Economics Archives – Southern California Law Review

Corporate Social Responsibility Through Shareholder Governance

June 2024June 2024Robert P. Bartlett III* & Ryan Bubb†

New approaches to corporate purpose have emerged in recent years that hold out the promise of addressing concerns about corporate social responsibility (“CSR”) through shareholder governance, rather than in spite of it. The seminal such approach—enlightened shareholder value—posits that treating other stakeholders well can ultimately redound to long-term shareholder value. However, two more recent proposals reconceptualize shareholder interests in more holistic ways and urge that it is shareholders’ welfare, not shareholder value per se, that managers should pursue. In particular, the “shareholder social preferences” view incorporates into the corporate objective the degree to which the firm’s operations align with the social views of shareholders. The “portfolio value maximization view,” in contrast, argues that corporate fiduciaries should maximize the value of diversified shareholders’ portfolios by considering the externalities of the firm’s operations on those portfolios.

Shifting to shareholder welfare as the corporate objective, however, would do little to improve corporate conduct and would entail substantial costs. The social preferences of shareholders are conflicted, muted, and often prefer less protection of stakeholder interests than provided by law. Shareholders’ portfolio value captures only a small portion of the externalities like pollution that its proponents hope to address and risks motivating anticompetitive conduct. And neither corporate managers nor shareholders would have the information and incentives needed to pursue these additional shareholder welfare considerations. On the contrary, by distracting management from their core competencies, shareholder welfarism would ultimately lower shareholder welfare.

The future of CSR, as with its past, is instead with enlightened shareholder value (“ESV”). But the existing law-and-economics literature on ESV has been stunted by key misconceptions, which we attempt to dispel. The increasing use by various actors in the corporate system of normative arguments that sound in ESV terms may lead to new pathways for achieving social progress.

INTRODUCTION

Corporate managers play crucial roles in our society, sitting as they do atop organizations in control of vast agglomerations of resources. A long-standing debate in American law concerns how corporate fiduciaries should conceive of their jobs—what objective should they pursue? The traditional understanding is that the fiduciaries of a business corporation should pursue shareholder value, and much of our corporate governance system is designed to that end. Pursuit of shareholder value, of course, can conflict with other interests in society. The classic alternative to the shareholder value maximization paradigm is some form of stakeholderism, in which shareholder wealth is but one of the ends to be sought by management, alongside the interests of workers, other suppliers, customers, and the broader community.

But stakeholderism has foundered due to two key problems. First, state corporation statutes give shareholders the right to elect the board of directors, which in turn holds legal power to manage the corporation.¹ Directors are naturally oriented toward serving the interests of their equity investor electorate, so that absent deeper reforms that would give other stakeholders board representation, shareholders’ interests are likely to continue to be treated as primary.² Second, stakeholder theorists have not congealed around any methodology to determine how corporate management should strike the inevitable trade-offs among the competing interests of different stakeholders, simply leaving it up to management to sort out as they see fit.³ Lacking any metric against which management performance can be judged, stakeholderism in practice risks reducing the accountability of management.⁴

The debate about corporate purpose is old, dating back at least as far as the foundational exchange between E. Merrick Dodd Jr. and A.A. Berle Jr. in the pages of the Harvard Law Review in the early 1930s.⁵ Yet as early as that era, there were those who questioned the extent to which shareholder interests are actually incompatible with stakeholder interests. Mistreating workers, customers, and other firm patrons is not in general a recipe for long-term business success.⁶ As Dodd himself put it, “No doubt it is to a large extent true that an attempt by business managers to take into consideration the welfare of employees and consumers . . . will in the long run increase the profits of stockholders.”⁷ While not embraced by Dodd,⁸ this so-called “enlightened” shareholder value view has historically represented the primary alternative to stakeholderism for those seeking to reorient corporate managers toward more socially responsible business practices.⁹

But recent years have given rise to new perspectives on how corporate managers should understand shareholders’ interests that aim to weaken the grip of shareholder value on the hearts and minds of corporate managers and provide a new north star by which they could chart a more socially responsible course. The key to these innovations is the recognition that the shareholders of a business corporation in general care about more than just the return on the company’s common stock. For one, shareholders care about other stakeholders’ interests directly because of their own personal normative commitments (their “social preferences,” in the reductive parlance of economists). And even from just a financial perspective, each shareholder’s stake in the company is held as part of a broader portfolio. Some portion of the external harms that arise as by-products of the company’s pursuit of profits—to the environment, for example—will ultimately fall on other companies held in shareholders’ portfolios. Under this view, for corporate fiduciaries to further shareholders’ true interests, properly understood, they must eschew narrow shareholder value maximization and instead focus on shareholder welfare maximization, which incorporates these shareholder social preferences and portfolio effects.

In this Article we provide the first comprehensive analysis of these attempts, new and old, to pursue corporate social responsibility through shareholder governance. In Part I, we provide a brief overview of the traditional debate about the objective of a business corporation. In Part II, we dilate on the idea of enlightened shareholder value (“ESV”) as a way to pursue corporate social responsibility (“CSR”) within the traditional norm of shareholder primacy. In Part III, we outline the more recent attempts to improve corporate conduct by incorporating more holistic understandings of shareholder interests, one that focuses on shareholders’ social concerns and another that considers shareholders’ financial interests from a diversified portfolio perspective, which we refer to as the shareholder social preferences (“SSP”) view and the portfolio value maximization (“PVM”) view, respectively.

In Part IV, we turn to evaluating the extent to which these three competing approaches to pursuing CSR through shareholder governance—ESV, SSP, and PVM—are likely to induce public companies to incur costs on a voluntary basis in ways that further the interests of other stakeholders in the firm. We refer to such actions as engaging in CSR. We begin by analyzing the degree to which the corporate objective posited by each approach captures CSR concerns, ignoring the challenges to inducing managers to pursue each objective. While the long-term shareholder value objective of ESV does align to some extent with key stakeholder concerns, it falls short of resolving all social conflicts about corporate conduct, even if we put feasibility concerns to the side. But incorporating shareholders’ social preferences into the corporate objective offers little hope for improvement. For one, shareholder welfare puts far greater relative weight on long-term shareholder value than would a proper conception of social welfare. As well, shareholders’ insulation from the social and moral pressures that generate prosocial behavior at the individual level mutes their social preferences with respect to corporate conduct. Finally, conflicts among shareholders about social issues further dampen the role of social preferences in shareholder welfare.

Diversified shareholders’ portfolio value is even less normatively attractive as a corporate objective. It captures only a small portion of the externalities like pollution that its proponents hope to address. The type of externalities it does capture effectively are competitive effects on other firms—like competitors’ loss of business following a cut to the price of the firm’s output—the result of which is to motivate socially destructive anticompetitive conduct.

We then consider the feasibility of implementing each approach. While ESV is substantially feasible in terms of its information demands, management’s incentives are more mixed due to standard agency problems. Corporate short-termism is one type of agency cost that might result in management failing to engage in CSR that would benefit shareholders in the long-term. Overinvestment due to empire building in high-negative externality industries is another. In sum, in practice management will sometimes, perhaps often, fall short of the degree of social responsibility that is consistent with the shareholder value objective.

Adding shareholders’ social preferences to the corporate objective, however, would provide little by way of incremental incentives to act responsibly. For one, given that shareholders’ social preferences are in important part associative, the shareholders actually willing to hold the shares of the companies that pose the greatest social concerns will be those least concerned about the social issues implicated. As well, management faces significant information problems in gleaning the strength and content of the social preferences of their shareholder base. Indeed, diversified shareholders themselves, we submit, would struggle to formulate such preferences across the myriad social issues implicated by their portfolios. These information problems of the SSP approach in turn produce a fundamental incentive problem. With one far more important component of the objective for which managers have reasonably good information—shareholder value—and one far less important component for which they have little information—shareholders’ social preferences—the optimal incentive scheme focuses management squarely on shareholder value. Attempts to push management to attend to shareholders’ social preferences thus risk doing more harm to shareholder (and social) welfare than good by distracting management from their core competencies.

The story is much the same for PVM. Corporate managers are likely to be far better informed about how their business produces cash flows for the company and about competitive effects on other firms than about other externalities of the company’s business on other companies. Nor are institutional investors likely to be in a meaningfully better position to provide information on portfolio externalities to managers. The optimal incentive scheme for firm managers under PVM would thus also focus on long-term shareholder value of the firm. To the extent it would incorporate externalities, they would be largely of the competitive variety, leading to worse corporate behavior from a social perspective.

To be sure, one might seek to sidestep these managerial incentive and information problems by simply devolving greater corporate control to shareholders, and a number of prominent scholars have indeed advocated taking such a direct approach to implementing shareholder welfarism.¹⁰ However, for publicly traded corporations at the center of these proposals, the basic economic logic of centralized management would continue to apply, suggesting any such departure from centralized management would entail sacrificing many of the efficiencies that have long justified this form of corporate organization. As well, recent work in economics suggesting that shareholders would act like social planners were they to have greater voting rights on operational decisions is based on strong assumptions and is in practice implausible. Devolving corporate control to shareholders would therefore offer little benefit in terms of more responsible corporate conduct and would entail substantial costs.

Shareholder governance does hold significant promise for improving corporate conduct, but this promise does not stem from any innovation in our basic understanding of shareholders’ interests along the lines of shareholder welfarism. Rather, the future of CSR, as with its past, is with ESV. The existing law-and-economics literature on ESV, however, has been stunted by two key misconceptions, which we attempt to dispel in Part V. The first is to frame ESV as an alternative to shareholder value as a corporate objective. This is a category mistake: ESV is best understood as a reform agenda targeting a particular class of agency costs that harm not only shareholders but also other corporate stakeholders. A second misconception is that the behavior of all the key actors in the corporate system is fully determined by their incentives and so ideas inspired by ESV cannot improve it. But we show that this determinacy paradox is a challenge for all normative arguments in corporate law scholarship. The generality of this analytic challenge for normative arguments in the field has not previously been recognized. Yet we also provide good reasons to think that this challenge can be surmounted in the case of ESV. We conclude by outlining a research agenda on ESV that would help illuminate the scope for further improvements to CSR through shareholder governance.

I . THE TRADITIONAL DEBATE ABOUT CORPORATE OBJECTIVE

The traditional debate about the objective of a business corporation traces back to an influential exchange almost a century ago between Columbia Law School Professor Adolf A. Berle and Harvard Law School Professor E. Merrick Dodd that grappled with a fundamental question posed by the publicly traded corporation: Given the practical inability of dispersed shareholders to monitor managers, what maximand should managers pursue in exercising their resulting wide discretion over corporate affairs?¹¹

A. Shareholder Wealth Maximization

Berle’s solution was to turn to the law of trusts and argue that managers are trustees obligated to exercise their discretion solely for the benefit of the shareholders,¹² which he understood narrowly in terms of their interests in the corporation’s profits.¹³ It was this view of the corporation that was later reprised in Milton Friedman’s famous assertion that corporate executives’ “responsibility is to conduct the business in accordance with [shareholders’] desires, which generally will be to make as much money as possible while conforming to the basic rules of the society.”¹⁴ For Berle, this was a matter of managerial accountability. The only alternative he saw to the shareholder wealth maximization norm was to simply hand over “the economic power now mobilized and massed under the corporate form . . . to the present administrators with a pious wish that something nice will come out of it all.”¹⁵

The shareholder wealth maximization norm has historically enjoyed broad support for several reasons. First, as a matter of economic theory, if markets are complete, firms are price takers, and there are no externalities not effectively addressed by government policy, corporate profit maximization results in a socially efficient outcome in the sense that there is no way to improve anyone’s well-being without making someone else worse off.¹⁶ By running the firm to maximize the value of the residual claims, the social pie is also maximized so long as government policy addresses externalities. Under the traditional shareholder value maximization view, then, externalities and distributive concerns are appropriately addressed by government policy, not by corporate managers assuming responsibility for them. Similarly, under these conditions, shareholders with conflicting preferences about the timing of consumption will nevertheless be unified in a corporate mandate to maximize shareholder wealth, since shareholders can satisfy their diverse consumption preferences by borrowing and saving.¹⁷ Second, these theoretical arguments are complemented by the agency cost concerns articulated by Berle. Share value provides a simple metric by which to evaluate managers and to hold them accountable for the efficient deployment of corporate assets. Indeed, pioneering work on agency cost theory by Michael Jensen and William Meckling in the 1970s later formalized Berle’s central premise.¹⁸ Lastly, the basic structure of corporate law reflects the shareholder value maximization norm, particularly in the key state of Delaware. While legal authority to manage the corporation is lodged in its board of directors, it is the stockholders who are entitled to elect directors.¹⁹ Likewise, courts have defined the fiduciary duties that directors owe to the corporation as ultimately oriented toward stockholder wealth.²⁰ A broad range of complementary institutions has developed that further entrench shareholder interests as the primary end of the corporate system.²¹

B. Stakeholderism

In contrast to Berle, Dodd identified a trend in public opinion toward viewing the publicly held corporation as an “economic institution which has a social service as well as a profit-making function”²² and believing that “business has responsibilities to the community.”²³ He viewed this trend in public opinion as desirable and likely to become the view of corporate managers, who would develop business ethics that would be “in some degree those of a profession rather than of a trade.”²⁴ Normatively he argued against the position of Berle that corporate fiduciaries have a legal responsibility just to stockholders in order to preserve the freedom of action necessary for management to fulfill their inchoate social obligations.²⁵ The conceptualization of those to whom corporate managers owe these social responsibilities as stakeholders took off much later with an influential book aimed at corporate managers by Edward Freeman titled Strategic Management: A Stakeholder Approach.²⁶ Freeman offered a capacious definition of stakeholders as “any group or individual who can affect or is affected by the achievement of the organization’s objectives.”²⁷ Owing in part to the influence of Freeman,²⁸ the school of thought originally launched by Dodd has since become known as “stakeholder theory” or simply “stakeholderism.”²⁹ Under this view, corporate fiduciaries should voluntarily advance not just the interests of shareholders but also the interests of workers, creditors, other suppliers, customers, and all others who are affected by the corporation’s activities. The term “corporate social responsibility” is generally used to refer to this view of a firm’s obligations to advance the interests of its stakeholders.

To organize the various types of social concerns that animate stakeholder theory, it is useful to distinguish between corporate stakeholders that transact with the firm—which we will refer to as firm patrons—and stakeholders that do not. One type of concern regarding the treatment of firm patrons stems from market failures that lead to inefficient outcomes. A primary source of such market failures is market power. A firm with market power in the labor market, for example, will depress workers’ wages in order to maximize its profits.³⁰ Similarly, market power with respect to its customers can lead to inefficiently high prices for the firm’s output.³¹ In both cases these deviations from competitive prices result in deadweight costs—inefficient reductions in transactions in the market. Market power also raises distributive concerns—a greater share of the social surplus generated in the relevant market goes to the firm rather than firm patrons. Distributive concerns can also arise even in the absence of market power when the relevant market is competitive and efficient. Stakeholderists might view the low wages in a competitive labor market, for example, as socially undesirable and advocate for the firm to pay its workers more.³²

Concerns about non-firm patrons, in contrast, typically involve externalities. Consider, for example, climate change. Firms’ operations inevitably entail some amount of greenhouse gas emissions, which contribute to the total stock of greenhouse gases in the atmosphere and in turn to the warming of the planet. The global scope of the climate change problem, in terms of both its causes and effects, means that essentially the entire global community is affected by every firm’s operations and hence can be considered a stakeholder of every firm. But many other externalities are much smaller in scale, resulting in a firm’s local community typically having a greater interest in the firm’s operations than those further afield.

Note that the basic normative claim at the heart of stakeholderism—that corporate fiduciaries should voluntarily advance the interests of all firm stakeholders and not just the interests of shareholders—presumes some sort of imperfection in current law and policy or in corporations’ responses to it. Stakeholderists argue, in effect, that current public policy is not sufficient to protect stakeholder interests, and so corporate managers should go even further on their own.³³

Notwithstanding the orientation of corporate law toward shareholder wealth maximization, certain core features of corporate law provide the managerial discretion that is necessary to implement stakeholderism. Director decision-making in the absence of financial conflicts of interest remains largely shielded from judicial scrutiny by the business judgment rule. As a result, corporate managers enjoy broad discretion to consider an array of stakeholder interests so long as their decisions can be justified as ostensibly in the interests of the corporation.³⁴ Moreover, many state legislatures have amended corporate statutes to increase the compatibility of corporate law with stakeholderism. For instance, so-called constituency statutes have been adopted in most states—but not Delaware—that make clear that corporate fiduciaries are not required to consider only shareholder interests to the exclusion of other stakeholders’ interests.³⁵ The main motivation for these reforms was to prevent corporate takeovers on the ground that takeovers and their associated restructurings could be harmful to workers and local communities.³⁶ Even in Delaware, the case law evolved to endorse the prerogative of corporate directors to take action to fend off a premium acquisition offer that the shareholders are eager to accept in order to pursue directors’ long-term vision of what is in the corporation’s best interest.³⁷ More recently, the adoption of public benefit corporation statutes has been similarly grounded in a desire to enable business corporations to pursue stakeholderist objectives.³⁸ These developments show that there is nothing inevitable about privileging the interests of investors in operating a commercial enterprise. Indeed, a wide variety of enterprises—such as consumer cooperatives, producer cooperatives, and nonprofits—have chosen to privilege a different set of stakeholders.³⁹

II . ENLIGHTENED SHAREHOLDER VALUE

Stakeholderism correctly identifies that shareholders’ interests in corporate profits can conflict with other interests in society. From a static, short run perspective especially, these conflicts can loom large. Squeezing suppliers and customers can increase corporate profits at their expense. Cutting back on greenhouse gas emissions will improve the environment but at a direct cost to the company’s bottom line. And so on and so forth—the list of such conflicts is endless. But taking a longer-term perspective on the company and its business may lessen the degree of conflict between stockholders and other firm stakeholders. More generally, for a range of reasons, considered in some detail below, it can be in shareholders’ interests for the company to incur costs to improve the well-being of the firm’s stakeholders. Or put more colloquially, companies can “do well by doing good.” This enlightened shareholder value perspective, while often dismissed by stakeholder theorists as insufficient⁴⁰ and by shareholder value theorists as uninteresting⁴¹ or even counterproductive,⁴² has gained increasing traction in recent years as a way to respond to the concerns of stakeholderism that is compatible with existing institutions that put shareholder interests first.⁴³

Today the idea of ESV is more commonly referred to under the moniker “ESG,” which stands for “Environmental, Social, and Governance.”⁴⁴ While ESG is a notoriously protean term, used for a range of different ideas,⁴⁵ its origins are as a term that captures ways that investors can improve their risk-adjusted returns by incorporating environmental, social, and governance considerations into their investment process.⁴⁶ A key aspect of the standard rationale for the use of ESG factors to improve investment returns is the idea that such factors affect profitability at the level of the portfolio company.⁴⁷ Indeed, the notion that paying attention to ESG matters for firm financial performance has become part of the zeitgeist of recent years, with public companies increasingly discussing their ESG initiatives on quarterly earnings calls,⁴⁸ hiring executives to oversee ESG reforms,⁴⁹ and tying executive compensation to ESG metrics.⁵⁰ Another aspect of this rationale for ESG investing is the claim that the stock market misprices ESG factors.⁵¹ To be sure, the term ESG is also used for practices that sacrifice investor returns in order to achieve benefits for stakeholders.⁵² But in the main, much of the standard rhetoric around ESG, and its intellectual origins, reflect what we refer to as ESV.⁵³ As of 2022, some $8.4 trillion in assets under management in the United States are invested using an ESG approach.⁵⁴

ESV theorists typically describe the corporate objective as long-term shareholder value. The modifier long-term serves two purposes. First, it signifies that much of the financial value of the firm’s shares stems from cash flows it will produce well into the future. Second, it reflects the possibility that a company’s stock price might not fully reflect immediately the future cash flows that an action to sacrifice corporate cash flows today will ultimately produce.⁵⁵ But the basic valuation framework underlying ESV is entirely conventional: the firm should be managed to maximize the net present value of the firm’s equity, calculated by discounting the cash flows available to equity holders using the appropriate risk-adjusted discount rate (however long it might take for the markets to catch up and price the company’s stock accordingly). In other words, ESV is not an alternative conception of corporate purpose—it retains the exact same corporate objective as standard shareholder value theory.⁵⁶ Instead, ESV theory identifies a set of mechanisms through which firm managers can increase long-term shareholder value by behaving in a more socially responsible way.⁵⁷

With respect to the treatment of firm patrons, one mechanism posited entails a type of efficiency wage: treating a class of firm patrons better can induce reciprocal improved treatment of the firm by those firm patrons. For example, when a firm pays its workers better than their outside option—the market wage for similar labor—workers have greater incentive to perform their jobs well, in order to reduce the risk of dismissal, and the resulting increase in productivity can more than compensate for the firm’s increased wage bill.⁵⁸ Other accounts emphasize the importance of employee morale and perceptions of fairness: workers who are paid what they consider to be an unfair wage are likely to shirk or otherwise cut back on effort and vice versa.⁵⁹ Similarly, a corporation that invests in promoting a diverse and inclusive work culture might boost employee motivation and performance⁶⁰ and attract talented workers away from less enlightened competitors.⁶¹ Consistent with this view—and with the stock market underpricing the benefits of favorable treatment of workers—the shares of companies identified as among the “100 Best Companies to Work For in America” earned significant excess returns from 1994 to 2009.⁶²

A related mechanism stems from the value of inducing firm-specific investments from firm patrons. A firm’s contracts with its patrons are often long-term and, in important respects, implicit.⁶³ Workers, for example, invest in human capital that is to some extent specific to the firm and less valuable elsewhere. In order to induce workers to make such costly investments, the firm promises in return to pay them a share of the surplus generated by their increased productivity. For such relational contracts to work, however, firm patrons must be able to trust the firm to perform its end of the bargain down the line. Breaching that implicit contract by cutting wages, say, can ultimately harm shareholders by destroying the firm’s reputation for trustworthiness.⁶⁴

The ESV perspective also posits a set of mechanisms through which incurring costs to treat non-patrons well can ultimately create net financial benefits to shareholders. Consider, for example, an energy company’s decision of how much to invest in exploring for oil. The optimal level of investment if one takes a myopic view and assumes that the current market demand for oil will continue indefinitely might be much higher than if one instead adopts a more realistic forecast of the coming transition to a low-carbon economy due to future policy changes and technological developments. The idea is that putting one’s head in the ground and investing based on a naïve assumption of continuing demand, even if it generates increased profits in the short- to medium-term, risks the eventual incurrence of large losses on stranded assets.

