teams compete in races on an independent basis.[99]  Similarly, the drivers are considered independent contractors of the teams themselves.[100]  Unlike the other major sports leagues, in stock car racing there is no collective bargaining agreement or union for the drivers.[101]  NASCAR rebuffed efforts by the drivers to form a union in the 1960s and 1970s; it gave two drivers lifetime bans for unionization efforts[102] and used replacement drivers in the 1969 Talladega 500.[103]  NASCAR’s free-enterprise system enables drivers to negotiate new contracts with new teams at any time, even while they are still in an existing contract.[104]  Their contracts provide for compensation through a base salary, a percentage of their winnings, incentives, and typically a third of the profits from sales of licensed merchandise bearing their identity.[105]  On top of their contracts with the team owners, drivers can stand to make substantial sums of money from endorsements.[106]  Top drivers Dale Earnhardt, Jr. and Jeff Gordon earned $23 million and $16 million respectively in 2009, just in endorsements.[107]

Sponsorship drives NASCAR more than any other professional sport.[108]  Sponsorships alone generate over $1 billion in revenue for NASCAR.[109]  There are three levels of sponsorship in the sport: NASCAR as a licensing body (e.g., “the official beverage of NASCAR”), the sponsorships at the tracks, and the sponsors of the cars themselves.[110]  However, sponsorships are probably most critical for the individual teams, which require roughly $20 million to operate.[111]  NASCAR fans have a strong reputation for brand loyalty: a recent study indicated NASCAR fans are 76 percent more likely to buy the product of a NASCAR sponsor than from a non-sponsor.[112]  NASCAR sponsorship is also attractive for its corporate hospitality events, as the sport provides unique access for its sponsors.[113]

Stock car racing is considered to be a free-wheeling exercise in individual competition.  As Geoff Smith, president of the Roush Racing team, said, “The whole NASCAR business environment is characterized by unrestricted free agency and free enterprise and rampant capitalism in every aspect of this sport.”[114]  Robert Hagstrom, manager of the Legg Mason Focus Trust Fund, echoed the sentiment: “In racing, each person works like an entrepreneur.  They succeed or fail on their own ability.  The capitalist model will always beat the socialist model.”[115]  However, this openness contrasts with the extremely tight control exercised by the France family.  Jack Roush, the owner of Roush Racing, has said of the Frances: “If you want to be a part of their circus . . . you have to play by their rules.”[116]

B.            NASCAR’s Green Initiatives

Since 2008, NASCAR has unveiled a series of programs to promote a “greener” or more environmentally friendly approach to the sport.  It began with the hiring of Mike Lynch as its new managing director of “NASCAR Green Innovation.”[117]  NASCAR’s goal for its Green Innovation program was to “lay out a comprehensive green strategy across all the activities of the sport” and “to have substantial and meaningful reduction in the environmental impact of the sport, while also being initiatives that our fans would resonate to in the right way.”[118]  These goals provide the framework for NASCAR’s green program: help the environment but also keep fans (and sponsors) happy.

Perhaps the most significant green initiative is the sport’s use of a new, more environmentally friendly fuel.  In 2011 NASCAR began using Sunoco GreenE15, a 15% ethanol blend made with American-grown corn.[119]  The fuel blend is touted by NASCAR as fostering U.S. energy independence while at the same time not diminishing performance.[120]  Thus far, the use of the ethanol fuel has generated few waves in competition.[121]  Although Sunoco GreenE-15 comes in part from NASCAR’s longstanding partnership with Sunoco as the official fuel of NASCAR,[122] the move to ethanol fuel coincided with a new partnership with U.S. ethanol producers as a whole.[123]  NASCAR CEO Brian France said of the partnership:

American Ethanol’s new partnership with NASCAR is much larger and more ambitious than a typical sports sponsorship.  Here we have an entire industry looking to NASCAR to communicate its message that America is capable of producing its own renewable, greener fuel.  The entire NASCAR industry will benefit from American Ethanol’s multi-faceted support of NASCAR, as well as from thousands of farmers and members of the ethanol supply chain now serving as new ambassadors for the sport.[124]

Right around the same time as NASCAR’s announcements, the Environmental Protection Agency announced that it would waive its restrictions on the use of E15 fuels.[125]  Although several more regulatory steps are necessary for E15 to be used by consumers, the EPA’s decision paves the way for E15’s introduction to the general public.[126]

In 2009, NASCAR announced a new program entitled “NASCAR Green Clean Air.”  In an attempt to reduce the environmental footprint of the sport and raise awareness of conservation among its fans, NASCAR pledged to plant ten trees for every green flag dropped during participating Sprint Cup Series events.[127]  The number of trees was calibrated to mitigate 100% of the carbon emissions produced by the race cars competing in each race.[128]  The program is expected to run for five years, during which time twenty acres of new trees will be planted each year.[129]  Officials from NASCAR, ISC, and the Daytona International Speedway helped plant 110 trees in April 2011 at the Daytona Beach International Airport.[130]  The Volusia County Chairman, Frank Bruno,  stated: “This event is a great showcase of community involvement in being green.  I applaud NASCAR and [Daytona International Speedway] for their substantial green efforts.”[131]

Recycling is also a big part of NASCAR’s sustainability efforts.  The company has partnered with its tracks as well as with Coca-Cola Recycling to process over eighty tons of waste and 2.5 million containers in 2009.[132]  In 2010, Coors Light, Office Depot, and UPS joined in to expand the program to include grandstands, concourses, suites, garages, and campgrounds.[133]  Office Depot was the lead partner in overall race-weekend efforts, while Coors Light focused on the speedway campgrounds, and UPS headed up the cardboard recycling initiative.[134]  NASCAR’s Lynch stated:

Each of these Fortune 500 companies are coming together to take on components of the recycling process relevant to their businesses.  We want to thank Office Depot, Coors Light and UPS for joining this unique and impactful consortium that broadens an event recycling program which is already the biggest in sports.[135]

These recent efforts join longstanding recycling programs for tires (with Goodyear), as well as oil, brake fluid, and other solvents (as managed by Safety-Kleen).[136]  In addition, NASCAR has a recycling effort underway at its offices, and two newly constructed buildings in Charlotte and Daytona Beach are LEED certified.[137]

One of the biggest sustainable stock car efforts comes not from NASCAR itself, but from one of its partners in the sport.  Pocono Raceway, an independently owned track, has installed a twenty-five-acre, three-megawatt solar farm.[138]  The power generated by the farm is sufficient not only for the track itself but also for one-thousand nearby homes.[139]  By December 2010 the farm had generated over one million kilowatt hours of electricity.[140]  Although not a project of NASCAR itself, current NASCAR CEO Brian France praised the solar installation:

This meaningful green project reflects the NASCAR industry’s collaborative approach to preserving the environment and highlights Pocono Raceway’s significant contribution as the first major U.S. sports venue to go green with 100% renewable energy.  We encourage other tracks and sponsors to follow this lead in making sustainable programs and renewable energy a continued priority for the sport.[141]

One NASCAR team has also taken up the sustainability mantle.  In 2009, the Hall of Fame Racing team joined up with, a supplier of accessories for hybrid cars and trucks, to offset the carbon footprint for the No. 96 car.[142]  Both and, the car’s primary sponsor, were to purchase carbon credits sufficient to offset the carbon emissions for the year.[143] CEO Paul Goldman stated:

As a hybrid automotive accessories business that really cares about the environment, we are excited to expand our green initiative into NASCAR with the support of, Hall of Fame Racing and Ford. . . . Not only does this initiative allow us to offset the carbon emissions of the No. 96 team, but it provides us a platform to bring this vital message to the attention of NASCAR’s 75 million fans.[144]

Overall, NASCAR has been praised for its sustainability efforts.  Because it is a privately held company, it is not eligible for listing on the Dow Jones Sustainability Index or other green- or CSR-related investment sites.[145]  However, as reflected in its initiatives as well as its rhetoric, NASCAR wants to be seen as a green company and a green industry.[146]  This concern for sustainability is reflected in its fans.  A recent survey found that 77 percent of NASCAR fans believe in a personal obligation to be environmentally responsible; 65 percent agree that companies should help consumers become more environmentally responsible; more than eighty percent of NASCAR households recycle; and approximately forty percent use energy efficient light bulbs (more than double the amount just five years earlier).[147]  Whether a cause or an effect of NASCAR’s green efforts, the fans’ interest in sustainable practices shows the importance of those practices to the sport.[148]

III.  NASCAR, the Firm, and the Problem of Sustainability

The hope for the sustainability movement is that it will cajole, nudge, or push firms into more sustainable practices without cumbersome or loophole-riddled environmental legislation.  The example of NASCAR provides some hope that firms will voluntarily adopt significant sustainable practices.  However, it also points up some of the difficulties in staking out the boundaries of sustainability when it comes to corporations themselves as well as the corporate law that creates them.

A.            Judging Corporate Sustainability

How do we judge the success of NASCAR’s sustainability efforts?  As a matter of first impression, NASCAR’s “Green Innovation” program has notched some notable successes.  Its change to E15 ethanol fuel will save on petroleum consumption and may make the fuel more palatable to consumers.  Its tree-planting program endeavors to offset the carbon emissions for the entire sport, and its recycling program reaches into every aspect of the racing experience.  NASCAR partners have also joined in the effort; most notably, the Pocono Speedway created a huge solar farm that powers the entire facility along with one-thousand nearby homes.[149]  Although praise has been somewhat muted, NASCAR’s efforts have been recognized as important steps toward greater sustainability.[150]

The mere recognition of sustainability as an important goal might be considered a significant victory in itself.  The sustainability movement is, at least in part, about changing mindsets to recognize the fragility of the environment and to consider future generations.  And indeed, given NASCAR’s modus operandi, it is somewhat surprising to see the company embrace green efforts at all.[151]

But it is unlikely that sustainability advocates believe it is enough to simply espouse the rhetoric.  After all, BP invested significant sums in its environmentally friendly image, only to see it clouded over with the oil spilling out of its well.[152]  The resulting disconnect between BP’s green image and its spotty safety and environmental record has prompted calls to make BP (and companies like it) liable for misrepresentation when its rhetoric does not match reality.[153]  But moving beyond rhetoric into substantive standards raises a host of difficulties.  The first, and most obvious, set of standards would be whether the company obeys the existing laws.[154]  But “sustainability” is about more than simple compliance.  It is about an ethos of going beyond what is legally required.  The movement should endeavor to reward those firms with stronger sustainability efforts and punish those with weaker ones.  To do this, some sort of baseline, some manner of measuring stick, is necessary to judge sustainability efforts.

NASCAR illustrates the problem of establishing a baseline.  First off, do we judge NASCAR the company or NASCAR the industry?  The company has an extremely important role to play in the industry as a whole.  But its efforts all involve some degree of cooperation or even delegation to its partners.  The rules requiring E15 fuel impose sustainability on the NASCAR teams that enter the race.[155]  Recycling programs are partnerships with local tracks and race teams, as are the tree-planting efforts.[156]  The solar-powered farm is owned by the Pocono Raceway, which has no ownership ties to NASCAR itself.[157]  The sustainability efforts that involve NASCAR the company, and only NASCAR, are limited to LEED certification for NASCAR buildings and the NASCAR offices’ recycling program.[158]  To the extent NASCAR’s efforts are remarkable, they involve the industry as a whole, rather than just the company.

Next, to whom or what do we compare NASCAR’s sustainability efforts?  The most obvious comparison would be to other motor sports industries, such as IndyCar[159]and FIA.[160]  In 2007, IndyCar (known at the time as the Indy Racing League, or IRL) transitioned its racers to 100% ethanol fuel.[161]  In contrast, the FIA requires that at least 5.75% of its fuel must be made of biocomponents, such as cellulosic ethanol or biogasoline.[162]  NASCAR’s ethanol initiatives seem to pale in comparison to IndyCar, and in fact IndyCar’s change may have prompted NASCAR’s move.[163]  Prior to the change, however, IndyCar racing had been using methanol, an alcohol-based fuel that is made from natural gas.[164]  Since open-wheel cars had been using methanol in the U.S. since the 1970s,[165] the transition to ethanol was much easier.  Stock cars are designed to be much closer to the automobiles driven by consumers, making an entirely ethanol-based product less saleable.[166]  One could argue that NASCAR’s endorsement of E15 will be better for the environment, since it is much more likely to be used by consumers in the short term.[167]  So while 100 percent seems to beat 15 percent, NASCAR’s program seems designed to have a broader effect than IndyCar’s.

The other major sports leagues have sustainability programs similar to NASCAR’s.  Several stadiums have installed solar panels, including the Staples Center in Los Angeles (home to professional basketball and hockey teams) and AT&T Park in San Francisco (baseball).  But these efforts are dwarfed by the Pocono Speedway installation; the Staples Center has 1700 solar panels, compared to Pocono’s 40,000, and Pocono puts out three megawatts of electricity, while AT&T Park only creates 120 kilowatts.[168]  The NFL has sought to offset the carbon created by the Super Bowl by planting trees and buying carbon credits.[169]  But NASCAR has sought to plant enough trees to offset the entire season.  The NBA celebrates a special “green week,” but the biggest aspect of the promotion seems to be the wearing of green uniforms.[170]  Again, however, it is hard to tell whether the concrete steps are more or less important than the cultural and ideological change these initiatives are trying to initiate.  To that extent, a program like the NBA’s may have less tangible effect on the environment but may be more effective in getting people to take green issues to heart.[171]

As mentioned earlier, NASCAR is not a publicly traded company, so it cannot be listed on one of the “green” or CSR indexes for public investors.[172]  Moreover, even if it were eligible, it is not clear that NASCAR would have earned a place there.  One example of such a list is the Corporate Knights Top 100 Most Sustainable Companies.[173]  The Corporate Knights, a Toronto-based media company, took 3000 publicly-traded companies, narrowed them down to 300 “based on financial performance and other criteria,” and then ranked those 300 “based on 10 environmental, social and governance performance metrics, including energy productivity, waste productivity and CEO-to-average-worker pay ratio.”[174]  The list was topped by Statoil, the Norwegian oil and gas producer, which performed well on water productivity and board diversity metrics.[175]  Last year’s number one company, General Electric, dropped to eleventh because other companies outstripped its carbon and energy productivity.[176]  And PG&E dropped forty-eight places because it scored lower on board diversity and taxes.[177]

CSR or sustainability lists like the Corporate Knights 100 show some of the perils of judging sustainability across industries.  The companies listed have wildly different metrics for leadership diversity, carbon productivity, and percentage of taxes paid, but somehow these factors are assigned different weights and collated into a top-100 list.  When it comes to cars or universities, slight changes in the weights given to various factors produce very different rankings.[178]  The inclusion of BP in many of these CSR lists (as well as law review articles on CSR) makes one even more skeptical about their categorical wisdom.[179]  Moreover, these lists tend to lump a variety of different factors into their calculations, such as corporate governance metrics, philanthropy, and even financial performance.[180]  Transparency is a “prerequisite” to being on the list, as the numbers cannot be crunched without it.[181]

NASCAR in its current form would have very low transparency and corporate governance factors.  It is closely held, privately owned, family run, and lacking in transparency.  It would surely score low on most corporate-governance metrics.  But those characteristics are separate and apart from its ability to adopt environmentally supportive practices and leverage those practices across the stock-car racing industry.  In fact, it is NASCAR’s “dictatorial” structure that gives it the immense power it has—for good or ill.  To the extent NASCAR seeks to promote green efforts, its structure will allow those efforts to be more quickly and efficiently adopted.  It is hard to know how much weight the non-environmental factors would be assigned in contrast to its environmental programs.  Indeed, it is hard to know how NASCAR’s environmental programs would be assessed as well.  Would they be measured in contrast to prior NASCAR practices?  In contrast to IndyCar or the NBA?  Or would they be measured against some average across all corporations?  And raising these questions provides no easy answers.  Is it enough that NASCAR has made racing more “green” when there is more that can be done?  Can NASCAR—a sport that is based on burning fuel at high speed, risking human lives merely for entertainment—ever really be considered sustainable?

