To speak or not to speak?


By Professor John Coffee is the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance



How should public corporations behave when they perceive that democracy is failing and their government simply does not have a clue as to the consequences of its actions? That is, assume that the business community feels not just that the government’s policies are wrong (a standard perception), but that the government in general has become paralysed, confused and dysfunctional.

After populist revolts in both the US and the UK in 2016 produced Trump and Brexit, this perception of government as dysfunctional (to the point of derangement) is now common in both nations. Once, the sound answer to the opening question was that corporations – at least in their public statements – should steer clear of political issues and remain neutral. But that default rule may no longer make sense today.

In the US, populism has produced a reckless and unpredictable style of leadership in which the chief executive might, on any given day, say or do almost anything (often preceded by a late-night outburst on Twitter in lieu of a formal position paper). In the UK, populism has resulted in Brexit, as interpreted by a government that declines to say what Brexit means. Both styles pose problems for corporations that expect governments to behave, well, like governments: consistent, rational and mature.

So, what should a large corporation do that will be impacted by these decisions (or non-decisions)? The old rule was to suffer in silence (and perhaps lobby intensively in private). But that rule is under pressure in different ways. In the US, a public corporation may find itself attacked without warning by the President in a late-night ‘tweet’. The most recent example in December (and there have been a host of others) involved Wells Fargo, a much-troubled and criticised US bank, which awoke to find that overnight the President had tweeted that he wanted an independent administrative agency to impose far tougher penalties than it had in fact imposed, because he thought the bank had cheated its customers. Although the President has a general responsibility for law enforcement under the US constitution, the President does not run independent administrative agencies and never functions as judge or jury. After recurrent such episodes, corporations (and their boards) that are in the public spotlight have to plan in advance how to respond to these now foreseeable attacks.

“Politics tends to produce polarised positions. But major business institutions could play a more statesmanlike role — especially if they can form a coalition that offered white papers and carefully substantiated estimates of the costs of various options”

In the UK, where manners matter more, personal attacks from the Prime Minister remain unthinkable, but the problem for the UK is that time is running out. Procrastination may make political sense, but it invites economic disaster. Many major corporations – whether US, UK, or European – face approaching deadlines. By some point, perhaps as early as the end of the first quarter of 2018, they have to decide whether to shift assets and personnel outside of the UK. Their decisions may depend in large part on whether they see a ‘hard’ or a ‘soft’ Brexit coming. But on this topic, Prime Minister May’s government is less than forthcoming and apparently deeply divided. Meanwhile, the EU is sending ‘be prepared’ memos to targeted UK companies, warning them that their UK operating licences will not be valid in the EU after March 2019. Obviously, pressure is being applied.

If the problem in the US is a government that is reckless, the problem in the UK is one that is indecisive (and even self-contradictory). Nonetheless, the position of public corporations in both the US and the UK is remarkably analogous. In both, the corporate sector generally favours free trade and liberal immigration policies (particularly in hi-tech industries where the need to import skilled employees is pressing). But opposition to immigration and (to a lesser extent) free trade was at the core of both Trump’s election and the Brexit vote. The quandary thus becomes what a major corporation dare say in public without sounding as if it is disdaining the decision of a democratic majority.

This will require some diplomacy and finesse. In all likelihood, anything perceived as a ‘threat’ will backfire (i.e. ‘unless the UK stays in the single market, we will move 8,000 employees to Frankfurt and Paris’ – that’s a threat, even if veiled). However, a major corporation or financial institution can and should be transparent. Thus, it may be appropriate to say: ‘Our current contingency plans require us to reposition at least 2,000 jobs to Europe by 30 June and probably more later, up to a total redeployment of 5,000 employees, depending upon the course of the continuing Brexit negotiations’. The latter disclosure focusses on the cost of a ‘hard’ Brexit and provides real information. It thus counters the ‘alternative facts’ that some Eurosceptic proponents of a ‘hard’ Brexit have offered (namely, that a net migration of jobs from the UK will not occur).

Some industries in both countries face acute problems. In the US, the North America Free Trade Agreement (NAFTA) has for a quarter of a century spurred economic activity on both sides of the Mexican and Canadian borders. But if Trump cancels it (as he has threatened), the investments that American firms have made on the far sides of both borders are imperilled and American agribusiness simply cannot operate without migrant labour. None of this has yet been recognised by a President who rarely descends beneath broad generalities.

