Pomerantz Lecture Focuses on Moral Duties of Public Corporation Board Directors

By Nanette Maxim

Corporate boards have long operated under shareholder profit incentives, but in an era in which corporate responsibility is part of the very DNA of big business, and amid growing concerns about wealth disparity, times are changing.

Arguing that directors on a public corporation’s board have independent moral duties separate from their legal duties under state fiduciary law, Professor Jeffrey N. Gordon, Richard Paul Richman Professor of Law at Columbia Law School, presented a wide-ranging, insightful examination of the subject on Oct. 18 as part of the Abraham L. Pomerantz Lecture Series.

Gordon, co-director of both Columbia’s Millstein Center for Global Markets and Corporate Ownership and the Richman Center for Business, Law and Public Policy, as well as a longtime fellow of the European Corporate Governance Institute, was joined in the discussion by Adam O. Emmerich co-director of both Columbia’s Millstein Center for Global Markets and Corporate Ownership and the Richman Center for Business, Law and Public Policy, as well as a longtime fellow of the European Corporate Governance Institute, was joined in the discussion by Adam O. Emmerich, partner in Wachtell, Lipton, Rosen & Katz’s corporate practice, and Amy J. Sepinwall, Associate Professor of Legal Studies and Business Ethics at the Wharton School of the University of Pennsylvania. Amy J. Sepinwall, Associate Professor of Legal Studies and Business Ethics at the Wharton School of the University of Pennsylvania. James A. Fanto, Brooklyn Law School’s Gerald Baylin Professor of Law and Co-Director of the Center for the Study of Business Law and Regulation, served as moderator.

“Part of what provoked me to think about the moral duty of directors is that this is a time of great unease about the role and responsibility of large firms which structure the economic life of the modern world, and which therefore have an influential role in social life in a more general way,” Gordon said. “For a long period, roughly 30 years, the pursuit of shareholder value appeared to be a sufficient guide to the behavior of the managers and the board of directors. The recent Business Roundtable reversal of that sentiment in favor of a broader conception of what the firm is about is an important social marker, even if its practical effect is constrained.”

Gordon elucidated the unease related to distributional concerns of stock ownership, including, in his view, “the inequity that in the U.S., the top 10 percent of households own approximately 84 percent of the stock market value in total. What this means is that the pursuit of shareholder value as a social and political end in the United States depends upon a kind of trickle-down… that some meaningful fraction will be shared with non-stockholders through increased wages and benefits.” An additional unease, Gordon said, “relates to the corporation’s capacity to create positive and negative externalities, the opportunities and responsibility beyond the immediate set of stakeholders,” within today’s framework of environment, social, and governance (ESG) investing.

What the debates on these issues lack, said Gordon, is “a robust account of human agency.” Therefore, Gordon premised his lecture on six claims, beginning with “a specific claim of personal agency that the directors of public firms have moral duties that provide some reason to approve or reject specific corporate action independent from whether the action will increase or decrease shareholder value. My claim is that such moral considerations are legitimately part of the rules of the game.”

Additional claims, Gordon explained, include:

• The basis for the directors’ moral deliberation should be considered not a restricted set of reasons that might be thought appropriate for a director of a business firm, such as those that depend upon the smooth functioning of market economy—a morality of the marketplace where such market perfection does not, in fact, exist. The directors’ moral duty is limited in scope to decisions where the potential for harm is large and where the directors should reasonably have notice.
• That any decision that the directors take on moral grounds, even at the expense of maximizing the profitability of the firm, will be protected by the business judgment rule [the legal doctrine that courts defer to boards who act within the fiduciary standards of loyalty, prudence, and care directors owe to stakeholders].
• That the key legitimating element of directors’ moral autonomy and decision-making on moral grounds is shareholder voting.
• And a cautionary claim: Since the nature of directors’ decision-making is through the action of a board, the moral judgments of individual directors may not overlap or cohere. How well do notions of complicity arise to group decision-making?”

In building out each of these claims, Gordon cited two instances that highlight the problematic moral judgements of boards: the first related to the directors of Fox News in its coverage of the COVID-19 pandemic and vaccination, and the second, the directors of Twitter (now known as X), who Gordon said, “in selling the company to a party likely to reject the directors’ previously considered view of the protections necessary for a public forum and selling it without any guardrails for its protection in that regard.”

In response, Sepinwall, of the Wharton School, pointed out that given the current underenforcement of corporate crime, “appealing to the moral reasons for directors to take responsibility for corporate conduct may be the best mode of prevention.” Sepinwall also agreed with Gordon’s points about the dynamics of responsibility diffusion. “Corporations are not meant to be morality-laundering machines where shareholders get to put money in, managers get to use the money in dirty ways, and then shareholders get to walk away with morally clean profits,” Sepinwall said. She also took up the issue of ESG initiatives, whose actual returns of profitability and productivity, she explained, are not always evident but that they serve a greater purpose. “That there are constraints on profit-making that go beyond the law’s morality is a constraint of its own, and morality mandates not only that directors refrain from wrongdoing… It mandates also that directors sometimes seek to do good even when it’s going to cost the corporation some money,” she said.

Emmerich, whose practice focuses primarily on mergers and acquisitions, corporate governance, and securities law matters, brought the conversation back to the struggle with the philosophy of economist Milton Friedman, who said the only social responsibility of business is to use its resources and engage in activities designed to increase its profits. Emmerich, whose practice at Wachtell, Lipton, Rosen & Katz focuses primarily on mergers and acquisitions, corporate governance, and securities law matters, brought the conversation back to the struggle with the philosophy of economist Milton Friedman, who said the only social responsibility of business is to use its resources and engage in activities designed to increase its profits. Emmerich expanded on Gordon’s points about the complicated issues of M&A, “the idea of value maximization that often comes into conflict with enforcement of norms or non-contractual obligations that may not be legally enforceable but that otherwise would have continued in the ordinary course to benefit employees or other stakeholders in the corporation.”

He also expounded on the legacy of the 1986 case Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., that resulted in the “Revlon rule,” the legal principle stating that a company’s board of directors must make a reasonable effort to obtain the highest value for a company upon a sale. “I don't think the judges who over the decades and centuries crafted the business judgment rule would have cast themselves as moral philosophers, but effectively what they said was, it's not a matter in which we can delve into people's hearts and minds and supervise on a micro basis, evaluating whether every action was profit-maximizing or whether there was a respect for the principles of stewardship,” Emmerich said. “Revlon was, if you want to call it, a case about Milton Friedman and, as we've talked about here today, we're still fighting with Milton Friedman.”

President and Joseph Crea Dean David D. Meyer introduced the Pomerantz lecture, a decades-long series celebrating the legacy of the late Abraham Pomerantz, a distinguished securities lawyer who was a 1924 graduate of Brooklyn Law School and was widely known as a champion of investors’ rights. The series was established by the Pomerantz family, the Pomerantz law firm, and the Friends of Mr. Abraham Pomerantz. Meyer especially thanked the members of the Pomerantz firm in attendance, including Gustavo Bruckner and Marc Gross, and the Pomerantz firm for its continued support for the series.

The Pomerantz Lecture was sponsored by the Center for the Study of Business Law and Regulation and the Brooklyn Law Review, which will publish Gordon’s lecture in an upcoming issue. The Pomerantz Lecture was sponsored by the Center for the Study of Business Law and Regulation and the Brooklyn Law Review, which will publish Gordon’s lecture in an upcoming issue. See photos of the event.