The social preferences of one class of firm patrons can also produce financial incentives to treat other classes of firm patrons and non-patrons well.⁶⁵ For instance, given consumer demand for environmentally sustainable products, investment in these products can result in increased profits as well as an improved environment.⁶⁶

While the foregoing identifies conceptually coherent mechanisms through which incurring costs to further stakeholder interests can ultimately redound to the financial benefit of stockholders, we do not mean to suggest that all corporate decisions ostensibly justified on that basis are in fact in stockholder interests. Indeed, ESV arguments might be advanced strategically by stakeholderists for actions that in fact will reduce long-term shareholder value. Similarly, ESV might be used as cover by management for actions taken to further management’s interests at the expense of stockholders.⁶⁷ We return to the information and incentive problems posed by ESV in Part IV below.

III . SHAREHOLDER WELFARISM

The ESV view posits considerable alignment between the financial interests of shareholders in the long-term and the interests of other firm patrons and the broader society. It thus provides one avenue to pursue CSR through shareholder governance. We now consider an alternative approach to doing so that is newer to the scene, which we refer to as shareholder welfarism. It posits that corporate management should seek to maximize shareholder welfare, not just share value, by incorporating a more complete understanding of how the corporation affects the well-being of shareholders. There are two primary strands of shareholder welfarism in the literature—the shareholder social preferences view and the portfolio value maximization view—which we take up in turn.⁶⁸

A. Shareholder Social Preferences

The shareholder social preferences (“SSP”) version of shareholder welfarism begins with the commonsense observation that public company shareholders care about more than just their own wealth—they also have ethical and social concerns. Many shareholders care about the environment, inequality, and racial justice, to give just a few examples, based on their own personal normative commitments. There is of course a wide range of views on such social issues. But while public company shareholders might not be perfectly representative of the entire population, there is no reason to think that corporate shareholders, unlike others in society, are narrowly self-interested and lack any social preferences.

Many shareholders would thus presumably often prefer that company management sacrifice share value in order to further their social preferences, at least to some extent. Consumer markets provide a useful analogy. Consider fair trade coffee, which is sold in major grocery chains across the United States. Fair trade goods are marketed to consumers at a premium price on the basis that the greater markup is passed on to poor producers. This is intended to appeal to consumers with ethical concerns about the treatment of such producers. Such a consumer might be willing to pay more for goods that promise better outcomes for the producers, a hypothesis confirmed by experimental evidence.⁶⁹ Suppose those same consumers are also shareholders of a corporation that sources coffee beans. The SSP view posits that those same social preferences would also lead them to be willing to sacrifice investment returns as shareholders in order for the corporation to pay producers more.⁷⁰ Under the SSP view, corporate fiduciaries should manage the corporation not to maximize shareholder wealth but rather to maximize shareholder welfare, incorporating shareholders’ social preferences.⁷¹

To be sure, in some cases, shareholder welfare so conceived is in fact maximized by simply maximizing shareholder wealth. Corporate charitable contributions provide an example. Tax complications aside, the goal of furthering shareholder social preferences provides no basis for such corporate philanthropy since the corporation could instead pay those funds out to shareholders, who in turn could donate directly to charity. Oliver Hart and Luigi Zingales—prominent proponents of the SSP view—characterize this as a case in which the social concern is “separable” from the company’s business.⁷² But Hart and Zingales argue convincingly that social concerns and moneymaking by the company are often inseparable.⁷³ They offer as an example shareholder concerns about mass shootings. Walmart might much more effectively advance those shareholder social preferences by no longer selling high-capacity magazines than by contributing the profits from doing so to charity.⁷⁴ Indeed, it seems plausible that for virtually every major CSR concern there are important aspects of the problem that are not completely separable from the businesses of the corporations involved.

The extent to which shareholders are willing to sacrifice their wealth to address various social concerns of course varies from shareholder to shareholder. Hart and Zingales propose that such heterogeneity be handled through voting by shareholders.⁷⁵ The board of directors of the corporation could be required to periodically poll shareholders about corporate policies that implicate social concerns so that the median shareholder’s views on the issue (on a share-weighted basis) prevail. Implicit in this voting-based approach is that the “shareholder welfare” objective weights each shareholder’s preferences by the number of shares they own.⁷⁶

A further wrinkle is that most corporate shares today are held by institutional investors.⁷⁷ Under the SSP view, it is the social preferences of the underlying investors in those institutions that corporate management should seek to advance. Institutional investors would thus have to channel their investors’ views in voting the stock in their portfolio companies in order for corporate voting to accurately reflect shareholder welfare. Hart and Zingales envision asset managers segmenting the market based on the social views the asset manager will seek to advance in voting shares of its portfolio companies, so that individual investors can simply sort themselves to the appropriate asset manager.⁷⁸

B. Portfolio Value Maximization

The portfolio value maximization (“PVM”) strand of shareholder welfarism, in contrast, retains the focus on shareholders’ financial interests from the traditional shareholder value approach but considers their financial interests from a portfolio perspective. Most shareholders in public companies are highly diversified and increasingly so with the ongoing shift from active management to passive investment vehicles.⁷⁹ From this perspective, the actual interests of a firm’s shareholders lie in the value of their diversified portfolios, not just in the value of the firm’s shares. Accordingly, corporate fiduciaries should seek to maximize the value of the firm’s shareholders’ portfolios, not their own firm value.

The main implication of the PVM approach concerns between-firm externalities, meaning ways that the decisions of one firm affect the value of other firms. Such spillover effects come in a variety of forms. One form stems from market competition. When a firm gains market share by cutting prices, competing firms often lose customers. Economists refer to this type of external effect as a “pecuniary externality.”⁸⁰ A quite different form—referred to as a “technological externality”—occurs when a production or consumption activity imposes costs or benefits on other producers or consumers and does not operate through the price system.⁸¹ For example, suppose a factory releases toxic chemicals that reduce agricultural productivity in the surrounding area. From the traditional shareholder value perspective, corporate managers should manage the corporation to maximize the value of its equity without regard to such spillover effects on the value of other firms or on consumers. But under the PVM view, the company’s shareholders would want firm managers to incorporate such external effects to the extent that they reduce the value of other securities held in shareholders’ portfolios.

The social desirability of such PVM behavior by firm managers depends critically on the nature of the externality at issue and the extent to which it is internalized in shareholders’ portfolios. In the case of pecuniary externalities, having firm managers take them into account would interfere with market competition. For example, if each firm in an industry were operated to maximize the total value of the industry, that would entail pricing their output above the competitive level, with all of the standard inefficiencies from monopoly pricing that would result. In recent years a burgeoning empirical literature claims that the growth of diversified institutional investors has in fact led to such anticompetitive outcomes in certain industries.⁸² The internalization of pecuniary externalities through the PVM approach is thus generally not socially desirable.

But for technological externalities, PVM offers hope that running the firm in the true interests of shareholders—maximizing the value of their diversified portfolios—would result in more socially responsible corporate behavior. For example, the portfolio value maximizing level of pollution emitted by a firm would take into account the portion of the costs of that pollution that fall on other firms in the portfolio.

These basic implications of running a corporation to maximize the value of diversified shareholders’ portfolios were worked out theoretically by economists decades ago.⁸³ They entered the legal literature when the growth of private and public pension funds, and their growing use of indexed investment strategies, led to calls for these so-called universal owners to exercise their shareholder rights in order to advance broader social interests with respect to corporate behavior.⁸⁴ More recently, Madison Condon has argued that attempts by asset managers to pressure their portfolio companies to combat climate change can be explained by their desire to maximize the value of the diversified portfolios they manage.⁸⁵

The PVM literature has thus largely focused on arguments about how diversified institutional investors should or do exercise their ownership rights in order to change a portfolio company’s policies in ways that increase the value of their diversified portfolios even at the cost of the particular company’s own value.⁸⁶ But as Marcel Kahan and Edward Rock argue, responding to such shareholder pressures without changing the legal norm defining the purpose of a business corporation would conflict with the fiduciary duties of corporate officers and directors, which are based on the traditional shareholder wealth maximization norm.⁸⁷ In what follows we thus focus our analysis on a more ambitious version of PVM that includes changing the legal definition of corporate purpose to encompass the internalization of externalities that fall on other firms held in their shareholders’ portfolios.⁸⁸

* * *

The main appeal of shareholder welfarism, in both its shareholder social preferences and portfolio value maximization guises, is that it seems to hold the promise of addressing the two key problems with conventional stakeholderism. First, it retains the basic norm that shareholder interests are primary in the management of a corporation. As such, shareholder welfarism might be compatible with the standard norms and incentives governing corporate affairs that put shareholders first, which the recent growth of institutional shareholders has further entrenched. Second, each form of shareholder welfarism provides a conceptual framework through which corporate management could determine, at least in principle, how to trade off among competing stakeholder interests. These two key aspects of the appeal of shareholder welfarism are shared by the ESV view. It too is compatible with existing norms that privilege shareholder interests and provides a clear objective to guide corporate management in trading off current profits in order to further stakeholder interests: long-term shareholder value.

IV. EVALUATING THE THREE APPROACHES TO CSR THROUGH SHAREHOLDER GOVERNANCE

We now turn to evaluating the three approaches to pursuing corporate social responsibility through shareholder governance—enlightened shareholder value (“ESV”), shareholder social preferences (“SSP”), and portfolio value maximization (“PVM”)—based on their potential to induce the management of public companies to incur costs on a voluntary basis in ways that further the interests of other stakeholders in the firm (that is, to engage in CSR). We divide our analysis into three parts. We first evaluate the normative attractiveness of the corporate objective posited by each approach, ignoring the practical challenges to inducing corporate managers to pursue each objective. We focus simply on the extent to which each proposed corporate objective captures various social concerns about corporate behavior. We then turn to the feasibility of each approach in terms of the extent to which managers would have the information and incentives needed to pursue the posited corporate objective, taking as given the centralization of control in corporate managers. Finally, we consider the extent to which implementing shareholder welfarism by simply devolving more control to shareholders might improve corporate conduct.

A. Normative Attractiveness of Each Corporate Objective

To what extent do the corporate objectives of ESV, SSP, and PVM capture CSR concerns? Our analysis in this Section can be thought of as adopting the assumption of no information costs and no agency costs: we imagine a world in which public companies fully maximize the corporate objective function posited under each approach. The corporate objective posited by the ESV view is long-term shareholder value, meaning the net present value of the future cash flows paid on the company’s equity, discounted based on the firm’s opportunity cost of capital.⁸⁹ Note that long-term shareholder value is also a major component of the corporate objectives posited by SSP and PVM. ESV and its long-term shareholder value objective thus form a key benchmark against which to judge SSP and PVM. We begin by qualitatively characterizing the extent to which the long-term shareholder value objective of ESV fails to capture CSR concerns so that even in a world in which management was perfectly successful at maximizing long-term shareholder value in an enlightened way, there would remain significant residual social concerns. We then turn to the SSP and PVM objective functions and consider the extent to which the further considerations they incorporate in addition to long-term shareholder value might capture CSR concerns beyond the ESV baseline.

1. Enlightened Shareholder Value

We begin by repeating an observation we made in our discussion of stakeholderism in Part I: corporate behavior is significantly shaped by the constraints and incentives produced by law and public policy, much of which is intended to address market failures and distributional concerns that arise from corporate conduct. This forms an important starting point for thinking about how, in a world in which managers perfectly maximize long-term shareholder value, there might remain social concerns about corporate conduct. Those concerns are, by definition, those not addressed by current law and public policy.

One category of social concerns about corporate conduct that would persist in such a world is with respect to the treatment of firm patrons. First, the outcomes for firm patrons—especially workers—might raise distributive concerns. Competitive labor markets, for example, operating under current tax and transfer policies induce a particular distribution of income and welfare in which low-skilled workers, in particular, earn income that many find unfairly low.⁹⁰ As we discussed above, maximizing long-term shareholder value generates some incentive for firms to pay their workers more than they otherwise would based on the value of incentivizing effort or firm-specific investment, but this is true only up to a point. Indeed, for workers for which such incentive contracting concerns do not loom large, the shareholder-value-maximizing wage might be little more than the competitive wage in the relevant labor market. Furthermore, it seems likely that such cases will often involve workers with relatively low levels of human capital whose low incomes raise the greatest distributive concerns from a social perspective. Put simply, efficiency wages and the like are no panacea for the standard concerns about the income inequality produced by market economies.

Another limitation of this class of ESV mechanisms stems from last period concerns. Firms have incentives to perform on implicit contracts in order to preserve the going concern value of the firm, which relies on the trustworthiness of the firm as perceived by current and future patrons. Implicit contracting thus depends critically on the firm and its patrons having a long future ahead of them. But as the probability that the firm will cease to operate and be liquidated goes up—due to business setbacks, for example—the incentives produced by the value of the firm’s reputation for trustworthiness are attenuated.

Market power of firms raises additional social concerns. While efficiency wage and implicit contracting considerations might moderate to some extent the incentive of shareholder-value-maximizing firms to exploit their market power, in the main, the long-term shareholder value objective is better understood as the key cause of the social problems posed by market power rather than as their solution.

In a similar way, maximizing long-term shareholder value provides no universal cure for other sources of contracting failures between the firm and various classes of firm patrons.⁹¹ A firm that possesses better information than its customers about the safety of its products, for example, might well succumb to the temptation to cut back on safety to save costs, correctly concluding that the reputational and other costs of doing so are outweighed by the short-run savings even when viewed through the lens of long-term shareholder value.

With respect to externalities on non-firm patrons, the limits of ESV are even easier to see. By definition, when production or consumption of a firm’s output generates a negative technological externality, running the firm to maximize long-term shareholder value will result in socially excessive levels of the activity (and the reverse is true for positive externalities). The mechanisms discussed in Part II through which ESV can incentivize firms to improve their treatment of non-patrons do not change this powerful implication of economic theory. When externalities exist that are not effectively addressed through taxation or regulation, the private costs and benefits of the activity that drive the maximization of long-term shareholder value diverge from the social costs and benefits of the activity.

In summary, ESV mechanisms under the corporate objective of long-term shareholder value only mitigate and do not resolve social conflicts with respect to corporate conduct. We turn now to SSP and PVM to consider the extent to which the objective function posited by each might go further than ESV in motivating CSR.

2. Shareholder Social Preferences

The corporate objective under the SSP view is based on two key components of shareholders’ well-being: (1) the long-term value of the shares and (2) shareholders’ social preferences with respect to corporate conduct. The weight each shareholder puts on these two components depends on their own preferences. As well, the specific content of shareholders’ social preferences will vary from shareholder to shareholder. To calculate aggregate shareholder welfare, individual shareholders’ well-being levels are weighted by their share ownership and summed.

Because of heterogeneity across shareholders in the strength and content of their social preferences, aggregate shareholder welfare for a corporation will depend on who owns the shares of the company. In turn, the decisions of individuals to hold the shares may well depend on the conduct of the corporation and the social preferences of the individuals. For now, we adopt the simplifying assumption that all shareholders are fully diversified, so that there is no variation in the share-weighted social preferences of shareholders of different public companies.⁹²

Under these assumptions, how would maximizing shareholder welfare, taking into account the social preferences of shareholders, change corporate conduct relative to maximizing long-term shareholder value? Consider first the weight that aggregate shareholder welfare would put on long-term shareholder value. This is an empirical question based on the share-weighted preferences of corporate shareholders. But we make three points that together point to the conclusion that aggregate shareholder welfare would be largely, perhaps even overwhelmingly, based on long-term shareholder value rather than shareholders’ social preferences.

To begin, it is useful to contrast shareholder welfare with overall social welfare. Social welfare does include as a component a firm’s long-term shareholder value—the well-being of the claimants to that value count, of course, in any appropriate measure of social welfare. But social welfare also includes the well-being of those who are not shareholders of the firm. In contrast, shareholder welfare would put weight on non-shareholders’ well-being based only on shareholders’ social preferences. Unless shareholders were perfectly altruistic in the sense that their preferences put as much weight on others as on themselves, this results in shareholder welfare putting greater relative weight on firm value than does social welfare. This effect alone means that maximizing shareholder welfare will generally not provide an incentive for managers to sacrifice profits to the extent required for the firm to behave appropriately as a social matter. Consider, for example, a profitable factory that emits such a large amount of pollution that, from a social welfare perspective, it should be shut down. Because shareholder welfare puts much more weight on firm profits than social welfare does, it will often not be in shareholders’ interests in such a situation to shut down the plant even including consideration of their social preferences.

Second, the shareholders of a public corporation are insulated from the social and moral pressures that generate other-regarding behavior at the individual level.⁹³ This is due in part to the complex governance structures that stand between individual shareholders and corporate decision-making that make shareholders anonymous to those who might impose social sanctions for harm done by the corporation as well as due to diversified shareholders’ basic lack of information about corporate affairs (ignorance is bliss).⁹⁴ Einer Elhauge argues that this insulation will result in shareholders putting much more weight on corporate profits relative to social concerns than would sole proprietors, who are far less insulated.⁹⁵ This is even more strongly the case with respect to shareholders who own interests in corporate shares through intermediaries like mutual funds and are therefore “double insulat[ed].”⁹⁶ In sum, from a revealed preference perspective, the welfare of diversified shareholders might be understood as stemming overwhelmingly from shareholder value rather than from social preferences.

Finally, what little weight shareholder welfare does put on social concerns as opposed to shareholder value is further muted by conflicts among shareholders about social issues. Hart and Zingales introduce the idea of shareholder welfare in a simple model in which the social concern is about pollution that is a by-product of firm operations and shareholders’ preferences vary only in terms of the weight they put on environmental harm from the firm’s pollution versus on their own wealth.⁹⁷ In this framework, aggregate shareholder welfare will be based on the share-weighted average of the weights individuals put on environmental harm relative to personal wealth.

But corporate activities typically pose trade-offs not just between profits and social concerns but also among competing social concerns. As a result, conflicts among shareholders in their views on social issues effectively further reduce the weight of shareholder preferences in determining what maximizes shareholder welfare. In some cases, these conflicts are direct. Consider abortion or affirmative action. Some socially minded investors want less of these things; some want more. In those cases, the competing social preferences of different shareholders cancel out to some extent so that, on net, shareholder social preferences get less weight in determining shareholder welfare.

But even for social issues that nobody is against per se, like clean air or good jobs, there are often indirect conflicts stemming from shareholders’ social preferences. Consider a manufacturing firm that causes pollution as a by-product of its production process but also provides jobs in a community with scarce economic opportunities.⁹⁸ The choice of scale of the firm’s output poses trade-offs between environmental quality and jobs. As a result, a socially minded investor who cares about both might ultimately prefer a level of output little different from the profit-maximizing level of output. In contrast, shareholders who care more about the environment than jobs might prefer a lower level of output, and vice-versa for a shareholder more concerned about jobs. The median shareholder’s preferences might then be close to the profit-maximizing level of output. So these indirect conflicts about social issues also, in effect, further mute the role of social preferences in shareholder welfare and increase the role of long-term shareholder value.

Note as well that corporations do not generally face binary decisions—like either protect the environment or preserve jobs—but rather face a continuum of choices, as in the example of a firm’s choice of level of output. As a result, having a bare majority of shares held by shareholders who lean in one direction on such trade-offs—toward the environment, say—does not mean that the conflicting preferences of the remaining shareholders do not matter for determining the operational decision that maximizes shareholder welfare. For a firm facing a continuum, or at least a large number, of potential operational decisions, the presence of a significant minority of shareholders who care more about jobs than the environment will pull the shareholder-welfare-maximizing choice in the direction of preserving jobs and away from protecting the environment.⁹⁹

In light of these considerations, the social issues for which incorporating shareholders’ social preferences into the corporate objective might potentially make a meaningful difference, relative to the ESV baseline, in motivating CSR would generally be issues on which there is a broad and strong social consensus. But these are exactly the set of issues for which the residual social concerns left under the ESV approach after fully maximizing long-term shareholder value are likely to be minimal, for two reasons.

