“Lessons On Corporate Values From Hobby Lobby”
Law360 08/22/14 John P. Vail
The United States Supreme Court’s decision in Burwell et. al. v. Hobby Lobby Stores Inc. et. al. is one of the most examined Supreme Court cases in recent years, drawing interest from many groups who are considering its implications for them. Employers and employees of many closely held corporations are directly affected by the decision so their interest has been the most evident. Those concerned about the future of health care reform are considering the impact of the decision on other possible employer efforts to limit employee coverage. Groups focused on ensuring the free exercise of religion feel strengthened by the court’s decision, while advocates for women’s rights worry that Hobby Lobby approved actions that operate to disadvantage women. Some legal scholars see the court’s decision as a potential threat to the integrity of the corporation as a separate legal person from its owners.
These multiple views arise because Hobby Lobby has many dimensions. The case is certain to be dissected by lower courts and interested parties for years. It has also become the subject of debate among corporate social responsibility (CSR) advocates and academics. Some of these parties see the court’s decision as supportive of corporate social responsibility while others have expressed concern that the court’s reasoning will ultimately be a setback for CSR initiatives. Before considering this question, what is the thrust of the court’s decision?
The owners of three closely held for-profit corporations challenged regulations adopted by the Department of Health and Human Services (HHS) under the Patient Protection and Affordable Care Act of 2010. The regulations required certain employers to include in their health plans preventive care and screenings for women without “any cost sharing requirements.” Penalties are placed upon any employer that does not provide minimum essential coverage required by the regulations. Among other things, covered employers are required to provide coverage for twenty contraceptive methods approved by the U.S. Food and Drug Administration, including four postconception contraception methods that were objectionable to the plaintiff employers on religious grounds. These employers argued that a requirement that their plans cover these four “abortifacients” free of charge violated the owners’ religious beliefs. They maintained that under the Religious Freedom Restoration Act of 1993 (RFRA) their closely held corporations were entitled to exercise the religious beliefs of their owners in the same manner as if the owners had decided to do business directly as sole proprietors.
The Supreme Court held that, as applied to the three closely held corporations, the HHS regulations and their imposition of the contraceptive mandate violated the RFRA. The court determined that for purposes of the RFRA, the for-profit corporations were “persons” who were entitled to be protected by the RFRA, which prohibits substantial burdens on the exercise of religion unless the government demonstrates that they are the least restrictive means of furthering a compelling governmental interest. So how does Hobby Lobby impact the subject of corporate social responsibility? It may be useful to first define exactly what CSR is.
Definition of Corporate Social Responsibility
Although corporate social responsibility is widely discussed and is a focus of many businesses today, it continues to have no single agreed upon definition. As one example, Professor Archie Carroll broadly defines CSR by stating: “The social responsibility of business encompasses the economic, legal, ethical and discretionary expectations that society has of organizations at a given point in time.” Note that he includes both legal compliance and the fundamental obligation of any business to remain economically viable.
Another definition is used by the Corporate Social Responsibility Initiative at the Harvard University Kennedy School of Government:
“Corporate social responsibility encompasses not only what companies do with their profits, but also how they make them. It goes beyond philanthropy and compliance and addresses how companies manage their economic, social, and environmental impacts, as well as their relationships in all key spheres of influence: the workplace, the marketplace, the supply chain, the community, and the public policy realm.”
This latter definition tends to emphasize the discretionary activities of a business that could affect society and constituencies of the business beyond its shareholders.
What Does Hobby Lobby Say?
What portions of the court’s decision have something to say to those interested in corporate social responsibility? As a starting point, the court emphasizes that under state laws corporations are permitted to be formed for any lawful purpose. It states that “[w]hile it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.” The court says that nothing in the inherent nature of a for-profit corporation requires that it maximize profits and forego other purposes. In fact, the court proceeds to recognize certain CSR activities that it views as within a corporation's broad authority:
“For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives ... So long as its owners agree, a for-profit corporation may take costly pollution-control and energyconservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well.”
The court appears supportive of CSR activities that go beyond mere legal compliance. In fact, the court actually suggests that a for-profit corporation could also have nonprofit goals. It points out that the compatibility of nonprofit and for-profit goals can be seen in the wave of state adoptions of benefit corporation statutes that permit formation of dual-purpose entities that seek to achieve both a public benefit and a profit for owners.