And that brings me to my final challenge to sustainability advocates when it comes to a definition of the term in the corporate context.  The term “sustainability” most directly means the ability to survive.[182]  NASCAR has demonstrated terrific sustainability, if that means the ability of the corporation (and the industry) to survive and thrive over time.[183]  In the context of the corporate sustainability movement, however, sustainability more likely means the ability of humanity to survive and thrive over time.  Should a corporation disregard the first meaning and adopt only the second?  After all, a corporation is merely a tool—a legal instrument enabling a group of people to cooperate over time.  It makes sense that some corporations should see their own demise as a means of carrying out greater sustainability for humanity.[184]  But then how do we judge those corporations?  And is NASCAR one of them?  Should NASCAR be looking for a way to put itself out of business?

B.            Judging Corporate Law Sustainability

The problem of defining and then measuring sustainability is not a new one, and NASCAR is only one example of the difficulties in judging the sustainability of a particular company.[185]  This Article’s primary concern, however, is with the role of sustainability in corporate law.  NASCAR’s sustainability efforts point up some of the problems, not only with defining sustainability at the corporate level, but also with incorporating sustainability into corporate law.

To the extent NASCAR has been a sustainability success story, it is due not to its own solitary, internal efforts, but rather its ability to partner with other corporations.  Its ethanol program comes from partnering not only with an ethanol producer (Sunoco), but also a multi-year partnership with the ethanol industry’s trade group.[186]  NASCAR works with local tracks in carrying out its tree-planting program, and it has a variety of corporate sponsors with whom it shares recycling responsibilities.[187]  Stock car racing’s most prominent green initiative is the solar farm of Pocono Raceway.[188]  NASCAR’s green efforts are partnerships between entities, rather than the internal workings of one.

Corporate law theorists have largely worked with the corporation as the unit of analysis and measurement.  This focus makes sense, as corporate law is primarily about the internal structure of an individual corporation.  Certain “sustainability” factors have a lot to do with the internal structure of the corporation, such as its approach to corporate governance and the diversity of its leadership.  Other factors do not have much to do with corporate law, as currently constituted, but could be seen as matters of internal governance that corporate law could incorporate.  I am thinking here primarily of those efforts to change corporate law’s structure to accommodate employees and, to a lesser extent, other firm stakeholders.[189]  However, still other sustainability factors deal primarily with a firm’s business, rather than its corporate structure.  These matters—such as taxes, workplace safety, and environmental concerns—apply across corporations as well as other business law structures (such as LLCs and partnerships).  They are not really matters for corporate law.

Sustainability advocates may resist this characterization.  After all, the very core of the sustainability norm is to build those principles into the corporate DNA.  But any effort to put sustainability into corporate law must attempt to define sustainability and then impose it across all corporations.  It is easy enough to make clear that shareholder primacy is itself a rather weak and unenforceable norm, and leave corporations to their own devices.  But I do not think much more than that could be done.  At most, perhaps, states could add a new form of organization that would be purportedly limited to sustainable corporations[190] or allow existing shareholders to incorporate a sustainability norm into the corporation’s charter.[191]  While these reforms would help change existing norms about the corporate purpose, they do not seem too likely to create actual legal incentives for companies to act more sustainably.  They would likely either reinforce a norm that already exists or be neglected and forgotten.  Other efforts at corporate reform, such as providing voting rights to employees, might be characterized as “sustainable.”  But such a characterization would only illustrate (in my view) the fungibility of the term.

NASCAR is a privately held, family owned company.  It is utterly not transparent.  It is viewed within its sport as a “dictatorship.”[192]  In the past, it has taken steps to make sure that its drivers could not organize or join a union.[193]  It has been accused of using monopoly power to direct races to another corporation owned and controlled by the same family.[194]  But it has taken steps toward making its sport more environmentally friendly and sustainable as a matter of planetary survival.  These steps illustrate the types of voluntary corporate activities that sustainability advocates support.

With this in mind, this Essay makes two suggestions to corporate law sustainability advocates.  First, define sustainability in a way that focuses on environmental concerns.  My sense of the literature is that “sustainability” falls somewhere between “green,” which is purely environmental, and “CSR,” which includes environmental concerns as one of many “social responsibilities.”  Arguably, there is no need to add sustainability to our linguistic mix if it simply means one of these two things.  When it comes to the need to “sustain,” the life of humanity on the planet trumps all other sustainability concerns.  When using the term, sustainability advocates should focus on efforts to sustain the planet through environmentally friendly practices that can serve humanity over the longer term.[195]  Concerns about board composition, taxes paid, or even worker empowerment should not dilute the “sustainability” brand.[196]

Second, I would encourage sustainability advocates to focus their efforts on environmental regulations and tax policies that encourage green practices, rather than focusing on corporate law.  Corporate law structures the corporation; it establishes voting rights, power structures, fiduciary duties, and derivative actions.[197]  It generally has little to say about the actual business of the corporation.[198]  Sustainability, on the other hand, is all about encouraging sustainable business practices.  These practices can be mandated by environmental laws or encouraged through tax laws.  At most, corporate law can allow for such practices to be adopted.  And—for the most part—it already does.

I do not mean to downplay the importance of norms.  In fact, I mean to assert the opposite: the changing social norms about the importance of sustainability are far more important to the environment than corporate law ever could be.[199]  It is those changing norms that drive companies to act sustainably in the first place.  NASCAR is a great example.  It is the importance of sustainability as a social norm that is driving NASCAR to act more sustainably.[200]  And NASCAR is not acting on its own; it is joining hands with its many corporate partners to leverage sustainable practices across as wide a swath as possible.  Certainly, the temptation is to get more publicity than the underlying practices warrant.  But sustainability is not something that these corporations are pursuing individually; they are practices that reach across corporate boundaries and change entire industries.  Tax breaks and environmental regulations are ways to encourage or push for these changes more directly.  Corporate law is peripheral.[201]

Corporate law commentators tend to think of the corporation as an individual silo of activity, with shareholders, directors, officers, and other stakeholders interacting within the firm to create economic activity.  The example of NASCAR shows that the corporation may not be the appropriate level of granularity when it comes to sustainability efforts—or perhaps economic regulation more broadly.  NASCAR is an example of the “imbedded corporation”—a firm working within a complex set of partnerships, contracts, and other economic arrangements.  Sustainability makes sense within this framework.  Perhaps ultimately we will decide that rather than importing sustainability into the closed world of corporate law, we need to look beyond the corporation in regulating the basic structures of our economy.


Global climate change is a massive problem, and it calls for massive efforts to combat it.  In looking to make our world and our economy more sustainable, we may need to rethink some of our basic institutions, structures, and norms.  However, we also must not overlook that the problem is, at root, a straightforward one: we need to reduce our carbon emissions.  NASCAR has taken some important steps to bring down its overall carbon footprint and make its sport more sustainable.  These efforts are of the type—if not the extent—of reforms that sustainability advocates would like to see across the economy.  But they are the result not of one firm acting on its own, but rather collaborative efforts between NASCAR and its many partners.  Corporate law dictates the structure and allocation of power and profits within the corporation; it has little to say about interfirm dynamics.  At least for the near future, sustainability will likely have much more to do with corporations than it does with corporate law.

* Professor and Associate Dean for Research and Faculty Development, Saint Louis University School of Law.  I am grateful to Alan Palmiter, Dean Blake Morant, and the Wake Forest Law Review for the opportunity to participate in this Symposium.  Many thanks to John Orbe, Michael Ross, and Michael Kruse for their research assistance.  I am also grateful to Saint Louis University School of Law for summer research funding in support of this project.

[1]. See, e.g., Jonathan H. Adler, Eyes on a Climate Prize: Rewarding Energy Innovation to Achieve Climate Stabilization, 35 Harv. Envtl. L. Rev. 1, 2 (2011) (“Global climate change is a terribly vexing environmental problem.”); Jeffrey Rachlinski, The Psychology of Global Climate Change, 2000 U. Ill. L. Rev. 299, 300 (“The worst-case scenarios projected by the scientific community are biblical in proportion.”); Prospect of Limiting the Global Increase in Temperature to 2° C Is Getting Bleaker, Int’l Energy Agency (May 30, 2011), (“The challenge of improving and maintaining quality of life for people in all countries while limiting CO2 emissions has never been greater.”).

[2]. See Rachlinski, supra note 1 (“If the planet’s climate shifts as abruptly in the next century as some scientists believe, the first few decades of the new millennium will witness massive shifts in rainfall patterns, a rising sea level that threatens to inundate coastal communities, and a dramatic increase in the frequency and severity of storms.  These horrors could make many heavily populated regions virtually uninhabitable and turn valuable farmland into deserts.”).

[3]. See Richard J. Lazarus, Super Wicked Problems and Climate Change: Restraining the Present to Liberate the Future, 94 Cornell L. Rev. 1153, 1155–56 (2009) (“To reduce the nation’s greenhouse gas emissions from 1990 levels by as much as 60 percent to 80 percent by 2050 and then maintain that emissions level throughout the twenty-first century will require Congress to craft an ambitious mix of regulatory programs and economic incentives.”).

[4]. Id. at 1156.

[5]. John C. Dernbach, The Essential and Growing Role of Legal Education in Achieving Sustainability, 60 J. Legal Educ. 489, 503 (2011) (quoting Am. Bar Ass’n, Resolution and Report on Sustainable Development 2 (Aug. 11–12, 2003), available at
/sustainabledevelopment.pdf) (“[A]ll law should have sustainable development principles integrated into it.”).

[6]. See, e.g., Beate Sjåfjell, Internalizing Externalities in E.U. Law: Why Neither Corporate Governance nor Corporate Social Responsibility Provides the Answers, 40 Geo. Wash. Int’l L. Rev. 977, 977 n.2 (2009) (defining sustainable development as “development where economic, social, and environmental aspects are integrated”).

[7]. See Brundtland Report: Our Common Future, Sustainable Cities,
-our-common-future (last visited Aug. 28, 2011).

[8]. Rep. of World Comm’n on Env’t & Dev., 14th Session, June 8–19, 1987, Our Common Future, Ch. 2, ¶ 1, U.N. Doc. A/43/427 (1987).  The Commission was led by Norwegian Prime Minister Gro Harlem Brundtland.

[9]. See Dernbach, supra note 5, at 512–13.

[10]. See, e.g., Judd F. Sneirson, Green is Good: Sustainability, Profitability, and a New Paradigm for Corporate Governance, 94 Iowa L. Rev. 987, 1022 (2009) (“If we are to achieve sustainability as a society, corporations must be part of the solution.”).

[11]. See Susan DeFreitas, NASCAR Race Track Gets Solar Power, Earth Techling (Aug. 9, 2010), (“When you think ‘green,’ chances are NASCAR is not the next word that comes to mind.”).

[12]. Lynch: Ethanol Mix Continues Greening of NASCAR, NASCAR (Oct. 16, 2010),

[13]. See NASCAR Hires Lynch to Head “Green” Initiative, NASCAR, (Nov. 14, 2008),

[14]. See Sneirson, supra note 10, at 991.

[15]. See id. at 1013–17 (contrasting shareholder wealth maximization with stakeholder theory).

[16]. Mark D. Howell, From Moonshine to Madison Avenue: A Cultural History of the NASCAR Winston Cup Series 18 (1997).

[17]. See Mark Yost, The 200-MPH Billboard: The Inside Story of How Big Money Changed NASCAR 41–52 (2007).

[18]. Joaggquisho (Oren Lyons), Scanno, 28 Pace Envtl. L. Rev. 334, 334–35 (2010) (“Over a thousand years ago, a peacemaker came along to our people . . . .  He said, when you sit and you council for the welfare of the people, think not of yourself, or of your family, or even your generation.  He said, make your decisions on behalf of the seventh generation coming, those faces looking up from the earth, each generation waiting its time.  Defend them; protect them, so that they may enjoy what you enjoy today.”).  The name of Seventh Generation, Inc., a maker of environmentally-friendly cleaning products, is based on this idea.  Seventh Generation, (last visited Sept. 1, 2011).

[19]. For a discussion of the difficulties of creating an environmental “baseline,” see Todd S. Aagaard, Environmental Harms, Use Conflicts, and Neutral Baselines in Environmental Law, 60 Duke L.J. 1505 (2011).

[20]. Cf. Todd S. Aagaard, Environmental Law as a Legal Field: An Inquiry in Legal Taxonomy, 95 Cornell L. Rev. 221, 225 (2010) (arguing that “environmental problems—the factual context of environmental lawmaking—involve two core factual characteristics that are, in combination, both common and distinct to environmental law: physical public resources and pervasive interrelatedness”).

[21]. For example, one sustainability proponent describes the “three conditions” of sustainability as: “[a society’s] rates of use of renewable resources should not exceed their rates of regeneration; its rates of use of non-renewable resources should not exceed the rate at which sustainable renewable substitutes are developed; and its rate of pollution should not exceed the assimilative capacity of the environment.”  John Elkington, Cannibals with Forks: The Triple Bottom Line of 21st Century Business 55–56 (1998); see also Sneirson, supra note 10, at 993–95 (describing the “gearing up” framework for sustainability and using Nike’s design and recycling programs as an example).

[22]. Dernbach, supra note 5, at 498.

[23]. Triple Bottom Line, Economist (Nov. 17, 2009),

[24]. Grant E. Helms, Note, Fair Trade Coffee Practices: Approaches for Future Sustainability of the Movement, 21 Ind. Int’l & Comp. L. Rev. 79, 82–83 (2011); Economist, supra note 23.

[25]. Jayne W. Barnard, Corporate Boards and the New Environmentalism, 31 Wm. & Mary Envtl. L. & Pol’y Rev. 291, 293 (2007) (including child labor in a list of unsustainable practices); Vanessa R. Waldref, The Alien Tort Statute After Sosa: A Viable Tool in the Campaign to End Child Labor?, 31 Berkeley J. Emp. & Lab. L. 160, 189 (2010) (“Indeed, regulations that prohibit child labor and increase overall wages may best advance sustainable growth to benefit all workers and society.”).