First, social issues for which there is a strong social consensus are much more likely to be effectively addressed by law and public policy. Federal and state law, for example, provide powerful controls on corporate conduct to address many social concerns raised by corporate operations, from the safety of motor vehicles, to the health consequences of tobacco consumption, to the emission of particulate matter by industrial activities. Our claim is most certainly not that the political process is perfect or that current public policy fully addresses all social concerns about corporate conduct. Rather, it is that the specific issues for which there is sufficient social consensus such that the social preferences of shareholders form a meaningful component of shareholder welfare are precisely the issues that are most likely to be effectively addressed by public policy. Indeed, corporate shareholders’ preferences put less weight on average on the social concerns raised by corporate conduct than does the overall polity, for reasons given above. It thus seems likely that for many issues for which there is a strong social consensus, public policy will go well beyond what the company’s shareholders would prefer in reining in corporate conduct.¹⁰⁰

Second, the broad social consensus we are supposing would include not just shareholders but also other classes of firm patrons, including its workers, managers, and customers. The social preferences of firm patrons can provide strong shareholder value reasons for the firm to act in ways that are consistent with those social preferences. Failing to do so risks inviting a backlash from these other classes of firm patrons that might have major financial consequences.¹⁰¹

Consider, for example, explicit and open racism in a firm’s treatment of its customers. A recent episode involving Starbucks is instructive. In 2018, a Starbucks employee called the police after two Black men entered a Starbucks in Philadelphia and sat down without purchasing anything and, when store employees asked them to leave, declined to do so. The police forcibly removed the men, leading to national headlines, a public apology by the Starbucks CEO, and the hashtag #BoycottStarbucks trending on Twitter.¹⁰² No reference to Starbucks shareholders’ social preferences is needed to explain the decision by Starbucks management several days later to close 8,000 stores to conduct racial bias training of employees.¹⁰³

In summary, under the SSP shareholder welfare objective, it is long-term shareholder value that is the key driver of decisions to incur costs to further stakeholder interests, not the social preferences of shareholders, which are conflicted, muted, and often prefer less protection of stakeholder interests than provided by law.¹⁰⁴

3. Portfolio Value Maximization

The corporate objective under the PVM approach is diversified shareholders’ portfolio value. To evaluate its normative desirability, we maintain for now the simplifying assumption that all investors are fully diversified—that is, they hold the market portfolio of all investible risky assets with each asset weighted in proportion to its value. This is in fact a key assumption underlying the standard model of valuation managers are taught in MBA programs, which is based on the Capital Asset Pricing Model (“CAPM”).¹⁰⁵ CAPM provides the original intellectual foundations for the specific model of financial management by which managers are supposed to pursue long-term shareholder value. We begin by sketching how that model works in order to frame more precisely how the PVM approach proposes managers should deviate from it.

In the standard model of corporate decision-making, diversified shareholders want managers to follow the “NPV Rule”: invest in every project that has a positive net present value (“NPV”).¹⁰⁶ The NPV of a project is calculated by converting (“discounting”) all of the future cash flows associated with the project to their present value and then summing those present values as follows:

, (1)

where is the net cash flow received from the project in period T and r is the risk-adjusted discount rate for the project.

The assumption of CAPM—that all investors are optimally diversified—plays a key role in the determination of the appropriate discount rate.¹⁰⁷ To capture the cost to investors of bearing the risk of the project, a “risk premium” is added to the risk-free rate (typically taken to be the return on government obligations) to arrive at the risk-adjusted discount rate. But crucially, CAPM considers the risk of a project from a portfolio perspective. That is, a project’s risk is measured not in terms of the degree of uncertainty of the project’s cash flows considered in isolation but rather in terms of the increment in portfolio risk if the project were added to a diversified portfolio. This matters because one component of a project’s risks—the idiosyncratic component—disappears when the project is held in a diversified portfolio. A diversified investor only has to be compensated for bearing the risks that they actually have to bear, which is the undiversifiable, systematic component of a project’s risk. In CAPM, the only source of systematic risk comes from the correlation between a project’s cash flows and the overall market return, which is referred to as the project’s beta. The standard shareholder value approach thus already adjusts the denominators of the fractions in the above expression for NPV based on a portfolio perspective. So the idea that corporate managers should take a portfolio perspective on the interests of shareholders is actually an old one and entirely conventional. It forms a core component of standard shareholder value theory.

The PVM approach, however, pushes this portfolio perspective further. It incorporates into the cash flows of the project not just the cash flows received by the firm but also the increment in cash flows paid on any other securities in the market portfolio. This entails adjusting not only the denominators of the terms in the expression for NPV, but also their numerators. The resulting NPV expression under the PVM approach is:

(2)

The numerators in the PVM-modified expression for NPV include both the expected cash flows from the project that will accrue to the instant corporation (the ’s) as well as the spillover expected cash flows for other securities resulting from externalities (the ’s), which could be on net either positive or negative in any given period. For most corporate decisions, the bulk of the cash flows at the market portfolio level in fact accrue to the securities issued by the corporation making the decision. The question we grapple with in this Section is the extent to which the consideration of the additional cash flows to other portfolio securities that the PVM approach requires—assuming no agency costs or information problems—will motivate CSR beyond that justified on the basis of maximizing long-term shareholder value under ESV. We reach an even more negative conclusion than the one we reached in evaluating the SSP objective function: the portfolio value objective will not only produce little additional motivation for CSR, but it will also provide new motivations for socially destructive corporate conduct.

First, taking a portfolio perspective on expected cash flows produced by corporate decisions captures only a small portion of the technological externalities of corporate conduct since the bulk of such externalities fall on interests that are not part of the market portfolio. These interests include the health and well-being of consumers as well as the interests of producers that are not owned in the market portfolio.¹⁰⁸

To be concrete, consider the facts alleged in Aguinda v. Texaco, a class action filed on behalf of residents of certain regions of Ecuador and Peru to recover for property damage, personal injuries, and increased risk of disease allegedly caused by Texaco’s improper waste disposal practices in its oil extraction operations in Ecuador.¹⁰⁹ The plaintiffs alleged that Texaco engaged in a range of wrongful conduct, including dumping large quantities of toxic by-products of the drilling process into local rivers and landfills.¹¹⁰ Texaco allegedly did this to save money, netting additional profits of $500 thousand to $1 million per well.¹¹¹ The pollution released by Texaco poisoned the local ecosystem, causing environmental harm, economic losses to local fishermen and agriculture, and serious injuries and disease among local residents.¹¹²

These allegations represent a paradigmatic case of socially harmful corporate behavior that CSR advocates hope to address. The harms suffered by local residents constituted negative technological externalities that were not effectively controlled through regulation or private law remedies.¹¹³ But they also illustrate a key limitation of the PVM approach: hardly any of these externalities would have manifested as reductions in expected cash flows to securities in the market portfolio. To be sure, the kinds of costs at issue in this example—costs to human health, ecosystems, and small-scale producers—might ultimately have second-order effects on companies in the market portfolio as, for example, the resulting shifts in supply and demand in various markets affect prices of companies’ inputs and outputs. But those effects on companies are de minimis and, for that matter, could be on net positive if, for example, the resulting fall in production by small-scale producers resulted in a reduction in supply of products sold by larger companies. To a first approximation, the ’s for this project would be zero, despite the sizable social externalities at issue.¹¹⁴

This is also true for larger-scale externalities. Consider climate change, which has been aptly described as “the mother of all externalities.”¹¹⁵ Essentially every business project produces some amount of greenhouse gas emissions, the accumulation of which in the atmosphere leads to warming of the planet over time. Climate change is expected to cause a manifold set of impacts on human well-being. The most recent report by the Intergovernmental Panel on Climate Change (“IPCC”) provides a useful taxonomy of the ways climate change is expected to affect human systems:

Impacts on water scarcity and food production.
Water scarcity.
Agriculture / crop production.
Animal and livestock health and productivity.
Fisheries yields and aquaculture production.
Impacts on health and wellbeing.
1. Infectious diseases.
2. Heat, malnutrition and other.
3. Mental health.
Impacts on cities, settlements and infrastructure.
1. Inland flooding and associated damages.
2. Flood / storm induced damages in coastal areas.
3. Damages to infrastructure.
4. Damages to key economic sectors.¹¹⁶

While some of these categories, especially those under “[i]mpacts on cities, settlements and infrastructure,” would include substantial effects on companies in the market portfolio, this taxonomy reveals that the scope of the harms from climate change is far broader than those effects.

Indeed, the United Nations Environment Programme’s Finance Initiative (“UNEP FI”) developed a methodology for assessing the impact of climate change on the portfolios of institutional investors that illustrates the relatively small portion of the costs of climate change that affect the value of the market portfolio in May 2019.¹¹⁷ The physical risks from climate change included in the analysis are limited to asset damage and business interruption from extreme weather events, a fairly small component of the myriad social costs of climate change identified by the IPCC.¹¹⁸ This reflects how limited a perspective the PVM objective function brings to the social costs of even large-scale externalities like climate change.

A similar issue concerns the geographic distribution of the social costs of climate change. Existing estimates show that the costs of climate change will be disproportionately borne by lower income regions. For instance, Africa and India are estimated to have aggregate climate damages as a percentage of GDP that are nearly 800% and 1,000%, respectively, greater than those estimated for the United States.¹¹⁹ Yet to the extent investors access the market portfolio by means of investing in public securities and private company debt, the market portfolio of these securities is tilted toward economic activity in North America and Europe. The standard measure of the extent to which a country’s economic activity occurs through public companies and private debt is the country’s market-cap-to-GDP ratio. In general, the GDP ratio is much higher for developed economies like those in North America and Europe that are relatively less exposed to the costs of climate change than the GDP ratio for the developing economies that face the largest risks.¹²⁰

This geographic mismatch problem also raises difficulties for one of the standard methodologies for estimating the degree to which reductions in carbon emissions would increase diversified investors’ portfolio values. For instance, in an influential paper in Nature Climate Change, Simon Dietz, Alex Bowen, Charlie Dixon, and Philip Gradwell estimate that, relative to a world without climate risk, investors can expect to lose $2.5 trillion due to the impact of climate risk on global financial assets.¹²¹ Madison Condon likewise estimates that if BlackRock could induce Chevron and Exxon to cut industrial emissions such that 1% of industrial emissions were removed each year through 2100, the global reduction in climate damages would have a net present value of $385 billion.¹²² Given the size of BlackRock’s portfolio, she estimates that BlackRock would therefore avoid damages to its portfolio with a net present value of $9.7 billion, which would be sufficient to offset BlackRock’s losses in the equity values of Chevron and Exxon.¹²³ But to arrive at these estimates, these scholars all utilize William Nordhaus’s Dynamic Integrated Climate-Economy (“DICE”) model to estimate the impact of climate change on global GDP growth.¹²⁴ They then assume that climate change will have a proportional effect on global financial assets given past research showing that aggregate financial returns generally track GDP growth.¹²⁵ However, the DICE model integrates the heterogeneous effects of climate change on different countries to produce a single estimate of the effect of climate change on global GDP growth, ignoring the fact that the costs of climate change will not be shared equally across all countries. This methodology therefore overestimates the effect of climate change on the growth rate for the market portfolio, which is tilted toward economic activity in North America and Europe.

As noted by Roberto Tallarita, a related issue with the objective function of PVM is that it discounts future costs and benefits using the opportunity cost of capital.¹²⁶ But for costs and benefits that play out over long time scales that span generations, like those of climate change, economists typically apply a discount rate that is much lower than the opportunity cost of capital to account for intergenerational distributional considerations.¹²⁷ This results in the PVM approach massively undercounting the costs of climate change, most of which will not accrue for many decades.¹²⁸

To give a rough numerical sense for the magnitude of this issue, note first that the present value of the future costs of climate change, when using social discount rates in the range typically used for climate policy, stems largely from impacts that will occur beyond the year 2200.¹²⁹ To simplify, suppose that all of those impacts occurred in 2200, which is 177 years from the year 2023. Suppose that the right social discount rate to use to convert those costs to present value is 2%, a number often used by experts.¹³⁰ At that social discount rate, each dollar of future climate change costs should be discounted by the factor 1/1.02¹⁷⁷, which comes out to 0.03. A $1 trillion future climate change cost in 2200 would then be considered worth $30 billion in present value terms. But applying the 12% real discount rate typically used by corporate managers, the PVM approach would use a discount factor of just 1/1.12¹⁷⁷ or 0.000000002. Under the PVM approach, that $1 trillion future social cost of climate change comes out to just $1,943 in present value terms. Or in different terms, the PVM approach would capture only the fraction (1/1.12¹⁷⁷)/(1/1.02¹⁷⁷) or 0.00000007 of the present value of the costs of climate change in 2200 (and even less of those beyond). Even if managers used a much lower discount rate of 7% under PVM, this fraction still comes out to just 0.0002. Discounting alone thus results in the PVM objective function internalizing only a trivial fraction of the social costs of climate change.

The UNEP FI report also illustrates another conceptual problem with the PVM approach: the methodology incorporates the positive business opportunities created by climate change for companies in the market portfolio.¹³¹ The transition to a low-carbon economy and adaptation to a warming planet will require investment in technologies and infrastructure in a range of sectors. To give one example, consider a concrete seawall installed in New York Harbor to address storm surges caused by climate change. The Army Corps of Engineers has proposed the construction of such a barrier at a cost of some $119 billion.¹³² If such a seawall were built in order to deal with climate change, it would count as among the negative externalities of climate change—it is a real resource use caused by the warming of the planet. But from a PVM perspective, the construction of a seawall represents an enormous business opportunity. In other words, while the aspiration of the PVM approach is to incorporate such costs as negative adjustments to expected cash flows for business projects that contribute to climate change (that is, negative ’s in the PVM-adjusted NPV expression above), in fact faithful application of the PVM approach would incorporate them at least in part as positive adjustments since the construction of the seawall will produce profits for companies in the market portfolio (that is, as positive ’s).

A final problem with the PVM objective function’s treatment of technological externalities is with respect to its interaction with public policies designed to address such externalities. Consider, for example, a pollution externality caused as a by-product of a certain production process, and suppose the externality is addressed at the public policy level with a Pigouvian tax set at the marginal social cost of the externality. As a result, the private profit-maximization problem facing firms that emit that form of pollution mirrors the social problem of choosing efficient behavior. But consider what would happen if managers of the polluting firms were instead to set firm policy following the PVM approach. Those managers would consider not only the Pigouvian tax but also the portion of the externality that reduced the value of other firms in the portfolio so that a portion of the externality would be double counted. As a result, they would, at the margin, be over-deterred from producing pollution. In short, the PVM approach, unlike ESV, does not integrate well with public policy approaches to addressing externalities.¹³³

In contrast to these failures with respect to technological externalities, the PVM approach is far better suited to capture pecuniary externalities. One reason is that pecuniary externalities largely involve a company’s competitors, a significant fraction of which are public companies. Consider the airline industry, which is dominated by public companies.¹³⁴ When Delta Airlines cuts its fares on the D.C.-Boston route and gains market share, it reduces the value of its competitors on that route, which are largely public companies. As we noted above, however, this feature of PVM is really a bug. If companies fully maximized diversified investors’ portfolio value, the resulting reduction in competition would harm consumers and workers even as it benefited investors. The PVM objective function thus poses significant harms to firm patrons relative to the ESV baseline.

To summarize, the objective function under PVM is socially perverse. It fails to capture effectively much of the technological externalities produced by corporate activities while at the same time having the potential to produce a form of market power that would be socially destructive to firm patrons. By our lights the PVM objective function is unattractive as a normative matter.

B. Feasibility for Corporate Managers

We now consider whether managers would have the information and incentives they would need to pursue the stated corporate objective under each approach. We begin by reiterating the insight that both SSP and PVM effectively build on ESV since long-term shareholder value is a primary component of both shareholder welfare and portfolio value. As such, we first evaluate the information and incentive problems that might confound implementing long-term shareholder value as the corporate objective under ESV. Having established these problems as a baseline, we then turn to analyzing SSP and PVM. In this section we take as fixed the centralization of management of the corporate form in the board of directors and hired professional managers. We analyze the extent to which changing the legal and business norm on the objective of a business corporation from the long-term shareholder value objective of ESV to either the SSP or PVM objectives would improve corporate behavior given the resulting incentives and information of corporate managers. We then consider in Section IV.C whether a structural change to corporate control that would give shareholders a greater say in operational decision-making, as some advocates of shareholder welfarism have urged, would be likely to improve corporate behavior.

1. Enlightened Shareholder Value

i. Information

The informational burden of ESV is considerable. Part of the challenge stems from the inevitable uncertainty with respect to contingencies far out in the future. As we have emphasized, ESV arguments for CSR often have a temporal structure in which the company incurs costs in the near term in order to achieve benefits to stockholders that play out over a long period into the future. Consider, for example, investing in renewable energy, shutting down a dirty factory, or auditing the supply chain for safe labor practices. To what extent would sacrificing corporate profits in those ways today enhance shareholder value over the long-term?

While these questions are no doubt complicated, we view the information gathering and analytic challenges posed by ESV as squarely in the wheelhouse of corporate management. First, the intertemporal structure typical of ESV is not unique but rather is standard fare in business management. Corporate managers face similar intertemporal challenges in many other aspects of business strategy unrelated to CSR. Should the firm expand production? Should it invest more in research and development? Does it have the optimal capital structure? Business schools train managers in analytic techniques—most prominently discounted cash flow analysis—to grapple with such ubiquitous trade-offs and uncertainties entailed by managing a business.

Today, the specific strategic issues raised by CSR under the ESV approach are part of the bread-and-butter of business school curriculums. New York University’s Stern School of Business, for example, currently offers no fewer than 33 courses under the “Sustainable Business and Innovation” specialization, including course titles such as “Corporate Branding & Corporate Social Responsibility,” “Sustainability for Competitive Advantage,” and “Sustainable Capitalism: A Longer Term Finance Perspective.”¹³⁵ From the course catalogs alone, it is clear that ESV is a major part of the analytic tool kit and worldview imparted to MBA students. Indeed, business school professors are among the most vociferous proponents of ESV.¹³⁶

Stock prices provide an additional source of information for a manager trying to understand the long-term value generated by current corporate policies. Stock markets incentivize the production and aggregation of information about corporate value by stock traders. Even if a manager is concerned that stock prices do not fully reflect long-term value, stock prices surely provide some relevant information to management regarding how to maximize long-term value. For example, the fact that Tesla and General Motors trade today with price-to-earnings ratios of 70 and 4, respectively, must say something about the future of internal combustion engines.¹³⁷

In summary, while maximizing long-term shareholder value under ESV puts a substantial informational burden on corporate management, there are good reasons to believe that managers are able to assemble and process a great deal of information about how best to further stakeholder interests so as to maximize long-term shareholder value.

ii. Incentives

Although ESV strikes us as substantially feasible from an information perspective, the story is more complicated with respect to managers’ incentives. As discussed in Part I, one reason for optimism stems from the structure of corporate law, which is generally designed with the goal of incentivizing management to maximize long-term shareholder value. Furthermore, Delaware courts have required corporate boards to put in place information and reporting systems designed to safeguard against risks to the company’s stakeholders that might ultimately harm shareholder interests through, for example, sullying the company’s reputation.¹³⁸

Executive compensation for senior officers also produces substantial incentives for managers to maximize shareholder value. Much of these incentives stem from the significant equity component of managers’ pay packages, which directly links the wealth of managers to the wealth of shareholders. For example, for the median CEO of an S&P 500 firm as of 2011, a 1% increase in the value of the company’s shares would produce an increase in the wealth of the CEO of about $500,000 due to their holdings of company stock and stock options.¹³⁹

Yet, while corporate governance is very much oriented toward the long-term shareholder value corporate objective of ESV, by no means does our corporate system produce perfect incentives for corporate management to maximize long-term shareholder value. Perhaps most obviously, standard agency cost theory teaches that whenever managers do not own 100% of the firm’s residual claims their incentives are not perfectly aligned with those of shareholders.¹⁴⁰ The literature on such incentive problems is vast, and we will not rehearse it all here. For present purposes we concentrate on the main incentive problems that result in failure to engage in forms of CSR that would benefit shareholders.

Perhaps the primary incentive problem related to ESV is corporate “short-termism,” in which management focuses myopically on short-run profitability at the expense of long-term shareholder value.¹⁴¹ A key premise of the standard short-termism argument is that the firm’s stock price does not fully reflect what management knows about the value of the firm, for example, because of information asymmetries between managers and investors.¹⁴² Consider the following stylized example. Suppose that managers had private information that an expenditure of $80 (for example, additional investment in research and development) would increase expected revenues by $100. However, investors—because they lack managers’ private information—place only 50% probability on revenues increasing by $100 and 50% probability on revenues remaining the same from this investment.¹⁴³ As a result, investors would view the investment as having an NPV of -$30, whereas managers would view the investment as having an NPV of $20. In this fashion, the company’s stockholders might undervalue a change in a company’s operations that would increase long-term shareholder value.

For such market myopia to actually affect corporate decision-making, however, some sort of “transmission mechanism” must exist that induces corporate management to focus on increasing the company’s short-term stock price rather than long-term shareholder value.¹⁴⁴ One potential such mechanism is the corporate takeover market.¹⁴⁵ In particular, managers might be concerned that if the market undervalues the long-term value of a particular strategy, a corporate raider might exploit the temporary mispricing in the company’s stock and acquire the company at a price that does not reflect the long-term value of the company, thus deterring managers from undertaking the strategy. In today’s corporate landscape, however, a more common version of this concern involves hedge fund activists who take only a minority stake in a target and then agitate for operational or financial changes that might increase the company’s share price even if the changes undermine long-term shareholder value.¹⁴⁶ As with corporate takeovers, even just the threat of such activist interventions might produce managerial myopia more broadly by incentivizing management to pay excessive attention to short-term results for fear of the company becoming a target.¹⁴⁷ Even more directly, modern executive compensation packages generally make managers themselves short-term stockholders, and there is some evidence that vesting equity induces CEOs to cut back on long-term corporate investments¹⁴⁸ and to engage in stock repurchases and corporate acquisitions that impair long-term shareholder returns.¹⁴⁹ Corroborating the hypothesis that short-termism might inhibit both firm performance and CSR investments is evidence that both firm performance and investments in stakeholder relationships increase as a result of reforms that improve executives’ long-term incentives.¹⁵⁰ The extent of managerial short-termism remains controversial,¹⁵¹ but it provides a coherent conceptual account for why corporate managers might sometimes fail to engage in CSR that would ultimately increase long-term shareholder value.

Other kinds of agency problems can also inhibit CSR under the ESV approach. For instance, managers might engage in empire building or otherwise overinvest in ways that harm long-term shareholder value. For firms that operate in high-negative-externality industries—fossil fuel production, say—such overinvestment can harm other interests in society as well. Alternatively, disloyal managers might claim to sacrifice short-term profitability to further stakeholder interests in the name of long-term value creation when in fact they are engaged in a form of self-dealing.