The court’s discussion is also generally consistent with the law in Delaware and other states. However, without any citations to legal authority, the court suggests that there is no profit maximization mandate applicable to for-profit corporations. Many states retain a profit maximization philosophy, although it is applied over the long term (except in the context of a change in control where the directors' role changes to auctioneer charged with getting the best price for stockholders). Although not mentioned by the court, the business judgment rule that is applicable to corporate directors in their decision making gives them wide berth in reaching decisions as to what is in the best interests of their corporations and shareholders. Many discretionary CSR activities are approved (and not second guessed) through application of the business judgment rule. In many states, so-called constituency statutes specifically allow directors to consider employees, vendors, the community and society at large when making decisions, even in the context of a change in control. So, the court's statements that suggest that for-profit corporations can engage in nonprofit generating activities have some basis in state law.
However, despite this CSR-positive view of Hobby Lobby, some are concerned that the decision could constitute a setback to legitimization of CSR. This group of commentators points to the Supreme Court’s emphasis on the fact that corporate actions that forsake profits for religious or social purposes must be approved by the owners of the business. In other words, they posit that the court considers profit maximization as a default rule. Is the court going a step further and actually taking a side on the decades long debate as to whether corporate governance should be grounded in a “shareholder primacy” model (where emphasis is placed on maximizing the decision making of shareholders) or a “director primacy” model (where directors are the center of the corporate universe)? Many CSR advocates have felt that a director primacy model facilitates stakeholder theory in which directors look at the corporation as a “nexus of contracts” among various corporate stakeholders (the shareholders being just one of the stakeholder groups) and exercise their responsibilities properly by balancing all stakeholder interests.
Thoughts on Hobby Lobby and CSR
So what can those concerned about corporate social responsibility take from the dicta of the court's decision in Hobby Lobby?
1. An initial observation is that most CSR-related discussion by the court is indeed dicta. The battleground over the scope of permissible activities by a for-profit corporation is usually at the state level where courts construe state corporate laws and applicable common law with respect to the duties of directors. The court's thinking should obviously not be ignored but certainly should be considered in this context.
2. With the foregoing in mind, it is not at all clear that the Supreme Court intended to take a side in the generations-old debate on the best model for corporate governance — shareholder primacy v. director primacy. The court's ruling certainly does suggest that profit maximization need not be the sole objective of good corporate governance. Once again dicta, but dicta that appears to provide support for CSR advocates who desire that for-profit corporations not be wed to profits.
3. What about the court's reference to the validity of broad corporate purposes when there is owner approval? The court's opinion was focused on closely held corporations and therefore it naturally pointed towards the importance of owner approval. Would the court view discretionary CSR actions taken by a publicly held corporation as requiring unanimous or substantial approval of its shareholders in order to be permissible? It is not clear what the court would say in this situation because it was not addressed. However, as mentioned above, current law provides boards with broad discretion.
4. Could Hobby Lobby create risk to CSR by opening the door to controlling shareholders seeking to avoid CSR-type legal obligations in the environmental or social realm because of personal religious or other beliefs? Although theoretically possible, it appears highly unlikely.
5. It is difficult to conclude that the court's decision will have a "chilling" effect on corporate social responsibility. CSR initiatives appear to have found a strong foundation that is driving companies towards greater responsiveness to their constituencies. CSR is also increasingly being grounded in rationales that make it an important business strategy.
6. Most importantly, the decision reminds us that corporate values are derived from individual values. “Corporations, ‘separate and apart from’ the human beings who own, run, and are employed by them, cannot do anything at all.” Hobby Lobby centers us on the individuals who are the corporate decision makers.
In a publicly held corporation, for most matters the ultimate decision makers are the members of the board of directors. Hobby Lobby reminds us that the personal values of decision makers are important and could very well affect organizational corporate values. Given this reality, those charged with nominating members of the board may be prudent to consider the following:
A. What are the candidate's personal values and how will they be brought to bear in corporate decision making?
B. Does the candidate appear to be a person who is open to hearing various perspectives and changing his or her views when appropriate?
C. Does he or she understand the values currently being expressed by vocal shareholders and other constituencies that the company affects or is affected by?
D. Does the candidate add to the diversity of the board — not solely in terms of gender, race and professional skills — but also in terms of personal values?
E. How does the candidate view the role of his or her personal values in making decisions for the corporation?
F. Will the corporate social responsibility objectives of the corporation be furthered by the candidate's presence on the board?
G. Does the candidate have a reputation for integrity and good character so his or her judgments regarding the organization's values will be respected by both internal and external constituencies?
So, reports of the demise of CSR may be greatly exaggerated. Those considering Hobby Lobby would be wise to focus on the decision makers, not just the decision itself.
Originally published in Law360, August 22, 2014