[26]. To be completely inclusive, the Venn diagram of corporate law theories outside of shareholder primacy would also include progressive corporate law as well as the social enterprise movement.  See Antony Page & Robert A. Katz, Is Social Enterprise the New Corporate Social Responsibility?, 34 Seattle U. L. Rev. 1351, 1352–53 (2011).  However, these labels are not sufficiently distinct, in my view, to warrant separate treatment.  But see id. at 1353 (distinguishing social enterprise from corporate social responsibility).

[27]. See Sjåfjell, supra note 6, at 982–83 (“The corporate social responsibility debate typically stands on the outside of the corporation, however, and is concerned with the corporation’s responsibility toward those parties and interests which seem to be implicitly defined as being external to the corporation, even including the corporation’s own employees.”).

[28]. See, e.g., Einer Elhauge, Sacrificing Corporate Profits in the Public Interest, 80 N.Y.U. L. Rev. 733, 735–36 (2005) (beginning the discussion of social responsibility with the example of clear-cutting practices).

[29]. R. Edward Freeman, Strategic Management: A Stakeholder Approach 44–45 (1984) (“By using ‘stakeholder,’ managers and theorists alike will come to see these groups as having a ‘stake.’  ‘Stakeholder’ connotes ‘legitimacy,’ and while managers may not think that certain groups are ‘legitimate’ in the sense that their demands on the firm are inappropriate, they had better give ‘legitimacy’ to these groups in terms of their ability to affect the direction of the firm.”).

[30]. In some circumstances, the stakeholders are defined broadly enough that they overlap with traditional “societal” concerns.  See, e.g., Gerald P. Neugebauer III, Note,Indigenous Peoples as Stakeholders: Influencing Resource-Management Decisions Affecting Indigenous Community Interests in Latin America, 78 N.Y.U. L. Rev. 1227 (2003) (including indigenous peoples in areas affected by corporate oil drilling or other development as stakeholders of the firm).

[31]. See Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, N.Y. Times, Sept. 13, 1970 (Magazine), at 33.

[32]. 170 N.W. 668 (Mich. 1919).

[33]. See, e.g., D. Gordon Smith, The Shareholder Primacy Norm, 23 J. Corp. L. 277, 279 (1998) (“The shareholder primacy norm is nearly irrelevant to the ordinary business decisions of modern corporations.”); Lynn A. Stout, Bad and Not-So-Bad Arguments for Shareholder Primacy, 75 S. Cal. L. Rev. 1189, 1208–09 (2002) (“Corporate law, in fact, does allow directors to pursue strategies that reduce share price whenever this can be rationalized as somehow serving the often-intangible interests of other constituencies.”); Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford, 3 Va. L. & Bus. Rev. 163, 176 (2008) (“Corporations seek profits for shareholders, but they seek others [sic] things, as well, including specific investment, stakeholder benefits, and their own continued existence.  Teaching Dodge v. Ford as anything but an example of judicial mistake obstructs understanding of this reality.”).  Interestingly, after much scholarship debunking the notion that shareholder primacy is required under corporate law, the Delaware Court of Chancery recently issued an opinion explicitly upholding the shareholder primacy principle.  See eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 33 (Del. Ch. 2010) (“Promoting, protecting, or pursuing nonstockholder considerations must lead at some point to value for stockholders.”).

[34]. See Sneirson, supra note 10, at 998 (finding that thirty-three states have such statutes).  Several of these statutes expressly permit consideration of nonshareholder constituencies only in the takeover context.  See id. at 998 & n.52.

[35]. Lawrence E. Mitchell, A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes, 70 Tex. L. Rev. 579, 631 (1992).

[36]. For example, New York’s statute states: “Nothing in this paragraph shall create any duties owed by any director to any person or entity to consider or afford any particular weight to any of the foregoing or abrogate any duty of the directors, either statutory or recognized by common law or court decisions.”  N.Y. Bus. Corp. Law § 717(b) (McKinney 2006).  As a result, constituency statutes may be most useful to boards simply in giving them the freedom to act for any reason whatsoever (absent blatant loyalty violations).  See Matthew T. Bodie, Workers, Information, and Corporate Combinations: The Case for Nonbinding Employee Referenda in Transformative Transactions, 85 Wash. U. L. Rev. 871, 906–07 (2007); Mitchell, supra note 35, at 579–80.

[37]. See David Millon, Communitarianism in Corporate Law: Foundations and Law Reform Strategies, in Progressive Corporate Law 1, 30 (Lawrence E. Mitchell ed., 1995) (“However attractive [the constituency] model might be in theory, communitarian scholars have yet to show persuasively that it could function effectively in practice.”).

[38]. Although a variety of proposals have been made, they have thus far had little actual traction.  See, e.g., Kent Greenfield, The Failure of Corporate Law 182 (2006) (advocating for worker representation on corporate boards); Lawrence E. Mitchell, Corporate Irresponsibility 118–19 (2001) (arguing that boards of directors should be self-perpetuating); Bodie, supra note 36, at 875–79 (advocating for a nonbinding employee referendum whenever shareholders are to vote upon a transformative transaction); Lawrence E. Mitchell, On the Direct Election of CEOs, 32 Ohio N.U. L. Rev. 261, 263 (2006) (arguing for direct election of chief executive officers by shareholders, creditors, and employees, each voting as a class); Cynthia A. Williams, The Securities and Exchange Commission and Corporate Social Transparency, 112 Harv. L. Rev. 1197 (1999) (advocating for the U.S. Securities and Exchange Commission (“SEC”) to expand disclosure requirements regarding a company’s products, where it does business, and the labor and environmental effects of its operations).  Arguably, Professor Williams’ suggestion was taken up in part in the Dodd-Frank Act, which requires public issuers to calculate the ratio comparing the annual total income of the CEO and the median annual total income for all employees other than the CEO.  Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 953(b), 124 Stat. 1376, 1904 (2010).

[39]. See, e.g., eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 33 (Del. Ch. 2010) (“When director decisions are reviewed under the business judgment rule, this Court will not question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value.”).

[40]. Mark J. Roe, Delaware’s Competition, 117 Harv. L. Rev. 588, 631 (2003) (“And once managers decided to sell the firm, Revlon said that the firm had entered, as lawyers thereafter dubbed it, ‘Revlonland,’ where its managers had the fiduciary duty to sell the firm to the highest bidder.  But by the end of the decade, the takeover machine hit Time-Warner, and Revlonland became a very, very small place.”) (referring to Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)).

[41]. See Jay A. Conger, Edward E. Lawler III & David L. Finegold, Corporate Boards: Strategies for Adding Value at the Top 146–48 (2001).

[42]. Jay W. Lorsch & Elizabeth MacIver, Pawns or Potentates: The Reality of America’s Corporate Boards 50 (1989).  Lorsch and MacIver claimed that only a minority of directors adhered to a strict belief in shareholder primacy.  Id. at 39.

[43]. See Conger et al., supra note 41, at 151 (“[I]n the boardrooms of large U.S. corporations, two decades of governance reforms had firmly entrenched the concept of ‘shareholder value,’ increased the independence of the board from management, and more closely aligned the interests of the board and the owners of the corporation.”); Terrence E. Deal & Allan A. Kennedy, The New Corporate Cultures: Revitalizing the Workplace After Downsizing, Mergers, and Reengineering 43–62 (1999) (discussing the rise of shareholder value as the primary corporate philosophy); Allan A. Kennedy, The End of Shareholder Value: Corporations at the Crossroads (2000).  For a more equivocal perspective on the presence of shareholder primacy in the boardroom, see Jill E. Fisch, Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy, 31 J. Corp. L. 637, 654–55 (2006) (comparing studies and finding little consensus).

[44]. See, e.g., Mitchell, supra note 38, at 4–8; Jeffrey N. Gordon, The Rise of Independent Directors in the United States, 1950–2005: Of Shareholder Value and Stock Market Prices, 59 Stan. L. Rev. 1465, 1526–35 (2007) (discussing the “triumph” of shareholder value as the dominant paradigm in the 1990s).

[45]. The SEC (after many false starts) recently provided a proxy nomination process through which established shareholders can earn a place on the company’s proxy ballot.  The Dodd-Frank Act gave the Securities and Exchange Commission direct authority to allow shareholders to nominate directors for placement on the company’s own proxy ballot.  Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 971, 124 Stat. 1376, 1915 (2010) (“The Commission may issue rules permitting the use by a shareholder of proxy solicitation materials supplied by an issuer of securities for the purpose of nominating individuals to membership on the board of directors of the issuer . . . .”).  The SEC used this authority to pass regulations allowing proxy access for certain large, long-term shareholders.  See Facilitating Shareholder Director Nominations, 75 Fed. Reg. 56,668 (Sept. 16, 2010) (to be codified at 17 C.F.R. pts. 200, 232, 240 & 249).  However, the U.S. Court of Appeals for the D.C. Circuit has vacated these regulations, finding their promulgation to be in violation of the Administrative Procedure Act.  Business Roundtable v. S.E.C., No. 10-1305, 2011 WL 2936808 (D.C. Cir. July 22, 2011); see also Jeffrey N. Gordon, Proxy Contests in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy, 61 Vand. L. Rev. 475, 487–89 (2008) (arguing that the SEC’s e-proxy rules significantly reduce the costs of waging a proxy contest).

[46]. 2 James D. Cox & Thomas Lee Hazen, Treatise on the Law of Corporations § 13:23 (3d ed. 2011).

[47]. For example, in the 2004 election of Disney directors, forty-three percent of shareholders withheld their votes from Michael Eisner, who at the time was CEO and chairman of the board.  The next day, the Board removed Eisner as Chairman.  James B. Stewart, Disney War 510–12 (2005).

[48]. 3 Cox & Hazen, supra note 46, at § 15:9 (“In order to maintain a derivative suit to redress or prevent injuries to the corporation, the plaintiff must be either an owner of shares or have some beneficial interest therein when the suit is brought.  As a general rule, the plaintiff must continue to be a stockholder throughout the life of the suit . . . .”).

[49]. A good recent example is the sale of Anheuser-Busch, Inc. to international beverage conglomerate InBev.  The Anheuser-Busch board initially resisted efforts to sell the company to InBev; it contemplated a poison pill as well as a purchase of another brewer.  Julie MacIntosh, Dethroning the King: The Hostile Takeover of Anheuser-Busch, an American Icon 236, 259–73 (2011).  However, the board eventually agreed to the buyout when InBev raised its offer.  Id. at 283–89.  And even a stubborn board will eventually reach the limit on takeover defenses.  See eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010) (“I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders . . . .”).

[50]. See, e.g., Elhauge, supra note 28, at 743 (“To avoid possible misunderstanding, let me make clear what I am not saying.  I am not saying that managers have a legally enforceable duty to sacrifice corporate profits in the public interest; I am saying that they have discretion to do so.”).

[51]. See Sneirson, supra note 10, at 997–1000, 1019–20.

[52]. See id. at 1017–19.

[53]. See Heidi N. Moore, Does Financial Reform Give Shareholders Too Much Power or Not Enough?, CNNMoney (July 9, 2010),‑financial‑reform‑give‑shareholders-too-much-power-or-not-enough.

[54]. See Miriam A. Cherry & Judd F. Sneirson, Beyond Profit: Rethinking Corporate Social Responsibility and Greenwashing After the BP Oil Disaster, 85 Tul. L. Rev. 983, 1008 n.135, 1013 n.160 (2011).

[55]. Neal Thompson, Driving with the Devil: Southern Moonshine, Detroit Wheels, and the Birth of NASCAR 30–35 (2006).

[56]. Howell, supra note 16, at 8; Timothy Miller & Steve Milton, NASCAR Now! 11 (3d ed. 2008).

[57]. Brian Tarcy, The Complete Idiot’s Guide to NASCAR 13 (2008).

[58]. Miller & Milton, supra note 56; Tarcy, supra note 57, at 15.

[59]. See Miller & Milton, supra note 56; Tarcy, supra note 57, at 15–18; History of NASCAR, NASCAR (March 8, 2010),

[60]. See Miller & Milton, supra note 56; Howell, supra note 15, at 16.

[61]. Tarcy, supra note 57, at 18; History of NASCAR, supra note 59.

[62]. Tarcy, supra note 57, at 18.

[63]. History of NASCAR, supra note 59.

[64]. Tarcy, supra note 57, at 18.

[65]. Id.; S. Joseph Modric, The Good Ole’ Boys: Antitrust Issues in America’s Largest Spectator Sport, 1 DePaul J.  Sports L. & Contemp. Probs. 159, 161 (2003).

[66]. Modric, supra note 65, at 161.  France believed that “if fans could identify with the cars on the tracks, they would bond with the sport.”  Miller & Milton, supra note 55, at 11.

[67]. Howell, supra note 15, at 21.

[68]. Miller & Milton, supra note 56; Tarcy, supra note 57, at 19.

[69]. Thompson, supra note 55, at 290–92; Michael A. Cokley, In the Fast Lane to Big Bucks: The Growth of NASCAR, 8 Sports Law. J. 67, 71 (2001).

[70]. Tarcy, supra note 57, at 20; History of NASCAR, supra note 59.

[71]. Miller & Milton, supra note 56.

[72]. Yost, supra note 17, at 62.

[73]. Id.

[74]. Id. at 64.

[75]. Id. at 77–78.  The name would stay with NASCAR’s premier series for the next thirty-three years.  See History of NASCAR, supra note 59.

[76]. Id.

[77]. Id. at 79.

[78]. Id. at 28.

[79]. Miller & Milton, supra note 56, at 8–9.

[80]. Yost, supra note 17, at 36.

[81]. Miller & Milton, supra note 56, at 45.

[82]. Officials to Announce Series Name Change to Sprint Cup,, (last visited Sept. 1, 2011).

[83]. Meri J. Van Blarcom-Gupko, Should NASCAR be Allowed to Choose the Tracks at Which Its Series’ Races are Run?, 16 Seton Hall J. Sports & Ent. L. 193, 210 (2006).

[84]. Howell, supra note 16, at 13; Juliet Macur, Nascar at Crossroads After Years of Growth, N.Y. Times, Apr. 15, 2007, § 8, at 1.

[85]. See Howell, supra note 16 (“From the absolute beginning, NASCAR was operated on the basis of control by a limited few.”); Van Blarcom-Gupko, supra note 83, at 210.

[86]. Van Blarcom-Gupko, supra note 83, at 210.

[87]. Macur, supra note 84.

[88]. See Michael D. Tucker, Exploring the Copperweld Analysis in Kentucky Speedway: Single Entity Treatment for NASCAR and International Speedway Corporation,15 Sports Law. J. 99 (2008); Van Blarcom-Gupko, supra note 83.

[89]. Howell, supra note 16, at 20.

[90]. NASCAR’s sponsorships are not limited to the title sponsor.  There are nearly sixty-eight brands in its “Family of Sponsors” ranging from the Official Frequent Heartburn Remedy (Prilosec OTC) to the Official Cheese Filled Product (Combos).  A.J. Perez, Sponsors of NASCAR, Teams Bang Fenders, USA Today, Mar. 20, 2007, at 1C; Official Sponsors: 2011 NASCAR Season, NASCAR, (last visited May 31, 2011) (listing all current sponsors).

[91]. Yost, supra note 17, at 130; Cokley, supra note 69, at 86.

