When Companies Act Like Countries: Inside Corporate Power and the Politics of Change

My goal there was to take the temperature down a few notches. I know that some people love that there's like a very hot temperature here, because it's the way they make a living. Some politicians love to have fights with corporations. Ron DeSantis became a national figure because of the clash with Disney. It'd be nicer if the temperature is down a few notches. And I'm trying to suggest some tweaks in our corporate governance design that can help. You're listening to Bite-sized Business Law, where we discuss big issues in small doses. This podcast is sponsored by the Ford University School of Law Corporate Law Center, which is run by Ford and law professor Richard Squire and me, your host Amy Martella. Okay, let's get down to business. Welcome back to Bite-sized Business Law. Today, we are sitting down with legal scholar and professor of business law at Rutgers Law School, Mateo Gotti, to discuss his new book, Corporate Power and the Politics of Change. The book describes how corporations have increasingly stepped into roles that were once reserved for the state. They're speaking out on social issues, they're shaping public expectations, and they're even offering benefits and protections where government falls short. Mateo calls this phenomenon corporate governing, which is a system kind of destined for tension. Mateo, we can't wait to hear more about this phenomenon in your book. Thank you so much for joining us today. Oh, thank you for having me, Amy. It's pleasure to be here. Yeah, so I guess you could start us off by telling us, how did you even get interested in the intersection between corporate power and politics and government? So I was seeing corporations that were increasingly pulled into public debates, and my guess, my initial guess was they were not doing that because of ideology, but there were some pressures there. And during the revamping of the corporate corporate debate, which happened some eight, nine years ago, I noticed the company, regardless of the approach of the law, which is endorses, shareholder maximization, was still performing tasks that one could consume as, you know, stakeholder driven, right? And so, and these tasks looked to me as something that we would expect the government to take care of, issues like climate, immigration, voting access, et cetera, and so I thought maybe the phenomenon needs a clearer name and a framework. And so that's why I got into it. Yeah, so give our listeners a little bit of background because it's interesting. You often hear people who criticize like this increasingly dominant role that corporations play in society and criticize things like citizens united. You often hear this refrain like corporations were never meant to be entangled with government. They were never meant to be involved in politics. But actually, you start out the book with some really interesting history that shows, no, actually the very purpose of the first corporations back way back when we're kind of tacked as an arm of the state. So tell us a little bit about that background. So, you know, throughout history, charters, what we see now as charters and incorporating, was done because the people that I needed an instrument to take care of, dealing with multiple persons involved in some actions, so think about orphanages or aqueducts back in the day during the ancient Rome time and think about chartering universities in Bolonia, Cambridge. And even to more recent times here in America, we needed corporations to build roads, canals and then we started to do it for utilities, educations, insurance pools, et cetera, et cetera. So at some point, of course, the profit motive became central and we started to have these framing as, you know, these two things need to be separate. And that's, you know, mainly, because that's how Milton Friedman really framed the separation theorem between what's public and what's private. That's interesting. So coming back to modern times, you bring us through this kind of wild pendulum ride, right? Where, like you were just saying, we built these corporations because we needed something. We needed them to fulfill, you know, avoid or railroads or industry rose up. And then they became kind of for profit. People got really rich. I mean, look at, you know, Vanderbilt and Carnegie and Rockefeller, they got really rich out out of creating these corporations that helped society, but also helped them. And then Milton Friedman came around and said, "That is the kind of the point." But then there was World War II, and then, you know, you saw civil rights becoming a big issue, and corporations taking up that mantle. How did we get to today where, like, we expect corporations to be socially responsible? So as you correctly framed it, here we have, you know, in the war, we needed corporations to help us. And right before in the progressive era in New Deal, that's where we started to see some, you know, initial private welfare programs, because the government did not really have that capacity to think about health care, right? And then, of course, as you said, the civil rights era where there was, you know, both consumers and workers that pushed corporations to do something there. The most recent time to think, you know, they'd back to, I guess, the '80s and the '90s, were a time where we started to have some of the first pressures to get health benefits expanded to same-sex couples. That's a 1990s thing. And from there on, we, you know, we then we got the birth of the ESG movement, et cetera. So