In the UK, some industries – most notably pharmaceuticals, chemicals and aviation – have come to depend on industry codes and standards, as specified by European agencies and interpreted by the European Court of Justice. If the UK leaves this single market, these industries face regulatory chaos. Still, publicly asking for continued regulation by EU agencies (and the much-disliked European Court) remains politically unacceptable – at least until the consequences of a ‘no deal’ departure from the single market are made clear.

Both sides, of course, should share the blame. In contrast to the indecision of UK political leaders, many EU political leaders have openly indicated a desire to retaliate against the UK, in part by requiring that certain trading and clearing operations now based in London (for example, Euro currency trading and related derivatives) move to the Continent. Although politically attractive, this policy would be economically very costly to the international banking system. That cost and the resulting inefficiency needs to be stressed to Europe (both its leaders and its led, with the point being clearly made that it would drive up costs to European users). None of this may stop politically motivated leaders, intent on playing symbolic politics. But such efforts might help achieve at least one short-term goal: obtaining the longest possible transition period. As the costs of Brexit begin to be borne over this period, compromise may become more feasible.

More generally, the old consensus that corporations should ‘stay out of politics’ (except for quiet lobbying) must be updated. To be sure, it is prudent to avoid endorsing or offending specific political leaders, but the corporate sector (and particularly non-UK companies) should stress to both UK and EU audiences the policies that are critical to it (e.g. free trade, relatively open immigration and a ‘soft’ Brexit) and the adverse consequences that will fall on both sides if those policies are abandoned. Some sceptics will retort: ‘who trusts corporations (and banks in particular)?’ But, in a world of ‘fake news’ and ‘alternative facts’, well-known corporations and financial institutions could become gatekeepers for honest and accurate information, in effect playing the functional role of an auditor of facts and the likely impact of policies. Yes, this role has its risks, but if no credible gatekeeper exists to undertake this role (and if the once authoritative role of the media has been weakened in this post-digital era), then an underinformed public is left to choose between overstated alternative scenarios offered (with much passion but less objectivity) by rival political parties and factions.

Necessarily, politics tends to produce polarised positions. But major business institutions could play a more statesman like role – especially if they can form a coalition that offered white papers and carefully substantiated estimates of the costs of various options. Predictably, significant coalitions will form only around significant issues. In the US, such efforts could focus on the cost of abandoning NAFTA, which most US businesses strongly support, but which is a favourite Trump target. In the UK, the need to stay in the single market (by whatever semantic compromises work to achieve this end) should be the primary goal. A ‘no deal’ Brexit is the least acceptable option. None of this rejects the majority’s right to decide, but rather helps inform future decisions. To be credible, these coalition papers would need to use and consult with respected experts (inside and outside academia) and be endorsed by a broad cross-section of firms. Ultimately, these efforts might prove futile, but continued silence in the face of an impending crisis makes no sense. Silence implies consent, but consent is hardly what the corporate world should signal today. Rather, it should sound the alarm.


About the Author:

John C. Coffee Jr. is the Adolf A. Berle Professor of Law and director of the Center on Corporate Governance at Columbia Law School. He is a fellow at the American Academy of Arts & Sciences and has been repeatedly listed by the National Law Journal as among its “100 Most Influential Lawyers in America.” Coffee has served as a reporter to The American Law Institute for its Corporate Governance Project; has served on the Legal Advisory Board to the New York Stock Exchange; and as a member of the SEC’s advisory committee on the capital formation and regulatory processes.

Coffee is the author or editor of several widely used casebooks on corporations and securities regulation, including Securities Regulation: Cases and Materials, (with Hillary Sale), 2015, (13th edition); Cases and Materials on Corporations (with Jesse H. Choper and Ronald J. Gilson), 2013, (8th edition); and Business Organizations and Finance, (with William Klein and Frank Partnoy), 2010, (11th edition). His scholarly books include Entrepreneurial Litigation: Its Rise, Fall, and Future, Harvard University Press, 2016; Gatekeepers: The Professions and Corporate Governance, Oxford University Press, 2006; Knights, Raiders, and Targets: The Impact of the Hostile Takeover, (with Louis Lowenstein and Susan Rose-Ackerman), Oxford University Press, 1988; and The Regulatory Aftermath of the Global Financial Crisis, (with Ellis Ferran, Niamh Moloney, and Jennifer G. Hill), Cambridge University Press, 2012.