[92]. The NFL, NBA, MLB, and NHL are all unincorporated organizations whose membership is made up of participating teams.  Oakland Raiders v. Nat’l Football League, 113 Cal. Rptr. 2d 255, 260 (Cal. Ct. App. 2001) (describing the NFL as “an unincorporated nonprofit association of 30 [now 32] football clubs”); Phila. World Hockey Club, Inc. v. Phila. Hockey Club, Inc., 351 F. Supp. 462, 469 (E.D. Pa. 1972) (describing the NHL as “an unincorporated nonprofit association”); Denver Rockets v. All-Pro Mgmt., Inc., 325 F. Supp. 1049, 1054 (D.C. Cal. 1971) (“NBA is an unincorporated association organized to operate and engage in the business of operating a league of professional basketball teams.”); Gregor Lentze, The Legal Concept of Professional Sports Leagues: The Commissioner and an Alternative Approach from a Corporate Perspective, 6 Marq. Sports L.J. 65, 68–69 (1995) (noting that MLB is actually composed of two independent “unincorporated non-profit associations,” the American League of Professional Baseball Clubs and the National League of Professional Baseball clubs).  The PGA and ATP are associations whose members are the individual competitors.  PGA Tour, Inc. v. Martin, 532 U.S. 661, 665 (2001) (describing PGA Tour as “a nonprofit entity formed in 1968”); ATP, How It All Began, ATPWorldTour, (last visited Sept. 1, 2011) (“In 1972, the leading professionals joined forces to create the Association of Tennis Professionals.”).

[93]. See Miller & Milton, supra note 56, at 49–52; Tarcy, supra note 57, at 15.

[94]. Int’l Speedway Corp., Annual Report (Form 10-K) (Jan. 28, 2011).

[95]. Macur, supra note 84.

[96]. See, e.g., Ky. Speedway, LLC v. NASCAR, 588 F.3d 908, 921 (6th Cir. 2009); Mayfield v. NASCAR, 713 F. Supp. 2d 527, 542–43 (W.D.N.C. 2010); Ferko v. NASCAR, 216 F.R.D. 392, 393 (E.D. Tex. 2003).  In fact, the close association between NASCAR and ISC led one court to conclude that it might be difficult to find that they are in fact separate entities.  Ky. Speedway, 588 F.3d at 920 (“[Plaintiff] KYS would thus need to show that despite having overlapping ownership, NASCAR (wholly owned by three members of the France family) and ISC (of which the France family owns 65% of the voting stock and for which the family makes all of the major decisions) are not under common ownership or control and do not share a single ‘corporate consciousness.’”).

[97]. See Driver Table: 2011 NASCAR Sprint Cup Series, NASCAR, (last visited May 31, 2011).

[98]. See id.

[99]. See Van Blarcom-Gupko, supra note 83, at 214; Marty Smith, Pointed Discussion: Top 35 in Owners Points Becoming Fertile Ground for Competition, NASCAR (Feb. 10, 2006),
/10/owners.points/index.html.  One of the problems for team owners in this free-enterprise system is that they must assume all financial responsibilities, and if they cannot secure sufficient sponsorship deals they may have to fold.  Id.  Many owners have called for franchising to guarantee them a spot in the races so they have a guaranteed shot at money.  Instead of granting franchises, NASCAR has come up with the “Top-35 Rule” to help guarantee a racing spot.  The “Top-35 Rule” works by giving the top thirty-five teams in owners points at the end of the previous season (points are earned by place finished in the races over the course of the season) a guaranteed spot in the top thirty-five spots for all the races.  Id.  The top thirty-five are guaranteed the first thirty-five spots but the actual starting position is determined by the qualifying speeds before the race.  Id.  Not only does this rule guarantee a shot at the money for team owners but it helps ensure that sponsors who spend big bucks to be on the top-owners’ cars will be in each race and have a chance for their logos to be exposed.  Tarcy, supra note 57, at 45.

[100]. Jenna Fryer, Without Pension, NASCAR Stars Forgotten, USA Today (Feb. 6, 2007),

[101]. David Newton, NASCAR’s Free-Market System Unlike Any Other, ESPN (June 23, 2007),

[102]. Howell, supra note 16, at 32.  The bans were later lifted in 1965 when NASCAR needed the once-popular racers to return to the tracks to boost excitement for the sport.  Id. at 34.

[103]. Id. at 42.  The nascent drivers’ union, known as the Professional Drivers’ Association (“PDA”), had organized a boycott of Talladega over concerns about the bumpy track surface.  To dispel these concerns, Bill France Sr. himself hopped in a car and ran fifty laps on the track.  However, the PDA was unmoved.  France was able to round up enough replacement drivers to run the race without further incident, and soon thereafter the PDA dissolved.  See Mark Aumann, Boycotted Race in ‘69 Led to Surprise Winner, Changes, NASCAR (Apr. 23, 2009),

[104]. Newton, supra note 101.

[105]. Peter J. Schwartz, NASCAR’s Highest-Earning Drivers, Forbes (Feb. 9, 2009),
-nascar09_0209_drivers.html; With Jr. Leaving DEI, Merchandise Sales Booming, ESPN (May 17, 2007),

[106]. See Jonah Freedman, The Fortunate 50, Sports Illustrated, (last visited Sept. 1, 2011) (listing Dale Earnhardt Jr. and Jeff Gordon among the top-nineteen in earnings by American athletes).

[107]. Schwartz, supra note 105.

[108]. Howell, supra note 16, at 27.

[109]. Susanna Hamner, NASCAR’s Sponsors, Hit by Sticker Shock, N.Y. Times, Dec. 13, 2008, at BU1 (“In the 2008 racing season, 400 companies put up more than $1.5 billion to sponsor races, cars and drivers.”).

[110]. Tarcy, supra note 56, at 137; Yost, supra note 16, at 35–36; Kevin McKeough, Where Sponsors Are King; Why Pay $5 Million to Back a NASCAR Race? 75 Million Hardworking, Beer-Drinking Fans, Crain’s Chi. Bus., July 31, 2006, at 26.

[111]. See Lack of Sponsorship Forces Ganassi to Shut Down Franchitti’s Team, ESPN (July 2, 2008),

[112]. McKeough, supra note 110.  One older example of the power of the NASCAR brand is Folgers coffee.  In 1986, when Folgers signed on as a sponsor with Hendrick Motorsports, it was the fourth-best-selling coffee in America.  By the end of the year, Folgers had become number one.  Yost, supra note 17, at 109.

[113]. Id. at 47–48 (discussing how corporate sponsors have access to garage and pit areas and often have drivers and team members speak to their guests before races).

[114]. Newton, supra note 101.

[115]. Roy S. Johnson, Speed Sells, Fortune (Apr. 12, 1999),

[116]. Macur, supra note 84 (internal quotation marks omitted).

[117]. NASCAR Hires Lynch to Head “Green” Initiative, supra note 12.

[118]. Scott Wright, Q&A: Mike Lynch, Managing Director of NASCAR Green Innovation, Oklahoman, Apr. 7, 2011, § C, at 2.

[119]. Eric Loveday, Sunoco Green E15 to Become Official Fuel of NASCAR for 2011 Season, Autoblog Green (Oct. 18, 2010, 11:04 AM),

[120]. Lynch: Ethanol Mix Continues Greening of NASCAR, supra note 11.

[121]. Dave Rodman, Fill ‘Er Up: Teams Off and Running with E15 Fuel, NASCAR (Jan. 22, 2011),

[122]. NASCAR, Sunoco, (last visited May 31, 2011).  The partnership dates back to 2003. Lee Montgomery,Sunoco to Become Official Fuel of NASCAR, NASCAR (Aug. 15, 2003),; Report: NASCAR Near Deal with Ethanol Group, NASCAR (Oct. 4, 2010),

[123]. NASCAR officially partnered with Growth Energy, a coalition of U.S. farmers and other members of the ethanol supply chain, under the name American Ethanol. American Ethanol Becomes an Official Partner, NASCAR (Dec. 2, 2010),

[124]. Id.

[125]. Sebastian Blanco, EPA Says E15 is Ready for Prime Time—and Your New-ish Car, Autoblog Green (Oct. 13, 2010, 3:56 PM),

[126]. Id.

[127]. NASCAR Announces Tree Planting Program at Tracks, NASCAR (June 12, 2009),

[128]. Id.

[129]. Id.

[130]. Press Release, Daytona International Speedway, NASCAR Green Clean Air Tree Planting Project Plants 110 Trees at Daytona Beach International Airport (Apr. 20, 2011), available at

[131]. Id.

[132]. NASCAR Sponsors Join Forces in Recycling Project, NASCAR (Apr. 15, 2010),

[133]. Id.

[134]. Id.  At the Earth Day celebration at Texas Motor Speedway, Office Depot and Coca-Cola Recycling had cobranding on all of the recycling elements at the track, including ink cartridge recycling containers.  Id.

[135]. Id.

[136]. Bob Pockrass, Increased Recycling Should Only be the Start of NASCAR’s Green Effort, SceneDaily (Apr. 29, 2010),

[137]. NASCAR Announces Tree Planting Program at Tracks, supra note 125.

[138]. Owners Install Solar Farm on Parking Lot, ESPN (Aug. 4, 2010),  The solar farm was installed on a converted parking lot across the street from the 2.5-mile tri-oval track.  The 40,000 solar panels are arranged in groups in parallel rows, mostly hidden from view.  Id.

[139]. Id.  The website for Pocono Speedway states:

Consisting of nearly 40,000 American made photovoltaic modules covering 25 acres, the Project will produce more than 72 million kilowatt hours (kWh) of energy over the next 20 years.  The environmental attributes associated with the system will offset more than 3,100 Metric Tons of carbon dioxide annually, Carbon Dioxide emissions from 106,529 propane BBQ grills and it will generate enough power to provide the electricity needs for close to 1,000 homes beyond the power needs of the Raceway.

Go Green Solar Project, Pocono Raceway
/pocono-raceway-solar-energy.html (last visited Sept. 1, 2011).

[140]. NASCAR Pocono Raceway Solar Hits One Million kWh Mark, Lime Light Times (Dec. 13, 2010),
-solar-hits-one-million-kwh-mark.  The power output from the farm is monitored live online at

[141]. DeFreitas, supra note 11.

[142]. No. 96 Team Goes Green by Offsetting Carbon Footprint, NASCAR (Feb. 20, 2009),

[143]. Id.

[144]. Id.

[145]. See Thompson, supra note 55, at 241–42.

[146]. See Wright, supra note 118.

[147]. DeFreitas, supra note 11 (citing an Experian Simmons National Consumer Survey).

[148]. Paul Thomasch, Stock Car Racing Going Green—At Own Pace, Envtl. News Network (Nov. 27, 2007), (“I haven’t met anybody in the last couple years who doesn’t think it’s a good idea to be as efficient and be as environmentally friendly as you can.”) (quoting NASCAR CEO Brian France).

[149]. See Owners Install Solar Farm on Parking Lot, supra note 138.

[150]. DeFreitas, supra note 10 (“[T]his fuel-guzzling motorsport circuit has initiated a major campaign to green its operations.”); David A. Gabel, The Greening of NASCAR, Envtl. News Network (Oct. 18, 2010), (“NASCAR is not exactly a model for environmental friendliness, but the new fuel is a significant step in the right direction. . . . Hopefully they will continually adopt new fuel-efficiency technologies as they emerge.  In the grand scheme of things, it is interesting to know that even a sport as gas-guzzling as NASCAR is trying to green their image.”).

[151]. Cf. Cokley, supra note 69, at 67 (“What do you get when you inject 700 to 750 horsepower into 3400 pounds of metal capable of achieving speeds in excess of 200 m.p.h. and then add in 100,000 to 200,000 rabid fans and a mix of young, good-looking, hotshot drivers, along with established veterans?”).

[152]. Cherry & Sneirson, supra note 54, at 1002 (“During the past decade, BP made a series of strategic branding decisions designed to green the company’s image.”).

[153]. Id. at 1025–38.

[154]. Id. at 995–99 (criticizing BP for its environmental and safety violations); Sneirson, supra note 10, at 993 (noting that the first level of the “gearing up” sustainability strategy is compliance with applicable labor and environmental standards).

[155]. Loveday, supra note 119.

[156]. See NASCAR Announces Tree Planting Program at Tracks, supra note 127.

[157]. See Owners Install Solar Farm on Parking Lot, supra note 138.

[158]. NASCAR Announces Tree Planting Program at Tracks, supra note 127.

[159]. IndyCar is the latest instantiation of the sanctioning body for “indy car,” or single-seat, open-wheel racing in the United States.  Prior to 2011 it was known as the Indy Racing League, or IRL.

[160]. FIA, or Fédération Internationale de l’Automobile, is the nonprofit association that operates as the primary governing organization for international Formula One racing.  See About FIA, Fédération Internationale de l’Automobile,
-fia/Pages/AboutFIA.aspx (last visited Sept. 1, 2011).

[161]. Liz Clarke, IndyCar Makes Switch to Ethanol, Wash. Post, Mar. 21, 2007, § E, at 3; IndyCar Goes 100% Ethanol, EPIC Plans National Marketing Campaign, Envtl. Leader (Mar. 19, 2007),
-plans-national-marketing-campaign; IndyCar Series Switching to Ethanol in ‘06, ESPN (Mar. 2, 2005),

[162]. Shell Corp., Powered by V-Power, Protected by Helix: FIA Rules & Regulations Fuel & Lubricants 6 (Dec. 24, 2010), available at

_regulations.pdf (“A minimum of 5.75% (m/m) of the fuel must comprise bio-components.  Shell V-Power race fuel contains two advanced biofuels: [c]ellulosic ethanol, an advanced biofuel made from straw and ‘biogasoline’, a biofuel converted directly from plant sugars.”); Fuel, Formula 1, (last visited Sept. 1, 2011) (“Formula One cars run on petrol, the specification of which is not that far removed from that used in regular road cars.”).

[163]. See Clarke, supra note 161 (noting in 2007 that “NASCAR, the country’s most popular form of auto racing, has no plans to explore renewable fuels at the moment”).

[164]. IndyCar Series Switching to Ethanol in ‘06, supra note 161.

[165]. Id.

[166]. See Howell, supra note 16, at 21 (“[Bill] France and his associates figured that people would like to see American-built, production-based cars in racing competition, especially since the cars being used were ones that the fans could actually purchase from a dealership.”); Thompson, supra note 55, at 227 (“By definition, a stock car was a pure, unalloyed passenger vehicle without any alterations or modifications.”).

[167]. And this is leaving aside the scientific debate about the extent to which ethanol or ethanol-gasoline blends are better for the environment than gasoline.  Ethanol promotes energy independence, as it replaces fossil fuels, and it burns cleaner than pure gasoline.  However, most ethanol is produced from corn, which requires significant resources to grow, and ethanol production increases the price of corn on the international market, making it more expensive for third-world communities.  SeeRoberta F. Mann, Back to the Future: Recommendations and Predictions for Greener Tax Policy, 88 Or. L. Rev. 355, 373–75 (2009); Tudor van Hampton, Collectors Go Looking for Nonalcoholic Blends, N.Y. Times, Mar. 18, 2011, at AU1 (“Still, many consumers would rather not have any alcohol in their gasoline.  Their reasons include reductions in fuel economy—a gallon of ethanol contains about one-third less energy than a gallon of gasoline—and alcohol’s affinity for moisture, which can cause a multitude of engine problems.”).