political paralysis is a really big thing here in the United States. All the while, you know, social media came up and a bunch of movements over the last 10-15 years from Creepy Wall Street to Me Too, Black Lives Matter. So that sort of created more portion and more sort of demand, especially on liberals, less progressive corporations to be more involved. Okay. So from that, you have coined this term, this idea, this concept, corporate governing. So tell our listeners, what exactly is corporate governing? And I know it has two parts. Yeah, so used to parts, you know, there's one aspect that is the, quote unquote, "talk" part of corporation, right? And, you know, we've been noticing that companies have been taking public positions on some contested social and political issues. Think, you know, immigration, race, reproductive rights, LGBTQ, the guns, and voting access. And these is them oftentimes whirling, at least putting some pressure on politician. And that's not lobbying in the old sense, right? It's at least on its face, it's a public, a values laden, and it's aimed at really sending a signal to employees, customers, and investors, as much as policymakers, I guess. So that's the talk part. And then there's the action part, which is, you know, corporation being providing benefits, protections, and services, to their own stakeholders when the government cannot or will not provide these benefits, protections, or services. And so, there are a bunch of examples throughout the book, but, you know, think about stricter gun sale policies, think about reproductive travel support, think about race equity lending commitments. I mentioned before, the domestic partner benefits a few decades ago. So, you know, those two things are, sure, conceptually distinct, but in practice, they're intertwined, because talk, where a seed, often prefigures or at least legitimizes action, or is expected when you take certain actions in these realms, then your stakeholders would expect you to do some talk, to sort of talk to politicians, talk to policymakers, or so when their benefits, protections, or services are put at risk by the policymakers. - Yeah, and it was interesting, as I'm reading your book, after the longest shutdown in U.S. history, longest government shutdown, it seems like, yeah, like I'm glad corporations are doing this. We need somebody to come in and fill this void. Our government is just so paralyzed more than ever. So, it was just a really, you know, kind of clear moment for me of like, yeah, of course, they must do this. Our government can be the operate in some of these realms. So, you have this really great stat in your introduction that the percentage of U.S. corporations that engaged in this type of socioeconomic advocacy is jumped from 10% in 2011 to 38% in 2019. Now, that's not really a long time, right? That's what, eight years. Like, what do you think accounts for such this huge jump in such a short time? - Yeah, and that by the way, you know, cuts off at 2019 and then it was COVID and by and forth. - George Floyd. - Yeah, exactly, George Floyd. And then, but it's the early years of Biden presidency. So, I suspect that you went up a little further. What happened? You know, again, what do we see? I mean, my view to series of potential drivers, right? And, you know, none of them works in a vacuum, of course. So, we have a workforce demands. We have investor pressure and, you know, the expansion of the ESG movement. And, you know, millennials and Gen Z, that's one of where the drivers at the time, coupled with the social movements, as I said before, me too, that does matter, climate movement. And all of these sort of made the silence costly, if you will, because if there are times when you corporations are sort of pressured to take a position and you know we can come back to this if we ever talk about Disney and the Santis and Don Seguei, but that's pretty much what happened. Disney could not stay silent there because the stakeholders did not want them to stay silent. So in all of this digital platforms of course amplify the expectations and also the reputational vulnerability of corporations and it's just before government paralysis creates often a vacuum that companies you know have to fill. Yeah okay but going off that so now we're in this place right where it's like you said it's actually costly to stay silent and there's all of these reasons and all this pressure to take positions and to do things that fill the government void. So but but very very very recently this is kind of shifted right whereas something that was once seen as like not only the norm but really a smart business strategy sustainable sourcing D.E.I. look at like Ben and Jerry the completely mission driven messaging and all that now all of a sudden it feels like a potential business risk. So if the social responsible corporation it's been our norm now for decades like you said since the 90s. What do you attribute this very recent sea change to? Well it's a good question. We've seen and it's not you said very very recently but you know depending how you measure time but you know it's been happening I think at least since the midst of the Biden presidency and of course became even more salient now in the Trump years and second turn Trump you know the this old phenomenon became politically salient you know the consensus on ESG turned into partisan fodder the polarization that we'll be living you know we have who's experiencing state level attacks only as G.N.D.I. there's a lot of legislation there and in 2023 we had the students for fair admissions