Ep.277 - Matteo Gatti on Corporate Governing

Speaker A: Welcome to the Business Scholarship Podcast, a place for interdisciplinary conversations in the broad world of business research. My name is Andrew Jennings and it's my pleasure to be your host. If you like what you hear today, please subscribe to the podcast on Apple, Spotify or wherever you get your podcast, plus leave a rating and let other people know about the show too. And if you have ideas for the show, please let me know. My email address is andrewdrewkginnings.com and I look forward to hearing from you. All right, time for the episode.

Speaker B: Our guest today is Matteo Gatti, professor of law at Rutgers University. We'll be discussing his new book, Corporate Power and the Politics of Change. I'll add a link to the book's website in the show notes for the episode. Matteo, welcome to the Business Scholarship Podcast.

Speaker C: Andrew. Thank you so much for having me here.

Speaker B: Matteo. There are certainly law professors who write books. It's not necessarily a book filled, though. We're best known for our law review articles that might go on as long as a book sometimes, but maybe aren't quite books themselves. Could you tell us why you decided to write a book and specifically why you decided to write this book?

Speaker C: I had some prior work on Stakeholder capitalism series of articles, and thought that I was getting to some good amount of work that could be turned into something bigger. I realized that it was while I was mostly focused on the normative question of, uh, should corporations behave this way? Should corporations be more or less stakeholder oriented? As I dug into that literature, a more basic legal question arose, which was, can they act in a more stakeholder way under the current laws? As I was looking at the issue closely, the answer was yes. Directors and managers have more room to maneuver towards a stakeholder orientation that most people would assume. Of course, they don't have a legal obligation to do. And that's why there are calls for a more stakeholder oriented capitalism. But they have the ability to do that, and a number of them were exercising it. What sharpened my focus was noticing that corporate action and corporate talk were both on the rise simultaneously. And I thought maybe they need to be analyzed as related yet distinct phenomena. So the book grew out of wanting to give this combined phenomenon a proper conceptual home and the rigorous legal and social scientific treatment. I think the timing also was right because during the first Trump administration we saw a wave of corporate responses on immigration, on racial justice, on climate. So that seemed important, maybe under examined by scholarship. So I wanted to catch this wave as corporations were growing more political, why it was still in motion in this

Speaker B: book, you coined the term corporate governing, which is one of the key themes or contributions of the book to describe something bigger than what most people might think of as corporate activism. Could you explain what you mean by corporate governing? How it's distinguished from corporate activism or even corporate governance, perhaps more familiar term to the listeners of this podcast, and why those distinctions matter.

Speaker C: Corporate governing is an umbrella term that I coined to capture two things that corporations are doing. Socioeconomic advocacy, which is taking public stances on political and social issues, sometimes picking up fights with actual politicians. That's one end of the spectrum. And then the other end is what I call government substitution, which to us is what we think when we think about stakeholderism, delivering services or protections, that the state is failing to think about employer provided health care or parental leave that is far beyond what the law requires, or internal civil rights protections for employees. So all these things bring this distinction that is standard corporate activism, um, doesn't really capture. We're used to thinking of corporate political activity as lobbying, which is quiet, which is transactional, which is behind closed door, which is of course motivated by direct business interests. And what I'm describing here is a little different. It's CEOs again, picking maybe some public fights with a sitting governor, companies inserting themselves into cultural war debates. And it's a different beast, both legally and strategically. Also, we got to bear in mind that corporate speech is constitutionally protected after Citizens United. So that raises a distinct set of legal and normative questions that we don't normally think about when we talk about corporate action. Those are the reason why I analyze these under the same umbrella, because I think that there are two sides of the same coin. Corporations talk because they also act in the sphere. And the talk is a sort of way to bolster what they do and justify when they act because again, they have a set of stakeholders, uh, notably the employees, of course, uh, who expect them to intervene and to, and to raise their voices when politics go the opposite way.

Speaker B: You opened the book with four corporate motivating examples that might be familiar to a lot of readers and listeners. You talk about recent events with Nike, recent events with Disney, with Apple and Meta, uh, formerly known as Facebook. These are four different stories with different outcomes. Could you maybe highlight them at a high level and tell us how the stories of Nike, Disney, Apple, meta, circa, uh, 2018 to more recently tell us about how corporate governing works or when it works and what happens when perhaps it doesn't work out?