[168]. Owners Install Solar Farm on Parking Lot, supra note 138.

[169]. Alex Davidson, Greening the Super Bowl, Forbes (Jan. 19, 2007),
.html; Amanda Lee Myers, NFL Using Clean Energy to Offset Super Bowl’s Impact, USA Today (Feb. 3, 2008),
/environment/2008-02-03-green-nfl_N.htm; Susan Thurston, How This Year’s Super Bowl is Going Green, St. Petersburg Times (Dec. 22, 2008),

[170]. See NBA Green, NBA, (last visited May 26, 2011).

[171]. Davidson, supra note 169 (“Sporting events are thus becoming fertile testing grounds for new environmental practices, and the events leave lasting examples of how events can change their practices for the better.”).

[172]. See Thompson, supra note 54, at 241–42.

[173]. Helen Coster, Ranking the World’s Most Sustainable Companies, Forbes (Jan. 29, 2011),

[174]. Id.  The metrics went to eleven with an overall “transparency” factor.  Id.

[175]. Id.

[176]. Id.

[177]. Id.  Its board diversity dropped from 30% of its directors being women last year to 18% this year.  Id.

[178]. Malcolm Gladwell, The Order of Things, New Yorker, Feb. 14, 2011, at 68.

[179]. Cherry & Sneirson, supra note 54, at 1007–08 (discussing investment fund managers as well as academics who praised BP for its corporate social responsibility); Telis Demos, Beyond the Bottom Line: Our Second Annual Ranking of Global 500 Companies, Fortune (Oct. 23, 2006),
/index.htm (ranking BP second on a list of socially responsible companies).

[180]. See Corporate Sustainability, Dow Jones Sustainability Indexes,
.html (last visited Sept. 1, 2011) (defining sustainability in terms of “meeting shareholders’ demands for sound financial returns,” “[f]ostering loyalty by investing in customer relationship management and product and service innovation,” and “[s]etting the highest standards of corporate governance and stakeholder engagement, including corporate codes of conduct and public reporting”); Coster, supra note 173 (discussing various factors such as leadership diversity and financial performance).  Corporate Knights was proud to report that its list had posted a total return of 54.95%, outperforming the MSCI AWCI [Morgan Stanley Capital International All-World Company Index] by more than sixteen points.  Id.

[181]. Coster, supra note 173.

[182]. See, e.g., American Heritage Dictionary 1225 (2d College ed. 1982) (defining “sustain” as “[t]o keep in existence; maintain”); Kent Greenfield, New Principles for Corporate Law, 1 Hastings Bus. L.J. 87, 92 (2005) (defining sustainability as “the ability of businesses to survive over time”).

[183]. W. Duane Cox (as Crabber 1967), NASCAR and Fuel Injection: “Sustainability” or Survival?, Bleacher Rep. (Dec. 3, 2009),
-sustainability-or-survival (“NASCAR will do whatever it will take, not to be sustainable, but to survive.”).

[184]. Sjåfjell, supra note 6, at 999 (“Finally, and most dramatically, the sustainable-development guideline may require a corporation to close down its business if it is not possible to adopt alternative ways of doing business that do not cause irreparable damage to the interests of the global community.”).

[185]. For efforts to address the market for CSR, see Janet E. Kerr, The Creative Capitalism Spectrum: Evaluating Corporate Social Responsibility Through a Legal Lens, 81 Temp. L. Rev. 831, 831 (2008) (discussing definitional problems for CSR and proposing the “creative capital spectrum” to measure a corporation’s degree of social responsibility); Michael R. Siebecker, Trust & Transparency: Promoting Efficient Corporate Disclosure Through Fiduciary-Based Discourse, 87 Wash. U. L. Rev. 115 (2009) (pointing out the excess of unreliable CSR information and proposing a fiduciary duty approach to corporate disclosures); Williams, supra note 38, at 1293–1306 (proposing a system of disclosure for environmental information).

[186]. See supra Part II.B.

[187]. See supra Part II.B.

[188]. See supra Part II.B.

[189]. See, e.g., Brett H. McDonnell, Employee Primacy, or Economics Meets Civic Republicanism at Work, 13 Stan. J.L. Bus. & Fin. 334 (2008).

[190]. See, e.g., Sneirson, supra note 10, at 1017–19 (discussing B corporations).

[191]. Id. at 1019–21.  These charter provisions do not appear to have any enforcement mechanisms.  Id.

[192]. Howell, supra note 16, at 13.

[193]. Id. at 37–48.

[194]. See, e.g., Ky. Speedway, LLC v. NASCAR, 588 F.3d 908, 921 (6th Cir. 2009).

[195]. But see Sneirson, supra note 10, at 989 (using “green” and “sustainable” interchangeably).

[196]. I do not mean to denigrate these concerns; in fact, most of my work relates to worker empowerment.  See, e.g., Bodie, supra note 36.  I only mean to suggest how “sustainability” should be used in the corporate law literature.

[197]. Kent Greenfield, Proposition: Saving the World with Corporate Law, 57 Emory L.J. 948, 950 (2008) (“Corporate law determines the rules governing the organization, purposes, and limitations of some of the largest and most powerful institutions in the world.”); D. Gordon Smith, Response: The Dystopian Potential of Corporate Law, 57 Emory L.J. 985, 990 (2008) (“Pared to its core, ‘corporate law’ is the set of rules that defines the decision-making structure of corporations.”).

[198]. Indeed, as discussed earlier, sustainability advocates have sought to establish this when it comes to dispelling the shareholder primacy norm.

[199]. Cf. Bernard S. Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84 Nw. U. L. Rev. 542, 544 (1990) (“Thus, it is no small matter to disprove even the extreme hypothesis that all of state corporate law is trivial.”).

[200]. Eddie Gossage, president of the Texas Motor Speedway, describes the importance of green initiatives to companies whose businesses are not focused on eco-friendly, sustainable products:

There are some companies that aren’t going to get involved with you if you don’t have a green initiative.  They want to be environmentally conscious and sound.  If you make a presentation to sponsor your car or race, it’s, ‘Well, tell us what you’re doing about green concerns.’  If you don’t have an answer, that may shut the door for you.  They might not have an interest.  There are some companies that are going to have budgets set aside exclusively for people that are actively green.  There is a smart economical benefit to this.

Nate Ryan, NASCAR Going Green, Moving to Ethanol Blend Fuel in 2011, USA Today (Oct. 16, 2010),

[201]. Again, I do not mean to suggest that corporate law is peripheral to all matters—only to sustainability issues (as I’ve defined them).  Matters relating to the corporation’s internal power structure should be the stuff and substance of corporate law.  As to issues like board governance and worker empowerment, I agree that “[c]orporate law is a big deal.”  Greenfield, supra note 197, at 950.


By: David G. Yosifon*


Corporate theory typically construes consumption activity as involving a series of arms-length, atomistic transactions in which consumers exchange money for discrete corporate goods or services.  Canonical accounts expect satisfied consumers to engage in repeat transactions, but the transactions themselves are (implicitly or explicitly) assumed to be isolated, fully contained dealings with the firm.  Such a view of consumption supports the inference that consumers can readily manage their own interests in corporate operations through serial decisions to “take it,” “leave it,” repeat, or refuse to repeat patronization of a firm.  This assessment plays an important part in justifying American corporate governance law, which charges corporate directors with fiduciary obligations only to shareholders, not consumers or other stakeholders.  In this Article, I begin to explore some ways in which consumer associations with the corporate “nexus of contracts” are more relational and indeterminate, and less atomistic, than mainstream corporate theory typically presumes.  I draw on and extend Ronald Coase’s transactional theory of the firm by exploring ways in which some  important consumption decisions are made “in-house” by firm managers rather than “in the market” by individual consumers.  This positive theory of “firm-based consumption” poses a challenge to the view that corporate governance law should require directors to manage firms exclusively on behalf of shareholders.


Consumption is a fundamental part of life.  We must consume air, water, and food to stay alive.  More than mere survival, consumption is an important technique through which we make our lives fully human.  We express ourselves and forge group associations, in part, through our consumption patterns.[1]  Influential economic and political theories hold that our social prosperity is dependent upon extensive and deepening patterns of consumption.[2]  Consumption activity is creeping ever more pervasively into the lives of people already living in consumer-based societies, and more and more societies the world over are becoming consumer based.[3]  How we consume is in part a function of our social, economic, and legal institutions.  In this Article, I explore some undertheorized aspects of the corporate organization of consumption.[4]  In particular, by drawing on and extending Ronald Coase’s work on the theory of the firm,[5] I explore ways in which some consumption decisions are made “in-house” by corporate managers, rather than “in the market” by individual consumers.[6]  I then argue that this analysis of “firm-based consumption” presents a new challenge to prevailing justifications of the view (presently dominant in corporate theory and corporate law) that corporate directors should manage firms exclusively on behalf of shareholders.

I.  Consumers in the Corporate Nexus

The corporation is a “nexus of contracts” comprised of all those with a stake in the firm’s operations, including shareholders, workers, consumers, and the broader social and political community.[7]  Under the prevailing view, shareholders are the exclusive beneficiaries of fiduciary obligations from corporate directors not because shareholders “own” the corporation, but because shareholders have a unique need for fiduciary ties in firm governance that other stakeholders can do without.[8]

Once shareholders invest their capital in corporate enterprise, they have little ability to control or monitor its use.[9]  After they turn over their money, shareholders are entitled only to whatever “residual” profits directors decide to pay in dividends after all other corporate obligations have been satisfied (e.g., payments to creditors, wages for workers, taxes to the state, etc.).[10]  The inability of dispersed shareholders to control corporate operations, combined with rank indeterminacy in what they are owed, leaves shareholders with little confidence that turning capital over to the firm would be a good idea.  One of corporate law’s basic solutions to this problem of shareholder vulnerability is to make directors fiduciaries, exclusively, of shareholders.[11]  Directors are charged with managing firm operations on behalf of shareholders without, at the end of the day, any formal regard for themselves or non-shareholding stakeholders, “however hard the abnegation.”[12]

Nonshareholding corporate stakeholders must rely on nonfiduciary mechanisms to guard their interests.  According to the standard account, workers are intimately involved in firm operations (physically, at the plant, or through electronic communications) and can therefore monitor their interests and negotiate their interest in corporate operations with firm managers either individually or collectively through unions.  Moreover, workers’ fundamental stake in the firm is wages, which unlike “residual” profits, can be contractually specified, ex ante, with precision.  They therefore do not need fiduciary attention in firm governance.[13]

Critical corporate scholars have repudiated this view, arguing that workers, like shareholders, also have unfixed, indeterminate interests in corporate operations.[14]  After all, workers want not only wages, but also job security, raises, promotions, and safe working conditions.  Once they invest their human capital (learning and becoming expert at firm-specific tasks) it becomes more and more difficult for laborers to “exit” a particular corporate nexus by quitting and getting work at a different firm.  Without a credible threat of exit, it becomes easier for directors to deal sharply with workers as one way of satisfying corporate law’s central command that directors pursue profits for shareholders.[15]  Further, some important elements of employment are difficult for workers to monitor on their own.  It is at least as hard for workers to spot asbestos hiding in construction materials, or carpel-tunnel syndrome lurking in repetitive key strokes, as it is for shareholders to see the frailty of investments in bundled subprime mortgages.  Because of the irreducibly relational nature of corporate employment, critical corporate scholars have sometimes argued that corporate boards should be required to serve as fiduciaries of workers in addition to shareholders.[16]

Fewer scholars have critically examined the nature of the consumer interest in corporate operations.[17]  Neither theorists nor the law have thought it necessary to afford consumers fiduciary protections in firm governance.  Corporations, the standard account goes, must already serve consumer interests if they hope to stay in business at all—neither taxes nor wages, creditors nor shareholders, can be paid unless consumers are satisfied and patronize the firm.[18]  Moreover, consumers can look after their own interests by inspecting corporate goods and services before making any purchases.  While consumers rarely negotiate the terms of their deals with corporate operatives, the decision to “take” or “leave” what firms offer is thought to be a sufficient contract-based safeguard to protect consumer interests.[19]  Of course, consumers will sometimes find it hard to evaluate important aspects of goods.  It is difficult, for example, for most consumers to inspect or understand the relevance of nicotine levels in cigarettes, trans fats in french fries, or escalating interest rates in home mortgages.  Nevertheless, mainstream corporate theory and extant law ascribe a protective role in such circumstances not to corporate decision makers, but to external government regulators who are charged with insulating consumers from the pernicious effects of misleading advertising or hazards that are difficult to observe.[20]

In previous work, I have challenged these fundamental justifications for keeping consumer interests out of corporate boards’ formal responsibilities.[21]  First, wedded as it is to unreconstructed “rational actor” and “common sense” conceptions of the sources of individual behavior, corporate theory has failed to adequately address what social science tells us about the ease with which consumer perceptions of risk and other product attributes can be manipulated by corporations through advertising and marketing activity.[22]  Corporations may be serving shareholder interests not by discerning and satisfying consumer preferences, but by inducing preferences and manipulating perceptions.[23]  Second, corporate theorists have failed to attend to the substantial public choice problems that preclude the development of the external regulatory structures that the canonical view claims should protect consumers where individual judgment is inadequate or exploited.[24]  After all, firms charged with maximizing shareholder profits will be motivated to work within the political sphere to stunt the development of such regulatory regimes in service to their shareholders.  After the Supreme Court held in Citizens United v. Federal Elections Commission[25] that the First Amendment forbids government from stifling corporate political speech, corporate interference in regulatory development will prove to be an even more significant hitch in shareholder primacy theory.[26]  In light of these problems, I have argued that it may be prudent for corporate law to vindicate a voice for consumers not only at cash registers and in the halls of government, but also in corporate board rooms, by making directors actively attend to the interests of consumers at the level of firm governance.

Here, I want to bracket my analysis of corporate manipulation of consumer preferences and political processes and focus instead on more deeply situating consumption activity within the general theory of the firm.  The positive assessment of the corporate organization of consumption that I begin to sketch here will provide a more complete foundation for my normative claim that corporate boards, or some corporate boards, should be required to attend to consumer interests at the level of firm governance.[27]

II.  Firm-Based Consumption

While equity and (sometimes) labor are viewed as having extended, unfixed relationships with the corporate nexus, corporate theorists typically construe consumption activity as involving arms-length, atomistic transactions in which consumers exchange money for discrete corporate goods or services.[28]  Under the canonical account, consumers might be expected to engage in repeat transactions,[29] but the transactions themselves are seen as isolated, finite, fully contained dealings with the firm.  The presumption that consumers have simple, fixed, and determinate claims on the corporation is an important basis for the conclusion that consumers can take care of their own interests and do not need fiduciary attention in corporate governance.  I believe that this presumption oversimplifies contemporary consumption patterns, which are far more relational in nature than is appreciated in mainstream corporate theory.

