A key problem for corporate directors and a key concern of modern corporation law is the creation and maintenance of management systems designed to identify and optimally reduce the firm’s exposure to internal misconduct and foreseeable external risk. In recent years, that problem has come to include concern for the implications of climate change and globalization. Yet Society and its institutions, including corporations, were inadequately prepared for the Covid-19 pandemic. Why were we so unprepared, and what are the implications of the pandemic for corporation law going forward? To understand the implications of the pandemic, we must understand how it unfolded, what tools were in place to combat it, and how key actors responded to the crisis. While we each experienced the pandemic, and are still living in its shadow, a detailed overarching understanding of what happened would be missing but for a magnificent history of the present, Adam Tooze, Shutdown: How Covid Shook the World’s Economy (2021) (“Shutdown”). The history detailed in Shutdown, though not focused on corporation law as such, reads and can be understood as an extension of the crisis in corporation law theory that was unfolding as the pandemic struck.
For the last decade of the twentieth century and most of the current century, corporate law could be taught comfortably by reference to a near universally recognized governing doctrine. The end of history for corporate law was at hand. Rejecting Adolf Berle’s mid-twentieth-century understanding, corporations were now viewed not as social institutions, but as nexuses of private contracts united by one overriding purpose – the maximization of shareholder value. The role of the board of directors and subordinate officers was not to serve stakeholders or society, other than indirectly, but to pursue shareholders’ wealth-maximization interests. Correspondingly, state corporation law, including common law fiduciary duties, as well as federal securities laws, could best be understood as guardrails designed and implemented to ensure that neither directors nor officers misused their power to pursue ends unrelated to, or counter to, shareholder value maximization. While there was room in this formulation to talk about corporate social responsibility or the importance of stakeholders, such conversations were generally understood to be tangential to a proper understanding of corporation law.
This comfortable understanding of corporation law began to unravel with the cultural and political shock delivered by the election of Donald Trump. As the anticipated election of Hillary Clinton neared, few responsible policy-makers doubted that the earth was in the second stage of what economic historians call “the Great Acceleration” – the period beginning around 1950 when the earth began to warm and its climate change at a pace previously unseen in recorded history, Nor did most responsible policy makers doubt that it was mankind’s actions that were responsible for the Great Acceleration and that cooperative and dramatic international actions would be required to prevent calamitous future consequence. This global consensus was thrown into disarray when Trump as one of his first official presidential acts withdrew the United States from the Paris Climate Accords. Many more shocks to our understanding of America and its place and role in the world were to follow and much of Trump’s presidency served both to divide Americans on major issues and to turbo-charge activists on both sides.
As Trump’s presidency neared the end of its term, Democratic candidates began to campaign in earnest for the privilege of running against him. Central to the platforms of Elizabeth Warren and Bernie Sanders was the assertion that America’s problems could be traced not only to Donald Trump but to corporations and their rapacious pursuit of shareholder wealth. Both promised to reign in those corporations by imposing higher taxes, and even, by requiring corporations to obtain a federal charter that would require corporations to promote the interests of stakeholders and society at the expense of shareholder wealth maximization. In 2019, in the midst of this strident criticism, the Business Roundtable issued a new statement of corporate purpose signed by the vast majority of its CEO members embracing the view that corporations should be run “for the benefit of all stakeholders—customers, employees, suppliers, communities and shareholders.”
This shocking change in corporate leaders’ articulation of corporate purpose was soon followed by other events that challenged long-accepted views about the nature of the corporation and the boundaries between corporation law and other law school subjects. For example, the epic collapse of the stock market in March 2020 and its equally epic reflation in value in the following year as a result of massive intervention by the Federal Reserve seemed inconsistent with the notion that corporations are private entities subject to the risks of the market; why should we bail out shareholders when they suffer losses, when we also reward them with favorable capital gains treatment when times are good? Likewise, the New York Times 1619 project and the Black Lives Matter movement cried out for an understanding of the corporation’s historical and current responsibility for racial inequities. Then, of course, came the Covid pandemic which has thrown our understanding of both ordinary life, work, the purpose of the corporation, and the role and nature of government into disarray. Then 2022 brought the Russia-Ukraine conflict and the stunning collapse of energy and food supply lines, forcing us to think even more urgently about globalization, the political competition between great and lesser nation states, and the role of corporations as instruments of national policy.
Given these events, how are we as teachers of corporation law now to bring coherence to our subject? How are we to grapple with a rapidly changing understanding of the larger society in which the modern corporation operates? As a lifeline and foundation for moving forward, I highly recommend Shutdown.
Like most of us, eminent economic historian Adam Tooze did not realize the significance of the already raging pandemic until early March 2020. Like most of us, the pandemic cast his life into disarray, forcing changes in travel plans and research projects. Early on he realized that chronicling the pandemic as it unfolded demanded his full and immediate attention. The result of his changed life and research agenda is Shutdown, which traces the Covid-19 crisis from its inception until Biden’s inauguration in early 2021. Shutdown is a history of the present, giving us a lens on events we all lived through, and showing us the underlying themes and connections between global actors and events that were not obvious or even knowable as events transpired. Importantly it has much to help in our understanding of how leaders, including corporate boards of directors should act in the face of existential risks and uncertainty
Central to how many of us teach Corporations is the centrality of risk and uncertainty. Entrepreneurs, firms, and boards of directors exist as devices to deal with uncertainty, and to ensure that economic decisions are made with due regard to the risks entailed. Equitable doctrines like piercing the corporate veil and directors’ Caremark monitoring duties minimize the extent to which firms may seek rewards by wrongfully shifting risks of loss to non-shareholders. And, central to Shutdown is a vivid account of how politicians, scientists, pharmaceutical ventures, central banks, corporations, and ordinary global citizens, coped with the onset and evolution of the Covid-19 crisis.