To summarize, management pursuit of ESV is neither hopeless nor a sure thing. We can expect corporate managers to be able to gather and analyze a substantial amount of the information needed to engage in CSR under the ESV approach and to have considerable incentives to do so, but their information and incentives will not be perfect.

2. Shareholder Social Preferences

Consider now the extent to which changing the corporate objective from long-term shareholder value under ESV to shareholder welfare under the SSP approach is likely to make corporate conduct more socially responsible. For this reform to achieve its goal of increased corporate social responsibility, corporate managers need both information about their shareholders’ social preferences and incentives to act on that information.

i. Sorting of Shareholders

A key premise of the SSP approach is that shareholders have social preferences that make them willing, in aggregate, to sacrifice shareholder value in order for the corporation to act more in line with their values. But as an initial matter, will socially minded investors actually be willing to hold the stock of companies whose operations raise the greatest social concerns? So far, we have maintained the simplifying assumption that all shareholders are perfectly diversified. In practice, however, shareholders’ incentives to hold the shares of a particular issuer will in fact depend on their social preferences. This is because shareholders’ social preferences are, at least in important part, associative. By associative we mean that shareholders prefer not to own shares in (or otherwise be associated with) companies whose business practices they find morally objectionable. One source of evidence for this stems from the portfolios of ESG mutual funds that are marketed to appeal to such investors, which are tilted towards companies with high ESG scores.¹⁵² In turn, mutual funds marketed as socially responsible are disproportionately held by more prosocial investors.¹⁵³ The result of such shareholder sorting is to further reduce the importance of shareholder social preferences in the shareholder welfare objective function for the very corporations for which there is the most at stake in terms of CSR. The shareholders that hold companies that raise the greatest social concerns will be systematically the investors least concerned about those social issues.¹⁵⁴

Hart and Zingales, in proposing the SSP approach, in contrast adopt a very different assumption about the form of investors’ social preferences and how they manifest in behavior. They assume that shareholders care about corporate behavior only at the point they are asked to make some decision about it—like voting on a shareholder proposal—and not before or after such a shareholder decision is made.¹⁵⁵ Under their view, environmentalists would have no qualms about owning shares in a coal-mining company. Their social preferences would manifest only if they were asked to decide on some specific operational matter that would implicate their environmentalist views. If shareholders were asked to vote on whether the company should adopt a more environmentally responsible mining technique, say, that would lower shareholder returns to some extent, environmentalist shareholders might vote yes, depending on the weight they put on their environmentalist views and the extent of the lower shareholder return entailed. But under Hart and Zingales’s view they would not hesitate to invest in the first place, even if there were no prospect for them to influence the firm’s environmental practices. Hart and Zingales thus propose an invest and engage model of socially responsible investing. But if shareholders’ social preferences are strongly associative, as existing evidence suggests, then this model would work only for companies with operations that are already relatively socially responsible, substantially undercutting the potential of SSP to improve corporate conduct.¹⁵⁶

ii. Information

In order for the shift to shareholder welfare as the corporate objective to affect corporate behavior in the intended way, managers must have information about their shareholders’ aggregate social preferences. Relevant preference information would include shareholders’ willingness to pay, in terms of reduced shareholder returns, to further various social concerns as well as how shareholders view trade-offs among competing social concerns. A natural way to gather such information would be for corporate management to poll their shareholders.¹⁵⁷

70401 [https://perma.cc/5U8E-4BKW] (arguing in favor of periodic shareholder votes on “corporate purpose” as a way for management to elicit information about shareholders’ social preferences); Jill E. Fisch, Purpose Proposals, 1 U. Chi. Bus. L. Rev. 113, 128–55 (2022) (analyzing purpose proposals).

One version of this would be for management to poll shareholders for their views on concrete corporate operational matters that implicate various social concerns. As a preliminary matter, however, note that diversified shareholders generally lack the information and expertise needed to understand the trade-offs available between firm value and social concerns—this is the core economic logic of centralized management. Put simply individual shareholders are unlikely to know what corporate decisions would maximize their utility.

Consider, for example, the shareholders of a social-media company. Many of these shareholders might share a belief that the corporation should protect the privacy and data of its users, but they likely have little knowledge of the different corporate practices that could advance those interests and the trade-offs they would entail. In principle, shareholders could, with the help of management, inform themselves of the relevant options and their associated costs, but doing so would entail costs that would likely deter diversified shareholders from doing so.¹⁵⁸

Consider then instead the possibility that management might learn information just about the content and strength of shareholders’ social preferences rather than shareholders’ views about specific operational decisions. Even at this raw preference level, however, we are skeptical that shareholders have clear preferences in any meaningful sense about the relevant trade-offs, much less that management could realistically learn much about them. For example, consider again a social-media company. Another major social concern about social media is its role in the spread of disinformation. Suppose you, dear reader, were a shareholder of a social-media company that had been plagued by such problems in the past. How much return would you be willing to sacrifice in order to reduce this problem? If you are like us, you are having trouble even coming up with a coherent metric for expressing such a preference. Are you willing to sacrifice fifty basis points in return for a reduction of one . . . disinformation unit?

Put another way, shareholder voting provides information about the stated preferences of shareholders but not necessarily their revealed preferences. As a result, a risk exists that asking what any given shareholder prefers in terms of social issues and investment returns might result in the shareholder expressing a preference that is inconsistent with the policy the shareholder would adopt if forced to pay directly for the policy adoption.¹⁵⁹ As well, we might question whether preference elicitation is in the wheelhouse of corporate managers.

These informational challenges facing SSP are not much diminished when we consider intermediation by institutional investors. Hart and Zingales propose that such intermediaries might provide a means of lowering the cognitive load on diversified investors of expressing their social preferences over corporate conduct.¹⁶⁰ Prosocial investors could simply invest in a prosocial mutual fund that will vote its portfolio company shares in order to advance the investors’ social preferences. But this essentially just moves the information problem down one level: How can the fund’s manager learn about the social preferences of its investors in order to relay that information to corporate managers?¹⁶¹

One possibility, suggested by Hart and Zingales, is that investors can “vote with their feet” by sorting into funds that have a track record of voting that investors find attractive.¹⁶² Indeed, Michal Barzuza, Quinn Curtis, and David Webber argue that index-fund providers have become increasingly vocal about their voting records on ESG issues in order to compete for millennial investors, who they argue place a significant premium on social issues.¹⁶³

But empirical evidence provides little support for the idea that investors sort into mutual funds based on their voting policies. For instance, using a dataset that contains the voting records of both individual investors and the mutual funds in which they invest, Jonathon Zytnick examines whether mutual funds vote on CSR-related matters in the same way that their investors vote on CSR-related matters when these investors cast ballots as shareholders.¹⁶⁴ Overall, he finds little overlap between investor preferences and fund voting, especially within index funds.¹⁶⁵ Zytnick attributes the overall lack of sorting to rational inattention: as in political voting, investors rationally choose not to investigate how an intermediary votes due to the small likelihood that their investment will cause the intermediary’s votes to be pivotal.¹⁶⁶

Hart and Zingales argue that the lack of investor sorting is due to current corporate governance rules that limit the scope of shareholder voting on CSR.¹⁶⁷ However, even in the absence of such limitations, we question whether sorting among funds based on how they vote on social issues would provide meaningful information to managers about their shareholders’ social preferences. First, as we argued above, we doubt that investors have sufficiently well-formed preferences about corporate conduct such that it is even possible for sorting to convey information to corporate managers about those preferences. Second, it would remain prohibitively costly for shareholders to evaluate the stated policies of asset managers. It is not as simple as environmentally minded shareholders buying a “green” mutual fund. As we have emphasized, shareholders’ social preferences are heterogeneous, both in terms of their strength relative to wealth in their utility function and in terms of their content. Individual investors will often differ in how they evaluate the trade-offs entailed when a company implements specific CSR-related policies.

Consider, for example, a fund dedicated to carbon reduction. Across the range of policy interventions a company might take to reduce its carbon footprint, how will investors know which ones a Reduce Carbon Fund will pursue, or how it will evaluate the inevitable trade-offs implicated by each course of action? While some investors may adopt a hell-or-high-water (“hah”) approach to carbon reduction, others may condition their support on evidence that the intervention will enhance long-term shareholder value. These problems are further compounded in cases in which a corporate decision involves a trade-off between competing social values and not just between a single social issue and investment returns. Many shareholders, for example, might have concerns about the implications of a given carbon reduction policy proposal on other stakeholders, such as workers or communities who may be adversely impacted by it.¹⁶⁸

A final problem with using shareholder voting and similar mechanisms to convey social preference information to corporate management is that shareholders will express their overall preferences about corporate policy, not just the part concerning shareholder value and their social preferences. For diversified shareholders, those overall preferences would include the portfolio effects that PVM—and not SSP—envisions incorporating into the corporate objective. As a result, attempts to implement the SSP approach, to the extent they are successful in tilting corporate decisions toward what shareholders want, will in practice blur into pursuit of the PVM objective including the anticompetitive aspects of it that are socially destructive.

iii. Incentives

As we argued above, shareholder value is a much more important component of shareholder welfare than shareholder social preferences, given heterogeneity and conflicts among shareholders regarding the relevant welfare trade-offs and sorting based on associative preferences. Our analysis also revealed that management has much better information about long-term shareholder value than it has about shareholders’ social preferences. In such a setting—with one far more important component of the objective function for which information is readily available and one far less important component for which information is not available—the best scheme for incentivizing corporate management to pursue shareholder welfare under the SSP approach focuses management attention squarely on the important and measurable component, long-term shareholder value, and thus is essentially identical to the ESV approach.

Our argument builds on insights from “multitask principal-agent problems” from contract theory.¹⁶⁹ These models entail a principal who hires an agent to perform several tasks or, similarly, a single task with multiple dimensions to it. A common problem in such an environment arises when performance on one dimension of the job is easily measurable while performance on another dimension is difficult to measure. Teacher performance is a classic example. Standardized tests can measure one dimension of teacher performance, but other aspects—promoting creativity or communication skills—are much harder to measure. In such a setting, the agent decides how to allocate effort across the dimensions of the job, and an increase in incentives on the more easily measurable dimension of their performance will result in the agent reallocating their effort toward that dimension and away from the others.

In a pathbreaking article working through the implications of such a setting for contract design, Bengt Holmstrom and Paul Milgrom argued that the optimal contract might entail very low-powered incentives, like a fixed wage, in order to avoid distorting the agent’s effort too much in the direction of the more easily measurable dimension of the job.¹⁷⁰ In the application to teachers, the idea is that paying teachers based on a fixed salary would result in better overall teacher performance than paying them based on the performance of their students on standardized tests since the more balanced allocation of teacher effort across the different dimensions of their job that would result—based on teachers’ intrinsic motivations—is more important than the fall in overall effort from giving up on high-powered extrinsic incentives on the measurable aspect of their performance.

In our setting, a low-powered incentive contract in the spirit of Holmstrom and Milgrom’s analysis would entail giving up on providing managers high-powered incentives to maximize shareholder value in order to induce them to put some effort into measuring and furthering shareholders’ social preferences. For example, managers could be paid like bureaucrats, with fixed salaries and no equity-based component to their pay. But this is not the optimal contract here, for two reasons.

First, as we have explained, long-term shareholder value is a more important component of shareholder welfare than is shareholder social preferences—by far—and, in addition, managers have much better information about how to maximize shareholder value than about how to satisfy shareholders’ social preferences. As a result, managerial effort to maximize shareholder value is generally much more productive, in shareholder welfare terms, than is managerial effort to further shareholders’ social preferences. Consider, then, how shareholders would ideally want managers to allocate their finite time and attention across those two tasks. For the sake of argument, suppose that management were to focus exclusively on maximizing shareholder value and ignored shareholders’ social preferences. From this benchmark, would shareholders’ welfare increase if management were to divert some of its attention to figuring out how best to further shareholders’ social preferences? We think not. The resulting fall in shareholder value would matter more to shareholder welfare than whatever small improvement management could achieve in better aligning firm policy with shareholders’ social preferences.

Second, suppose we are wrong about that, and in fact shareholders would ideally want management to devote at least some attention to furthering shareholders’ social preferences. That alone is not sufficient for the optimal incentive contract for management to be one that avoids high-powered incentives to maximize firm value. The optimal design of incentives depends not only on the relative productivity of management’s efforts on the two tasks but also on management’s intrinsic motivation to pursue the tasks as well as on the availability of good incentive instruments to motivate managerial effort on each of the tasks.

In the application of the Holmstrom and Milgrom multitask model to the problem of incentivizing teachers, a fixed wage contract results in teachers’ effort being driven by their intrinsic motivation to help students learn. In the educational context, it seems plausible that teachers have substantial intrinsic motivation—presumably many teachers enter the profession not because the pay is high (it is not) but rather because they like teaching and care about students. As a result of their intrinsic motivations, the fixed wage contract for teachers results in substantial effort across both the measurable and nonmeasurable dimensions of their performance.

But in the corporate context, we think intrinsic motivations play a much smaller role relative to extrinsic motivations. As a result, giving up on extrinsic incentives would result in a substantial fall in managerial effort on maximizing firm value, and for little benefit; it is hard to see why corporate managers would have much intrinsic motivation to figure out shareholders’ social preferences and seek to further them.

In terms of the availability of incentive instruments, the key issue is whether there are good proxies for the agent’s performance to base their compensation on. When an agent is paid on the basis of some performance measure, they will have incentives to increase the performance measure, which might not produce the desired results. The basic analytic point here is captured evocatively in the title of a classic article in the management literature: On the Folly of Rewarding A, While Hoping for B.¹⁷¹ In the teacher context, there might not be great proxies even for the relatively measurable aspects of the job. Consider the practice of paying teachers based on their students’ test scores. The hope is that doing so will motivate teachers to teach better. But following the introduction of incentive pay based on test scores for teachers in Atlanta, ten teachers and administrators were caught helping students cheat on the test to inflate their scores.¹⁷² Put simply: you get what you pay for.

The implication for the optimal design of incentives is that the fall in effort on the measurable dimension of performance from switching from a high-powered incentive scheme to low-powered incentives depends on how well the former dimension of performance can in fact be measured.¹⁷³ In teaching, test scores are a potentially problematic measure even of the aspects of teacher performance they purport to measure, as the cheating scandal illustrates in extreme form. This measurement problem then reduces the benefit, in terms of student learning, of paying teachers based on the proxy. In contrast, in the corporate context, there are excellent performance measures available for shareholder value. The shareholder value component of shareholder welfare is ultimately revealed over time as the firm’s cash flows are realized. Executive compensation plans make use of that fact by employing equity-based pay and explicit bonus schemes tied to accounting measures of earnings to generate incentives to maximize shareholder value. We believe that equity-based pay can provide substantial alignment between management’s incentives and shareholder value. Giving up on those incentives would therefore result in a substantial loss in shareholder value.

Finally, we do not believe it is optimal to add explicit incentives for managers to further shareholders’ social preferences. The shareholder social preferences component of shareholder welfare is much harder to measure than shareholder value and remains largely hidden. Some crude proxy for shareholders’ social preferences, based on surveys of shareholders or the like, would have to be constructed to use as a performance measure in management’s compensation scheme. But the measurement challenges here reduce the productivity, from a shareholder welfare perspective, of trying to provide extrinsic incentives to management to take into consideration shareholders’ social preferences.

In sum, the optimal incentive scheme under the SSP view focuses squarely on shareholder value, so that the SSP approach would do little to improve corporate behavior relative to the ESV baseline. One response might be that there is no downside to changing the corporate objective to shareholder welfare under SSP and possible upside. If we are right, the argument goes, that the optimal incentive scheme would remain unchanged, then boards charged with pursuing shareholder welfare under SSP will ensure that management has incentives to stay focused on shareholder value. But it could be, the argument continues, that for some firms, the information and incentive problems we have identified with seeking to further shareholders’ social preferences are less severe. For those firms, changing the corporate objective to shareholder welfare under SSP could result in more socially responsible corporate behavior. But in our view, such a change to the legal and business norm about corporate purpose would inevitably result in substantial efforts by many corporate boards to induce the company’s senior managers to incorporate shareholders’ social preferences into their decision-making even when doing so in fact lowers shareholder (and social) welfare by distracting management from shareholder value.

3. Portfolio Value Maximization

Evaluating the feasibility of PVM as an alternative corporate objective requires assessing whether corporate managers might have the information and incentives needed to incorporate the effects of the firm’s decisions on the value of their shareholders’ portfolios into their decision-making process, above and beyond how those decisions affect the long-term value of the corporation. We show here that there are good reasons to think they will not.

i. Information

A first type of information managers would need under PVM is on the composition of the portfolios held by the company’s shareholders. A company’s shareholders are likely to vary widely in the investment portfolios that they hold. Indeed, the large number of investment products offered as mutual funds reflects the strong demand for a broad range of investment portfolios with varying investment objectives. As of November 2023, Morningstar lists over 1,800 investment funds as providing exposure to “U.S. Equity” and nearly 1,100 investment funds as providing exposure to “International Equity.”¹⁷⁴

star.com/us-equity-funds [https://perma.cc/24N7-M6WJ]. For the list of International Equity funds, see International Equity Funds, Morningstar, https://www.morningstar.com/international-equity-funds [https://perma.cc/TZ5P-XGCT]. Moreover, the portfolios of these funds reflect a broad range of investment theses, such as funds focused on growth firms, small-capitalization firms, low-volatility firms, dividend-paying firms, or firms operating in particular regions or sectors. Note as well that it is not enough for managers to determine what institutional investors hold the company’s shares. Institutional investors serve as intermediaries for the underlying individuals on whose behalf they ultimately hold the company’s shares. In turn it is those individual investors’ portfolios that form the ultimate aggregate portfolio the company’s managers should be trying to maximize.

To keep things simple, however, suppose corporate management assumed that the company’s shareholders are fully diversified so that the PVM objective is just the value of the market portfolio. This simplifying assumption stacks the deck in favor of the feasibility of PVM, so if PVM is not reasonably feasible under this assumption, then it certainly is not feasible in the real world.

A second type of information a corporate manager would need to pursue PVM is on the expected cash flows that alternative decisions would generate, not only for the company itself but also for other securities in shareholders’ portfolios, which again for now we take to be the market portfolio. These expected cash flows to the company and to other securities in the market portfolio are the ’s and ’s, respectively, in the numerators of the terms in the PVM version of the expression for the NPV of a project in equation (2) above.

In general, corporate managers will have much better information about the cash flows to the company (the ’s) than they will about the portfolio externality cash flows (the ’s). The cash flows to the company are ultimately directly observable and of course directly implicate the business of the company, on which managers are hired to be experts. Externalities, in contrast, involve other businesses that the firm’s managers will have much less information about. The information challenges posed by technological externalities are particularly acute. It is not clear how a firm’s managers would be able to divine the extent to which pollution emitted by the company, say, would reduce the value of other public companies, which include a diverse array of sectors and industries.¹⁷⁵ In contrast, pecuniary externalities primarily affect the company’s competitors, about which firm managers are likely to have substantial information.

Nor are institutional investors likely to be in a meaningfully better position to provide this information to managers. Acquiring information about the ’s of a portfolio company would require a level of firm-specific engagement likely to be far more complex than acquiring information only about the ’s of the company by virtue of the diffuse ways a company’s operations can affect firms in the market portfolio. Yet even when it comes to firm-specific engagement on increasing a company’s ’s, both active asset managers and index-fund providers have strong incentives to refrain from active engagement.¹⁷⁶ Rather, both types of institutional investors adopt a stance of “rational reticence”¹⁷⁷ in which they weigh in on a company’s operations only after an activist hedge fund—which has incentives to investigate how a company might increase its cash flows due to its concentrated investment position—proposes an intervention. Yet by the same token, the fact that an activist is undiversified also means it has little reason to invest in exploring how to reduce the ’s of a company. Indeed, to the extent an activist surfaces information on a company’s technological externalities, it will most likely relate to how they adversely affect the company’s cash flows—a point to which we return in Part V. As a result, managers cannot count on institutional investors to solve the critical information challenge posed by PVM.¹⁷⁸

ii. Incentives

Consider now the implications of the foregoing analysis for the incentives that firm managers have to pursue the PVM objective. The long-term value of the firm’s own shares and the pecuniary portfolio externalities produced by the firm are far more important components of the PVM objective function than the technological portfolio externalities produced by the firm. One reason for this is that there exist social institutions, such as environmental regulation, designed to internalize technological externalities of corporate activity. While these institutions are certainly imperfect, they do substantially limit technological externalities. Another reason is that only a fraction of corporate technological externalities actually falls on other companies’ securities, as we explained above. As a result, when managers are considering investing in a new project, typically the primary effect it has on investors’ portfolios is through its implications for the company’s own value. As well, pecuniary externalities are likely to be far more important to its shareholders than technological externalities for the reasons discussed above. Note that the ordering of these three components of the PVM objective function in terms of their importance to investors mirrors their ordering in terms of the information available to managers.

Incentivizing firm managers to incorporate technological externalities into their decision-making under the PVM approach thus poses a similar problem to that of incentivizing them to consider shareholder social preferences under the SSP approach. The most productive use of managers’ scarce time and attention, in terms of improving the PVM objective function, is in working to increase the cash flows to the firm’s own shares and to competing public companies. As a result, we think it likely that diversified shareholders would want managers to focus their limited time and attention on those outcomes. Diverting their attention to addressing technological portfolio externalities would likely be counterproductive for the value of shareholders’ portfolios, given their relatively small role in the PVM objective function and the relatively limited information firm managers have about them. The optimal incentive contract for managers under the PVM approach would thus focus squarely on the long-term value component of the objective function and put little to no weight on technological externalities.¹⁷⁹ Reforms that aim to induce managers to incorporate portfolio effects into their decision-making are likely counterproductive for both diversified portfolio returns and for social welfare.