A.            Consumption and Corporate Philanthropy

Recently I made my weekly trip to Whole Foods Market, Inc. (a publicly traded company).  Thrilled with my chosen lot of fresh fruit, vegetables, breads, and prepared (but purportedly healthy) delectables I had chosen, I paid for the goods and left the store.  As I pushed the grocery cart to my car I saw a notice printed on the sides of the brown paper grocery bags announcing that on September 22, Whole Foods would be giving 5% of its sales to something called the California Coastal Cleanup Day.  I thought to myself, is this a promise or a threat?  I wondered, why would Whole Foods give 5% of the price it charges me for groceries to this cleanup project, instead of reducing its prices by 5% such that I could then have a little extra to spend on cancer prevention, the search for extra-terrestrial life, prisoner rights advocacy, my still-festering law school loans, or, if I wanted, coastal cleanup?  Why would I be better off with Whole Foods deciding how to spend this money than I would be if I made the decision myself?  Whole Foods might as well fill up my grocery cart for me, and I could just meet them at the checkout.  The mystery deepens when you consider that if I donated to the Coastal Cleanup with cash savings from reduced prices I could take a tax deduction on the donation.  At least with respect to the prepared food I purchased, I had to pay sales tax on the purchase price (which was inflated by the cost of the coastal cleanup contribution) and I get no personal tax deduction for the money Whole Foods donates to the Coastal Cleanup.[30]

For a moment I thought that maybe it really was a kind of warning and that if I wanted no part of the cleanup I could just avoid patronizing Whole Foods on September 22.  But then I realized that I had, obviously, already paid for part of the beach cleanup through the prices on the purchases I had just made (before I even learned about the Coastal Cleanup); indeed, I had paid for it in the purchases I had made the previous week too, and the week before that.  The money that Whole Foods was going to use to pay for the cleanup could have been used instead to lower prices throughout the year.  Or was Whole Foods trying to make me think that the 5% for coastal cleanup would be coming only out of “residual” profits, and thus coming from shareholders’ pockets, rather than coming out of the gains-to-trade that all stakeholders in the corporate enterprise, including workers and consumers, must split?[31]

Perhaps Whole Foods is able to accomplish an economy of scale by drawing consumers to its stores with promises of coastal cleanups, economies that reduce the overall cost of produce to the consumer.[32]  Indeed, one of the justifications that scholars and courts propound for why corporations are permitted to make charitable donations is that consumers like it and are more likely to patronize firms that do it, thereby making such conduct profitable for shareholders.[33]  But this just begs the question, why do promises of coastal cleanups, rather than promises of greater cash savings, attract consumers and produce this economy of scale?  Upon further inquiry (i.e., by Googling it), I learned that the California Coastal Cleanup is also supported by contributions from, among others, Oracle, Inc., Kohls, Inc., Delta, Inc., KPMG, Inc., Fairmont Hotels & Resorts, Inc., and See’s Candies, Inc.[34]  It turns out that one’s consumption of computer services, household goods, travel, accounting, lodging, and candy all come with a side of beach cleanup.  Now, I generally favor coastal cleanups and other environmental ventures, and am happy to help pay for them.  What begs explicit analysis, however, is the realization that I am paying for them not just through direct contributions, or through tax-and-transfer programs, but as part of my day-to-day consumption activity.  Of course, the California Coastal Cleanup is just one of many charitable ventures supported by corporations.  In 2009, American corporations made an estimated $14.4 billion in charitable donations.[35]

In the penultimate section of this Article, I will turn to the issue of consumers’ desire for goods that are produced and disseminated in an environmentally sustainable fashion (rather than products that are bundled with charitable contributions).[36]  I hold that issue in abeyance in this Part in order to first square up the analytic issues involved in “firm-based” consumption through two further examples that I think introduce the issue in a more direct, graspable fashion.

B.            Loyal Consumption

My highly organized wife is a proponent of cultivating and using “points” or “miles” by participating in retail and credit card company loyalty and reward programs.  By staying as often as possible at Marriott International, Inc. hotels, we generate “points” which can be used for a “free” (ahem) hotel stay in the future.[37]  By using an American Express, Inc. credit card to pay for all manner of consumption, we can receive “free” (ahem) hotel rooms, baseball tickets, household electronics, or gift cards for retailers, such as Home Depot, Inc., or Linens ‘n Things, Inc.[38]  Consumer loyalty programs have a long and quirky history, but the modern practice can be traced to the introduction of “frequent flyer” miles by American Airlines, Inc. in 1981.[39]  The success of that program spurred imitators not just in the airline industry, but throughout retail markets.[40]  Analysts have found that the average American consumer belongs to fourteen different rewards programs, and is actively engaged in six of them.[41]  So why would a consumer prefer to receive “points” that she can put towards future consumption of a limited range of goods that American Express or some other business offers through its rewards program, rather than receiving a present cash discount (equal to whatever it costs the business to run the rewards program), which she could then spend on anything at all?  This pattern is especially mysterious given robust evidence from social psychology that consumers usually behave as “hyperbolic discounters.”[42]  That is, consumers are generally thought to strongly prefer more present consumption over the possibility of higher levels of consumption in the future.[43]  Why do firms compete on the basis of offering better “miles” or rewards programs, rather than on price?[44]

C.            Employee Consumption of Benefits

I am principally concerned here with analyzing the nature of consumer associations with corporate enterprise.  This task will be aided by briefly considering an important employee-specific form of firm-based consumption: employee benefits, or “in kind” employee compensation programs.  Such benefits most prominently include health insurance, but also include maternity, paternity, and other family leave programs, fitness and recreational programs, meals and entertainment (group or individual tickets to baseball games, etc.), and reduced costs for company products and services.[45]  A 2002 study by the U.S. Chamber of Commerce found that benefits programs comprised a (surprisingly high) 42.3% of total employee compensation for American workers.[46]

Why would a worker prefer to receive specific goods or services as compensation rather than higher wages that the worker could use to buy anything she wanted, including health insurance, opera tickets, or coastal cleanups?  Analysts give two fundamental explanations, only the second of which is directly relevant to the present inquiry.  First, unlike ordinary wages, some in-kind benefits are not taxed as income under the United State Tax Code.[47]  These include big-ticket, obvious items like health insurance, but also less-obvious, less-tractable items like “free” air conditioning in the office.[48]  The tax explanation is important, but it is not complete, as many benefits do count as income under the tax code.[49]  In fact, the default rule is that benefits are taxed as income, although, as stated, there are important exceptions.[50]  Examples of nonexcludable benefits include routine snacks and meals, athletic club memberships, gift certificates to department stores, and the like.  The second, nontax explanation for why firms give employees benefits instead of higher wages is that firms sometimes have a cost advantage in procuring the in-kind item and can make it available more cheaply than their employees could acquire it in the open market.[51]  The cost advantage can be split between the firm and the worker, making both better off than they would be if the firm paid the worker enough cash to purchase the benefit outside of the firm.  As one scholar succinctly puts it: “When the firm can buy a benefit for a lower cost than the employee could buy it on their own, the firm is essentially acting as a buying agent for the worker.”[52]

III.  A Coasian Approach to a Firm-Based Theory of Consumption

A firm that wants to sell pencils might go into the open market and contract with a woodchopper for the chopping of wood, then make a deal with a graphite miner for the mining of graphite, then contract with a designer for the pencil’s design, then make a deal with a factory to compile all these elements into a pencil, which the firm would then sell.  Alternatively, a pencil business might organize these production components “in-house” by employing and deploying its own woodchoppers, miners, designers, and manufacturers.  How do firms decide how to organize pencil production?

In his groundbreaking 1937 essay The Nature of the Firm, Ronald Coase explained why production (pencil and otherwise) is sometimes accomplished through a series of arms-length contractual exchanges “in the market,” and at other times is organized by command and control “in the firm.”[53]  Coase famously argued that “[t]he main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism.  The most obvious cost of ‘organizing’ production through the price mechanism is that of discovering what the relevant prices are.”[54]  The high cost of discovering—Coase includes the cost of “negotiating” in this notion of discovery—prices for various inputs, such as raw materials and labor, can sometimes make it cheaper to just vertically integrate production components within one firm, where the combination and use of such components is determined by the day-to-day fiat of firm managers, rather than continually negotiated with outsiders.[55]

Coase’s “transactional” theory of the firm has had tremendous influence in economics generally and in corporate law scholarship in particular.[56]  Coase’s insights, however, have not been deployed to make sense of consumption activity.  Coase himself touched only very briefly on the issue of consumption in his article.  His one statement on the matter comes in an obscure footnote to a famous rhetorical question: “[W]hy, if by organizing one can eliminate certain costs and in fact reduce the cost of production, are there any market transactions at all?”[57]  The Coasian answer to the rhetorical question is, of course, that in some circumstances transaction costs in the market are lower than organizing (and monitoring) costs in the firm.[58]  But in the footnote to his rhetorical question Coase stumbles (well, Coase never stumbles, he jaunts) into consumption:

There are certain marketing costs which could only be eliminated by the abolition of ‘consumers’ choice’ and these are the costs of retailing.  It is conceivable that these costs might be so high that people would be willing to accept rations because the extra product obtained was worth the loss of their choice.[59]

I argue that this is not just conceivable, but is in fact widespread in the contemporary corporate organization of consumption.  Where price information and other transaction costs are relatively cheap, consumers prefer to make their own consumption decisions through spot transactions “in the market.”  But where information and other transaction costs are high, consumers fare better turning consumption decisions over to be made “in-house” through firm governance.[60]  Just as the worker sometimes gets higher wages by turning discretion over the use of her labor to corporate managers, rather than bargaining for its use in individual projects in the marketplace, and capital sometimes receives higher returns by relinquishing to firm managers discretion over how its money will be invested, so also does the consumer sometimes do better turning over discretion regarding what exactly will be consumed to firm managers.  The consumer sometimes finds it more efficient to eat what is “rationed” to her on “islands of conscious power” rather than go casting her own net about in the open sea.[61]

The consumer who purchases groceries, candy, insurance, hotel stays, or computer software all with a side of coastal cleanup[62] of course is free to patronize a different set of firms not tying their wares to beach cleanup, buy groceries, insurance and candy at a slightly cheaper price, and then separately make her own donations to the charities of her choice.  It is difficult to tell exactly what amount of beach cleanup one would be getting with a purchase of groceries, candy, or software, just as it is difficult to tell how much beach cleanup one can get with a direct donation.  That is to say, it is difficult for the consumer in these areas to determine prices.  The quantum of the individual consumer’s portion of the corporate donation with each purchase is so small that the opportunity costs involved in seeking out and executing atomistic purchases and donations would far outweigh any efficiency loss in just leaving the decision making up to an otherwise trusted firm and taking the corporate bundle.[63] The firm-based decisions will not exactly accord with the consumers’ private preferences, but the consumer has no better preference-maximizing option in serial spot markets, which are very costly to negotiate.[64]  These are precisely the conditions that Coase explained would cause activity to be brought in-house and managed by fiat, rather than left to the market.[65]

A similar analysis helps to explain the phenomena of consumer loyalty and rewards programs.  Rather than holding onto more cash with which they could buy a greater range of future goods, consumers in such programs turn over a quantum of future consumption decisions to the firm and take whatever “ration[s]” the firm later provides.  The consumer is willing to turn these decisions over to the firm because the opportunity and transaction costs of open-market activity would leave the consumer with less than she receives in the end by just taking what firms she knows she already likes and trusts decide by fiat to give her.  This kind of firm-based consumption corresponds in a sense to economists’ explanation of the service that conglomerates (firms that own companies in numerous distinct industries, but not every industry) provide for capital investors.  The conglomerate accomplishes for investors “a breadth-for-dept tradeoff . . . as the firm selectively internalizes functions ordinarily associated with the capital market.”[66]  Consumers similarly trade breadth-for-depth by relying on the firm’s capacities and expertise to select a limited set of consumption goods, in exchange for the full breadth of options that are available in spot markets.  This trade-off makes sense because the opportunity and transaction costs of open market activity would leave the consumer with less than if she simply took what the firm decides to give her.[67]

IV.  Reforming Corporate Law to Account for Firm-Based Consumption

The ubiquity of corporate charitable giving and consumer rewards programs makes implausible the view that what consumers want (or get) from their corporate associations is merely a product or service on offer, and nothing more, with no relational strings attached.  Consumers rely in ongoing fashion on the fiat of firm-based decision making.  This positive assessment can contribute to the normative case for making firm directors fiduciaries of their consumers.[68]  The shareholder primacy norm relies in part on the presumption that consumers manage their interests in corporate enterprise through serial, arms-length, fully-determined transactions (with government regulators as a backstop).[69]  In fact, the consumer’s dealings with the firm can be far more relational than the conventional depiction would lead us to believe.  Firm-based consumption decisions can only reliably be in the consumer’s interest if firm managers are taking consumer interests into account when making them.  If firm managers are charged only with pursuing shareholder interests then there is reason to doubt that consumer deference to the firm’s consumption decisions is reliably well placed.

Moreover, firm-based consumption may put consumer interests in more direct conflict with shareholder interests than is anticipated by canonical justifications for the shareholder primacy regime. Consider the case of rewards programs.  The consumer who participates in such a program pays a premium on earlier transactions (rather than taking a cash discount) in order to receive discounts or perks in connection with future consumption.  The consumer now has a stake in the long-term viability of the firm with which she has a loyalty association and wants that firm to be managed in a conservative, risk-averse fashion.  Shareholders are generally thought to be relatively more risk preferring as to the operations of any individual firm with which they are invested, given that most shareholders are highly diversified, enjoy limited liability for firm losses, and receive unlimited upsides from very profitable firms.[70]  This conflict bears not only on the survival of individual firms, but also on business decisions while the firm is a going concern.  Directors of a corporation with many retail outlets might consider it profitable to close a number of stores, or an airline might decide it can make more money by shutting down some routes.  While shareholders may benefit from such a move, consumers in loyalty programs may find that their points, miles, or discounts are worth less than when they were earned.[71]  Bringing this analysis together with concerns about the incentive (and ability) that shareholder-primacy corporations have to manipulate consumer risk perceptions and external regulations, the case for requiring corporate directors to manage their firms with fiduciary attention to consumers, in addition to shareholders, begins to look stronger.

Such an extension of the board’s fiduciary obligations may seem like a radical proposal at first, but this impression surely fades when one considers how little is actually required of corporate directors before corporate law will say their fiduciary duties are satisfied.  Corporate law does not permit courts or law professors to review the substance of the business judgments that corporate boards make.  Absent fraud or self dealing, courts will not second-guess the business judgment of corporate boards.[72]  This “business judgment rule” in corporate law ensures that it is the board, with its particular institutional expertise, that ultimately has authority over corporate operations, rather than some other less qualified institution.[73]  While corporate law abstains from substantive evaluation, it nevertheless does impose process obligations on the firm’s decision makers.  To satisfy fiduciary obligations to shareholders, corporate law requires directors to deliberate in an informed and sincere fashion about what course of action will be in the shareholders’ best interests.[74]  Imposing such obligations on the board with respect to consumers would help to ensure that decisions consumers turn over to corporate boards are made at least with consumer interests explicitly on the table.  Despite the ease with which these fiduciary obligations may be satisfied, canonical corporate theory holds that the process obligations do presently substantially benefit shareholders.[75]  This mechanism can also pay dividends to the consumer interest.[76]

More dramatic approaches to multi-stakeholder corporate governance are also cognizable.  One such possibility would be to provide consumers with an active voice in corporate governance, by extending to them the corporate suffrage that shareholders now exclusively enjoy.  Instead of getting soy milk with a side of coastal cleanup, consumers might get soy milk with a side of coastal cleanup and a fraction of a vote in the next corporate election.[77]  Consumers could be given access to the corporate proxy mechanism, allowing them to author and vote on “stakeholder proposals” through a process similar to the Securities and Exchange Commission’s Rule 14-a mechanism, which allows shareholders to author and vote on “proposals” broadly relating to firm operations.[78]  Mainstream corporate theorists consider such mechanisms presently to be only a weak kind of “backup” safeguard even for shareholder interests,[79] but they do provide a bit of backup protection, which might at least serve as a credible threat against directors by encouraging them to work hard and honest on behalf of their consumer stakeholders.

