Meta Ruling Spurning Stakeholder Duty Embraced by ESG Boosters

A court ruling rejecting claims that Mark Zuckerberg prioritized Meta Platforms Inc. profits over the health of the economy is drawing unexpected praise from advocates for stakeholder capitalism and corporate responsibility.

Meta’s senior leaders recently defeated a first-of-its-kind shareholder lawsuit advancing the theory that they had a duty to boost the broader portfolios of the company’s diversified institutional investors.

The lawsuit said Zuckerberg and Meta’s board put its share price above the rule of law, public health, and other social values. The judge who tossed the case described the allegations somewhat dismissively, saying “the plaintiff has rediscovered the concept of externalities.”

The notion that companies shouldn’t dodge the costs of their actions is intuitively appealing, but importing that obligation into corporate law could actually remove critical guardrails, according to Boston University law professor Madison Condon.

“Even people who support stakeholder governance in the abstract agree that the law on this wasn’t that ambiguous,” Condon said. “At least managing the share price is something I can hold the board to, rather than giving them seven different masters, which lets them use these multiple objectives as a cover for doing whatever they want.”

Read More: ANALYSIS: Boards Win in Delaware’s ‘Firm-Specific’ Duty Ruling

A ruling in the other direction would have “let corporations justify virtually anything,” according to Southern Methodist University law professor Carliss Chatman. “I tend to agree with stakeholder theory, but think about Facebook and Cambridge Analytica,” Chatman said. “What if they had said, ‘We think Trump is better for the economy than Hillary Clinton?’ I don’t think we want directors making those kinds of business judgments.”

Those criticisms are legitimate but misplaced, said Rick Alexander, CEO of the nonprofit Shareholder Commons, which backed the case targeting Meta. “It’s already a concern with the current construct,” Alexander said. “It’s virtually impossible to hold directors liable for breaching their fiduciary duties if they don’t have a conflict of interest, as long as they have a business reason they can give with a straight face.”

Shareholderism

The lawsuit—filed in Delaware’s Chancery Court in 2022—launched a two-pronged attack on the shareholder primacy model, which states that corporate leaders have a single-minded duty to maximize the value of investments in the company they manage.

The suit argued that there’s no direct precedent holding Delaware is a shareholder primacy state. It also said Delaware’s courts should opt for a “stakeholder primacy” approach that requires corporate directors to account for the other stockholdings and economic interests of their investors, regardless of the doctrinal status quo.

Although the state’s “shareholderism"—as opposed to “stakeholderism"—has never been explicit, that’s only because it’s implicit in everything about Delaware corporate law, and “fish don’t talk about water,” Vice Chancellor J. Travis Laster said in a lengthy opinion April 30. The suit “has not made a persuasive case for change,” the judge added. “A diversified-investor model has drawbacks of its own.”

The ruling wasn’t really a setback, Alexander said, given that his group recognized the claim was a long shot. For one thing, if it took Laster 102 pages to back up his ruling, that means another judge could conceivably come out the other way, Alexander said.

Just as importantly, “my organization has a theory about how the diversified-investor perspective is a better way to think about what people call ESG issues than just going one company at a time,” he said. “This case laid the issue on the table.”

‘Unconstrained’

The main problem with imposing stakeholder governance on companies is that “they’re trying to translate an academic theory about how institutional investors can influence a company into an actual legal obligation,” according to Tulane University law professor Ann Lipton.

“Not every diversified investor is diversified in the same way,” so giving corporate leaders a general mandate to improve the economy would leave them with “free hand to enact their own preferences” by cherry-picking among conflicting interests, Lipton said. “It would be vaguely unworkable or worse. Look at Elon Musk’s ‘effective altruism’ philosophy, asking what’s best for people 10,000 years in the future. It ultimately leaves them sort of unconstrained.”

There are other potential downsides, too, according to Condon, who pointed to a growing body of economic literature suggesting major asset managers diversified across a single industry may be responsible for anticompetitive policies. The asset managers have described themselves as passive investors.

“The mechanism has been hotly debated,” Condon said. “But it’s a strange contrast with BlackRock going around saying how successful it was in all these social spaces—reducing opioid addiction and gun violence, putting women on boards. So I’m skeptical of this idea that they couldn’t possibly manifest their desires at a product or pricing level.”

Alexander downplayed that line of criticism. “If you’ve got three owners who separately own three airlines or three who each own one-third of each airline, they get the same benefit from colluding, whether they’re diversified or not,” he said.

And investors with portfolios mirroring the wider economy—such as the institutional asset managers that collectively own a majority of most major companies—"also invest in businesses that use the airlines,” Alexander added. “So you’re going to lose money on the other end.”

How to Get There

Central to Laster’s reasoning in the Meta case was the often overlooked distinction between shares and shareholders. The ruling traced the development of the corporate concept in exhaustive detail, concluding that a board’s fiduciary duties stemmed originally from the obligation to grow the capital entrusted to their care by investors. “The ultimate human beneficiaries of that value are incidental,” the judge said.

He devoted dozens of pages to legal precedents reading the doctrine narrowly, albeit in drastically different contexts. Those sections of the decision show investors have legally significant identities apart from their portfolios—such as creditor, employee, and consumer—that a board couldn’t possibly consider within the fiduciary framework, according to Chatman.

Basing fiduciary duties on the external characteristics of a company’s investor base, rather than the value of their shares themselves, “goes against the very nature of corporate law,” she said. “The point is your capital.”

Though Laster declined to adopt the stakeholder model as an across-the-board default, he went out of his way to stress that it’s compatible with Delaware corporate law for individual businesses to prioritize diversified portfolios. He suggested various ways that could be accomplished through charter amendments adopting a narrow “purpose clause” or bespoke fiduciary duties.

The issue isn’t whether there should be mandatory constraints on corporate profiteering—there already are—but whether the right way to get there is by fundamentally altering the nature of fiduciary duties, according to Lipton.

“You can maximize profits for shareholders, but not by dumping pollutants,” she said. “You can maximize profits, but not by paying less than minimum wage. The question is simply where those limits come from. Do they come from shareholders and their outside interests, and is that even feasible? Or do they come from democratic institutions?”