These considerations help explain why institutional investors have refrained from pushing managers of high carbon-emitting firms to slash emissions in the name of maximizing the value of other portfolio firms, as one might expect if investors truly wanted firms to adopt a PVM perspective. On the contrary, to the extent investors evaluate the impact of climate change on portfolio value maximization, they typically focus on the implications of climate change for each firm’s long-term value and in particular on transition risks, such as the costs a firm will face as governments seek to rein in carbon emissions and the investment opportunities these efforts will produce.¹⁸⁰

Indeed, the work of UNEP FI, which was established to advance methodologies for assessing the impact of climate change on the portfolios of institutional investors, is replete with this perspective. Using an investment portfolio consisting of 30,000 global securities, the report’s headline results indicate that investors in such a portfolio would face a 13.16% risk of loss due to transition risk, but low carbon-technology opportunities offset these costs by providing 10.74% of potential gains. To be sure, the report also estimated the aggregate physical losses to the portfolio arising from climate change to be 2.14%.¹⁸¹ Yet even in this regard, the report cited investors as using these methods to engage with companies “to encourage greater climate risk resiliency”—in other words, to ensure companies are looking to maximize firm value in the face of these climate risks.¹⁸² Likewise, to the extent shareholder engagement at Big Oil firms has resulted in revised compensation plans to address climate change, the revised plans are uniformly designed to reward management for success in managing transition risk—a broad category of conduct that includes meeting greenhouse gas (“GHG”) emissions targets in anticipation of higher carbon costs as well as pursuing alternative energy technologies.¹⁸³

C. Devolving Corporate Control to Shareholders

In the prior Section we took as given the current institutional arrangements that give the board of directors control over corporate policy. This model of corporate governance necessarily raises the challenges of how shareholders might convey their preferences to managers (whether to maximize portfolio value or pursue social preferences) as well as how to provide managers with incentives to pursue these preferences. As we have argued, these challenges are difficult—if not impossible—to overcome, so it is hardly surprising that some proponents of shareholder welfarism, from both the SSP and PVM strands, have proposed implementing the shift away from shareholder value maximization toward shareholder welfare maximization by simply giving shareholders much greater direct say in operational matters. This approach is perhaps most associated with two 2022 papers penned by Oliver Hart and Luigi Zingales,¹⁸⁴ but similar admonitions to provide shareholders with greater voice in corporate governance have long emanated from proponents of PVM.¹⁸⁵

We therefore conclude our evaluation of shareholder welfarism by considering the extent to which devolving corporate control to shareholders might improve corporate conduct. Note that, under this implementation mechanism, the distinction between the SSP and PVM forms of shareholder welfarism becomes less significant: in exercising their control rights over a corporation, shareholders would be motivated by their full range of relevant preferences, including with respect to the value of the firm, the value of other securities in their portfolios, and their social preferences. As such, we refer collectively to scholars taking this particular approach to implementing either SSP or PVM as proponents of “shareholder welfarism.”

1. The Economic Logic of Centralized Control

To begin, we note that adopting a more holistic understanding of shareholder interests, as urged by these proponents of shareholder welfarism, does not change the basic economic logic that originally gave rise to the centralized management of publicly traded corporations. Diversified shareholders generally lack the information and expertise needed to run the firm; this is why, under current institutional arrangements, corporate control is vested in an elected board of directors. Put simply, centralized management lets managers be managers and investors be investors, and that specialization of function has well-understood economic benefits. In our view, devolving operational decisions to shareholders of publicly traded corporations would make little economic sense and would result in worse corporate performance, not just in terms of shareholder value but even in shareholder welfare or social welfare terms.

2. Determining Which Decisions to Devolve to Shareholders

To be sure, proponents of shareholder welfarism do not propose that all operational decisions be devolved to shareholders, presumably in large part because they recognize the value, indeed practical necessity, of a significant degree of centralization of control over public companies in professional managers. But what then determines which operational decisions are made by shareholders and which by managers? Hart and Zingales argue that, as a conceptual matter, shareholders be given a direct say only with respect to operational issues that implicate a social goal that the company has a comparative advantage in achieving.¹⁸⁶ They offer as an example a case from 1984 when DuPont faced a choice between polluting the Ohio River or spending money to avoid doing so.¹⁸⁷

But identifying conceptually a class of decisions that should be delegated to shareholders is on its own not enough. One must also specify who decides on a day-to-day basis when a particular corporate decision meets the specified criteria for devolution to shareholders. One possibility is that management decides. We suspect, however, that such an arrangement would result in management rarely bringing matters to a shareholder vote, given the time and expense involved and the fact that shareholders are so poorly equipped to make such decisions. It is not clear why management would have any incentive to bring such votes, and enforcement of a legal obligation for them to do so would presumably entail suits brought by shareholders, in effect making shareholders the key actors in instigating these shareholder votes over corporate operations.

Accordingly, the only plausible approach is to let shareholders initiate such votes, perhaps with management having access to a legal procedure for refusing to bring the vote if it does not meet the specified legal criteria.¹⁸⁸ This is how the process for putting precatory shareholder proposals on management’s proxy statement for the annual shareholder meeting generally works currently under Rule 14a-8. But consider the incentives of shareholders to initiate such interventions. Standard collective action problems would inhibit diversified individual shareholders from bearing the considerable costs of putting operational issues to a shareholder vote. Similarly, traditional asset managers likely have little incentive to bear the costs of intervening by sponsoring shareholder proposals.¹⁸⁹

Consistent with this analysis, existing evidence on precatory shareholder proposals on social issues shows they are proposed largely by what Roberto Tallarita calls “stockholder politics specialists”: policy advocacy organizations like As You Sow, socially responsible investment advisors like Domini Impact Investments, and public and union pension funds.¹⁹⁰ These specialists generally have particular social and political agendas that existing scholarly commentaries characterize as different from the interests of most of the shareholder base.¹⁹¹ It seems likely that these actors often make proposals designed not to push corporate managers to strike a trade-off desired by shareholders between firm value and shareholders’ other preferences (which would be consistent with the view taken by proponents of shareholder welfarism), but rather they make proposals aimed at advancing a particular political agenda. In line with that understanding, only 3.3% of shareholder proposals on social issues from 2010 to 2021 received majority shareholder support.¹⁹²

We would expect these same actors to be the primary proponents of shareholder proposals under the reforms urged under the shareholder welfarism view that would make shareholder proposals on operational issues binding. The key question is whether empowering these actors to initiate shareholder decisions that override management through binding shareholder resolutions on operational matters is likely, on net, to improve corporate behavior.

3. The Nature of Shareholder Preferences over Operational Decisions

Consider now how shareholders would vote on proposals pertaining to operational decisions. In an influential article published in the Journal of Political Economy,¹⁹³ which we will refer to as BHZ, Eleonora Broccardo, Oliver Hart, and Luigi Zingales develop a model of shareholder voting and derive a startling result: in voting over operational decisions that pose trade-offs between firm value and social concerns, diversified shareholders will ignore the implications of the decision for their own investment returns and instead view the decision exactly as a social planner would, making the decision on the basis of the net social benefits to society as a whole.¹⁹⁴ They thus show that, under their assumptions, if a majority of shares are held by investors who are even slightly socially responsible, letting shareholders decide on operational matters achieves the socially optimal outcome. If their model provides a good account of shareholder voting behavior, then devolving operational decision-making to shareholders would have enormous potential for improving corporate conduct. Specialist actors with various views on social issues implicated by corporate conduct could tee up a range of binding resolutions for shareholders to vote on, and shareholders would pass them if and only if they improve social welfare.

But BHZ’s stark result depends on a set of critical assumptions and seems to us implausible in practice. BHZ models investors’ utility from owning a stock as having two components: one stemming from their investment returns from the stock and an altruistic component stemming from how the company’s operations affect society.¹⁹⁵ BHZ assumes that, because any individual stock would make up a de minimis fraction of a perfectly diversified investor’s portfolio, such an investor would have no (or de minimis) concern about the effect of an operational decision on their own investment returns.¹⁹⁶ On the other hand, BHZ assumes that diversification has no effect on the strength of an investor’s ethical concerns about the company’s behavior.¹⁹⁷ This asymmetry in their treatment of the effects of diversification is the key behind their result that each investor would vote on operational decisions just like a social planner would.

A natural alternative model of investor psychology is from earlier work by Hart and Zingales in which they assumed that the level of responsibility that shareholders feel for corporate externalities scales with their holdings in the firm.¹⁹⁸ Under that assumption, investors would vote on operational matters by trading off the effects of the decision on firm value and on social considerations, with the weight on social considerations depending on the strength of their social preferences (which would reflect their financial position in the firm), in much the same way as we characterized aggregate shareholder welfare in Section IV.A above. Which of these models best captures how investors would actually think about binding shareholder proposals on operational matters cannot be derived through purely deductive reasoning but rather is ultimately an empirical question, which we return to below.

A second key assumption of BHZ concerns the effect of diversification on investors’ incentives to become informed about votes. An individual investor’s probability of casting the pivotal vote that determines the outcome goes to zero as they become perfectly diversified, for the same basic reason that their interest in the returns on any particular company’s stock goes to zero. This latter effect of diversification plays a key role in BHZ’s analysis, as we have discussed, but with regard to the former, BHZ assumes that “shareholders will vote as if they were pivotal since this is the only case where their vote matters; in other words, they vote the outcome they would like to occur.”¹⁹⁹ But a more consistent view about the effects of portfolio diversification is that there would be no reason for an individual investor to give a moment’s thought or attention to how to vote shares or to potential investment funds’ voting policies, because in the limit an individual shareholder has no effect on the world.²⁰⁰ The prediction of the model would then not be that each investor acts like a social planner but rather widespread rational investor apathy about shareholder votes and about how funds vote, even for socially minded investors.²⁰¹

Perhaps the best evidence for evaluating the predictions of BHZ is from shareholder voting on a major class of operational decisions on which shareholders currently are given a binding vote: mergers. Corporate mergers implicate both investors’ investment returns as well as a range of social concerns, including those stemming from increased market power and with respect to the effect of the merger on various classes of firm stakeholders, such as employees and creditors. The model of BHZ predicts that investor voting on mergers would be based not on their own investment returns but rather on such social issues. In short, shareholders would vote for mergers only to the extent they improved social welfare and against mergers that impaired social welfare, regardless of the financial return shareholders could expect from the merger. It is, of course, a claim that calls into question the need for any oversight of mergers on public policy grounds (for example, through antitrust review) as this work would be accomplished through the shareholder vote.

Not surprisingly, this prediction is belied by the evidence: the main concern among shareholders in controversial merger votes is, to our knowledge, never about market power or the effects on other corporate constituencies but rather about the deal price. As an example, consider Michael Dell’s 2013 leveraged buyout of Dell, Inc. When originally proposed, the deal—like many management buyouts—attracted substantial shareholder opposition based on the concern that shareholders were being offered too low of a price, leading Michael Dell to sweeten the deal by offering a special dividend to shareholders.²⁰² Deal price is a purely distributive concern that implicates investors’ returns; if shareholders cared only about the social welfare effect of a merger, this distributive concern would be irrelevant. It is difficult to reconcile the centrality of concerns about deal price in shareholder voting about mergers—as opposed to concerns about market power or treatment of other corporate constituencies—and BHZ’s model of voting on operational decisions. In contrast, this outcome is consistent with our analysis in Section IV.A above that the overwhelming driver of shareholder welfare under the SSP view is firm value, not shareholders’ social preferences.

4. The Benefits of Devolving Control to Stockholders

What then would be the benefits, in terms of improved corporate conduct, of devolving control to stockholders? In our view they would be negligible, for the same basic reasons we gave in evaluating the objective functions under SSP and PVM and their feasibility for corporate managers in Sections IV.A and IV.B. We will not recapitulate all of those arguments here, but in short, the predominant consideration that would drive shareholder voting on operational matters would be firm value, not broader social concerns or portfolio externalities. To the extent shareholders’ social preferences did factor into their voting on operational matters, they would entail a form of stated preferences based on the limited information available to shareholders about the full consequences of the vote on a firm’s operations. As such, they would not serve as a reliable guide to shareholders’ revealed preferences about social issues or to social welfare.

While it might be hoped that such a devolution would at least facilitate low-hanging-fruit improvements to corporate behavior—changes that would attract widespread agreement in society—such issues are those that are most likely to be addressed already by law and public policy. Putting operational matters to a shareholder vote involves deploying a type of political mechanism—what Roberto Tallarita refers to as “stockholder politics”—as an alternative to traditional politics.²⁰³ But by our lights, stockholder politics is likely to be much less protective of broader social interests than traditional politics since corporate stockholders are a subset of the broader polity and this subset of voters owns the claims to the corporate profits that would have to be sacrificed in service of those broader interests.

5. The Costs of Devolving Control to Stockholders

While the social benefits from devolving control to stockholders would be negligible, the social costs would likely be significant. Those costs would come in three main forms. First, allowing shareholders to propose binding resolutions on corporate conduct would result in substantial distraction of management, which would inevitably be drawn into defending corporate policies against social activists pushing for reforms. As we have emphasized previously, managers have a finite amount of time and attention so that this distraction would result in worse corporate performance over time. Second, devolving control to shareholders risks changes to corporate policy that are likely to reduce the well-being of shareholders and the broader society. That is, one cannot be confident that all successful shareholder interventions would ultimately be in shareholder interests, given the many layers of intermediation between beneficial owners and the shares as well as the limited amount of information shareholders would inevitably have about the full costs and benefits of a proposed change in a firm’s operations in this decision-making environment.²⁰⁴ Finally, as other scholars have noted, turning to shareholder voting in hopes of regulating the production of technological externalities comes with troubling political implications. These include the possibility of chilling the perceived need for systematic legislation and regulation,²⁰⁵ the effective weighting of shareholders’ policy preferences by their wealth,²⁰⁶ and the vesting of de facto regulatory power in the hands of a few unelected asset managers given the prevailing distribution of voting power in corporate elections.²⁰⁷

V . THE FUTURE OF CSR IS ESV

Shareholder governance holds significant promise for improving corporate social responsibility. But this promise does not stem from any innovation in our basic understanding of shareholders’ interests along the lines of shareholder welfarism. Indeed, we have argued that changing the corporate objective in the ways urged by shareholder welfarism would fail to meaningfully improve corporate conduct and might even do the opposite. Rather, the ongoing promise of shareholder governance for CSR stems from the prospect of further reductions in certain agency costs and information problems based on the traditional corporate objective, long-term shareholder value. We suspect that there remain opportunities for corporate management to reform firm policies in ways that both increase shareholder value and improve the firm’s social performance, perhaps by addressing the information and incentive problems of ESV we have discussed. But ESV is often misunderstood in the law-and-economics literature. In this final part we begin by addressing those misconceptions and clarifying what we believe to be the most useful understanding of ESV. We then briefly describe an episode at ExxonMobil that illustrates recent innovations in the use of ESV arguments by market actors and the potential promise that ESV holds for advocates of CSR. We conclude this part by identifying a set of key questions about ESV that we think form an important research agenda for the field.

A. Clarifying ESV as a Concept

Despite its surging popularity in the business world, ESV has received little sustained analysis in legal scholarship. What attention it has received from legal scholars largely reflects one or both of two misconceptions about ESV that we seek to clarify here.

First, some shareholder primacy theorists misconceive ESV as an alternative to traditional shareholder value as a corporate objective.²⁰⁸ For example, in a recent paper Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita examine “the view that corporations should replace their traditional purpose of shareholder value maximization (SV) with a standard commonly referred to as ‘enlightened shareholder value’ (ESV).”²⁰⁹ After arguing that SV and ESV are operationally equivalent, they conclude that “replacing SV with ESV should not be expected to produce benefits for either shareholders or society.”²¹⁰

But their framing of ESV as an alternative corporate objective is, in our view, a category mistake. ESV is not an alternative corporate objective. The enlightenment that ESV calls for involves not an adjustment of the corporate objective itself but rather in how to seek it. ESV is best understood as a reform agenda targeting a particular class of agency costs and information problems that harm not only shareholders but also other corporate stakeholders. Just as one might usefully analyze problems with the design of executive compensation as a distinctive manifestation of and contributor to managerial agency costs,²¹¹ ESV theory identifies a particular class of agency and information problems worthy of study that might point to their own set of interventions.

Why have law-and-economics scholars instead viewed ESV as advancing an alternative corporate objective? This framing of ESV might stem in part from the grammatical structure of the label: “enlightened” is an adjective, modifying “shareholder value.” Another reason—suggested by Bebchuk and coauthors²¹²—is that some jurisdictions have added explicit language to corporate statutes highlighting the importance of operating in a socially responsible manner to the achievement of shareholder value. For example, the United Kingdom Companies Act provides

A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its [shareholders] as a whole, and in doing so have regard (amongst other matters) to— . . .

(b) the interests of the company’s employees,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct.²¹³

But such a provision does not change the corporate objective from maximizing shareholder value. Rather, we suspect that the existence of stakeholderism as a competing conception of corporate purpose may explain the perceived need to add explicit language endorsing such CSR considerations in pursuing long-term shareholder value. After all, many people believe in stakeholderism, which is indeed a fundamentally different understanding of ends, and not just means, of the corporate form. This leads to several phenomena that might in turn justify explicit acknowledgement of ESV considerations in corporate law.

First, when good faith managers sacrifice short-term profits to act more responsibly in ways that further shareholder value, they might be accused of being stakeholderists! Explicit legal endorsement of ESV can reassure all involved that engaging in CSR is often required to further shareholder value. Second, one could interpret explicit ESV legal language as limiting rather than permissive; it can make clear to corporate managers that they should pursue CSR only to the extent that it furthers shareholder value. This is what the Delaware Supreme Court did in the Revlon case (“A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related beneﬁts accruing to the stockholders.”).²¹⁴ Finally, stakeholderists often propagate a caricature of shareholder value theory in which fat-cat capitalists squeeze every last penny out of workers and customers, pollute the environment at will, and otherwise act in outrageous ways all in pursuit of immediate profit.²¹⁵ Legal endorsement of ESV helps combat that distorted view of shareholder primacy.

A second misconception about ESV is that it is useless because the behavior of all the key actors in the corporate system is determined by their incentives and so ESV ideas cannot improve it. One version of this critique focuses on the significant extent to which existing corporate governance institutions already provide substantial incentives for management to maximize shareholder value, including through practices that also further stakeholder interests, which raises the question of whether there remain any such opportunities not yet exploited. As Elhauge puts it, “Agitating for corporations to engage in responsible conduct that increases their profits is a lot like saying there are twenty-dollar bills lying on the sidewalk.”²¹⁶

Quite the contrary. For one, the mechanisms posited by ESV often involve substantial uncertainty as to how best to maximize long-term shareholder value.²¹⁷ That uncertainty is in part a function of the long time horizon over which the firm will receive the ultimate financial benefits of socially responsible conduct. In contrast, the financial costs of such practices are typically both immediate and certain. As a result, there is no reason to think that all such positive NPV investments in social responsibility will be exploited. In many cases, firm managers will simply make mistakes in striking these uncertain intertemporal trade-offs. These mistakes, moreover, might be systematically biased toward social irresponsibility, given the asymmetry that poses certain, immediate costs against uncertain, future benefits of more responsible conduct.²¹⁸ More fundamentally, management might face conflicts of interest that produce agency costs in the form of inefficiently irresponsible corporate conduct.²¹⁹ As we have explained, the ESV approach is best understood as largely involving concern about a genus of agency costs in the short-termism family.²²⁰ The key conceptual challenge for ESV theory is thus not how to explain all the cash on the sidewalk but rather to identify governance reforms or other interventions that might realistically reduce these agency costs and produce more cash.

In that vein, a second version of this critique of ESV takes a glass-half-empty perspective on management incentives. For example, Bebchuk and his coauthors argue that, to the extent that managers fail to engage in shareholder-value-maximizing CSR due to incentive problems that lead to short-termism, ESV offers no way out. As they put it: “[A]s long as corporate leaders have short-term incentives, pontificating to them about the importance of taking into account long-term effects, either in general or with respect to stakeholders in particular, would not address short-termism problems.”²²¹

Their claim exemplifies what economists have termed the “determinacy paradox.”²²² This problem arises when an analyst has a positive model of the actors in a system that generates predictions about how those actors will behave, but then nonetheless engages in normative arguments about how those actors should behave.²²³ If the analyst believes that the actors’ behavior is pinned down by the positive model, what exactly is the point of the normative arguments? That is the logical structure of Bebchuk and his coauthors’ critique, and it does indeed pose an important challenge for ESV theory.

But note that, as a preliminary matter, this basic challenge for ESV theory is shared by all normative arguments in corporate law scholarship. Economic analysis of corporate law relies on a rich set of positive models that explain the behavior of key actors in the system—officers, directors, shareholders, and the like. But in addition to all of their positive theorizing, corporate law scholars have a decidedly reformist bent. After diagnosing some set of pathologies in the corporate system, generally with the aid of a positive model, the typical scholarly article about corporate law then turns to reform proposals that aim to remedy the problem.²²⁴ But if all of the relevant decisionmakers’ behavior is pinned down by incentives, what is the point of this pontificating? If the positive model is right, then why would managers or directors, for example, care about the analyst’s normative arguments? This is a challenge even for normative arguments about what the law should be, since positive models in corporate law scholarship purport to explain even the content of corporate law itself, for example as the inevitable outcome of state competition for charters.²²⁵ The generality of this analytic challenge for normative arguments in corporate law scholarship has not previously been recognized.²²⁶

Are all normative arguments about corporate governance hopeless then? Thankfully, no. The way out of the paradox is to identify some set of actors that might ultimately be persuaded by the normative argument. The ability to persuade an actor in turn typically requires that the actor have both something to learn and incentives that align to some degree with the recommendation.²²⁷ Rather than leading to normative nihilism, the determinacy paradox should instead discipline us as corporate law scholars to be more explicit about the audiences we have in mind for our normative arguments and to explain why—despite our rich positive models—those arguments command attention. We need an unmoved mover in the system who might be open to the normative argument in order for it to make a practical difference.

