Corporate Goodwill

Perhaps the most significant debate in corporate law today is the role of the corporation in society. Do corporations have a responsibility to their employees, local communities, and other non-shareholder constituencies? On one side of the debate, there is a vocal group of critics arguing for a shareholder primacy model of governance focused on maximizing value to shareholders. On the other side, there are corporations embracing stakeholder governance and the consideration of employees, local communities, and other non-shareholder constituencies in the ordinary course of business. Modern corporate governance, however, presents a curious phenomenon: Even the most ardent supporters of stakeholders abandon their longstanding commitments during times of change, such as dealmaking and shifts in governmental power. Thus, this Article examines the question of why corporations that adopted a stakeholder governance approach in the ordinary course abandon their commitments in times of change. As a baseline matter, it analyzes the increased risks during times of change as well as lack of transparency when reneging on prosocial commitments. Notwithstanding widespread criticism of this conduct, the Article argues that such abandonment is not a complete deterioration of stakeholder governance. Rather, it demonstrates that times of change are periods of rearranging priority among those with a stake in the corporation. Each corporation will have implicitly established a hierarchy among these stakeholders in the ordinary course. During times of change there is an implicit rearranging of stakeholder claims on the corporation’s resources, attention, and time. When viewed through the lens of reprioritization of stakeholder claimants, it becomes clear that while there is a decrease overall of stakeholder considerations in times of transition, it is not an eradication entirely. The Article makes three primary contributions to the literature. First, it uses novel, hand-coded data from filings with the Securities and Exchange Commission (SEC) to examine the conflict between stakeholder treatment in the ordinary course and in times of change. Second, it advances a cohesive theory of the drivers of corporate abandonment and uncovers the potential harms of such conduct. Lastly, the Article explores the implications of this analysis on the corporate purpose debate and advances a range of doctrinal and policy proposals, such as increased disclosures, durable contractual commitments, and third-party certifications, to promote transparency and increase accountability in corporate governance.