decision that open floodgates just remind our listeners material with that decision yes that's decision of our US Supreme Court that made legal affirmative action for college admissions so college admissions so that's that decision is limited to to higher education but in question right after it was what's going to happen for the private sector and of course those who wear the drivers to get affirmative action validated turned their attention to the private sector right away and so these became a risk for corporations so you know there's a politics this moving there's advocacy you know the same the same devices that were used by liberals less progressives on social media now became the tools of conservatives and conservatives have been had a lot of traction in the naming and shaming corporations on Twitter and other social media platforms for what was considered an excess in ESG and especially in DEI and these old became a risk all the while I guess there's been some social fatigue there are some polling that show that Americans have grown a little wary of corporation waning on every social question arguably some companies overextended and they appeared not authentic or opportunistic and so you know all these factors created openings for backlash what I like about your book Mateo is that you're very careful like not to get too far into like all of these individual battles like you remind us that you know your book is less about weather corporations you know should pull back DEI or provide more healthcare like it's more about and this is a quote it's more about what happens when corporations assume roles traditionally reserved for government so that's where kind of it gets interesting for me and gets almost a little scary to be honest so tell us like what happens when they do that what are the strongest arguments for them doing that for them not doing that the way I address it is okay let's talk about the pros and cons if we just focus on what's good for the corporation and sort of tick the you know the pro factors and the cons factors and then we figure out what we have but also because corporations are involved in societal to address societal issues what's good for society and so these are two different analysis and on the corporate front I guess my conclusion is that yes there are some pros sometimes it works sometimes you foster better relationships with your workers so with your customers sometimes with investors too some other times you don't and it's very hard on trying to be a designer of solutions of policy maker that says well you know in the aggregate disease good or not so good because these stuff works for certain corporations it's proven to work for certain corporations think Nike and it has not worked for other corporations that we're considering authentic think when Gillette changed its messaging to sort of try to embrace some more wholesome less macho themes that got to be backlash you know you know without any judgment one way or the other that was something that market did not like but my point there if we just look at corporations I think they are the ones that should make this call because you know you have executives and PR people and messaging people that do that for leaving there they know they know or should know their stakeholders they know or should know the markets they operate you know labor capital and product markets so it's hard to intervene as a policy maker to deal with it and we can talk about this a little more from a societal perspective it's a trick here definitely there are some advantages right because it's said before you know government stalls so many times and its action is insufficient there's preno gridlock so somebody has to because slack but there are some downsizes you know and you know in general the you know for one or two I do it in one war what how these both down to is that this name these old phenomenon is a democratic it's a democratic because these folks are not elected by citizens it's democratic because if your corporation expresses certain values and if you don't believe in those values and you're working in their corporation or a shareholder in their corporation you feel that you're left out and that your voice doesn't count and so create some sort of alienation it's undemocratic because its Milton Friedman was put it well you know there are elections for these type of stuff and if you lose elections don't try to get this stuff back from the window if you got pushed out from the door and in the book I argue that each of these problems is not insurmountable happy to go into it or have you to create some suspense and click hangar and have people pick up the book but then I add that there is another undemocratic feature that scares me and that is on the demand side of things if you will which is if we get used to this if you get used to this oh we're in america we know the congress not on operating and so we are also very pro private initiative so it's good that certain things are handled by corporations then this is a risk we don't ask too much from our politicians from our representatives and we sort of disengage I call this in the book the death of politics and this scares me and I think that this scares me because it's a problem that we would have to face and our typical solutions that we have for corporate governance are completely off and here because you know governance corporate governance traditionally is good to tackle agency costs stockholders and how the design of the corporation works but for these issues what are we going to do yeah that scares