Two key audiences who often play that role in corporate law scholarship, more or less explicitly, are institutional investors and government officials. To give one illustrative example, consider Lucian Bebchuk and Jesse Fried’s incisive book on executive pay.²²⁸ They argue that a range of common practices in executive pay stem from, and contribute to, managerial agency costs.²²⁹ For this analysis to deliver a practically useful normative payoff, however, requires there to be an audience for their arguments that might be influenced in such a way that the design of executive compensation improves. The authors argue in part that “[t]his is an area in which the very recognition of problems may help alleviate them,” asserting that “[m]anagers’ ability to influence pay structures depends on the extent to which the resulting distortions are not too apparent to market participants—especially institutional investors.”²³⁰ But they also advocate policy changes that would shift power from boards to shareholders, arguing that

[f]or there to be changes in the allocation of power between management and shareholders, investors’ demand for them must be sufﬁcient to outweigh management’s considerable ability to block reforms that chip away at its power and private beneﬁts. This can happen only if investors and policymakers recognize the substantial costs that current arrangements impose—as well as the extent to which solving existing problems requires addressing the basic problem of board unaccountability. We hope that this book will contribute to such recognition.²³¹

The determinacy paradox strikes us as easier to surmount for normative arguments in ESV theory than it typically is in corporate governance theory more generally. After all, ESV theory, by definition, pushes for reforms that are in the interests of both shareholders and other stakeholders so that multiple classes of actors in the system have interests that are to some degree aligned with the reform to corporate practice being urged and might therefore play a role in helping to bring it about.

Normative ESV arguments by academics, for example, might usefully target a range of audiences in the corporate system. Consider Alex Edmans’s 2020 book, Grow the Pie, which seems primarily aimed at teaching managers how focusing on the social value created by the firm is a surer path to shareholder value creation than seeking shareholder value directly.²³² The book provides a lucid account of the relevant empirical literature on these issues that we suspect has important lessons for managers and independent directors. Institutional investors might also benefit from his analysis and be persuaded to adjust their approach to using ESG factors in their investment process. This could well be an area in which clearer recognition of the agency cost problems that deter managers from considering social value may help alleviate them, as Bebchuk and Fried assert about executive compensation.²³³ And to the extent that failures to exploit all opportunities to engage in CSR in ways that benefit stockholders stem from mistakes due to limited information, the potential for ESV arguments to make a difference is even more straightforward.

In sum, the Panglossian argument that nobody could possibly have a useful new idea along the lines of ESV because if it were incentive compatible to adopt a practice that improved CSR in ways that benefit shareholders, corporations would already be doing it, proves too much. As well, as a positive matter, the increase in the use by various actors in the corporate system of normative arguments about corporate practices that sound in ESV terms is by our lights a phenomenon worth studying rather than simply dismissing. Consider, for example, the ESV argument advanced by Blackrock’s Larry Fink in his 2022 Letter to CEOs: “In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders.”²³⁴ The audiences for this argument include independent directors, managers, and other investors.

More concretely, the 2021 activist intervention at ExxonMobil by the hedge fund Engine No. 1 similarly illustrates the potential promise ESV holds for CSR. In the spring of 2021, Engine No. 1 initiated a proxy fight based on a platform that was heavily critical of the Exxon’s failure to grapple with the reality of a rapidly decarbonizing world.²³⁵ Critically, however, its central argument was that management’s failure to cut back on investment in oil production was bad for business, not just bad for the earth.²³⁶ However, with a stake amounting to a mere 0.02% of Exxon’s shares outstanding,²³⁷ Engine No. 1 had to win the votes of other institutional investors in order to succeed. In this regard, it reflected precisely the type of challenge faced by proponents of ESV ideas: namely, how could it convince other investors that Exxon was somehow failing to see how its existing policies were destroying long-term shareholder value? Consistent with our analysis of the limits of ESV, the answer was through highlighting a lack of information²³⁸ and a lack of incentives²³⁹ among Exxon’s management. In the end, its message resonated with a critical audience of institutional investors,²⁴⁰ allowing Engine No. 1 to win a contested director election to place three new directors on the board of ExxonMobil.

To be clear, we are not arguing that Engine No. 1 was correct in its critique of Exxon’s management on shareholder value grounds. Exxon’s management heavily disputed that claim, and we remain agnostic. Our claim instead is that the intervention was framed in ESV terms, and the key deciders—large institutional investors—appear to have evaluated Engine No. 1’s candidates based on shareholder value considerations.

B. A Research Agenda for ESV

We conclude by briefly outlining a set of research questions about ESV that we think would shed light on the ultimate scope for further improvements to CSR through ESV-motivated reforms and that we hope future scholarship will address.

First, how big is the gap between perfect ESV behavior (that is, fully realizing all opportunities to further stakeholder interests that also benefit shareholders) and actual corporate behavior with respect to various social issues? In some areas it may be that calls for reforms to corporate practices, even though ostensibly based on ESV considerations, are actually better understood as stakeholderist in nature. It may be that public policy is a better tool for responding to those cases than appeals for CSR. But in other areas there may be substantial scope for further improvements to corporate practice on ESV grounds.

Second, what are the main reasons that corporations fail to realize ESV opportunities? Investigating past episodes of reform to corporate conduct might reveal the extent to which such failures stem from lack of information versus incentive conflicts. For example, has recent empirical research documenting the firm value generated by treating workers well²⁴¹ led to the spread of such practices in the corporate world? Diagnosing the underlying causes of failure to engage in CSR in ways that benefit shareholders might in turn provide insights into how to intervene in the system to improve corporate performance.

Third, and relatedly, what are the contours of the ESV reform agenda with regard to interventions and corporate governance reforms that might improve CSR in ways that further shareholders’ interests? For example, to what extent do governance reforms intended to encourage longer time horizons in management decision-making affect CSR behavior? How can executive compensation arrangements advance ESV considerations? Do popular ESV-oriented interventions—such as enhanced climate disclosures, creating board risk oversight or “sustainability” committees,²⁴² and appointing independent directors with broader experiences—actually affect CSR decision-making?

Fourth, who exactly are the key actors who might be persuaded by ESV arguments for reform to corporate practices? To what extent are managers, independent directors, and institutional investors persuadable on different ESV issues to act to further such reforms?

CONCLUSION

At the turn of the twenty-first century, leading commentators announced an “end of history for corporate law,” declaring that “[t]here is no longer any serious competitor to the view that corporate law should principally strive to increase long-term shareholder value.”²⁴³ Yet the two decades since have witnessed continued developments in corporate law theory and practice that seek to find new pathways for generating more socially responsible corporate behavior. These include new shareholder-centric perspectives that go beyond shareholder value and focus managers instead on more holistic conceptions of shareholder welfare. And even within the traditional paradigm of shareholder wealth maximization, promising innovations abound, including in ways that might improve broader social outcomes. All of these developments suggest to us that the history of corporate law has not yet been fully written, and in this Article, we have tried to assess aspects of this latest chapter. Despite the seeming appeal of conceptualizing shareholder interests in broader terms, on closer examination shareholder welfarism offers little hope for improved corporate conduct. Rather, for those seeking to promote corporate social responsibility, the way forward is through a more thoroughgoing, dare we say enlightened, pursuit of shareholder value.

97 S. Cal. L. Rev. 417

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Robert P. Bartlett III*

* W.A. Franke Professor of Law and Business, Stanford Law School.

Ryan Bubb†

† Robert B. McKay Professor of Law, New York University School of Law. For helpful comments and discussions, we are grateful to Emiliano Catan, John Donohue, Alex Edmans, Jill Fisch, Stavros Gadinis, Jeff Gordon, Oliver Hart, Marcel Kahan, Louis Kaplow, Lewis Kornhauser, Zach Liscow, Dorothy Lund, Veronica Martinez, Curtis Milhaupt, Michael Ohlrogge, Frank Partnoy, Elizabeth Pollman, Ed Rock, Roberta Romano, Holger Spamann, Michael Simkovic, Jeff Strnad, Anne Tucker, Luigi Zingales, Jonathon Zytnick, and seminar participants at Columbia Law School, Cornell Law School, Duke University School of Law, Fordham University School of Law, Georgetown University Law Center, Harvard Law School, Hebrew University, NYU School of Law, Stanford Law School, University of Michigan Law School, USC Gould School of Law, the UC Berkeley/Duke Organizations and Social Impact Conference, and the Corporate Law Academic Workshop Series. Ginger Hervey provided outstanding research assistance.

Data Valuation and Law

April 2024April 2024Jordan Barry* & D. Daniel Sokol†

Data has become an increasingly valuable asset. Numerous areas of law—including contracts, corporate law, intellectual property (“IP”), antitrust, tax, privacy, and bankruptcy—require parties and courts to determine the value of assets, including data. Unfortunately, data valuation has been hindered by a lack of clarity over what data is and why it is valuable. This lack of clarity also increases the chances of legal decisionmakers valuing data in inconsistent ways, which would create further confusion, inefficiencies, and opportunities for regulatory arbitrage.

This Article proposes a unified framework for valuing data that will promote consistent valuations across fields of law. It begins by conceptualizing data as building blocks: It is of little value on its own. But when placed in skillful and creative hands, it can unlock choices for its holders—choices they would not otherwise have—that can generate tremendous profits. Thus, data constitutes what is known as a “real option.” This Article shows how using real options to value data can significantly improve upon existing data valuation practices.

INTRODUCTION

The rise of data analytics has been staggering. In 2021, 1.134 trillion megabytes were created every day, totaling 74 zettabytes for the year.¹ As large as this is, projections for 2022 are over 25% higher.² Big data and new information technology are changing the tools, business models, operations, and mindset that firms, nonprofits, and governments use every day, quietly transforming business and society.³

These changes come with challenges. A variety of legal regimes govern economic activity; in many instances, those legal regimes must determine the value of owning or using particular assets, including data.

For example, one area in which data valuation plays an important role is in contracting. Firms contract with each other daily with regard to the sale of data. This includes first-party data sales, such as when Target sells data that it has collected to Proctor & Gamble, as well as third-party data sales, in which data aggregators or brokers sell data that others have collected. If one party breaches the contract, what remedies are available to their counterparty?⁴ In corporate law, target boards have fiduciary duties to make sure their shareholders are being appropriately compensated during mergers and acquisitions. This requires having a handle on the value of the target firm’s assets, including its data.⁵ In tax, the taxation of intangible assets and specifically of data is a growing issue of concern.⁶

These questions can potentially be even thornier when specific aspects of data must be valued, rather than full ownership. To take another example, suppose that one firm’s negligence results in another firm’s proprietary data leaking to the public. To award damages, a court must determine how much the damaged firm lost from having the data become public—but how much is that?⁷ Similarly, in antitrust, when control of data plays an important role in anticompetitive behavior, is it ownership of the data itself that creates the problem, or the use of the data?⁸ Does sharing the data with competitors make matters better or worse?⁹ The rise of generative artificial intelligence (“AI”), which requires data for its machine learning models, may create additional concerns as to the value of various data usage rights.

Unfortunately, the difficulties of conceptualizing data have hampered law’s attempts to incorporate the data revolution into multiple legal doctrines. This has opened the door to confusion, inconsistency, and inefficiency. Decisionmakers have confused data with algorithms, and struggled with how to apply certain doctrines to the legal rights that data owners and data users possess. This increases the risks that regulators in different substantive areas of law, as well as in different jurisdictions, will take inconsistent approaches. This creates inefficiencies as parties subject to multiple regimes work to navigate them. Different legal regimes also creates opportunities for regulatory arbitrage, in which regulated parties take advantage of divergent regulatory rules to achieve the regulatory treatment they want while making only minor changes to their economic activities.

To address these concerns, this Article offers a general framework for valuing data based on real options valuation. The financial economics literature pioneered the use of real options to better assess business decision-making under uncertainty.¹⁰ This approach has since been extended beyond finance to address other areas of uncertainty.¹¹ Real option analysis provides a better path forward than the current patchwork of doctrinal and analytical approaches. A real options approach is conceptually correct and thus has the potential to ameliorate the confusion, inconsistency, and inefficiency of existing approaches. To our knowledge, this is the first article to utilize real options as a method to value data, in law or otherwise.

Along with its potential benefits as a method of data valuation, real options analysis does have its drawbacks. Real options theory is complicated, which creates implementation challenges that must be overcome, or at least managed, to achieve the benefits described above. That said, real options analysis is an improvement over existing approaches. Applying a more unified theory also allows for a more standardized approach that can then be tailored to specific doctrines and areas of law.

This Article proceeds as follows. Part I provides context regarding the big data revolution and the growing importance of data. In doing so, it reviews the extant theoretical and empirical literatures on data valuation. Part II identifies the implications of data valuation for law by providing some case studies across fields. It includes vignettes demonstrating the types of issues that emerge and some current legal approaches. Next, in Part III, the Article explores how real options analysis offers a viable potential solution to the current patchwork of legal approaches. The Article concludes on how agencies and courts would benefit from such an approach, notes limitations on the use of real options, and offers avenues of future research.

I. THE DATA REVOLUTION AND THE VALUE OF DATA

To understand the importance of data valuation methods to the law, one must understand two other, related points. First, one must have a grounding in why and how data is used in the modern economy. Second, one must consider how to think about how those use cases translate into value estimates.

A. Digital Transformation

To understand the role of data in the modern economy, one must consider three related points: (1) The increase in AI techniques that can generate value from data; (2) The increase in data to which such AI techniques can be applied; and (3) The amount of value that these techniques are creating. Understanding these dynamics allows us to explore specific case studies that apply these insights across a number of areas of law.

1. Generating Value from Data with AI

As a starting point, companies across the economy have moved to increasingly digitized, AI-enabled business strategies, producing profound effects on value creation and innovation.¹² We use the term AI broadly here, as a way to encompass algorithms that improve prediction and decision-making.¹³ There are different approaches to AI, such as neural networks and machine learning, among others.¹⁴

When thinking about data and AI, it can be helpful to consider a simple, three-tier vertical model of how companies and other actors use data and AI to further their goals.

Figure 1.

At the first stage is data. If AI is the product or output, data serve as the input. Data feed the needs of AI-enabled technologies. Data underlie machine learning and prediction models, and it is data that has fueled digital transformation.¹⁵ Without sufficient quantity and quality of data, many current AI techniques simply cannot produce very good results.

Data often is the input to the next stage—powering an algorithm. The algorithm itself is not the end of the production. Rather, the algorithm simply enables better prediction. It is at the stage of prediction where there are outputs to AI—outputs that can generate tremendous value.

For example, when a user types terms into a search engine, that engine might consider data about what sites other users who typed in similar terms ultimately clicked on (among other data) when deciding what results should appear. Diagnostic software might compare a patient’s MRI to millions of MRI images that have already been analyzed by doctors to estimate the likelihood that the patient has breast cancer. Data drives the AI, the AI makes predictions, and those predictions enable better decision-making, which creates economic value.

2. Increase in Data

While many facets of AI are themselves not new, the speed of data collection and processing have significantly improved these tools’ impact.¹⁶ Data is vast and the various ways to use it have grown significantly, such that there are distinct data-related strategies that firms may adopt.

The data ecosystem is worth exploring briefly. Data can be bought and sold like many other inputs.¹⁷ It can be acquired from public sources. It can be collected from what can be termed data suppliers. For example, first-party companies such as Netflix or Spotify can sell their data and databases to other companies—firms regularly sell large quantities of this type of data through basic business transactions.¹⁸ Third-party data brokers, apps and internet service providers (“ISPs”) that can provide locational or other data, and data aggregators also play significant roles in the data ecosystem.¹⁹ Data brokers buy and sell data, thereby allowing firms to acquire new data to make better predictions.²⁰ This increase in data sources is an important change, as it makes data more widely available. This both enables more actors to put it to use and to experiment and innovate with it.²¹

Indeed, data has become both a make and buy decision.²² That is, firms have significant opportunities to generate their own data—such as Target keeping track of what consumers buy at Target—and to acquire third-party data from other actors. This is especially true with respect to end-consumer data.²³

3. Amount of Value

What is this power of data? Typically, data is defined across four “V’s”: velocity, veracity, volume and variety.²⁴

http://www.americanbar.org/content/dam/aba/administrative/antitrust_law/comments/october-2019/clean-antitrust-ai-report-pt1-093019.pdf [https://perma.cc/F9S2-8P5Q]. Combined, these four Vs create data value. Velocity is the speed at which data is collected and used. Volume is the sheer amount of data that is generated, which (at least at present) overwhelms our ability to process it; there is more data than ever before and every day we create 328.77 million terabytes of new data.²⁵ Veracity goes to the increasingly important issues of data accuracy and trustworthiness. Finally, variety reflects the diversity of data types that can be collected and used, such as e-mails, PDFs, and videos.

Data may come from many sources. The general rule of data is that the more the data, the greater the ability to feed AI and the better the ability to improve prediction,²⁶ although there are limits to what data alone can do.²⁷ Data must be processed, via AI or otherwise, to reap benefits.²⁸ When properly processed, big data allows firms to improve their products and services and to develop new such products and services.²⁹

The academic and practitioner literature on data valuation is complex. First, there is the literature on data brokers. In some senses, the costs of data are lower now than ever before.³⁰ The reduced cost of data allows for the creation of a wide variety of sophisticated algorithms that can produce insights that would elude unassisted humans.³¹ The ability to utilize data to feed AI allows for opportunities to better create, appropriate, and deliver economic value not merely for AI-driven firms but for the different users of digital platforms such as advertisers, complementors, and customers.³²

This transformation creates significant economic value, but the drivers of that value are not well understood by courts and regulatory bodies. In some cases, regulation might stymie the use of data and chill innovation and investment.³³ In other cases, the potential portability of certain types of data has motivated increased legislative and regulatory action.³⁴ In other situations, courts have held that owners of certain types of data have certain rights, such as the right to exclude others from such data. The exact value—either of the underlying data itself or of the rights to exclude others—may not always be clear.³⁵ There are yet other areas in which data-related transactions occur on a regular basis, but which have not produced judicial decisions to date.³⁶

It is these sorts of complexities as to law and data to which we next turn.

B. Disagreements on How to Think About Data Creating Value

Valuing data presents conceptual challenges because data is unlike other assets, including other intangible assets. The first problem is to understand how even though data is a building block for constructing a final product, data is not like traditional tangible assets such as bricks and steel used to make a factory. Data can be collected and mixed in a number of different, complex ways. Further, unlike bricks, data is non-rivalrous; more than one firm can use the same data.³⁷ For instance, someone’s driving history can be used at the same time by multiple firms, in the same or different industries (for example, advertisers, insurance companies, credit card companies). As Jones and Tonetti explain:

An analogy may be helpful. Because capital is rival, each firm must have its own building, each worker needs her own desk and computer, and each warehouse needs its own collection of forklifts. But if capital were nonrival, it would be as if every auto worker in the economy could use the entire industry’s stock of capital at the same time. Clearly this would produce tremendous economic gains. This is what is possible with data.³⁸

Thus, non-rivalry means that valuation may be harder across a number of the traditional measurements.

Further complicating data is that it is (mostly) non-exclusive.³⁹ For example, if someone collects public records about home purchases into a comprehensive database, that does not prevent others from collecting that same information in the same way. This is a stark contrast from some other intangible assets, including traditional forms of IP such as patents and copyrights, which create value by conferring exclusive rights on their holders.⁴⁰

Both of these indicia suggest that the underlying value of the data, rather than that of the algorithm, may be small. When the input (data) is easily available to all, it is the actor’s ability to make use of the input—that is, the algorithm—that creates the value, not the input itself. For example, a classic crème brûlée recipe has only four ingredients—cream, sugar, egg yolks, and vanilla. All of these items are widely available. The ability to charge a premium for the final product is a function of the baking skill of the pastry chef.

Beyond non-rivalry and non-excludability, some regulation, such as the European Digital Markets Act⁴¹ requires fair, reasonable, and non-discriminatory (“FRAND”) licensing. Even in IP and antitrust, FRAND terms are not always clearly understood.⁴² It stands to reason that in data, with fewer cases to provide guidance across different areas of law, the nature of FRAND obligations is even less clear. Further, certain types of data have sharing requirements in practice that may change the valuation of data, such as requirements for data portability.

Data is also unlike some other intangible assets because of the speed at which data can become obsolete.⁴³ Much data gets stale over time.⁴⁴ This suggests that much data is a diminishing asset, something which IP such as patents or copyrights do not face nearly as quickly because those rights last for longer periods.

II. THE IMPLICATIONS OF DATA VALUATION FOR LAW

There are many areas of law for which valuation of various assets is important. Data is an increasingly valuable asset. Unfortunately, there is currently relatively little law on how to value data. Courts and regulators have generally avoided the question whenever possible, perhaps out of concern for the difficulty of the problem, or uncertainty on how to proceed, and often such cases get decided upon other grounds. This raises the chances that different legal areas will use different valuation methods. Such inconsistency creates dilemmas as to how to allocate legal rights and responsibilities. Perhaps the clearest way of understanding this tension across areas of law is to consider the purpose of damages. Damages exist to compensate a potential victim for violations of law and/or to deter the violator from doing so again.⁴⁵ Methods across areas of law might include: (1) a cost-based approach based on the replacement cost; (2) a market-based approach based on similar acquisitions of data (or companies with data); and (3) an income-based approach, to the extent that the data is producing income via sales or even licensing. To this, we add the importance of a fourth possibility, an options-based approach. Often, outcomes seem to be highly contextual rather than based on valuation methodology.⁴⁶ A lack of consistency is significant because of the growing stake of data as an important part of economic activity.