Speaker C: Let's start with Nike. Nike famously dropped an ad uh, with Colin, uh, Kaepernick as its talent and brand ambassador. Colin Kaepernick was, for those who don't recall, fired by The San Francisco 49ers, uh, after big controversy over him kneeling during the national anthem to protest police brutality. Nike was considering whether or not to keep Kaepernick in his roster. And so some internally were suggesting to drop him. But then a senior person suggested that it would be a complete mistake and in fact he would be a good face for a new campaign. And they dropped the ad, which was controversial and, uh, wildly successful at the same time. This is a paradigm of high risk, high reward, corporate governing that it's done right. Market research within Nike suggested that the consumer base is young, urban and socially conscious. The argument was that not featuring Kaepernick would align with opponents of the very audience that Nike most needed. And it turned out that online sales surged immediately after the ad. The market value of Nike rose. I guess the lesson here is that if you know your product market, if, uh, you know your stakeholders, you can show that your brand identity is authentic, uh, and you're strategically patient, then that will bring rewards. Disney and the up with a fight with the Florida Governor Ron DeSantis, because Disney got caught in a political fight. The Orlando Sentinel, which is the local newspapers in Orlando where Disney is at one of its main headquarters, revealed that the company was donating to the sponsors of a Florida, uh, law that called the don't say gay. Once that happened, Disney tried to manage the fallout with some carefully worded neutrality that made everybody angry. Like the employees got angrier, the showrunners got angry. So there was a big PR fiasco on social media. Folks felt that the LGBTQ representation was core to what Disney makes, at least at the time. And Disney was pretending to be pro lgtq, but then it turned out that it was contributing to campaigns, uh, to the opponents. So what it did was, uh, it overcorrected publicly and that handed the Florida governor a political gift. Interestingly, from a corporate law perspective, Disney did everything right procedurally. There were C suite meetings, board level deliberations, there was risk management in place. But also Disney had no real good options strategically. Right. So I guess the takeaway here is that Disney didn't fail at governance. Once political risks are, uh, created, you may end up boxed, uh, regardless of process, and you're left with just bad options. And we don't have counterfactual to tell what would have been a better option. Meta was once very vocal on its support of dei, but then Right before the second inauguration of Trump, Mark Zuckerberg showed up in a different outfit, literally and figuratively, and declared that DEI was done at the company. In addition to that dropped a whole bunch of fact chatters. Meta is a monopolist or a quasi monopolist with lots of political exposure. So antitrust scrutiny, legislative threats, regulatory risk across both the US and the eu. So maybe calculates that alienating some users is less costly than being on the wrong side of the Trump administration. We can argue whether that's right or wrong. What's not debatable probably is that once a reversal is so visible because Mark Zuckerberg went on record to say that yeah, it was no longer necessary, that we needed more aggressive masculinity. I think that's how he labeled. That's something that it damages your credibility in that any future corporate stand that Meta might take, people remember what happened was. And finally Apple, I use Apple to contrast it with Meta because unlike, uh, Meta, Apple stood its ground on DEI commitments. It was facing an anti DEI shareholder proposal and management opposed it and the shareholders voted it down. And it was the only major tech firm uh, that did so publicly. But Apple is still pretty hard to grasp because then you see Tim Cook, who's seated at the Melania movie premiere. On one hand Apple is staying course on substance but manages political relationships pragmatically. It's not clear whether it's the commitment is performance or not. Uh, so I guess here the jury's still out A, uh, few things changed after the book was closed but frankly I guess that these ambiguity in itself is instructive because it shows that it's hard to hold a position when the political winds shift quite sharply.

Speaker B: A cynical view of this phenomenon of corporate governing might be that it's just agency cost all the way down, that corporations are the ideological alter ecos of their executives, particularly their chief executives. But this book suggests that the real drivers here in terms of corporate governing are more structural in nature. Can you talk about what's actually pushing companies to engage in corporate governing?

