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Praise the law

20 March 2014 By Reynolds Holding

The U.S. Supreme Court may be getting ready to shake the faith of shareholders. Company boards have a legal duty to put business interests first. Yet a challenge to the Affordable Care Act’s requirement that corporate healthcare insurance cover contraception could give biblical doctrine priority. Some laws designed to protect investors could suffer collateral damage.

The case raises the novel issue of whether for-profit corporations have religious rights under the U.S. Constitution and other federal laws. Arts and crafts chain Hobby Lobby and Conestoga Wood, a cabinet maker, say their owners’ beliefs excuse the companies from including birth control coverage in employee health plans.

Amidst the broader debate, one question is whether the firms’ boards can legally make this argument. State laws generally require company directors to enhance profit and shareholder value. They have leeway to make charitable donations, tout ideological positions and promote social objectives that have at least some business purpose. That’s why Apple Chief Executive Tim Cook could dismiss critics of the company’s renewable energy policies without fearing lawsuits.

But Hobby Lobby and Conestoga may have gone too far, suggests Mark Underberg in a recent Harvard Law School blog post. The pursuit of faith-based policies devoid of any business benefits could leave the companies open to substantial legal fees and penalties and board members vulnerable to lawsuits.

Other boards have paid for favoring personal views. In 2010, for example, a Delaware court struck down a Craigslist poison pill that was intended to preserve the directors’ hazy notion of corporate culture rather than promote shareholder value.

Hobby Lobby and Conestoga are family-owned companies whose stockholders and board members share religious beliefs. That may help directors avoid litigation, but it doesn’t relieve them of their obligations to act independently in the corporations’ best interests. Companies that want to give social objectives priority can do so as so-called benefit corporations or B Corps, an alternative legal form offered in at least 17 states and the District of Columbia.

The Supreme Court will probably not address these issues directly, but a decision in the companies’ favor would implicitly bless unprecedented board discretion. Investors expecting directors to be guided by shareholder value rather than divine inspiration could be the losers.


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