Prof. Kent Greenfield

Hard Law or No Law?

In the United States, most corporate law is “soft” law. The duty of care is a shadow of its former self, and the duty of loyalty has become a market-based test. Both are adjudicated, if at all, with a level of judicial deference that would be shocking in any other context. This deference goes by the name of the “business judgment rule,” as if it constitutes a deference to the better judgment of experienced business decision makers. But in reality it acts as a “get out of jail free” card that makes any vestige of hard fiduciary duty quite soft. Corporate executives are much more fearful of the reprimands of the marketplace than of judicial enforcement of fiduciary duties.

In addition, any obligation in the United States toward stakeholders is the softest and most abstract of duties. In fact, the word “duty” is a misnomer. In those states — most notably not Delaware — in which corporate executives may take into account the interests of non-shareholder stakeholders, this is permissive rather than mandatory. In Delaware, stakeholders may only be taken into account in corporate decision making if in so doing the interests of shareholders are advanced. Of course the business judgment rule would act to protect executives who took a broad view of their obligations, but this is again discretionary and haphazard. Soft law indeed.

Even with under the current push for states to adopt statutes providing for “B Corporations” — corporations that articulate corporate purposes that go beyond shareholder gain — such statutes are opt-in. Only those corporations that choose these obligations will have them, and the remaining corporations will not be burdened by a hint of stakeholder concern.

All in all, both with regard to fiduciary duty in general and toward stakeholders in particular, the law is so soft that we could fairly say that in fact there is no law.

Given this reality, harder law is indeed required. Fiduciary duty should constrain managers and require genuine care and loyalty. And these duties should run to non-shareholder stakeholders, both in terms of how the duties are articulated and in how the structure of corporate governance makes those duties a reality.