A business judgment rule of life
Devin Humphreys | Wednesday, February 15, 2023
In the grand scheme of things, there are not all that many required classes at Notre Dame Law School. Sure, we, like practically any others, have a set of first-year doctrinal courses that we must complete: the standard civil procedure, constitutional law, contracts, criminal law, property and torts. But after 1L, almost every course we take is an elective. Sure, everyone has to have six “skills credits,” everyone has to take professional responsibility at some point, and Notre Dame is unique in requiring every student to take a course in jurisprudence, but by my count that leaves 48 credits in two years that are entirely elective. With Notre Dame Law’s wide array of course offerings, there’s something for everyone’s niche, from copyright to administrative law to Anglican Canon Law (all of which I’ve taken).
But even at Notre Dame Law, with this vast freedom to set one’s own course schedule and explore a multitude of legal interests beyond the 1L doctrinal portfolio, there are some courses that are still considered “must-take.” One of those courses, Business Associations, I must confess I put off until the last minute. I want to be a law professor, you see, and private law isn’t really an area of research or teaching interest for me, so I always assumed that Business Associations would be one of those classes I either took because it would help me with the bar exam or would forego taking in law school because I could always learn the material in bar prep. But then, on a whim, as I was putting together my schedule for the spring semester of 3L, I decided that I’d give Business Associations a go anyway, and I am quite glad that I did indeed.
Business Associations sounds like a course in how to start a business and order a business’s affairs vis-a-vis the behemoth that is corporate law, and it is certainly that. But under the direction of the eminent Professor Julian Velasco, we’ve gone much further than simply evaluating how businesses work, additionally considering the question of why businesses even exist in the first place. While there are many philosophical answers to that question, the one that matters most for a couple of key black-letter law principles is that businesses are meant to make their owners or investors money. For corporations, this means that the purpose of a corporation is to make its shareholders money.
This is somewhat intuitive, of course, but the consequences are striking. As a critical example, take the 1919 case of Dodge v. Ford (yes, the car companies). Henry Ford, as the story goes, wanted to pay his assembly line workers exceptionally high wages (for the time, anyway), but the Dodge brothers were shareholders in Ford and were quite miffed that Ford was increasing wages and reinvesting in steel mills and the like instead of paying shareholder dividends. (It definitely didn’t have anything to do with the fact that Ford knew the Dodges were thinking of starting their own car company.) So the Dodges sue, claiming that Ford intended to deprive them of dividends to which, as shareholders, the Dodges were entitled. And the Michigan Supreme Court agreed, saying that “it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others.” Ford’s problem wasn’t that he was trying to pay his workers more money or that he wanted to reinvest profits, said the court; his problem was that he was trying to do these things to keep his shareholders from making more money. While corporations are able to be shielded from shareholder challenges whenever they’ve acted in good faith for the benefit of the shareholders, giving corporations the ability to make risky business decisions that just might pay off (one formulation of what’s called the business judgment rule, or BJR for short), the one way a shareholder challenge might still succeed in spite of the business judgment rule is if a shareholder can show that those running a corporation had some primary purpose apart from making them money. That said, businesses can (and do!) get very creative about how money that isn’t going directly into the shareholders’ pockets is nonetheless indirectly benefitting them in some ancillary way. While it might take some mental gymnastics to make those justifications, the end result is a broad understanding of what business decisions can fall under the protective cover of the BJR.
At breakfast with my dear friend Ellie Augustine, though, where we were talking about the day-to-day of law school amidst our other obligations, from Ellie serving as an assistant rector in Lewis Hall to me serving as the symposium editor for my journal, I realized that maybe the BJR has a more personal application. The very first column I ever wrote for The Observer, all the way back in August of 2021, was a column deploring the so-called Culture of Busy. There, I said that one of the biggest lies the “Culture of Busy” tells us is that “if you decide that time should be spent on things that are not work or school, you should be budgeting it down to the minute, for all such time spent is a net burden.” At the end of the day, though, perhaps the Culture of Busy can be tamed with mental gymnastics like those corporations use to shelter themselves under the umbrella of the BJR. Ford could have made, but didn’t make, the argument that paying his workers more will increase company loyalty and worker morale, increasing car output (and shareholder profit!) in the process. Had he done so, Dodge v. Ford might have come out the other way. Accordingly, maybe the best way to combat the “Culture of Busy” is to conceive of our leisure in similar terms. Getting enough sleep every night doesn’t mean you aren’t working hard enough — it means you know you do better work well-rested! Spending an evening catching up with a friend need not be a “waste” of time if it means you’ll approach the work to come after with a refreshed mind, body or spirit!
So let’s consider, in these weeks ahead, how we can be intentional about ordering our work and our leisure. Done well, taking the “risky business” decision to reject the “Culture of Busy” will almost certainly end up helping us better manage our busyness in the long term. At the end of the day, our time is not our own but instead a gift from God, and he has trusted us to be stewards of our time. May we use our time, in work as in leisure, in such a manner that when all is said and done, God might look upon us and say, “Well done, my good and faithful servant,” a heavenly analogue to the BJR.
Devin Humphreys is a 3L at Notre Dame Law School. When he isn’t serving as the sacristan at the Law School Chapel, singing with the Liturgical Choir or Chorale or competing at a quiz bowl tournament, he’s sharing his thoughts on the legal developments of the day with anyone who will listen. For advice on law school, hot takes on Mass music and free scholarly publication ideas, reach out to Devin at [email protected] or @DevinJHumphreys on Twitter.
The views expressed in this column are those of the author and not necessarily those of The Observer.