Journal of Free Speech Law: “Corporate Speech and Corporate Purpose: A Theory of Corporate First Amendment Rights,” by Sean J. Griffith
The article is here; the Introduction:
Every spring, hot button issues of social policy are debated on the pages of corporate proxy statements. Recent examples include abortion rights, climate activism, discrimination against racial and religious groups, and transgenderism. In these debates, the affirmative side is taken by a shareholder putting forward a resolution for reform—a “shareholder proposal”—while the negative side is taken by the company, which seeks to persuade its shareholders to reject the proposal. The company publishes and disseminates the resolution along with the arguments of both sides in its annual proxy materials.
Shareholders submitted 889 proposed resolutions in 2023. A substantial majority of these (582 or 65%) raised questions of social policy. Of the social policy proposals, 188 (32%) urged action relating to climate change and greenhouse gas emissions. Meanwhile, 394 (68%) focused on other social issues, such as racial equity audits and diversity, equity, and inclusion (DEI) initiatives. Slightly more than half of all the shareholder proposals received by corporations in 2023 were ultimately voted upon. In some cases, proposals failed to reach the ballot because corporations successfully excluded them. More often, proposals were withdrawn in connection with a negotiated settlement in which the corporation agreed to some of the proponent’s requests. Of the 483 shareholder proposals that went to a vote in 2023, 25 (5%) passed.
Why do American companies become laboratories of democracy during proxy season? Is it that managers sense some competitive advantage in turning their attention from the product market to the marketplace of ideas? Or is it that investors are more likely to subscribe to public offerings if the company promises them an opportunity to speak their mind on social issues? Neither is the case. While it may be true that some corporations have chosen to lean in to the culture wars, it is equally certain that many corporations would prefer to lean out and avoid such issues altogether, fearing distraction or backlash. But companies cannot opt out of shareholder proposals. Their participation is compelled by the government.
Companies publish and distribute shareholder proposals because Rule 14a-8 of the Securities and Exchange Commission compels them to do so. Subject to a set of exceptions and exceptions-to-the-exceptions, the shareholder proposal rule requires corporations to include shareholder resolutions and supporting statements of up to 500 words in the company’s own proxy materials. Publication of proposals raising controversial social issues are compelled either (1) under an exception to the “relevance” exemption, requiring companies to include proposals that “raise issues of broad social or ethical concern related to the company’s business” even if they are not quantitatively relevant to corporate revenues or assets, or (2) under an exception to the “ordinary business matter” exemption, requiring companies to include proposals that “raise[] issues with a broad societal impact, such that they transcend the ordinary business of the company.” These exceptions have swallowed the rule to the point that the majority of shareholder proposals now raise controversial issues of social policy.
But government compulsions to speak are constitutionally suspect. The First Amendment of the U.S. Constitution prohibits the government from “abridging the freedom of speech,” and Supreme Court doctrine has long held that speech is abridged both when it is restricted and when it is compelled. Rule 14a-8 compels speech. Through it the SEC, an agency of the government, compels corporations to speak on social controversies. While the government does not choose the words spoken—the matters are put forward by shareholders, not the government—the government compels speech by requiring companies to publish shareholder proposals that comply with the SEC rule. Moreover, the structure of the rule and the choices made by the SEC in applying it regulate the content of speech in a way that is not “content-neutral.” This raises the question: Does Rule 14a-8 violate the First Amendment?
If Rule 14a-8 is unconstitutional, it is because corporations’ negative speech rights—that is, the right to refrain from speaking—have been violated. But do corporations have negative speech rights? This framing of the question exposes two lacunae in First Amendment doctrine. The first is the extent to which the speech rights of corporations, as opposed to natural persons, are protected. Although it is now clear that corporate speech enjoys some protection under the First Amendment, it is by no means clear that these rights are fully coequal with those of natural persons. The second lacuna is the extent to which the First Amendment protects negative speech—that is, silence—as opposed to the positive freedom to speak. While natural persons have both rights, the foundations of the two are not the same. In particular, it has been unclear whether negative speech rights extend to corporations.
The Free Speech Clause has been justified as “both as an end and as a means,” having both intrinsic and instrumental rationales. The intrinsic rationale protects the natural right of citizens to autonomy in thought and expression. The instrumental rationale promotes the production of information and opinion beneficial to democratic self-governance. The intrinsic and the instrumental bases for the freedom of speech are united in natural persons, for whom each rationale supports the other. More information in public debate improves individual opinion, which, when expressed, improves public debate, and so on.
The situation with corporations, however, is different. Although corporations are “legal persons” with rights protected by the Constitution, corporate speech rights are justified primarily by the instrumental rationale. Corporations can produce information and opinion as well as any individual—better, in fact, than many. As a result, the instrumental rationale would seem to support the protection of at least some corporate speech. However, because the intrinsic rationale is based upon the natural right to autonomy in thought and speech, it is of doubtful applicability to corporations, which are artificial, not natural persons.
