What do Elon Musk and Democratic Massachusetts Senator Elizabeth Warren have in common? They are both wrong to support enacting federal law to replace Delaware’s role as our corporate law capital.
Delaware maintains its stature because it favors no one. Critics from the right declare it has adopted an anti-shareholder and approach sympathetic to the environmental, social, and governance movement, while critics from the left blame Delaware for stalling ESG. Logic suggests that one of these sides must be wrong. The reality is, they both are.
As someone who works closely with corporate governance at the University of Delaware’s Weinberg Center, I have had the privilege of studying firsthand how Delaware’s approach to corporate law has provided stability and flexibility for businesses. Delaware’s commitment to a balanced, sensible approach to corporate governance has allowed it to remain a leading force in the field, despite pressure from both sides of the ideological spectrum.
Former Attorney General William Barr and Washington lawyer Jonathan Berry wrote a column last year lamenting that Delaware’s preeminence in corporate law is under threat. They credit Delaware’s leadership to its sensible pro-stockholder jurisprudence, but caution that Delaware is risking that leadership by “falling in line with ESG to reject shareholder value as corporate law’s lodestar.”
A distinguished panel at Baruch College’s Zicklin School of Business last week expressed the view that Delaware remains stringently shareholder-oriented, which constrains boards in promoting values viewed as socially good, especially those associated with ESG. The panelists posited that Delaware law would restrict ESG activities not designed to maximize shareholder value and opined that it is “at least partly responsible for the resistance the ESG movement has encountered in the United States.”
I respectfully acknowledge the theoretical risk of such lopsided jurisprudence. But Delaware has neither abandoned shareholders nor outlawed ESG. Delaware remains committed, as it has been for at least a century, to the idea that boards owe their duties to the corporation and its shareholders. That requires all board actions to bear a rational relationship to shareholder value. That’s neither Milton Friedman nor Ralph Nader, but the sensible and practical center.
While critics on both sides argue that Delaware’s adherence to what they criticize will lead to a loss of its leadership position, other states, such as Texas and Nevada, are consciously competing to challenge Delaware.
Meanwhile, progressive legislators such as Warren and disgruntled executives such as Musk, the CEO of several companies including Tesla and SpaceX, call to preempt the states altogether with a national corporation law.
While such competition is real, it has always helped Delaware maintain its leadership and double down on the reasons for the state’s success. Federal intervention risks replacing a rationally flexible system with a one-size-fits-all approach that would ignore the diverse needs of businesses across states.
Delaware’s system, built on moderation and business sense, provides the adaptability companies need while maintaining a robust legal framework. It’s this balance that has allowed Delaware to maintain its position as the gold standard for corporate law.
Delaware’s preeminence is partly due to its deliberate pursuit of moderation. The state’s approach is built to withstand prevailing political trends, ensuring stable corporate principles despite shifting ideological winds.
In the legislative realm, Delaware’s corporate statute is crafted by corporate lawyers from the state bar association, not politicians. This entrusts the creation of corporate law not to elected officials but to a body of professionals who dedicate their careers to applying, discussing, and advising on those laws. Delaware’s corporate code isn’t a political tool—it’s the product of decades of experience.
In the judiciary, Delaware’s state constitution requires major courts to maintain a partisan balance. This ensures a nonpartisan bench that focuses on business law rather than political ideology, fostering stability and predictability in corporate decision-making.
This feature allows Delaware courts to remain insulated from the political turmoil that can skew legal outcomes in other states.
In the executive branch, even as political leadership changes, participants value the state’s reputation for efficient handling of corporate affairs. The infrastructure that supports Delaware’s corporate law is a permanent asset, not a partisan one.
This unique blend of stability and expertise percolates throughout Delaware’s legal profession, acting as a buffer against the impacts of political and societal turbulence that afflict other institutions.
History shows that Delaware has consistently struck a reasonable balance between the competing interests of stockholders and other constituencies. By maintaining this pragmatic approach, Delaware has weathered past corporate storms and adapted without losing its commitment to shareholder value.
Today, the state stands at the center of ongoing national corporate debates, showing its capacity to adapt and lead with moderation. A federal corporate law would be a disaster; state competition is ingenious.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Lawrence A. Cunningham is director at University of Delaware’s John L. Weinberg Center for Corporate Governance.
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