Which approach ultimately to take across areas of law such as IP, antitrust, mergers and acquisitions (M&A), bankruptcy, torts, and other areas of law varies. One important driver is what information courts and parties can easily measure. When contracts (and comparable transactions) are not easy to find, private negotiations between contracting parties in the shadow of the law are another important driver. These questions become more salient as we try to understand how issues involving big data reverberate across a number of areas of law and in terms of the value of data overall. The biggest question is how much value do we think is in big data?⁴⁷

A. Valuation Is Important to Many Areas of Law

Below we offer some examples of how data valuation plays a role across various areas of law. We highlight these examples as a way to understand some of the complexity that requires a more generalized rethink as to valuation method of data. Understanding these complexities helps clarify the value of data as well as some of the struggles that different areas of law are currently experiencing as they seek to value data.

1. Antitrust

Antitrust has tried to address the questions of competition and the exercise of market power in two contexts—mergers and conduct cases. These produce two types of antitrust cases—those where data is an input and those in which data is a product. However, there is little caselaw in each area. Consequentially, the problem with both sets of circumstances is that we tend not to see litigated cases that get to the valuation issue of the data.

Antitrust primarily addresses behavior one of two ways. The first is through ex ante enforcement through merger control. Essentially, regulators can block mergers that are expected to produce antitrust problems. On the mergers side, most cases do not go to court, which means that litigated cases may not be representative. Even in those cases for which there is a judicial opinion, not all issues may get addressed. Scholars have expressed general frustration with what gets decided under the shadow of merger law.⁴⁸ Thus, the basis for decisions on many issues, including data valuation, is limited or incomplete. As Professors Katz and Shelanski lament, “The overall picture of current merger enforcement practice is, therefore, murky.”⁴⁹

Cases provide some guidance on how antitrust courts and agencies think about data, which gives some insight on how to think about data’s value. Yet much uncertainty remains. As of this writing, no mergers have been blocked on data theory grounds in the United States. Nor have there been any decided cases that explain the valuation method used for such transactions that weigh the data rather than its use to a specific platform.

In the case of data, let us begin with mergers and the possibility that data is itself the market. One such deal that included data as the market is the 2014 CoreLogic-DataQuick merger.⁵⁰ In that transaction, the Federal Trade Commission cleared the transaction with a database divestiture but did not explain the valuation technique employed. Alas, this has been typical with regard to antitrust analysis of mergers that include data as a market. Similarly, people generally have not discussed mergers that include valuable data as an input (for example, Microsoft/LinkedIn, Apple/Shazam) as matters of valuation. At best, there are transactions that have received some sort of conditional approval such as Nielsen/Arbitron but without an explicit discussion of data valuation.⁵¹

Antitrust, through public and private enforcement, polices against anticompetitive conduct by one or more firms that harms competition. Conduct cases in antitrust involving data issues have not resolved the data valuation question, either. Complicating antitrust further is that duties to deal with competitors are limited, which means that such data sharing cases do not get to the data valuation stage of the case. Rather, these cases are decided based on the premise that data is not required to be shared in the first place. Yet, understanding such cases helps to explore the value of data because the discussion helps to inform the value of data use and ownership.

For example, Section 2 of the Sherman Act generally imposes no requirements to deal with one’s competitors.⁵² In Aspen Skiing Co. v. Aspen Highlands Skiing Corp., the Supreme Court held that there are some limited circumstances under which Section 2 requires monopolistic firms to deal with their rivals.⁵³ Courts have further narrowed Aspen Skiing’s holding since. Most recently, the DC Circuit dismissed a monopolization case that forty-six states brought against Meta based on the court’s narrow reading of Aspen Skiing.⁵⁴

Cases brought under other provisions of the Sherman Act have also implicated the value of data. However, much like the Section 2 monopolization cases, courts examining Section 1 of the Sherman Act have offered little guidance on how to value data. For example, in Authenticom, Inc. v. CDK Global, LLC, Authenticom brought a claim against CDK for closing its system for data and thereby barring data scrapers from access. The Seventh Circuit ruled in favor of CDK on the basis that forced data sharing was inconsistent with precedent.⁵⁵ Because of this ruling, which dismissed the case on essential facilities grounds, the data valuation issue was never addressed. Of course, that does not mean that the data does not have value, merely that the court was able to dispose of the case without determining what the data’s value was.

Similar to antitrust enforcement, competition regulation increasingly plays an important role in big data valuation. This comes up specifically in the case of the Digital Markets Act (“DMA”), the European approach to ex-ante regulation of data.⁵⁶ Regarding “gatekeeper” firms, the DMA states:

The gatekeeper shall provide to any third-party undertaking providing online search engines, at its request, with access on fair, reasonable and non-discriminatory terms to ranking, query, click and view data in relation to free and paid search generated by end users on its online search engines. Any such query, click and view data that constitutes personal data shall be anonymised.⁵⁷

Of course, data from a gatekeeper will not generate profits on its own; gatekeeper data must still be combined with some effort by recipients. But this reality makes it harder to assess the incremental profits the recipient earns as a result of having access to the data.⁵⁸

2. Business Law

Business law increasingly confronts data valuation. Unfortunately, it does so in ways that do not always show the precision that we believe is necessary to unlock a more accurate value of data assets. For example, data valuation questions arise within the context of both mergers and acquisitions (“M&A”) and bankruptcy. A number of factors arise in each context that make data valuation more difficult. Within the merger context, the purpose of valuation is to best help the acquiring and target boards to fulfill their fiduciary duties to ensure that the price paid for the acquisition is an appropriate one.

Overall, corporate law has grappled with how to account for intangibles. Many assets, including branding and intangibles such as IP, are lumped together under the heading of “goodwill.” However, the goodwill from reputation and branding is different than goodwill that is the basis of a regenerative asset such as data. Further, how data is stored and how easily it can be processed and integrated make such a valuation more challenging.⁵⁹

Different data sets may have different levels of privacy requirements, such as data that is protected under the Health Insurance Portability and Accountability Act (“HIPAA”) versus commercial health data, which has less stringent requirements. Identifying what sort of data companies may keep, for how long, how stale such data get, and the potential liabilities of such data are complex.⁶⁰ Yet, there are very few cases that offer direct guidance on how to value data in the corporate and M&A setting. Thus, data valuation ends up a financial black box with potentially large implications if and when such cases go to litigation. This sort of uncertainty creates potential risk for deals, particularly those deals for which the underlying data may be a significant asset.⁶¹

Finally, unresolved issues include requirements of how to store data⁶² as well as how to destroy data.⁶³ The lack of uniform federal privacy legislation makes such analysis more difficult. Federal agencies, especially the FTC, enforce privacy protections,⁶⁴ but private actions also play a role.⁶⁵ Moreover, states can impose additional rules on top of the federal ones. For example, California took inspiration from the General Data Protection Regulation (“GDPR”) and adopted the California Consumer Privacy Act (“CCPA”) and the California Privacy Rights Act (“CPRA”).⁶⁶

This issue of data valuation similarly plays itself out in the bankruptcy setting. In some settings, the data itself, such as customers’ spending behavior,⁶⁷ may be the asset. Take the example of the bankruptcy proceeding for Caesar’s Entertainment Operating Corp casinos.⁶⁸ Creditors viewed the company’s data (customer-specific data on spending habits) as one of the company’s most important assets. Yet, as is often the case in bankruptcy proceedings, this issue was resolved through negotiations in the shadow of the law, leaving behind no case law to help shape future data valuation inquiries. On one side, there was a note by the bankruptcy court examiner that properties of Caesar’s that were sold off were worse off because they could not leverage the data of the rewards program—but at the same time, the examiner recognized that it would be difficult to sell the rewards program to other buyers.⁶⁹ Thus, the court never ultimately decided how to value the data in light of these complexities. This is common in bankruptcy, where few decisions come in the form of a bankruptcy court ruling.⁷⁰

3. Synthesis

These case studies lead to a number of conclusions. First, courts do not always get to valuation questions. This may be because cases are decided on other grounds for legitimate reasons or because judges feel uncomfortable getting to the actual valuation and so they rule on different grounds to avoid the exercise. Second, there is uncertainty of valuation methodologies across areas of law, as well as potential for some such issues to simultaneously emerge in multiple contexts (for example, M&A and antitrust, M&A and bankruptcy, antitrust and data privacy) that may employ different methodologies. Accordingly, we believe that a more consistent approach may better facilitate business certainty with regard to valuation models.

III. REAL OPTIONS AS A SOLUTION

Real options analysis provides a framework that can be used to value data across different contexts, including different areas of law. We provide a basic introduction to real options before discussing the advantages and disadvantages of using them to value data. We then discuss how this approach might be employed in the real world.

A. Real Options

An option is the right, but not the obligation, to do something. For example, if Maria has the right to paint her house green, to travel to Paris, or to order pizza for lunch, those are all options.

In finance, the most well-known options give their holders the right to buy or sell a specific quantity of a particular asset at a specified time for a specified price. These options are known as financial options.⁷¹ For instance, Jacinta might have the right to buy 1,000 shares of Apple stock in three months’ time at a price of $150 per share. That right would be quite valuable if, three months from now, Apple stock is trading at $200 per share: Jacinta could buy 1,000 Apple shares for $150,000,⁷² then immediately sell them to other investors for $200,000,⁷³ netting her $50,000 of profit.⁷⁴

Real options, like financial options, reflect the value of being able to react to changing conditions. However, rather than representing merely the right to buy or sell, they can encompass one’s ability to change one’s behavior in all manner of ways.⁷⁵ This ability to change course can be extremely valuable. A pair of simple, stylized examples help illustrate this point.

Example 1. Suppose that you are an executive at a company, and you are considering whether the company should launch a new product. It is unclear how consumers will react to the product; they may love it (iPods) or they may not (Zunes). Suppose that there is a 50% chance that the product will be a success, in which case it will generate $10 million of profits per year for the next ten years.⁷⁶ On the other hand, there is a 50% chance that the product will be a commercial failure, in which case it will cost the company $20 million per year for the next ten years.

Under the facts of Example 1, the company should not launch the product.⁷⁷ Half of the time, the product will produce $100 million of profit;⁷⁸ the other half of the time it will produce losses of $200 million.⁷⁹ On average, then, launching the new product will cost the company $50 million.⁸⁰

Example 2. The facts are the same as in Example 1, except that now the company has the ability to stop making the new product after its first year on the market.

Under the facts of Example 2, the company should absolutely launch the product. When the product is a success, it will keep the product on the market. Everything will remain the same in that circumstance, and the company will earn $100 million of profit. But when the product is a commercial failure, the company can now cut its losses after one year. By doing so, the company will reduce its total losses when the product fails from $200 million to only $20 million.⁸¹ On average, the new product will now generate $40 million of profit.⁸²

Taken together, Examples 1 and 2 show how valuable the ability to change course can be. Simply having the ability to give up on the product when it is not profitable transforms a project that loses $50 million into one that earns $40 million—a $90 million swing.⁸³ Since the only difference between these two Examples was the real option to give up on the product after a year, that option is worth $90 million.

Real options come in a variety of common forms. Companies can expand or contract their businesses, such as by opening new locations or closing existing facilities. They can accelerate or delay projects, such as by hiring more workers to build a factory or pausing construction. They can switch production processes, trade-off between workers and automated processes, or shift production between in-house divisions and outside contractors. Taken together, real options encompass a wide range of actions spread across an expansive set of possible circumstances.

B. Real Options as a Model for Data Valuation

As a framework for valuing data, real option analysis has many virtues. First, the value of data is that it enables a person to take new actions that were not available previously.⁸⁴ Real option analysis is how finance values the ability to take new courses of action. Thus, as a conceptual matter, real option analysis is a natural fit for valuing data. Further, real option analysis is a flexible and expansive tool that can be used to model an extraordinarily wide range of scenarios and circumstances. This makes it capable of handling the range of new possible outcomes that data, paired with modern statistical analysis, can produce.

Moreover, as noted previously, current approaches to data valuation offer little guidance. This increases the potential for confusion, inconsistency, and regulatory arbitrage. In some instances, they assign data no value at all.⁸⁵ Applying real options analysis to data valuation would help ameliorate all of these problems. Real options analysis gives a clear theoretical framework, providing guidance and structure for those trying to determine data’s value. This would help align and unify the disparate valuation approaches that have been employed to date. Improved alignment would also reduce the opportunities for regulatory arbitrage that can result when different regulatory regimes adopt inconsistent valuation methodologies.⁸⁶

While real option valuation offers a number of benefits, it also entails a significant drawback: correctly valuing real options is quite difficult. To do so precisely, one must anticipate, and then think through, all of the possible future states of the world, their respective likelihoods of occurring, how one would respond to them all, and how much one would ultimately reap as a result. From there, one can work backwards from these endpoints to determine the right course of action at each decision point and the scenario’s expected value overall. This is a tall order—especially when valuing data, an asset whose value depends in part on future developments in statistical analysis.

To put a somewhat finer point on it, consider financial options once more. Valuing financial options is a difficult mathematical problem. Fischer Black, Myron Scholes, and Robert Merton’s options pricing model was a watershed advance for the field, ultimately garnering a Nobel Prize in 1997.⁸⁷ Even with the solution in hand, the mathematics remain challenging. As important as options are to modern finance, many undergraduate finance courses do not cover the application of their formula, let alone its derivation.⁸⁸

Valuing real options is even harder than valuing financial ones. There are more possibilities to consider, more actions available, and more variables of interest.⁸⁹ It would be extremely difficult to write and apply a regulation with a precise formula that generalized across different types of data from diffuse contexts and industries. The complexity of real options also poses challenges for parties, for judges, and for juries.

This is a serious problem. A valuation method that has attractive theoretical properties, but that is impossible to apply in practice, would seem to be of extremely limited value.

C. A Way Forward

Despite its complexities, we nonetheless believe that real options analysis holds great promise as a framework for valuing data. If one wants to value data accurately, one must have the right model. In our view, real options analysis captures what makes data useful, and thus offers the best framework to think about data’s value. If data’s value is complicated and depends on many factors, then this is not a fault of the model; the model can only help a user identify and focus on the things that matter, even if that’s a long list.⁹⁰ Put another way, to get the right answer, one must ask the right question. The right question may be a hard one—but answering a different, easier question means avoiding the problem, not solving it.

Moreover, it is worth stating what may be obvious: the real options approach need not be perfect to be an improvement over existing practices.⁹¹ Getting all interested parties asking the right question—or even the same question—would be valuable. It would reduce conceptual confusion, inconsistencies, and opportunities for regulatory arbitrage. Moreover, real options always have positive value.⁹² Whenever taking an available course of action is profitable, one can do so; if that course of action is not profitable, one can simply decline to take that action.⁹³ Real options analysis would underscore the point that data has value and thus should not be ignored.⁹⁴ These combined benefits may be considerable.

Furthermore, if decisionmakers use real options analysis to value data, they may find ways to ameliorate the complexity problems over time. Trial and error can produce insights. As agencies and courts experiment with the framework, approximations may arise that are easier to calculate. Even if these approximations are not precisely accurate, they may be close enough to be useful. In particular, they may be significant improvements over existing data valuation methods.

That dynamic—of finding heuristics that are simpler but informative—has been borne out in other settings. For example, basic corporate finance theory teaches that profit-maximizing firms should use net present value analysis to allocate their resources.⁹⁵ Yet many firms, including large, sophisticated ones, analyze other metrics as well.⁹⁶ These metrics include the profitability index, which measures how much profit a project generates per dollar invested, and the payback rule, which considers how long it takes for a project to repay its startup costs.⁹⁷ Both of these simple rules have well-known flaws that can cause them to produce absurd results.⁹⁸ Why, then, do they remain common?

One possible answer is that these simple rules produce information about projects’ real option value. For example, recouping one’s initial investment means that those recovered dollars can be redeployed toward other purposes, increasing the range of decisions available to the firm.⁹⁹ Researchers have found that, under a variety of circumstances, such simple rules can allow firms to make nearly optimal decisions.¹⁰⁰ The relative accuracy of these rules, combined with their simplicity, may explain why firms use them more frequently than real options analysis.¹⁰¹ These types of heuristics, and others, may prove useful to valuing data.

Alternatively, real option analysis can inform other modes of valuation. One response to complicated valuation problems is the method of comparables: To determine an item’s value, identify similar items whose values are known (that is, comparables), then make appropriate adjustments. This method is frequently employed to value items such as real estate, art, and active businesses.¹⁰² Under the right circumstances, this method can produce accurate valuations.

The method of comparables can be tricky to apply to data for several reasons. First, it may be difficult to identify similar data sets with known values. Sale prices are often used as the measure of value for comparable items, and sale prices for data may not be public. But even when sale prices are available, data sets can differ from each other along a variety of dimensions. Which of those differences are important, and how much should value estimates be adjusted to account for these differences? For example, which is more valuable—a data set that is twice as large, or one that includes data drawn from twice as much time? Is data more valuable when the future is more uncertain or less? These are but a few of the dimensions one might wish to consider.

Real option theory sheds insight into some of these questions. It identifies a number of factors that directly affect real option value, and thus the value of data. These factors can then be considered and adjusted for when using comparables to value data.

One factor that informs a data set’s value is its informational uniqueness. To what extent does that data tell its user something that they otherwise would not know? Having insights that no one else has can be extremely valuable. On the other hand, when competitors have access to comparably informative data, profitably exploiting the data gets harder, as competition among firms puts the firm’s counterparties in a comparatively stronger position.

Two other factors stem from the payoffs available from exploiting data. Unsurprisingly, the higher the potential future profits that the data can unlock, the more valuable the data is. What is less obvious is that the value of data increases as the future becomes less certain. This is somewhat abnormal; in finance, safer cash flows are usually considered more valuable than riskier ones.¹⁰³ Options are an important exception to this general rule, however. Because options allow one to change behavior in response to different circumstances, they actually become more valuable when a project has a wider range of possible future payouts.¹⁰⁴

Another important factor in real option valuation is the length of time over which one can continue to change one’s behavior.¹⁰⁵ The longer that one can change direction, the more actions that one has available, and the more valuable the option. In the data context, this corresponds to the useful life of the data. As noted earlier, some data remains useful and informative for years or even decades; other data grows stale quickly.¹⁰⁶ All else equal, the former is more useful than the latter.¹⁰⁷

Relatedly, interest rates affect the value of real options, and thus of data.¹⁰⁸ Profits earned in the future are more valuable when interest rates are low than when rates are high.¹⁰⁹ Interest rates have more of an effect on data with a longer useful life, and less of an effect on shorter-lived data.

How quickly and cheaply one can change one’s behavior also affects a real option’s value. The quicker one can act, the more nimble one is, the more ways in which one can profitably change one’s behavior. Similarly, options that can be exercised at little cost are more valuable than those which are expensive to utilize.¹¹⁰

These factors are more amenable to forming legal standards than a strict formula for valuing real options would be. Accordingly, they may provide a path forward for data valuation.

Finally, real options theory could inform attempts to value data in a different way. Experience may convince policymakers that valuing data is simply too hard, and that they should act accordingly. Such actions could take multiple forms.

One response to a difficult valuation problem is to simply exit the field as much as possible. Section 83 of the Internal Revenue Code provides a good example of this approach.¹¹¹ It addresses the questions of how much income a taxpayer has when they receive property in exchange for performing services, and when the taxpayer is taxed on that income. Section 83’s general rule is that employees are taxed on property based on its fair market value, and they are taxed at the time it becomes clear that they will get to keep the property.

For example, startup companies frequently include some form of equity interest in the company as part of their employees’ compensation packages.¹¹² These interests can come in various forms, including stock, restricted stock units, or stock options.¹¹³ If employees leave their employer before a certain date—if they quit to take a new job or are fired—then they forfeit some or all of their equity interests. The date after which an employee gets to keep an equity interest, even if the employee leaves the firm, is known as that interest’s vesting date. If an employee leaves the employer before the vesting date, they lose their unvested equity.

Under the general rule of Section 83, an employee is typically taxed on the value of their equity interest at the time those interests vest.¹¹⁴ However, as noted previously, valuing stock options is difficult. Accordingly, Section 83 exempts stock options from its general rule—unless they have a visible market price (in which case they are easy to value).¹¹⁵ Instead, employees who receive stock options generally are not taxed until they exercise those options, at which point they receive stock in their employer, which is easier to value.¹¹⁶ This limits taxpayers’ ability to take aggressive valuations of hard-to-value stock options.¹¹⁷ Regulators can adopt similar tactics in the context of data valuation.

A potentially complementary approach would be to foster a market for data, with standardized features, in order to make private transaction prices more visible and data sets more easily comparable. In a number of instances, legislative and regulatory interventions have helped shift markets characterized by bespoke arrangements toward more commoditized features and greater transparency.¹¹⁸ Such standardized markets can make the job of valuation much easier, and can also protect unsophisticated parties operating in those markets.¹¹⁹

CONCLUSION

While data has become increasingly valuable and important, the law’s attempts to value data have lagged, remaining confused and underdeveloped. Situating data valuation law within an economic framework built on real options analysis would resolve conceptual confusion among courts, agencies, and legislatures. It would also create greater predictability among private actors, which in turn would reduce the risk of regulatory uncertainty and facilitate investment. A clearer legal approach that cuts across different areas of law and jurisdictions would limit opportunities for regulatory arbitrage across fields of law addressing data valuation. Furthermore, a consistent approach reduces politicization of results, preventing favored groups from shifting unclear legal rules in their favor when there is no economic basis for such a shift. A consistent approach also makes decision-making less opaque, thereby increasing the legitimacy of outcomes.

While the real options approach is not without potential problems, we believe that it is the least bad alternative available. Moreover, increased use of real options analysis over time may generate heuristics that simplify data valuation by courts and agencies. These heuristics may prove so effective that private parties incorporate them into arm’s length transactions. Further research is needed to identify what heuristics work best in the data valuation context, as well as how to encourage more transparent and comparable pricing in burgeoning data markets worldwide.