V.  Collective Consumer Preferences for Sustainability

As this Article was developed for a symposium on the subject of the “sustainable corporation,” I want to briefly examine some implications of firm-based consumption and multi-stakeholder corporate governance for spurring corporate “sustainability” in the sense of corporate operations that are environmentally sound.[80]  This issue is distinct from corporate charitable contributions to environmental projects unrelated to the firm’s business, and is arguably a much more important issue when it comes to environmental protection generally.  Some corporations tout sustainable production as an attribute of the product they are selling.  As I write these words I am sipping on a cup of coffee from Starbucks, Inc.  On the side of the cup it reads: “You.  Bought 228 Million Pounds of Responsibly Grown, Ethically Traded Coffee Last Year.  Everything We Do, You Do.”  The cup has many slogans on it, but the one that best encapsulates the point under analysis here is this: “You and Starbucks.  It’s bigger than coffee.”  While many product attributes are difficult for consumers to inspect and verify on their own,[81] the environmental consequences of a good’s production and distribution dynamics are almost always unverifiable through individual consumer evaluation.[82]  Starbucks is assuring me that the coffee I am drinking has been responsibly grown—but is this “mere” puffery, or can I take Starbucks’ word for it?[83]  Douglas Kysar has argued that even as consumers have in the last several decades developed a “preference for processes” (i.e., a desire for products made and disseminated with sound environmental practices), consumer protection laws have been stunted in their continued focus on advertising relating to the attributes of end products, failing to require firms to provide information about the processes through which products are created.[84]

If consumers desire sustainable business practices, then firms charged with attending to consumer interests at the level of firm governance might adhere to such practices more sincerely than firms charged merely with pursuing profits for shareholders.  Moreover, addressing consumer preferences for processes at the level of firm governance might help consumers overcome what I call “the consumer collective action problem.”[85]  In surveys, consumers routinely say that they prefer products that are made in an environmentally responsible fashion; however, they do not always put their money where their mouth is: “[t]here appears to be a significant gap between consumers’ explicit attitudes toward sustainable products and their consumption behavior. . . . [O]ne study suggests that though 40% of consumers report that they are willing to buy ‘green products,’ only 4% actually do so.”[86]  From the perspective of revealed preference theory, it might seem that consumers are not sincere when they tell researchers they prefer sustainability, given that they are unwilling to actually pay for it.[87]  But the seeming contradiction between asserted and revealed preferences may instead be evidence of a collective action problem.  Any one consumer knows that, because of the very marginal impact of any one product on environmental sustainability, the environment will only be sustained if other consumers, and not her alone, are also willing to purchase sustainable products.[88]  If a consumer assumes that others will be too selfish to purchase a (higher priced) sustainably produced good, then she is throwing good money after bad if she purchases the sustainably produced good: it costs her more, and the environment will not be sustained anyway.  Somewhat more deviously, if she assumes that other consumers will pay the premium for the sustainable product, then she may free ride and purchase the cheaper, unsustainable product, thinking she will still enjoy a sustained environment because of everyone else’s consumption habits.  Since all consumers are prone to this logical assessment, nobody ends up paying extra for the environmentally sustainable products, even though everyone is willing to—and indeed, would prefer to—but only if they could be assured everyone else was going to do so as well.

Charging corporate boards with attending to consumer interests at the level of firm governance provides one way of overcoming this consumer collective-action problem.  If firm directors explicitly strive to attend to consumer interests and to produce their products in a way that furthers those interests, they may choose to produce only sustainable products in a given product category, thus helping consumers to overcome their collective action problem.  This would be another invocation of the “rationing” program that Coase identified may sometimes be in the consumer interest.[89]

This argument is a specific application of the general principle that government action can help overcome collective-action problems that otherwise stymie solutions to enduring social problems (like building roads or providing for national defense).[90]  It may be wise, however, to have some kinds of governance decisions made at the level of individual firms, rather than in state or federal governments or administrative agencies, none of which can exercise the kind of informed, specific, and localized “business judgment” that corporate boards can in their own area of expertise.[91]

Of course, consumers and other stakeholders do not necessarily want sustainability.  Some consumers, or consumers at some times, may be indifferent to future environmental conditions.[92]  To the extent that this is true, then corporate law may have to find a way of making some other stakeholders’ interests, beyond shareholders and consumers (e.g., the community at large or even future generations) a part of corporate governance concerns.


Integrating consumption into theories of the firm, and considering ways in which corporate law can make firms more responsive to consumer interests, may contribute to corporate “sustainability” in more than just the environmental sense.  Corporations are highly useful mechanisms for gathering, organizing, and deploying resources in socially useful ways.  To sustain the availability of the corporate instrument, we must safeguard the institution against its own worst inclinations that might otherwise lead to its untimely demise.  Public opinion and popular political movements on both the right and the left seem to be fed up with corporations and appear to be galled in particular by the selfish, myopic nature of corporate operations.[93]  Among the reasons for such animosity is undoubtedly widespread dissatisfaction with the narrow, shareholder-focused agenda of corporate governance, which has been the driving force behind pollution of not just the natural environment, but our political landscape as well.[94]  This Article has argued that consumers, just like shareholders, already rely on the authoritative decision making structure of the firm.  Corporate governance reforms, which put directors into the business of talking about and working for not just shareholders, but workers, consumers, and other stakeholders, might contribute significantly to the long-term sustainability of not just the environment, but also the corporation in our society.

* Assistant Professor, Santa Clara University School of Law.  I would like to express my sincere thanks to Alan Palmiter, Kent Greenfield, and the editors of the Wake Forest Law Review’s Symposium, “The Sustainable Corporation,” for their invitation to participate in this symposium.  My thanks to Marx Sexton for her help in obtaining research materials.

[1]. See Albert C. Lin, Virtual Consumption: A Second Life for Earth, 2008 BYU L. Rev. 47, 62 (“Consumption often involves an attempt to satisfy nonmaterial needs—such as affection, participation, relationship, and understanding—through material means.”) (emphasis added) (citing Tim Jackson, Live Better by Consuming Less?, 9 J. Indus. Ecology 19, 25 (2005)).  See also id. at 64 (“[C]onsumption choices can also serve as a means of liberation from the constraining norms of closed communities.”).

[2]. See Martha T. McCluskey, Efficiency and Social Citizenship: Challenging the Neoliberal Attack on the Welfare State, 78 Ind. L.J. 783, 802–07 (2003) (attributing these ideas to the influence of economist John Maynard Keynes).

[3]. See Lin, supra note 1 (reviewing the rapid expansion of consumption across the globe, emphasizing the adverse environmental impact of such consumption, and exploring the possibility that “virtual” consumption may offer a solution to adverse environmental impact of this pattern, but concluding that such a solution is not very promising).

[4]. This work builds on my recent scholarship, which has endeavored to flesh out a more robust conception of the consumer interest in the corporation than is otherwise available in corporate law scholarship.  See generally David G. Yosifon, The Consumer Interest in Corporate Law, 43 U.C. Davis L. Rev. 253 (2009) [hereinafterConsumer Interest]; David G. Yosifon, The Public Choice Problem in Corporate Law: Corporate Social Responsibility after Citizens United, 89 N.C. L. Rev. 1197 (2011) [hereinafter Public Choice Problem]; David G. Yosifon, Discourse Norms as Default Rules: Structuring Corporate Speech to Multiple Stakeholders, 21 Health Matrix 189 (2011) [hereinafter Discourse Norms].

[5]. See Ronald Coase, The Nature of the Firm, 4 Economica 386 (1937).

[6]. As this Article has been developed for a symposium on the “sustainable corporation,” the focus here will be on the ways in which consumer preferences for sustainable consumption are sometimes managed “in-house,” within the firm, rather than through individual consumer transactions in the market.

[7]. Commentators employing “nexus of contracts” models of the corporation usually presuppose, typically without elaboration, that consumers are part of the “nexus,” along with investors, workers, and communities.  See Reinier Kraakman et al., The Anatomy of Corporate Law 6 (2004) (“[A] firm fundamentally serves as a nexus of contracts: a single contracting party that coordinates the activities of suppliers of inputs and of consumers of products and services.”); Michael C. Jensen & William H. Meckling, Theory of the Firm, 3 J. Fin. Econ. 305, 307 (1976) (describing the corporation as being “in a very real sense only a multitude of complex relationships (i.e., contracts) between the legal fiction (the firm) and the owners of labor, material and capital inputs and the consumers of output”).

[8]. For authoritative justifications of modern corporate theory and doctrine, see generally Stephen M. Bainbridge, The New Corporate Governance in Theory and Practice (2008); Frank H. Easterbook & Daniel R. Fischel, The Economic Structure of Corporate Law (1991); Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439 (2001).

[9]. My focus here is on large, publicly traded corporations. Closely held firms present unique analytic challenges, which I do not address here.  See Stephen Bainbridge, Corporation Law and Economics 797–842 (2002) (summarizing governance issues unique to close corporations).

[10]. Once shareholders turn over their capital to a corporation, they cannot demand that the firm cash them out by buying back their shares.  This exacerbates shareholder agency problems.  Shareholders can alienate their shares on secondary markets, but only at a price that is discounted by whatever corporate problems (managerial or otherwise) are motivating the sale.  See Larry E. Ribstein, The Rise of the Uncorporation 71–72 (2010); infra note 27.

[11]. See Bainbridge, supra note 8, at 28–30.

[12]. Meinhard v. Salmon, 164 N.E. 545, 548 (N.Y. 1928) (describing fundamental requirements of fiduciary obligation); see also Bainbridge, supra note 8, at 53 (“[T]he shareholder wealth maximization norm . . . indisputably is the law in the United States.”).

[13]. See Kent Greenfield, The Failure of Corporate Law 57–60 (2007).

[14]. See id. at 41–71 (synthesizing and extending corporate law scholarship critical of shareholder primacy, largely from the labor perspective).

[15]. Id. at 52–53.

[16]. Id. at 60–71.

[17]. See Consumer Interest, supra note 4, at 261–63.

[18]. See id. at 259–60.

[19]. See id.

[20]. This reliance on external government regulations, rather than internal firm governance, is also prescribed to protect workers from health and safety concerns that they cannot effectively protect themselves from through contract.  See Greenfield, supra note 13, at 60–66.

[21]. See supra note 4.

[22]. See Consumer Interest, supra note 4, at 261–70; see also Jon Hanson & David Yosifon, The Situational Character: A Critical Realist Perspective on the Human Animal, 93 Geo. L.J. 1, 169–70 (2004) (reviewing social science emphasizing the general failure of human intuition to appreciate the magnitude of situational influence over human behavior).

[23]. See Consumer Interest, supra note 4, at 169–71.

[24]. See Public Choice Problem, supra note 4, at 1198.

[25]. 558 U.S. 50 (2010).

[26]. See Public Choice Problem, supra note 4, at 1199.

[27]. As the “Toward” in my title implies, this Article is the first step in what will be an ongoing research project.  I continue this analysis in a forthcoming article,Locked-In: Shareholders, Consumers, and the Theory of the Firm [hereinafter Locked-In] (draft on file with author), which explores ways in which consumers can find themselves “locked-in” to consumption relationships with particular firms.  The problem of consumer “lock-in” presents a challenge to prevailing views of corporate governance, which typically considers “lock-in” to be a problem that only needs to be solved for shareholders.

[28]. See Consumer Interest, supra note 4, at 261–62.

[29]. Indeed, the imperative of encouraging repeat transactions in order to keep the firm going is among the justifications that proponents of shareholder primacy in firm governance give for why consumers do not need fiduciary duties.  See e.g., Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 4 (1991) (asserting that firms succeed by promising and delivering what people value); see also id. at 38 (“The more appealing the goods to consumers, the more profit.”).

[30]. Corporations can deduct charitable contributions from their federal income taxes (up to ten percent of their taxable income).  See IRS Publication 526 (2010), Charitable Contributions, available at
/publications/p526/index.html.  This corporate tax savings may to some extent be reflected in discounted prices to the consumer, but the discount would be less than the possible savings available from foregoing coastal cleanup altogether.

[31]. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 Va. L. Rev. 247, 290–92 (1999) (emphasizing the role of the board of directors in divvying up gains-to-trade among all stakeholders in corporate enterprise).

[32]. Whole Foods’ corporate ethos generally expresses a commitment to sound environmental practices.  But a number of journalistic inquiries have drawn attention to elements of Whole Foods’ business practices that may be misleading in this regard.  See, e.g., Field Maloney, Is Whole Foods Wholesome?, Slate, Mar. 17, 2006, (arguing that Whole Foods misleads consumers about the amount of organic food it supplies from small, family-owned farms and claiming that Whole Foods’ promotions “artfully mislead customers about what they’re paying premium prices for”).

[33]. See, e.g., Victor Brudney & Allen Ferrell, Corporate Charitable Giving, 69 U. Chi. L. Rev. 1191, 1192–94 (2002); Geoffrey Miller, Narrative and Truth in Judicial Opinions: Corporate Charitable Giving Cases, 2009 Mich. St. L. Rev. 831, 842–43.

[34]. See Press Release, Cal. Coastal Comm’n, California Coastal Commission Announces the 26th Annual California Coastal Cleanup Day (Aug. 31, 2010), available at

[35]. See Charitable Giving Statistics, Nat’l Philanthropic Trust, (last visited Aug. 30, 2011).  It is possible to analyze this as a “tying” problem under anti-trust laws which prohibit firms with monopolistic power in one consumer market from requiring consumers who want to purchase their product to also purchase a distinct or “tied” product.  See generally Einer Elhauge, Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory, 123 Harv. L. Rev. 397 (2009); Alan J. Meese, Tying Meets the New Institutional Economics, 146 U. Pa. L. Rev. 1 (1997).  Commentators appear to sometimes use the term “bundle” to refer to benign or competitive “tying” arrangements.  A stricter usage refers to “bundles” as the discounted, grouped sale of two or more items that are otherwise sold separately, and “ties” as sales of two or more items that a firm will only sell together.  See Daniel A. Crane, Mixed Bundling, Profit Sacrifice, and Consumer Welfare, 55 Emory L. J. 423, 433 n. 38 (2006).  Using these terms, the coastal cleanup example appears to be a benign tie, because the markets that I am describing, grocery stores (even health food stores), clothing retailers, insurance, and candy are all quintessentially competitive markets.  The coastal cleanup is not, strictly speaking, bundled with these firms’ goods, since the firms will not sell you soy milk, insurance, candy, etc. without the slice of beach cleanup (i.e., will not reimburse your pro-rata share of the contribution if you want to refuse to be a part of it).  So again, the question is why are these firms competing with ties (or more loosely, bundles) that involve their own products and largely distinct sustainability initiatives, rather than on price?