While Shutdown is a history of the present, Tooze situates 2022 against the backdrop of the revolution against democracy that began in the early 1970s, which revolution is still identified most closely with Reagan and Thatcher. That revolution introduced fiat money and the independence of central banks, crushed labor as a political force, deregulated many public services, and protected and promoted the interests of capital to a degree not seen since before the New Deal, feeding a corresponding rise in inequality. That fifty-year period coincided with the second wave of the Great Acceleration, also known as the Anthropocene, in which the impact of man on the planet has produced an increasingly fragile environment, notable not only for increasing risks from climate events, but also increasing risks from infectious diseases. Despite doubters, these risks are and were generally understood. However, they also are and were not treated with the priority that the risks rationally demand. In other words, the Covid-19 pandemic was not an unforeseen risk. We simply chose not to prepare for it. As Tooze describes, “as 2020 began, the disproportion between pandemic risk and the investment in global health was nothing short of grotesque.” On the American home front, “the U.S. health system was ramshackle and its domestic social safety net left tens of million at risk of poverty.”
The lack of preparation for the pandemic was accompanied by a deterioration in the relationship between citizens, on one hand, and governing elites on the other, and a similar deterioration in relationships between key nation states. Fueled in no small part, if not in major part, by the Reagan-Thatcher revolution, social trust in national governments had declined sharply, exemplified by Brexit and the Trump presidency. Likewise, fueled by the inconstancy of U.S leadership, including its withdrawal from the Paris Climate Accords, and its trade war with China, trust between nations states had eroded.
In hindsight, we now know that Covid-19 was not particularly lethal as measured against historic plagues. But the lack of preparation and lack of social cohesion between citizens, governments, and nation states, quickly turned a potentially simple crisis into a global polycrisis, the unfolding of which Shutdown grippingly chronicles. When the health systems in first Italy and then New York City were overwhelmed by the first wave of Covid-19, citizens and authorities panicked together. The result was the sudden and complete shutdown of public life, much of commerce and business activity. This global disruption of normal life was unprecedented and led to a threat to the stability of the world economic system that dwarfed the risk of the 2008 crisis, and led to the printing of fiat money by both central banks and legislatures on an unprecedented scale. World capital markets crashed, then rebounded in a dizzying turnaround.
In the United States the unfolding polycrisis played out against the backdrop of the 2020 presidential campaign. As the first wave peaked, the polycrisis morphed again with the murder of George Floyd. Spontaneous demonstrations and street marches for social justice sprang up worldwide fueling anger in more conservative circles who saw a double standard at work with social distancing rules.
Biden’s narrow victory was immediately followed by the announcement and roll out of a series of vaccines. However, the second wave of the Covid-19 pandemic was accompanied by the threatened end of generous unemployment and other benefits, including the CDC eviction ban. In December the rump Congress provided an additional package of financial assistance for the most at risk.
As the second Covid-19 wave raged, the polycrisis received new fuel as well. On January 6, 2021, Trump supporters invaded the nation’s capital, reacting to Trump’s insistence that the election had been stolen. Despite this crisis, Biden took office peacefully, promising to work to retore America’s infrastructure, to build on the successful innovations in social policy that had allowed America to survive the dislocations of the pandemic, to make major investments in the Green New deal, and to finally make good on the promise of an anti-racist society. In short, 2021 began with the hope that America at least had learned its lesson. The Anthropocene is upon us, and we must prepare for it.
Tooze concludes Shutdown, with two observations. First, the lesson that the Biden administration and global central banks learned is that money can be printed liberally without risk of inflation. Instead of being a tool to be used with restraint, money printing now becomes a means for nation states to aggressively tackle major social problems, including climate change. Accordingly, the Biden administration plan as understood at the beginning of 2021 was to “deliberately run the economy hot.”
Second, Tooze identifies China and its authoritarian governance system as the key geopolitical risk for the United States and the extant world system. Russia receives only passing mention in Shutdown, and never as a serious threat to the world system’s stability.
The world Tooze saw in the early days of 2021, is not the world we are now experiencing. It turns out that printing money does have serious inflationary consequences. It turns out that Russia could trigger a perhaps existential crises for the world system. That the world can change so quickly, and in ways not foreseen by thoughtful expert observers, is a lesson for leaders, including corporate boards of directors, charged with identifying and preparing for potentially catastrophic risks.
As the Covid-19 polycrisis exemplified on a global level, we have many examples of polycrises in corporation law, beginning most famously with the Caremark case and continuing recently with the debacle at Boeing. As with the Covid-19 crisis, most of those famous corporate cases involved not a failure to foresee a particular risk, but a failure to take appropriate action, coupled with subsequent decisions or inactions that turn a simple crisis into a polycrisis.
As Tooze summarizes:
Crisis-fighting is both relentless and hectic. It is driven by the urgency of the immediate situation. It is caught in a tangled web of interests and must make up its instruments as it goes along. It is also, however, guided by reflection on past crisis-fighting. Whether in the form of books, articles, or “folk narratives,” contemporary history is part of that process of collective learning.
What Shutdown offers us as teachers of corporate law, is, of course, a compelling account of crisis management done right and gone wrong in a myriad of overlapping settings. But, it also provides an opportunity to reflect on both the societal purpose of the corporation, the board of directors’ risk management function, and how stakeholder governance might enhance the corporation’s sustainability in an increasingly fragile social and physical environment.
