Introduction
Think back to October 2019. You are Adam Silver, chief executive of the NBA. Houston Rockets general manager Daryl Morey for Hong Kong pro-democracy protests. Tilman Fertitta, the Rockets owner, disowns Morey's position. China bans coverage and lodges a diplomatic complaint. Democrat and Republican lawmakers slam the NBA's weak response. NBA fans and players begin to protest and voice support for Hong Kong and Morey. Nike pulls Houston Rockets merchandise from Chinese stores. For context, 640 million Chinese watched the 2017-18 season.
So, what do you do?
Corporations can no longer hide behind a facade of neutrality. As they grow in size and scope, their decisions impact the daily lives of millions in real time. In the age of social media and political polarization, corporations are compelled to take positions publicly and visibly, even if they are reluctant to do so. They must constantly balance and re-balance between a bewildering array of competing interests, including shareholders, employees, creditors, consumers, competitors, supply chains, regulators, legislators, politicians, activists, NGOs, celebrities, foreign governments, and international markets. Corporate lawyers must be alive to this evolving dynamic.
Why it matters
How a corporation navigates political controversy today will determine its success tomorrow. Its ability to do so matters for three reasons. First, political controversy is not only a source of significant risk, but also an opportunity. Second, the way ahead is unclear. Corporate law imposes duties and obligations to address shareholder and stakeholder interests, but with little practical guidance on how to do so. Yet, directors and senior officers must make decisions daily to steer their corporations through the political maelstrom. Third, political controversy is amplified through social media like never before. Their users, quick to pass judgment, have expectations of corporations that go far beyond a simple duty to maximize shareholder wealth.
Elon Musk鈥檚 2022 takeover of Twitter provides a timely example. In 2017, only of top CEOs were personally active on Twitter. Today, it is at the centre of a raging debate on free speech and the proper role of private corporations in the world鈥檚 digital town square. Musk promised to restore free speech while preventing the platform from descending into a 鈥�.鈥� He privatized the company, laid off half of its 7,500 employees, eliminated board oversight, and relaxed content moderation. Large advertising firms immediately reduced their exposure to the platform, prompting about Twitter鈥檚 legal risks and its ability to pay its creditors. Ignoring warnings from Twitter鈥檚 staff, Musk rolled out a monthly 鈥淭witter Blue鈥� subscription model for verified users. Predictably, new 鈥榲erified鈥� users began to impersonate real accounts. Pharmaceutical giant Eli Lilly was in a tweet promising free insulin. Three hours and thousands of retweets later, its stock had dipped 4.7% (a reported loss), and the company halted advertising on the platform. In less than a month, Musk had driven away . He has since paused the verification program.
Key positions: Shareholder versus stakeholder capitalism
The shareholder versus stakeholder capitalism debate casts a long shadow over corporations confronting political controversy. In 1970, Milton Friedman famously that 鈥渢he social responsibility of business is to increase its profits.鈥� He argued that when corporate officers act for the social good, they violate the principal-agent relationship. In other words, they fund personal projects with other people鈥檚 money. Contemporary shareholder capitalists like Vivek Ramaswamy argue further that when companies try to do 鈥榞ood,鈥� they and accelerate political polarization. Citizens and governments, not executives, should tackle social issues. Political controversy is to be avoided, lest it interfere with the responsibility to increase shareholder profit.
Yet as points out, Ramaswamy鈥檚 position is unsupported by data. For example, Sonnenfeld鈥檚 research suggests that corporate responses to the recent US Supreme Court abortion decision were driven by 鈥済eography, the workforce and a firm鈥檚 customer base鈥� rather than 鈥渢he personal politics of a given boss.鈥� In short, controversial decisions taken by corporations are not driven by the elite at Davos. Rather, they are calculated business decisions.
The shareholder capitalism argument remains highly influential, but it is showing its age. The negative externalities of climate change, amongst others, have grown too large to ignore. Stakeholder capitalism - the idea that corporations should serve the interests of all their stakeholders, appears to be . Friedman himself that 鈥渋t may well be in the long鈥恟un interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government.鈥� Further, more people than ever now profit from the corporate form. In Friedman鈥檚 time, around 10% of American households directly held shares. By 2019, it was . A growing number of people are both shareholders and stakeholders with interests beyond the quarterly bottom line.