[36]. See infra text accompanying notes 80–93.

[37]. See Marriott Rewards, Marriott,
/rewards-program.mi (last visited Aug. 30, 2011).

[38]. See Get the Card, American Express, (last visited Aug. 31, 2011).

[39]. See generally Frederick F. Reichheld, Loyalty Rules! (2001).

[40]. See id.

[41]. Tim Donnelly, How to Start a Customer Rewards Program, (Aug. 17, 2010),

[42]. See Hanson & Yosifon, supra note 22, at 44–46 (reviewing studies on hyberbolic discounting); Christine Jolls, Cass R. Sunstein & Richard Thaler, A Behavioral Approach to Law and Economics, 40 Stan. L. Rev. 1471, 1539–42 (1998) (exploring policy implications of hyberbolic discounting).

[43]. See Hanson & Yosifon, supra note 22, at 44–46.

[44]. Commentators have provided idiosyncratic explanations for specific programs.  For example, airline “miles” programs have been explained as a method of (open) secret compensation for employees, who are reimbursed for corporate (or law school) related travel by employers, but keep the accumulated miles in their personal rewards account for future personal travel.  Moreover, this compensation has typically evaded taxation.  See Abhijit Banerjee & Lawrence Summers, On Frequent Flyer Programs and Other Loyalty-Inducing Economic Arrangements, Harvard Institute of Economic Research, Discussion Paper Number 1337 (1987), available at (last visited Aug. 21, 2011).  Lawrence Ausebel has argued that credit card companies compete on the basis of rewards programs rather than on interest rates because most consumers (mistakenly) predict that they will use credit cards merely for convenience and will not use the credit; they therefore do not distinguish between interest rates when deciding which cards to patronize.  Lawrence M. Ausubel, The Failure of Competition in the Credit Card Market, 81 Am. Econ. Rev. 50, 70–76 (1991).  Others argue that rewards programs are the bounty of transfers from the relatively poor, who cannot qualify for credit cards with rewards programs, to relatively wealthy consumers who do use them, since credit card interchange fees are impounded into the price of commodities by retailers who do not offer discounts for cash payments (retailers are forbidden by credit card companies from offering such discounts).  See, e.g., Adam J. Levitin, Priceless? The Economic Costs of Credit Card Merchant Restraints, 55 U.C.L.A. L. Rev. 1321 (2008).  These interesting arguments undoubtedly go some distance in explaining specific programs, but the ubiquity of rewards programs in consumer markets suggests that something more general may help explain their use.  See Banerjee and Summers, supra, at 2.  Moreover, these accounts do not explain why airlines or credit cards attract consumers with rewards offering a limited universe of consumption, rather than cash, which consumers could put to any privately preferred use.  I explore a “firm-based consumption” explanation infra, text accompanying notes Part II.B.

[45]. Anthony M. Marino & Jan Zabojnik, A Rent Extraction View of Employee Discounts and Benefits (Oct. 16, 2005), available at

[46]. Id.

[47]. 26 U.S.C. § 132 (2006).

[48]. See generally Taxable Fringe Benefits Guide, Internal Revenue Service (2011), (examining various benefits exempt from taxation under the Internal Revenue Code).

[49]. Moreover, without some other explanation for benefits programs, we might expect that many employees would still prefer to have cash, even if they had to pay taxes on it, rather than taking a limited set of in-kind goods tax-free.

[50]. See Taxable Fringe Benefits Guide, supra note 48, at 7 (“In general, taxable fringe benefits are reported when received by the employee and are included in employee wages in the year the benefit is received.”) (citing 26 U.S.C. §451(a) (2006)).

[51]. See Marino & Zabojnik, supra note 45, at 1.

[52]. Darren Lubotsky, The Economics of Employee Benefits, in Employee Benefits: A Primer for Human Resource Professionals 34 (Joseph Martoccio ed., 2004).  A third interesting (though not directly relevant to the present inquiry) explanation for the prevalence of benefits in lieu of more cash is that it provides employers a cheap mechanism through which to distinguish more desirable from less desirable job applicants.  See Marino & Zabojnik, supra note 45, at 10.  For example, if firm managers believe that employees who exercise regularly are likely to be more productive than workers who do not exercise, then firms might find it useful to offer a mix of cash and gym memberships rather than all cash as compensation.  Workers who are likely to use the gym membership will value it and be attracted to the compensation package, while workers who do not value gym memberships will be less likely to apply for the job.  The compensation structure is a more reliable sorting mechanism than would be simply asking applicants whether or not they enjoy exercising, which might seem both rude and legally risky.  See id.

[53]. See Coase, supra note 5.  The Nature of the Firm was Coase’s first article.  He published it at the age of twenty-seven, reportedly based on a lecture he first developed at the age of twenty-one.  See Donald N. McCloskey, The Lawlerly Rhetoric of Coase’s The Nature of the Firm, 18 J. Corp. L. 425, 426 n.79 (1993).

[54]. Id. at 390.

[55]. Id. at 388 (“Outside the firm, price movements direct production, which is co-ordinated through a series of exchange transactions on the market.  Within a firm, these market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-co-ordinator, who directs production.”).

[56]. See Jason Scott Johnston, The Influence of The Nature of the Firm on the Theory of Corporate Law, 18 J. Corp. L. 213, 214 (1993).

[57]. Coase, supra note 5, at 394.

[58]. Id. at 395 (“[A] firm will tend to expand until the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange on the open market or the costs of organizing in another firm.”).

[59]. Id. at 394 n.2.

[60]. See id.

[61]. See D.H. Robertson, The Control of Industry 85 (1930) (describing business corporations as “islands of conscious power in this ocean of unconscious co-operation [i.e., the price mechanism in the market] like lumps of butter coagulating in a pail of buttermilk.”).

[62]. See supra Part II.A.

[63]. See M. Todd Henderson & Anup Malani, Corporate Philanthropy and the Market for Altruism, 109 Colum. L. Rev. 571, 576–77 (2009).

[64]. See Coase, supra note 5, at 114–19.

[65]. My analysis here bears some resemblance to Henry N. Butler and Fred S. McChesney’s assessment of corporate charitable giving from the shareholder perspective in Why They Give at the Office: Shareholder Welfare and Corporate Philanthropy in the Contractual Theory of the Corporation, 84 Cornell L. Rev. 1195 (1999).  Butler and McChesney take as their point of departure the idea that some corporate philanthropy benefits shareholders because it creates goodwill for the firm in dealing with workers, consumers, and communities, leading to more profit opportunities (their example is General Motors sponsoring a Ken Burns documentary).  Id.  It is conceivable, Butler and McChesney argue, that rather than firms giving directly, shareholders could make donations in their individual capacity, contingent on the recipient noting their support from “shareholders of GM.”  Id. at 1203.  This might achieve the same kind of goodwill for GM, but at a much higher cost.  “[I]t is not hard to see why in fact shareholders wold prefer to give at the office . . . .  [T]he firm already has the earnings (current or past) necessary for the philanthropy.  Distributing the earnings as dividends which [shareholders] can contribute individually simply imposes an additional transaction cost . . . .  Each shareholder must send in his [or her] own check; write a letter explaining that the gift is made in the firm’s name . . . .”  Id. at 1203.  Consumers benefit from charitable giving in a similar fashion.  To the extent that such giving creates goodwill for the firm it may more easily attract shareholders, reducing the cost of capital, or workers, reducing the cost of labor, all of which will reduce the prices that consumers have to pay for the firm’s goods and services.  Individual consumers could donate to the coastal cleanup in their own name, but then they lose such collateral benefits.  They could make the donation conditional on the recipient noting support from “consumers of GM,” but in doing so they take on unnecessary transaction costs.  Further, as Butler and McChesney note, if individual shareholders were to make donations qua GM shareholders, then nondonating shareholders would free ride on those who make donations (making would-be donors less likely to contribute, since they anticipate the free riding).  Firm-based philanthropy helps shareholders and consumers alike overcome this free-riding problem.  Butler and McChesney acknowledge that firm managers may sometimes exploit the firm by donating to charities they privately prefer rather than charities that would benefit the firm, but such costs have to be balanced against the gains that are otherwise available through corporate charitable giving.  Id. at 1205.

I am taking the argument a step further to suggest that corporate charitable giving may serve the private interests of individual consumers irrespective of the benefits to the firm, in that firms may enjoy transaction cost advantages over individuals in making charitable donations, even without considering the impact of such donations on corporate reputation.  Large firms can make it somebody’s entire job to study and manage the organization’s philanthropic activity.  There is some evidence that firms are beginning to make use of sophisticated metrics to evaluate the utility of their philanthropic activity, something that is well beyond the capacity of most individuals or families.  See, for example, materials collected at, the website for an international organization of corporate CEOs called the Committee Encouraging Corporate Philanthropy, which collects research on best practices in corporate philanthropy.  See also Henderson & Malani, supra note 63 (arguing that business corporations sometimes have a competitive advantage in the supply of “altruism” over nonprofit and government entities, and urging tax reforms that treat nonprofits and for-profits more equally).

[66]. Oliver Williamson, The Modern Corporation: Origins, Attributes, Evolution, 19 J. Economic Lit. 1537, 1546 (1981).

[67]. Of course, an alternative explanation is that consumers do not benefit at all from charitable-giving ties or loyalty programs, but rather that such programs succeed only by manipulating consumer perceptions in the service of corporate managers or shareholders.  Such an alternative explanation is plausible and would support arguments I have otherwise made for requiring firms to treat consumers in a fiduciary, rather than an arms-length, fashion.  See Consumer Interest, supra note 4.  However, as noted, here I am trying to (at least temporarily) leave the question of manipulation to the side and am trying to ground justifications for consumer-oriented firm governance in a more general theory of firm-based consumption.

[68]. Note that Coasian analysis of the contours or “nature” of the firm provides no deductively applicable answers regarding what rights or duties should run to those stakeholders determined to be inside or outside the firm.  See Oliver Hart, An Economist’s Perspective on the Theory of the Firm, 89 Colum. L. Rev. 1757, 1764 (1989) (arguing that the intellectual turn in the second half of the twentieth century from entity to nexus-of-contract theories of the firm merely “shift[s] the terms of the debate” from a focus on distinctions between entities and markets to an assessment of “why particular ‘standard forms’ [or terms within standard forms] are chosen”).

[69]. Id. at 258–61.

[70]. See Bainbridge, supra note 8, at 114–20 (explaining risk preferences of diversified shareholders).

[71]. Some firms’ reward programs purport to reserve the right to unilaterally change the terms of their programs at any time, at their discretion, even as to already accumulated “points” or “miles.”  See Peter A. Alces & Michael M. Greenfield, They Can Do That? Limitations on the Use of Change-of-Terms Clauses, 26 Ga. St. U. L. Rev. 1099, 1103–04 (2010) (citing examples from JetBlue, Inc., and, Inc.).  Some economists argue that loyalty programs “artificially” inflate consumers’ cost of switching from one seller to another, resulting in higher prices.  See Gianluca Faella, The Antitrust Assessment of Loyalty Discounts and Rebates, 4 J. Competition L. & Econ. 375, 402–03 & n.96 (2008) (noting the issue and citing literature).  I explore the problem of “switching-costs” in Locked-In, supra note 27.

[72]. See Bainbridge, supra note 8, at 106–26 (reviewing doctrine of and justifications for the business judgment rule).

[73]. Id.

[74]. See Discourse Norms, supra note 4, at 1236.

[75]. See Bainbridge, supra note 8, at 77–100.

[76]. See Discourse Norms, supra note 4, at 1236.

[77]. The loyalty and rewards programs that many firms have in place suggest that the technological means to track consumer purchases, and apportion consumers votes in corporate elections, is already available.

[78]. See Consumer Interest, supra note 4, at 311–12.

[79]. See Bainbridge, supra note 8, at 201–19.

[80]. See generally Jeff Civins & Mary Mendoza, Corporate Sustainability and Social Responsibility: A Legal Perspective, 71 Tex. B.J. 368, 369 (2008).

[81]. See supra text accompanying notes 18–19.

[82]. See supra text accompanying notes 18–19.

[83]. “Responsibly” is obviously a less tractable concept than is a label specifying the amount of caffeine or sugar in the drink (which, come to think of it, my beverage is lacking).  When I speak of taking the firm’s “word” for it when it says the coffee it sells is responsibly grown, I am asking if I can trust that the firm means by “responsible” what I reasonably mean by the word, what workers involved in the coffee production reasonably mean by the word, and what the law and ethics generally mean by the word.  See Discourse Norms, supra note 4, at 104 (applying Michael Jensen’s work on integrity to an exploration of the viability of multi-stakeholder corporate governance).

[84]. See Douglas A. Kysar, Preference for Processes: The Process/Product Distinction and the Regulation of Consumer Choice, 118 Harv. L. Rev. 525, 641 (2004) (“[The] process/product distinction has been invoked to question the authority of an importing nation to ban or label products that are developed using processes deemed objectionable by its citizens; to rationalize ignoring overwhelming consumer support for mandatory labeling of food products that contain genetically engineered ingredients; and to narrow the constitutional conditions under which states may force manufacturers to disclose process information or to face legal challenges for disclosing false or misleading process information.”).

[85]. See Consumer Interest, supra note 4, at 283–85.

[86]. Michael G. Luchs, et al., The Sustainability Liability: Potential Negative Effects of Ethicality on Product Preference, J. Marketing, Sept. 2010, at 18, 18.  See alsoKysar, supra note 84.

[87]. Economists typically treat preferences as being “revealed” by conduct. Paul A. Samuelson, A Note on the Pure Theory of Consumer’s Behaviour, 5 Economica 61, 62 (1938).

[88]. This assumes that consumers do not have a fetishistic desire for products produced with sound processes, in the sense that what they really desire is to possess products with such transcendent qualities.  Rather, what they want is both to have the basic product and to have environmental sustainability.  See Margot J. Pollans,Bundling Public and Private Goods: The Market for Sustainable Organics, 85 N.Y.U. L. Rev. 621, 637–38 (2010).

[89]. See supra text accompanying notes 53–59.

[90]. See Mancur Olson Jr., The Logic of Collective Action 12–16 (1965).

[91]. Cf. Stephen M. Bainbridge, Catholic Social Thought and the Corporation (2003), available at
?abstract_id=461100 (describing and applying the principle of subsidiarity—the idea that other things equal decisions should be made at the most local level possible, rather than at a distance by hierarchical decision-makers—to corporate law concerns, although concluding that corporate governance should have no role other than pursuing shareholder value).

[92]. See Luchs et al., supra note 86.

[93]. See Evan Osborne, The Rise of the Anti-Corporate Movement: Corporations and the People Who Hate Them 41–70 (2009).