me I mean look we already have a lower voter turnout than most other countries so it definitely scares me to think oh well if corporations are handling all these issues why would I go vote for a politician who I know is not going to get anywhere on this front right I try in the book I tried to be as surgical as an expert it can be but then you know in the conclusion it's sort of be a little more emotional and yes and these are one of the things that I that are pointing out that there are some politicians so we'll take a hypothetical stance here that you know the one hand they say oh you should not be intervening here because I want to take care of these issues but then on the other hand they take money from corporations they get to advocate for corporations on the business side of things you know and and so that creates a short circuit I think another point that you made which is a good really good important point on the society side is like it's just inefficient to ask corporations to do this all like they're never going to promote solutions that conflict with their interest you know met is never going to say oh I see all these studies that you know social media is harming children's brains yeah let's just drop Instagram like they're never going to do something that conflicts with their profit making motive right absolutely and they try to do it you know they created at some point a panel of experts to do with this stuff and then they disbanded you know because then all of a sudden Marcia Cooper said you know what we are dropping D.I. and dropping all these other things because you know there's too way too much rules and regulations and we don't want to create even our own ones so that is really a problem. I single out other issues where if we have a canvas of all topics that matter from socio-economic standpoint, competition and taxation and worker protections and all of that clearly corporations, clearly big business is not the right arbiter there, is not the right decision maker there. So for all this stuff, they will not be your protector. Also on the other stuff, Andy Zissante sort of goes back to what we were talking about before. Anything that it's been done is by design unstable because it's a private initiative and so you can walk back and that's what it did right. As soon as the administration became very aggressive in its anti-DI efforts, a bunch of them did like a total of 180. All the while there were some people, there were some folks out there that were relying on certain protections but they're no longer protected because the likes of meta, Amazon and all the corporations that decided we're going to follow what this administration wants. Now they're just left out. One reason why societies have laws because among other things, they are stable and durable. And they're general and stable and durable versus these stuff is not general because it's specific to that very corporation. So if you happen to work at that corporation, you're lucky, but if you work at another corporation, you don't have that protection and then it's unstable as we've seen. So that's the other big big risk here. We were at social activists partnering with them. We've got to be very careful of what to expect in the long term that these are short-term fixes but you still have to keep pressure on. And some folks out there the literature said, "Well, it's a good first step." And I agree with that. It can be a good first step but it comes with cost and backlash as being clearly a big cost that we're all dealing with. Right now. Now Mateo, can you explain a little bit more to me about the governance tools that corporations have and why those are not a good match and they don't really constrain corporations or what is kind of your point on that front? Right. So Indiana tried to come up with something that can improve because my goal there was to take the temperature down a few notches. I know that some people love that there's a very hot temperature here because it's the way they make a living. And I'm trying to suggest to some tweaks in our corporate governance design that can help. Will they ever happen? Will they stick to speaking? Probably not. We know that Delaware is not interested in these type of things and the federal legislator is probably never intervened. But we still try to flow them around because they may be adopted on a private ordering basis by corporations. So of course, talk about better disclosures, more open way for corporations to frame how they're going to tackle certain certain topics. And you know, the book also goes into a survey of what some large corporations have been doing on that front. And then I keep going with all the usual suspects, you know, more of board centrality, one the board involved in these type of things. There is a sort of close relative to what we're discussing here in the corporate governance in corporate governance discussions, which is corporate political lobbying and contributions. And there we have a set of suggestions by some of my colleagues. And I don't think that they work perfectly here. So, you know, the two main ones are one having the disinterested directors being charged here. And the second one is having shareholders approve or ratify. So on the disinterested directors, if you look at it, it's unclear to me who is interested and who is disinterested, right? Because we all have priors. We all have political priors. So assume for a second that we have this board where there are some folks that yes, they are, they are a record for being Democrats, right? And now they're going to be