July 16, 2014
CSR, Employees, and Hobby Lobby's Theory of the Firm
Posted by Brett McDonnell

In my first post, I proposed some guidance as to when corporations should be treated as exercising religion under RFRA, and said that I planned to examine how well the Court's opinion fits with that guidance.  However, several very thoughtful related posts raise issues that I should address first.  Essentially, these posts put pressure on my approach from both the right and the left.

From the right, Alan Meese argues that the Court's opinion only endorses a weak theory of corporate social responsibility, not the stronger version that I prefer.  The weak version allows corporations to pursue policies that reduce profits only if shareholders expressly agree.  Let's distinguish three situations.  (1) Shareholders have expressly dictated, through the proper legal channels, that the corporation should pursue only profit.  (2) Shareholders have expressly dictated that the corporation may pursue another goal even if it sometimes leads to a reduction in profit.  (3) Shareholders have taken no express position either way.  Alan and I are both contractualists enough to agree that in situations (1) and (2), the express shareholder position prevails.

Where we disagree is (3).  I don't want to re-litigate here the whole legal and moral debate.  Alan does point to two sentences in Justice Alito's opinion which provide some support for the claim that the Court favors the weaker version of CSR, by referring to owner approval.  I think you can parse the language of that paragraph (p. 23 of the majority opinion) differently.  Some sentences don't have any owner approval caveat.  Of the two that do, at least the first does not necessarily imply that owner approval is required (it may just point out that shareholders sometimes do approve). 

More significantly, on Alan's approach what does it take for shareholders to expressly agree to waiving the alleged profit maximization default rule?  One would think the agreement has to operate through a legally-recognized channel for shareholder action.  If so, did that happen for Conestoga?  The Court refers to a "Statement on the Sanctity of Human Life," but that was adopted by the board.  It also refers to "Vision and Values Statements," but does not say who adopted that/them (and if shareholder approval is crucial to the Court, shouldn't it mention this?).  If the shareholders have not explicitly agreed to a religious goal through a legally-recognized channel, does that mean the profit maximization default rule remains in place?  If so, then Conestoga would seem inconsistent with Alan's position.  If instead one says that shareholders may agree to considering other goals through more informal means, then I'm not sure that we have a real disagreement in practice, since where a board has adopted a non-profit-centered goal in any sort of systematic way, one will probably be able to find implicit shareholder agreement (at least if one is motivated to look for it).

From the left comes the post of Eric Orts asking why employees don't also count in determining what religious goals, if any, a corporation is exercising (also on this point is an excellent op-ed by Matt Bodie and Grant Hayden).  Since I once wrote an article called "Employee Primacy," I'm very sympathetic.  In my ideal world, the views of employees would count at least as much as those of shareholders.  But U.S. corporate law is not my ideal world (to say the least).  In this world, the board is the primary authority (hello, Steve Bainbridge), and shareholders choose who is on the board, along with a few other significant powers.  And in closely held corporations, the same persons are both directors, controlling shareholders, and officers.  So, where through appropriate means the board and shareholders in some combination (see my first post) have set a religious goal, that becomes the goal of the corporation. This is particularly persuasive where that goal has been publicized, so that employees know what they are getting into (Joan Heminway has a thoughtful post on the role of disclosure, though I'm not prepared to say such disclosure is required).  That does not necessarily mean that the religious goals of the corporation, so determined, trump the religious rights of its employees.  Later stages of the analysis, in particular the strict scrutiny test, must address that potential conflict.  But it does mean that in the first two steps of the analysis--determining if a particular corporation has a religious goal such that it is exercising religion and whether that religious goal is substantially burdened--one looks to the actions of the board and shareholders.

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