Speaker C: Every corporation has its own specific drivers and we should not treat them as ah, a cohesive group of actors that behave in a certain way. I of course identify several drivers that are structural and so they probably recur across the board. So some are firm level and some others are at the societal level. At the firm level we have pressure from the bottom up. Uh, employees, especially employees have been vocal at several firms for management to do certain things. Think about the walkouts against mandatory arbitration for sexual harassment claims that happen at Microsoft, at uh, Alphabet, you know, that ultimately turn in these companies changing their internal policies during the 2017, 2021 phase, at least. Remember ESG investing and shareholder engagement. On that front we had some investor pressure going on as all the while we, in the late 2000 and tens we had the uh, Business Roundtable coming in with its statement, uh, redefining corporate purpose. Whether that was part, it was a genuine ideological shift or some reputational signaling we can discuss, but something was happening on that front as well and why we had these firm level pressures probably because society was moving as well. So social movements in the 2010s, from Occupy Wall street to uh, Me Too to Black Lives Matter climate marches, they demanded signals that corporations, uh, from time to time responded to, especially when amplified by social media. Crucially, political gridlock, uh, means that corporations are oftentimes seen as the only game in town when it comes to moving the needle on some issues. When Congress is really paralyzed to think about gun control, think about climate, for instance, right or racial equity, reproductive rights, stakeholders. And society looks to employers and to corporations to change certain things. And uh, the first Trump administration is also an interesting case study in that dynamic because it was from the get go considered a politically weak presidency that triggered lots of corporate response. Very early on. One of its first policy initiatives was the Muslim ban, and lots of corporations responded to that. It was seen as an opportunity to fill a vacuum. Now, now we're in the midst of Trump 2.0, which much higher political risk and an administration that is very eager to show willingness to retaliate. So the question is, what's happening now? Of course we're experiencing much more silence. Whether that's going to last, uh, we don't know. You know, the approval ratings, uh, are net negative. That has been so high since last year when he took office. So we'll see for the remainder of the presidency what's going to happen. But these are the drivers that I find where we're important in, in the rise of the phenomenon in the late 2010s, early 2000s, there has been quite

Speaker B: a shift in corporate response and corporate governing between Trump 1.0 and Trump 2.0, as you note. And in Trump 2.0 we've seen, I think, a corporate retreat from DEI and ESG commitments or principles. We've seen that from a number of firms that once loudly embrace those ideas and commitments. Does this reversal vindicate some of the critics of uh, this practice of corporate governing who questioned how durable or sustainable or genuine it was?

Speaker C: I Think, Yes, I think that the speed uh, and comprehensiveness of the retreat Meta we mentioned, but then Walmart, McDonald's, Ford, Harley Davidson. It's striking even to those of us who were already in some ways skeptical of the durability of the phenomena. You know, in the book I argue that we cannot rely on this to deliver lasting progress on the things that matter most. Because listen, law and regulations apply to all citizens, not just to the employees of some enlightenment employers if you will. And they bind successors, right? They cannot be reversed so easily. It can be reversed, of course. You can change a law, you can change a regulation. It takes more effort than Mark Zuckerberg is showing up with, with a gold chain and a new haircut to say that the eye was over at Meta during the second administration. The political costs of being on the wrong side of who is in power in D.C. again, retaliation on the regulatory front. Executive order exposure, contract risk for federal contractors. Those are concrete and immediate, right? So the cost of abandoning the commitments are diffuse and maybe they, they move more slowly. So it's I guess a rational calculation. Again, corporations don't have the luxury of choosing these things. They're, they're often times between raw stock and a hard place. Target got backlash from a bunch of its consumers for having completely ah, reversed its policy to favor some black suppliers. So again, it's something that we are observing on a real time basis. What's true though is that if you care about these outcomes, uh, maybe we should all keep reminding ourselves that we should really still focus all our energy on politics and on legislation. I know that in the US it's been very slow and, and not happening on fronts. There's no substitute for it. Nudging on corporations can be a good temporary solution. Maybe they are conducive to reform when reform can be achieved on bipartisan ground. I was mentioning before the walkouts, uh, to abolish mandatory arbitration for sexual harassment claim that ultimately resulted in bipartisan legislation in Congress which is signed by Joe Biden. It may happen on certain fields, but it's much harder to achieve on other fields.

Speaker B: Given that you're a law professor, I'd like to talk a little bit about law. What do law, ah, and corporate law doctrine say about the practice of corporate governing? Do they provide us with anything definitive or at least guiding in general about this practice?