discussing some DI or ESG commitments, right? And so, you know, if we adopted the disinterested approval framework at the board level, you know, their votes should not count. But then we let other folks decide, right? But where are they coming from? Are they coming from Mars? They don't have also some priors. So those may be independent, I guess, or conservatives. But so they are also interested in this thing, right? So we're in a catch, I think. Also, the question is maybe for some corporations, these actually works, you know, Nike, for instance, is said to have profited from its calling Kaepernick ad. And so if we were to use a disinterested approval from the directors, what is really the poll star being political neutral or trying to maximize the shareholder value or the value of Nike? So, you know, it's complex. And the shoulder approval, well, you know, why asking shareholders are a subset of society. But if the premise is that we're trying to serve broader society here, I don't think that shareholders are really poised to make that decision, well, you know, especially if, you know, what we're talking about are some issues that benefit the workforce and the workforce is geographically located in certain parts of the country. But, you know, shareholders are spread out. So also that is not quite quite easy. So there's not a lot of things that can be done. And remember, there are also two big constraints here in whatever recipe a policy maker will come about. One is the business judgment rule. I don't think that we want to do away with it. So I guess we will still have to give deference to the directors for what they do, assuming that, you know, they're not conflicted and they're reasonably informed and their decision is rational. Citizens United makes it very hard for policy makers to limit speech. And so, so long as citizen United is the law of the land, find it difficult to intervene and say, you know what, we don't want corporations to talk politics. Also, because it's very hard to draw a line. It's very hard to draw a line with what is commercial speech and political speech. There are so many gray areas. And if you're trying to be precise, you're going to have a lot of trouble. Yeah. And for folks who pick up the book, you'll see that like ultimately your best solution kind of transcends any sort of corporate governance tools and moves more over into the realm of like, what do we do with our public institutions? I thought that was a really nice, nice proposals there at the end, but you're going to have to grab the book to see what Mateo thinks we should do on that front. Now Mateo, you've alluded many times to Nike, which is this, most people know, but like, this is the really interesting example that you open the book with. And that is, of course, the Khan Kaepernick episode with where Nike supported him. And they're sure holders rallied around Nike. And you know, apparently as you write in the book, Nike did pretty well going waiting into that kind of social issue. But on the other hand, you talk about Disney and Rhonda Santas and don't say gay and how Disney handled that. And it was kind of a disaster. What was the difference for those two social scandals? And like, what is the lesson for business leaders to take away here? So, and of course, you know, we have the benefit of hindsight here, obviously. But, you know, Nike knew its audience and the strategy that they decided to pick was aligned with brand priors. Interestingly, they overruled the famous Michael Jordan quote that Republicans buy sneakers too. But, you know, all of that was consistent with their history. There was some internal alignment. And the controversy sort of matched the demographic. And that's what they kind of want it. They want it for people to talk about this. And so, it worked well. Disney, that's an interesting thing. Disney got caught in a situation where they only had bad options because they tried to stay silent first. What happened then is that the bill, don't say gay bill is proposed and a story on the Orlando Sentinel, the local newspaper, points out that the sponsor of the bill is somebody who's been receiving political contributions from Disney. And so, when that story blew up, people on Twitter, and by people on Twitter, I meant, you know, important stakeholders of Disney screenwriters and employees started with questioning and then hashtags went on. And so, at that point, the company took it on the board to decide what to do. And that was, you know, ultimately was something that got out of legal trouble, but not on business trouble, if you will. And so, at some point, they had to decide what are we going to do. And silence, at that point, keeping on doubling down silence, it would have been costly. But then, of course, being vocal, you know, they enter a live political fight with a hostile governor who loved that they picked this political fight because that's what sent them to the national news. So, this is hard. This is where, you know, this is why you have corporations with Chief Reputation Office. He are people that, and communication people that, you know, make, you know, big salaries to handle this stuff. And for all that talk about, oh, you know, management should not be doing this because they they're in business school and they in business school they study something else and not this my reaction to that is well it's 20 25 and surely 2026 you know this is the business environment we live in and when there's you know a lot of politicization so they better figure out how to handle this stuff because this is one of the