The intrinsic rationale is especially critical in the context of negative speech rights. A person who refrains from speaking expresses no idea, and silence does nothing to improve the quality of democratic deliberation. For this reason, the First Amendment protection of negative speech rights has been wholly grounded upon the intrinsic rationale and, more specifically, rooted in the integrity of “conscience”—a concept that, as variously formulated by the Court, seems to refer to the interior life, intellectual or spiritual, of natural persons. As artificial entities, corporations do not have interior lives and are, as the saying goes, as bereft of conscience as they are of body and soul. Unless corporations can somehow draw upon the intrinsic rationale, there would seem to be no basis for negative corporate speech rights.
A starting point for locating a basis for corporate speech rights is to focus not on the corporate entity but on the natural persons who form it and whose interests it represents. Corporations are, in their essence, associations of natural persons who, in coming together to form artificial entities, do not abandon their natural rights. An intrinsic justification for corporate speech rights thus can be derived from the people for whom it exists—that is, its shareholders. However, corporate law teaches that shareholder rights are transformed by the corporate form. Although shareholders retain individual rights to liberty and property, as shareholders they can neither command corporate action—to pay a dividend, for example—nor sell corporate property. We might therefore expect that any intrinsic justification for corporate speech rights based upon shareholders’ natural rights will be similarly transformed by the corporate form.
This article offers a theory of corporate speech that connects “conscience” to “purpose” and, in doing so, implies a basis for protecting corporations’ negative speech rights. Starting from the premise that any intrinsic foundation for speech rights must be derived from shareholders, this article draws upon basic corporate law principles to show how the corporate form modifies shareholder rights. The extent of this modification depends, fundamentally, on the potential for conflict among shareholders’ interests and objectives. Sole shareholder corporations, in which the entity is the “alter ego” of its owner, demonstrate perfect alignment between the interests of the shareholder and of the corporation. In such cases, corporations have the full speech rights of their owner. Likewise, closely held family firms where there is relatively little conflict among the shareholder base may also feature broad speech rights. The difficult case is the publicly traded corporation.
Publicly traded corporations, whose defining characteristic is a large number of widely dispersed investors, possess a broad diversity of interests and objectives in their shareholder base. This breeds conflict. Lest the conflicts in the shareholder base render the firm ungovernable, corporate law provides managers with a presumptive purpose: wealth maximization. Shareholders may specify other purposes in their governing documents, but in the absence of such an election, corporate law presumes the company to be managed for the purpose of shareholder wealth maximization. This presumption provides a basis for corporate speech rights.
The wealth-maximation norm serves as the coherent internal core of the corporation. For lack of a better word, its conscience. When corporations are compelled to speak in a manner that is consistent with wealth maximization—for example, when mandatory disclosure rules prompt disclosures that financially motivated investors would ordinarily demand—the compulsion is unobjectionable. However, when corporations are compelled to address issues that are not consistent with wealth maximization, they violate the integrity principle underlying the compelled speech cases. Violation of the integrity principle triggers First Amendment protection.
Rule 14a-8 provides the ideal context in which to study these issues. First, unlike other First Amendment cases involving sole shareholder firms or closely-held family businesses, the rule applies only to those firms where First Amendment rights are most problematic—that is, publicly-traded corporations. Second, because the rule involves a compulsion to speak, rather than a restriction on the content of speech, it highlights the context of negative speech rights. Third, because the majority of shareholder proposals under the rule involve matters of social policy invoking either the ordinary business or relevance exemptions, Rule 14a-8 presents a context in which the content of the disclosure violates the integrity principle. Thus, although corporate and securities lawyers sometimes dismiss Rule 14a-8 as a minor annoyance, in fact the rule is the ideal instrument for probing the limits of the speech rights of corporations.
From this introduction, the article proceeds as follows. Part I focuses on Rule 14a-8, first describing the origin and evolution of the rule, then reviewing the existing literature on the rule in order to understand how the rule has been approached by other scholars. It finds that the current rule, which is essentially the inverse of the original rule, is justified only by instrumental reasons, all of which are highly questionable on their own terms, and none of which provide any support for the rule’s constitutionality.
Part II focuses on First Amendment doctrine. It begins by investigating the first doctrinal problem—the constitutional basis of corporate speech rights. After analyzing the applicability of both the intrinsic and instrumental rationales to different forms of corporate communications, it argues for a conception of intrinsic corporate speech rights based upon the wealth maximization norm. Part III then proceeds to the second doctrinal problem—the question of negative speech rights. After combing through the court’s compelled speech cases for a coherent theory of the protected interest underlying negative speech rights, it puts the two pieces together, articulating an intrinsic rationale for corporate speech rights based on the principle of integrity. The intrinsic rationale supports the right of corporations not to be made to speak for reasons other than wealth maximization. Part IV argues that these principles reveal that Rule 14a-8, at least insofar as it mandates controversial disclosures on matters of social policy, violates the First Amendment rights of corporations.
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