False dichotomies
The stakeholder versus shareholder capitalism debate invokes a false dichotomy that is no longer relevant or useful in helping corporations navigate today鈥檚 complex operating environment. Shareholder primacy has long been the overriding concern when making boardroom decisions. This premise remains fundamental, but shareholder interests no longer offer directors a straightforward answer to how they should run corporations, because 鈥�.鈥� Increased awareness of 鈥榚nvironmental, social, and governance鈥� (ESG) issues means that shareholder and stakeholder interests converge more frequently, and the ubiquity of social media accelerates their interaction.
The financial incentives that drive corporations no longer stand in isolation from other societal interests. Corporations have grown in size and scope, such that their positions on politicized issues impact the daily lives of millions. In July 2022, the Securities and Exchange Commission plans to ease barriers for shareholder proposals. In the 1980s, shareholder proposals to divest from ethically dubious supply chains were as not being related to the best interests of the corporation. Today, the practice is .
This leads to the conclusion that the question facing corporations today is no longer whether to engage in political controversy, but which issues to engage in and how to do so. The challenge lies in navigating the oftentimes conflicting interests between shareholders and stakeholders. For example, Disney tried to remain silent and neutral when Florida passed the Parental Rights in Education Act, known as the 鈥淒on鈥檛 Say Gay law,鈥� in March 2022. The law forbids early grade instruction on gender and sexual orientation. Employee protests finally pushed Disney鈥檚 Chief Executive Officer (CEO) Bob Chapek to against the law. The Florida Governor retaliated by Disney鈥檚 special tax status.
Corporate law is an unhelpful guide to navigating political controversy 鈥� but does it have to be? to the Canadian Business Corporations Act subsection 122(1.1) acknowledge that the 鈥渂est interest of the corporation鈥� may require directors and officers to consider other stakeholder interests. However, the act provides little guidance on how to balance them. The jurisprudence .
To successfully navigate a political controversy, directors should articulate their corporation鈥檚 purpose and position before one arrives at their doorstep. They cannot afford to bury their heads in the sand. For example, on June 24, 2022, Bank of America announced an expansion of employee healthcare coverage and funding for travel expenses for abortions 鈥� the very same day that the US Supreme Court overturned Roe v Wade. In , the company was already matching their employees鈥� donations to Planned Parenthood. It was only able to react to the Dobbs decision so quickly because it had already taken a on the issue.
The path ahead is neither straightforward nor easy. What emerges however, is that the deceptively neat distinction between governmental 鈥榠ntervention鈥� and market self-regulation prevents us from realizing the transformative opportunities that a closer collaboration between private and public actors can enhance. Such opportunities exist, even where the dominant mantra suggests a 鈥渘ever鈥� or 鈥渓ater, perhaps鈥�.
As external actors apply intensifying pressure for corporations to do 鈥榞ood,鈥� shareholders and creditors are not letting corporations jettison their duty to book a profit. While major banks supported post-Dobbs abortion rights and gender equality, they also provided to lawmakers who backed anti-abortion legislation. The NBA has quietly to Chinese screens, despite its prior objections to Chinese conduct in Hong Kong. In , Disney remains silent as Governor Ron DeSantis moves to target gender-affirming care for trans youth. It now appears that former Disney CEO Bob Iger will Bob Chapek, despite a previous board decision to renew Chapek鈥檚 contract for three years.
Conclusion
Corporate lawyers must be alive to the effects of political controversy, including the risks and opportunities it presents. Above all, they must prepare to navigate it in the face of legal ambiguity. They must avoid zero-sum or binary thinking that pits profits against broader interests. Lawyers must keep abreast of emerging theories like , as consumers, employees, and regulators demand more serious engagement with corporate social responsibility and ESG. They must attend to, and advise their clients of, the new costs of doing business.
The corporate landscape has changed, and it shows no signs of reversing course. Speaking to the Disney controversy, Martin Whittaker, CEO of Just Capital, a leading nonprofit engaged in stakeholder capitalism, that 鈥渢his is not going away, and it's not just about LGBTQ rights. There's a broader shift that's happening.鈥� The issue is about the 鈥渞ole business plays in society.鈥� For any large corporation, the need to navigate a political controversy is a matter of time. Corporations must learn how to do so if they are to chart a course through the storms coming their way.