Speaker C: In the book I separate the corporate law question with the compliance question. Of course there are compliance issues as to what extent DEI is still feasible, for instance, after students forfeit admissions versus harp. But corporate law Issues that we normally grapple with. Is there any potential director or managerial liability if there's any overstep, uh, while doing this? Uh, I think it's an easier answer. We have to look no further than the business judgment rule. As we all know it presumes that directors and officers act on an informed basis in good faith and in the honest belief that the actions are in corporations best interest. Of course, they have to show that they were reasonably informed and all that. And so courts are extremely reluctant to second guess these decisions. For a shareholder to challenge a board decision to, let's say, engage in DI initiatives on sustainability pledges or even on advocacy stands, they would need to show that the board acted in bad faith, uh, or was really irrational. And so that's a high bar that almost never gets clear. Let's think about government substitution rights, an employer provided services, and internal policies that go beyond what's legally required. I guess that the analysis under a pure shareholderist lens would ask whether there is a plausible business rationale there. And there is always one, right? Talent attraction, retention, brand differentiation, uh, maybe even esg. Investor appeals courts don't require that corporation prove it was the optimal strategy, but that it was a rational one and it was reasonably related to shareholder value. The only thing you don't have to say if you are in a shareholder centric jurisdiction like Delaware is you cannot thrash the shareholder wealth. You, uh, cannot say that you don't care about that, but we all know that. And then for corporate advocacy, which is the speech side, got to remember that after Citizen United, these has the First Amendment protection, you really need to find something extremely egregious. And so this is one, the only one area, maybe when there is some risk is whether somebody says something that is so outrageous that I guess you are, you stepped on a risk and you did not manage a risk that can put you in trouble, um, from an oversight perspective, right, because you did not handle the political risk around that particular executive. Right? In that word, that would get us into the Caremark line of cases. But even then I'm not sure we have that much coverage because Caremark, as is being applied by uh, the Chancery Court, uh, really is related to legal risk. So I guess the you are very outrageous on your political statements, right? Think about Elon Musk, for instance. One can argue that's a business risk that he's taking. That is he wants to consolidate the sales of his products with, with the US government on the one hand and with conservative consumer base. And he has decided that he doesn't care if German consumers don't buy Teslas any longer. That's a business risk. There's no underlying legal violation. Still, I'm curious to try to come up with an example where you have. I'm sure that there could be some hypotheticals there, but it's. You have to do something pretty bad in order to trigger liability vis a visual shareholder.

Speaker B: Let's talk about some of the prescriptive piece of this book. Tell me about the guardrails that you propose for corporate governing and could you discuss how feasible or realistic they are?

Speaker C: Guardrails that I survey are some of the usual suspects. More disclosure and better process. And for better process, I borrow from the literature who's dealing with political contributions. Think about interesting IT director approvals or shareholder approval. I want to be honest here. I'm not holding my breath for any dramatic legislative intervention here, and I say that much in the book. State legislators, with a few exceptions, are, ah, not going to regulate these in any coherent way. Maybe some red states like Texas might try to restrict esg. We'll see if those efforts would be in line with the First Amendment. And then Congress is effectively unavailable for anything that requires bipartisan consensus. So I guess the, the practical guardrails, uh, have to come from within corporations themselves, uh, in anything that the prescription here is for them, uh, to do good on the legitimacy issue. Why are they even here, why they're doing this? Because this is the critique that they get from the left and from the right. And so an improvement would be to come up, uh, with practices that improve legitimacy. Right. So disclosure and process are probably our best guesses. Uh, disclosure is interesting because it comes with the product itself. Right. If we're talking about corporate socioeconomic advocacy, as I describe in the book, that's transparent by definition. Okay, so we have some disclosure there, but I guess that they could do a little better. So corporations should probably be upfront with their stakeholders about what their guidelines for intervention are, when and how they engage politically, on what issues, in whose interest. And so I surveyed, uh, current practices across some subsets of the S&P 500 index. And admittedly I did that at the end of 2020 24, in a different phase now, but then found that, uh, two thirds of the companies in the sample that were still endorsing ESG goals, and that was like a broad majority of corporations we're talking about, roughly speaking, 90% of corporations at the end of 2024 still saying that they were following one or more ESG goals, only one third of those were also clear that they advocated on, um, those matters as well, and how, under what conditions and how they were advocating on, uh, esg. So there's a little bit of a discrepancy. Corporations tend to say that they're pro esg, but they were not extremely clear as to when and how they would again pick up fights about policies with politicians. So I guess it's a gap that creates confusion and credibility problems on process. I think that boards should have adequate governance mechanisms to oversee political risk. They, uh, don't want to micromanage every CEO tweet, I guess. Uh, but you have to show that there's a coherent framework for when and how the company engages. Several colleagues from both law and business disciplines have made similar proposals. So I'm happy to acknowledge that the book is contributing to a conversation rather than inventing it from scratch. Of course, in the book I also spent some time on, as I said before, the usual suspect in corporate governance. Disinterested director approval or independent director approval and shareholder approval. The devil's in the details there because it's unclear who is a disinterested director here. Let's assume we have a board with some people who have been contributing to Democratic Party, and there is a DEI issue at stake. If you use the playbook, you would maybe want to set up something where these folks recuse themselves and abstain, but that would give the conservatives and the centrist, if you will, the decision on the matter. Not sure that would work because it would empower the other side. And again, guess that nobody is really truly disinterested unless they come in from Mars. Even a centrist is a political belief, which is, I'm not aligned with the right and another line with the left. And so again, it's unclear how that work. Even shareholder approval. I wonder if that's the right forum, uh, to decide on issues that affect other, uh, stakeholders. And of course, this is something that we've been talking about for decades in corporate governance. So I'm not inventing any. Anything new here in particular. What I would add is that the Trump 2.0 environment has made corporations more cautious about committing publicly to advocacy positions. And maybe this is improving the quality of governance around these decisions because if you're more nervous about it, on the one hand, you will have fewer companies that will act on it on the impulse, and then others, uh, would be more nuanced than more, more proactive, uh, in explaining why they do certain things politically. And that's probably a silver lining of what's been happening politically.