risks of the enterprise and you know there are some polls out there there are surveys out there that show that political risk is one of the most important risks from an enterprise risk management perspective it's such an interesting hairy story it feels like you're saying Disney maybe had it worse than Nike Nike saw this as like a very good opportunity where Disney was thrust into it unwillingly and there was a lot of forces at work but something about it just the shareholders they didn't like it you know they were turned off by the way Disney handled it yeah I mean you know so you know when you're proactive like Nike you're an advantage right and when you're reactive you're left with bad options and you try to take the lesser evil one but then you know you are judged with hindsight and where the contractual cannot be shown so you know maybe they saved a lot of money for this year older because the alternative would have been even worse or maybe not but you know from a legal perspective the business judgment will protect them why we caused they were diligent they did what they were supposed to do they held the series of board meetings and this is not something that was done on a whim if these two cases show any lesson is that authenticity and alignment matter more than ideology and you got to understand your markets you got to understand your you know internal stakeholders got to be coherent somehow and not improvised for sure and and this is you know a big thing and this is something where people are corporations and their advisors should be very well prepared so that's why they should read my book well I know professors hate making predictions but I'm going to ask you what you see when you look ahead a few decades with this whole phenomenon with corporate governing I had last year someone on the show Bradford Newman and he really like scared me into the idea that he's very very assured of that in five to ten years there will be no governments there will be no countries there won't be physical boundaries between states there will just be five to ten corporations that run the world and govern us and provide all the things we need that's an extreme position of course but when you look 10 20 50 years into the future do you see more of like this pendulum swinging the way it does between corporations having an important role in society stepping back the new deal government stepping up functioning now it's more kind of paralyzed like do you just see more this back and forth or do you see what Bradford Newman sees where corporations really do become much much more important in our daily lives that's a very difficult question and you know making these forecasts always you know expert forecast if you read them like you know five ten years after oh my gosh that projection sounds a lot to me like the alien franchise because that's what the alien movies are about so I'm not gonna go that far in in the decades I'm gonna do a more modest prediction of what's gonna happen in the next five years and I think that you know we're gonna see US political cycles I hope at a very least this is the optimism me thinks that we're still gonna have a republic and a democratic one and so there's gonna be alternates I think you know social movement pressures whether on social media whether somewhere else is still gonna be a thing because you know in history it's always gonna be it's always being a thing and you know corporate risk calculus that will continue oscillating so I think you know the contours of what's gonna happen precisely can vary but these sort of pressures right this back and forth these sort of dialectic between businesses in the one hand governments and the other and but also with stakeholder pressures is still gonna be out there the drivers are still gonna be there workforce is gonna have expectations consumers are gonna be expectation you will limit the workforce significantly because of AI what have you you know consumers are still gonna have something to say and political dysfunction for the better of the world so it's still gonna it's not gonna go away so we are gonna be experiencing this to some extent now the expression might be different right so maybe some firms will retreat for good and after their stance in the days they say you know what is not for us they're not gonna do it and so they're gonna take like a sort of like a university of Chicago type of approach that they don't comment on these type of things I think that the line between market logic and political logic will keep blurring and we're seeing these already for on a completely different angle which is you know how the current government is you know very interventionist in in industrial policy and in political economy and so this is one of the factors to obviously be mindful of but this is something that is here to stay well Mateo got the corporate power and the politics of change it's out December 18th everyone should pick up it's a fascinating book and see what they think about all of these really really important issues Mateo thank you so much for being here this was so much fun thank you so much for having me I had a blast thanks thanks to everyone at Fordham Law School especially the Dean's office and our corporate law center donors for supporting this podcast bite-sized business laws produced by we edit podcasts listen and subscribe to bite-sized business law on Spotify Apple or wherever you get your podcasts the information in this podcast is for educational informational and entertainment purposes 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