Speaker B: Let's imagine that a decade from now that your editor at Cambridge gives you a call and says, we'd like you to do a new edition of the book and if you'd like to update the introduction or add a chapter, what might that new introduction or that new chapter say?

Speaker C: I will look at what happened more thoroughly during the second Trump administration and, and I guess after his administration, whoever is in power in D.C. especially in the survey of what corporations have been doing, have been communicating to their investors and stakeholders about these practices. As it was mentioned m before and I guess mentioned the introduction. I guess the introduction would be very transparent about what I got right and wrong the first time around. Don't want to say this for false modesty, but I guess it's more a commitment or method. One of the book's central points is that we need a nuanced, non ideological view of this phenomenon. I would look into when I was right and why and when I was wrong and why, and see how the whole phenomenon evolved in the current era.

Speaker B: Are there any key takeaways you'd like listeners of this interview or readers of the book to have?

Speaker C: Uh, one is to keep an open mind about this phenomenon. So this book will probably not validate political priors. So if one comes thinking that, that corporations is political engagement is some sort of a, ah, corporate virtue in action, I hope that I have complicated your views. And if you came thinking that it's a pure cynical theater, I hope I also complicated that view. The cases resist a, uh, simple categorization. Second, I think that corporations are active in the political and social space and will remain active, possibly in more subtle and, and less visible ways as the current political environment makes public stance riskier. But I wouldn't mistake the current retreat from the insg for pure disengagement. I think that the structural pressures have not gone away. The calculus has changed a bit. So again, something to uh, keep an eye on. And third, and this is the one that I most want people to live with, which is, is don't expect corporations to fix politics because they won't. They can't and they won't. I guess that the durable, universal, democratically legitimate change that most people across the political spectrum actually want, which can be on very different, different areas. Think labor, taxation, privacy, AI competition, all those really require the government and the legislator, right? And they require laws. And so corporate governing is, is at best, uh, a stopgap and a pressure valve at worst. I guess it's a way of convincing ourselves that the hard political work doesn't need to be done, but in fact, it does. And so that's how I conclude my book. And that's the main takeaway for our listener.

Speaker B: Our guest today has been Matteo Gotti, professor of law at Rutgers University. We've discussed his new book, Corporate Power and the Politics of Change. I'll, uh, add a link to the book's website in the show notes for the episode. Matteo, thank you for joining the Business Scholarship Podcast.

Speaker C: Thank you so much for having me here. It was a pleasure.

Speaker A: Thank you for listening to another episode of the Business Scholarship Podcast. If you like what you heard today, be sure to subscribe to the podcast on Apple, Spotify, or wherever you get your podcast. Rate the show and let other people know about it, too. If you have ideas for future episodes, let me know. My email address is andrewdrewkjennings.com and I look forward to hearing from you. Until the next time. I'm, um, your host, Andrew Jennings.