96 S. Cal. L. Rev. 1545

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Jordan Barry*

* John B. Milliken Professor of Law and Taxation, USC Gould School of Law.

D. Daniel Sokol†

† Carolyn Craig Franklin Chair in Law, Professor of Law and Business, USC Gould School of Law and USC Marshall School of Business, and Senior Advisor, White & Case LLP.

The New Data of Student Debt – Article by Christopher K. Odinet

September 2019December 2019Southern California Law Review Admin

Article | Regulations
The New Data of Student Debt
by Christopher K. Odinet*

From Vol. 92, No. 6 (September 2019)
92 S. Cal. L. Rev. 1617 (2019)

Keywords: Student Loan, Education-Based Data Lending, Financial Technology (Fintech)

Abstract

Where you go to college and what you choose to study has always been important, but, with the help of data science, it may now determine whether you get a student loan. Silicon Valley is increasingly setting its sights on student lending. Financial technology (“fintech”) firms such as SoFi, CommonBond, and Upstart are ever-expanding their online lending activities to help students finance or refinance educational expenses. These online companies are using a wide array of alternative, education-based data points—ranging from applicants’ chosen majors, assessment scores, the college or university they attend, job history, and cohort default rates—to determine creditworthiness. Fintech firms argue that through their low overhead and innovative approaches to lending they are able to widen access to credit for underserved Americans. Indeed, there is much to recommend regarding the use of different kinds of information about young consumers in order assess their financial ability. Student borrowers are notoriously disadvantaged by the extant scoring system that heavily favors having a past credit history. Yet there are also downsides to the use of education-based, alternative data by private lenders. This Article critiques the use of this education-based information, arguing that while it can have a positive effect in promoting social mobility, it could also have significant downsides. Chief among these are reifying existing credit barriers along lines of wealth and class and further contributing to discriminatory lending practices that harm women, black and Latino Americans, and other minority groups. The discrimination issue is particularly salient because of the novel and opaque underwriting algorithms that facilitate these online loans. This Article concludes by proposing three-pillared regulatory guidance for private student lenders to use in designing, implementing, and monitoring their education-based data lending programs.

*. Associate Professor of Law and Affiliate Associate Professor in Entrepreneurship, University of Oklahoma, Norman, OK. The Author thanks Aryn Bussey, Seth Frotman, Michael Pierce, Tianna Gibbs, Avlana Eisenberg, Richard C. Chen, Kaiponanea Matsumara, Sarah Dadush, Jeremy McClane, Emily Berman, Donald Kochan, Erin Sheley, Melissa Mortazavi, Roger Michalski, Kit Johnson, Eric Johnson, Sarah Burstein, Brian Larson, John P. Ropiequet, the participants and the editorial board of the Loyola Consumer Law Review Symposium on the “Future of the CFPB,” the participants of the Central States Law Schools Association Conference, the faculty at the University of Iowa College of Law, and Kate Sablosky Elengold for their helpful comments and critiques on earlier drafts, either in writing or in conversation. This Article is the second in a series of works under the auspices of the Fintech Finance Project, which looks to study the development of law and innovation in lending. As always, the Author thanks the University of Oklahoma College of Law’s library staff for their skillful research support. All errors and views are the Author’s alone.

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92_6_Odinet

Regulating Bankruptcy Bonuses – Article by Jared A. Ellias

March 2019July 2019Southern California Law Review Admin

From Volume 92, Number 3 (March 2019)
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Regulating Bankruptcy Bonuses

Jared A. Ellias [*]

In 2005, the perception that wealthy executives were being rewarded for failure led Congress to ban Chapter 11 firms from paying retention bonuses to senior managers. Under the new law, debtors could still pay bonuses to executives—but only “incentive” bonuses triggered by accomplishing challenging performance goals that go beyond merely remaining employed. This Article uses newly collected data to examine how this reform changed bankruptcy practice. While relatively fewer firms use court-approved bonus plans after the reform, the overall level of executive compensation appears to be similar, perhaps because the new regime left large gaps that make it easy for firms to bypass the 2005 law and pay managers without the judge’s permission. This Article argues that the new law was undermined by institutional weaknesses in Chapter 11, as bankruptcy judges are poorly situated to analyze bonus plans and creditors have limited incentives to police executive compensation themselves.

TABLE OF CONTENTS

Introduction

I. The Rise of Bankruptcy Bonuses and the 2005 Bankruptcy Reforms

A. The Rise of Bonuses as a Prominent Feature of
Chapter 11 Bankruptcy

B. As the Economy Fell into Recession in the Early 2000s,
the Public Salience and Controversy over Chapter 11 Bonuses Increased

C. Congress Empowers the Oversight of Managers and Restricts Retention Bonuses with the 2005 Reform

II. Theoretical Problems with the 2005 Reform

III. Evidence of Design Problems in the 2005 Reform

A. Sample and Data Gathering

B. Assessing Evidence of Design Flaws in the 2005 Reform

1. Assessing the Effect of the Reform: Evidence of
Higher Costs and Regulatory Evasion.

2. Assessing the Limitations of the Bankruptcy Judge

3. Assessing the Role of Creditors and the U.S. Trustee

IV. The Case for RETHINKING the 2005 Reform

Conclusion

Appendix: Methodology FOR Analyzing
Bankruptcy Costs

Introduction

When large firms struggle financially, they usually restructure by firing employees, cutting the pay of those who remain, and cancelling promised pensions. While these measures are often necessary, they can seem unfair when highly paid senior managers do not appear to share in the pain.[1] This unfairness became a major public issue in the early 2000s, as formerly–high-flying titans of corporate America like K-Mart, Enron, and WorldCom filed for headline-grabbing Chapter 11 bankruptcies and subsequently paid millions of dollars in bonuses to senior managers.[2] The ensuing public outrage contributed to a growing sense that the economy had become rigged in favor of high-level executives who prospered no matter how poorly their companies fared.[3]

In 2005, Congress responded to this public outcry by banning Chapter 11 debtors from paying retention bonuses to high-level executives.[4] This legal reform eliminated part of then-existing bankruptcy practice, as the largest firms typically paid retention bonuses shortly after filing for bankruptcy on the theory that bonuses were needed to keep employees working hard to turn the firm around.[5] However, the reform did not ban Chapter 11 debtors from paying any type of bonus to senior managers—only bonuses triggered by a manager’s mere continued employment. Under the new regime, Chapter 11 debtors can pay bonuses if they convince a bankruptcy judge that the bonuses are “incentive” bonuses, or bonuses managers would only receive if they accomplish specific, challenging performance goals.[6]

This Article offers the first comprehensive analysis and empirical study of how the 2005 law changed corporate bankruptcy practice. As further explained below, the data suggest that the reform appears to have had little substantive effect on executive compensation.[7] The evidence suggests that this is primarily due to two flaws that undermine the reform. First, the new law only regulates payments characterized as bonuses during the period when firms are in Chapter 11 bankruptcy. Firms can easily sidestep the new law by paying managers before or after the bankruptcy case, and many appear to have done so.[8] Second, bankruptcy law institutions have struggled to administer the law. A rule that bans retention bonuses while allowing incentive bonuses requires bankruptcy judges to make fact-intensive determinations about the “challengingness” of a proposed bonus plan. Unfortunately, bankruptcy judges often lack the information and expertise necessary to perform this inquiry.[9] Although creditors would appear to be well-situated to assist the judge and scrutinize executive compensation themselves, they have little economic incentive to quibble over relatively small bonuses, because doing so might anger the managers with whom they need to negotiate more important Chapter 11 issues.

This Article proceeds as follows. Part I describes how bankruptcy bonuses became a frequent subject of public outrage and how Congress changed the law in 2005 to alter the process through which Chapter 11 debtors pay executive bonuses. Part II explains potential flaws in the design of the reform and develops hypotheses about how those design flaws arguably doomed its implementation. Part III summarizes the sampling and data gathering methodologies and then presents evidence that illustrates the design flaws predicted in Part II. One question that this Article does not answer is whether there actually was a problem that needed fixing prior to the 2005 reform. Most Chapter 11 attorneys appear to believe so, but this is an empirical question that is impossible to answer with available data. However, because the evidence presented in this Article does not support the view that Chapter 11 executive compensation was improved by the reform, Part IV argues that Congress should rethink the 2005 reform.

I. The Rise of Bankruptcy Bonuses and the 2005 Bankruptcy Reforms

Part I first summarizes how the phrase “bankruptcy bonus” entered the public lexicon and why these bonuses became so controversial. Next, I explore the legislative history of the 2005 reform, before discussing the ways in which the new law altered the ability of Chapter 11 debtors to pay bonuses to their executives.

A. The Rise of Bonuses as a Prominent Feature of Chapter 11 Bankruptcy

For the first two decades of the Bankruptcy Act of 1978, bonus plans approved by bankruptcy judges were not an important part of bankruptcy practice.[10] The new Bankruptcy Code contained few provisions dealing with executive compensation, and bankruptcy courts routinely granted uncontroversial motions to pay employees their promised salaries.[11] This quiet period ended in the early twenty-first century, as Chapter 11 debtors and the law firms advising them developed a practice of paying retention bonuses outside the ordinary course of business after filing for bankruptcy.[12] Generally, firms that wanted to pay retention bonuses would file a motion asking the judge to approve “Key Employee Retention Plans,” or “KERPs,” which created schedules of payments of retention bonuses.[13]

Chapter 11 debtors offered two main justifications for why they needed to pay retention bonuses. First, they usually pointed to the value that the debtor’s current employees contribute to the restructuring effort.[14] Incumbent employees often have firm-specific knowledge that would be costly to lose and hard to replicate in new employees.[15] Even if the knowledge could be replicated, Chapter 11 debtors may fear that they will have trouble attracting new employees because new hires might hesitate before accepting a job with a bankrupt company.[16]

Second, many debtors claimed that they needed to update their compensation practices to avoid underpaying employees.[17] This underpayment problem arose because of the growing complexity of executive pay packages.[18] At a high level, executive compensation consists of two components: (1) a “base” payment, (2) and a “bonus” payment. The base payment is what we usually think of as salary; the amount of money that a manager expects to be paid for showing up to work every day.[19] The bonus payment is a catchall term that consists of all performance-related pay, such as rewards for achieving a sales goal or remaining an employee of the firm for a certain period of time.[20] Increasingly, in the early 1990s, large firms began to rely on bonus compensation, creating new pressure to update performance–compensation policies to reflect changes in the firm’s business and the disruption created by bankruptcy.[21] Accordingly, Chapter 11 debtors argued that they needed to pay retention bonuses to avoid paying valuable employees significantly less money than they were accustomed to making, undermining morale and retention.[22]

B. As the Economy Fell into Recession in the Early 2000s, the Public Salience and Controversy over Chapter 11 Bonuses Increased

These retention bonus plans became the subject of controversy in the early 2000’s for three main reasons. First, the public spectacle of a failed firm paying millions of dollars in bonuses to senior managers while firing workers naturally led to populist outrage.[23] The controversy over bankruptcy-related pay echoed the still-raging public controversy over the high levels of executive pay, which seemed unfair to many observers and was especially salient after the dot-com bust sent the nation into recession.[24]

Second, the bonuses attracted criticism from some commentators who worried that the public nature of the payments and the large amount of media attention that they attracted were undermining public confidence in the bankruptcy process.[25]

Third––and most importantly from the perspective of bankruptcy policy––some observers believed that management was exploiting the basic structure of Chapter 11 to extract undeserved pay.[26] When a firm files for bankruptcy, existing management remains in control of the business, giving managers great influence over the firm and its stakeholders.[27] Management’s control over the bankruptcy process can lead the board of directors and even creditors to seek to pay managers for desired outcomes, such as enticing management to agree to sell the firm.[28] The dislocations created by bankruptcy can also provide management with bargaining power.[29] The board of directors may fear that the departure of a key executive would seriously reduce the prospect of a successful reorganization, creating an opportunity for opportunistic managers to demand more pay than they deserve.[30] This agency problem threatens the basic structure of Chapter 11 bankruptcy, a process in which a firm’s asset value is supposed to be maximized for the benefit of pre-bankruptcy creditors, not the personal wealth of incumbent managers.

Of course, the Bankruptcy Code recognizes the power that management has over a corporation in bankruptcy and thus creates a strong system of checks and balances to counterbalance managerial power.[31] The first line of defense is the federal bankruptcy judge, who must approve any payment of bonuses.[32] Next, bankruptcy law appoints an “[o]fficial [c]ommittee of [u]nsecured [c]reditors” to act as a “watchdog” that scrutinizes management’s business decisions.[33] This committee is generally composed of some of the firm’s major creditors, who stand to receive lower payouts at the end of the bankruptcy case if the firm overpays management.[34] The committee will usually have a high-powered law firm and investment bank assisting them, and they will analyze any proposed bonus plan to determine whether it overpays managers.[35] To the extent that creditors believe management is extracting undeserved pay, they can file written objections informing the judge of the bonus plan’s problems and negotiate in the shadow of those objections and the right to object.[36]

Further, the Department of Justice’s United States Trustee Program provides a second level of governmental oversight that helps the bankruptcy judge assess the motions in front of her.[37] Congress created the United States Trustee Program as a part of the Bankruptcy Act of 1978 to oversee the then-new system of bankruptcy courts.[38] Each district has its own Office of the United States Trustee, which generally consists of several attorneys and other legal professionals.[39] These lawyers supervise all bankruptcy cases, looking for evidence that bankruptcy law is being abused.[40] The United States Trustee has the right to file an objection of its own if it determines that management is using its control of the corporation to extract excessive compensation.[41]

Prior to the 2005 reform, this system of checks and balances lay dormant because bankruptcy law instructed the judge to defer to management in determining if bonuses were needed.[42] Chapter 11 debtors only needed to convince the judge that a proposed retention bonus plan was the product of reasonable business judgment.[43] This was an easy standard to satisfy, and firms would do so by arguing that the employees were important to the successful reorganization of the business [44] and that the board of directors engaged in some sort of deliberative process to develop the plan.[45]

C. Congress Empowers the Oversight of Managers and Restricts Retention Bonuses with the 2005 Reform

This equilibrium changed when Congress banned retention bonuses as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “BAPCPA”).[46] Congress sought to “eradicate the notion that executives were entitled to bonuses simply for staying with the Company through the bankruptcy process.”[47] After the reform, bankruptcy judges were only allowed to authorize Chapter 11 debtors to pay “incentive” bonuses, typically through a formal “Key Employee Incentive Plan” (“KEIP”).[48] In theory, KEIPs tie any bonus payments to the achievement of challenging performance goals, such as improving the firm’s financial performance or attaining a milestone in the bankruptcy process like confirming a plan of reorganization.[49] As a result, bankruptcy judges found themselves with the challenging new task of evaluating proposed bonus plans to determine if they were permissible incentive plans or “disguised retention plans” that did not actually challenge management.[50]

Consider a hypothetical bonus plan that pays an executive if the firm’s revenue increases by 10 percent. Is this an incentive plan or a retention plan? The answer turns on how likely it is for that anticipated revenue increase to occur.[51] An executive who commits to such a plan may very well have private information regarding an imminent sale to a major customer that will yield the 10 percent increase, making the incentive plan a “disguised retention plan” that rewards the manager for remaining employed without requiring extra effort and accomplishment to earn the bonus.[52] On the other hand, in some cases a 10 percent increase in revenue could be highly unlikely and something management can only achieve with extra effort.[53] How can one proposed bonus plan be distinguished from another? In the seminal case interpreting the 2005 reform, Judge Burton I. Lifland of the Southern District of New York declared “if it walks like a duck (KERP) and quacks like a duck (KERP), it’s a duck (KERP).”[54]

Judge Lifland also identified several factors that bankruptcy courts should analyze to determine if a proposed bonus plan creates challenging incentive bonuses or disguised retention bonuses:

Is there a reasonable relationship between the plan proposed and the results to be obtained, i.e., will the key employee stay for as long as it takes for the debtor to reorganize or market its assets, or, in the case of a performance incentive, is the plan calculated to achieve the desired performance?

Is the cost of the plan reasonable in the context of the debtor’s assets, liabilities and earning potential?

Is the scope of the plan fair and reasonable; does it apply to all employees; does it discriminate unfairly?

Is the plan or proposal consistent with industry standards?

What were the due diligence efforts of the debtor in investigating the need for a plan; analyzing which key employees need to be incentivized; what is available; what is generally applicable in a particular industry?

Did the debtor receive independent counsel in performing due diligence and in creating and authorizing the incentive compensation?[55]

To summarize, the 2005 reform is best understood as creating new responsibilities for Chapter 11 debtors, the bankruptcy judges, and the Department of Justice’s United States Trustee Program, while providing new bargaining power for creditors. Prior to the reform, a Chapter 11 debtor could easily obtain a judge’s permission to pay bonuses by demonstrating a plausible business justification.[56] After the reform, Chapter 11 debtors can only pay bonuses if they convince a judge that a proposed bonus plan requires management to demonstrate extra effort and skill. The standard developed in the Dana Corp., and re-articulated above, requires the debtor to present evidence of industry and firm practices to demonstrate the reasonableness of the overall level of compensation, as well as the structure that would trigger the payment of bonuses. In making this case, Chapter 11 debtors typically present the testimony of an independent compensation consultant that helped to develop the incentive plan. The judge then must weigh significantly more evidence and make more findings of fact than was the case prior to the 2005 reform. This new bargaining dynamic empowers creditors, who can investigate a proposed bonus plan, file an objection, and negotiate to change the plan in the shadow of the objection.[57]

II. Theoretical Problems with the 2005 Reform

This Part describes theoretical flaws that undermine the bankruptcy system’s then-newfound mandate to police executive compensation in bankruptcy. These flaws lead to three testable hypotheses about the reform, which are respectively analyzed using empirical evidence in Section III.B.

As a general rule, laws that leave gaps create incentives for regulatory evasion.[58] The 2005 reform only affects bonuses paid through court-approved bonus plans in Chapter 11. This narrow scope allows firms to simply sidestep the regulation by paying managers prior to filing for bankruptcy or waiting until a Chapter 11 case ends to adjust management’s compensation retroactively. Indeed, the reform likely created financial incentives for firms to engage in evasion, as the additional work that law firms need to do to meet the new standard is costly.

Accordingly, hypothesis one is that firms will respond to the increased costs of proposing a bankruptcy bonus plan by evading the new regulation and paying managers through channels unaffected by the 2005 reform.[59]

Further, the reform places bankruptcy judges in the challenging position of distinguishing permissible incentive plans from forbidden retention plans. To do so, judges must assess ex ante the likelihood that a triggering event will occur. If a performance goal is likely to occur without additional managerial effort, the judge should reject it as a disguised retention plan that rewards management for remaining employed. This is a difficult analysis. The boards of directors and managers that develop bonus plans presumably know their businesses better than the judge, placing the judge at a disadvantage in evaluating a bonus plan. Further, judges are bankruptcy lawyers and lack subject-matter expertise in executive compensation, let alone specific knowledge of the firm’s industry. Moreover, even in a world with perfect information, the judge would still struggle to perform this analysis because the line between retention and incentive plans is very thin. All incentive plans have some retentive element, as employees often remain in jobs to earn promised bonuses.[60]

Therefore, hypothesis two is that bankruptcy judges are unlikely to be able to screen out all but the most obviously disguised retention plans, and the bonus plans that are approved are unlikely to be significantly different in substance than the bonus plans prior to the reform.[61]

The challenges that bankruptcy judges face are exacerbated by the incentives that creditors have to use their bargaining power to police executive compensation.[62] One of the main reasons that executive compensation theorists have long sought to empower investors with a greater voice in determining executive pay is because of the belief that the excess compensation paid to managers reduces the returns to investors.[63] Superficially, this is the case in Chapter 11 as well, as creditors are generally the firm’s residual claimant and thus the losers if the firm overpays management. However, executive bonuses affect such a small amount of value in large Chapter 11 cases—single-digit millions when the firm’s assets can potentially be worth billions—that we would expect creditors might decline to spend the time and money required to actively police executive compensation.

Further, the bankruptcy judge is unlikely to get much help from the Department of Justice’s U.S. Trustee Program. In theory, the Department of Justice only has incentives to enforce bankruptcy law, and the 2005 reform created a new Congressional policy of policing abuses in executive compensation. In practice, the U.S. Trustee suffers from the same informational asymmetries and expertise deficits that limit a judge’s effectiveness in evaluating a proposed bonus plan. The 2005 reform did not provide extra money to hire compensation experts to help the lawyers in the U.S. Trustee’s office analyze proposed bonus plans.

Accordingly, hypothesis three is that the bankruptcy judges are unlikely to receive much help from creditors and the U.S. Trustee. Creditors have weak incentives, on average, to invest the time and resources required to police executive compensation aggressively. The U.S. Trustee lacks the necessary expertise to perform the role assigned to it by Congress.[64]

III. Evidence of Design Problems in the 2005 Reform

Part III presents an account of the flaws that undermine the 2005 reform. Section III.A first describe the data gathering methodology and the sample of bankruptcy cases. In Section III.B, evidence from the empirical study tests the hypotheses developed in Part II.

A. Sample and Data Gathering

To study the reform, I gathered two samples of data: (1) a large sample that represents the population of large companies that filed for Chapter 11 between 2001 and 2012 with traded debt or equity and (2) a smaller case study sample of cases from before and after the statutory change to examine bonus plans (and bankruptcy litigation) in a more comprehensive and detailed way. Both samples are drawn from Next Generation Research’s list of large company bankruptcies from 2001 to 2012.[65] I describe the construction of the large sample and the case study sample in turn.

The large sample consists of all large companies from Next Generation Research’s list of large company bankruptcies from 2001 to 2012 that traded debt or equity. I focus on firms with publicly traded debt or equity because those firms have obligations to file disclosures with the Securities and Exchange Commission (“SEC”), so information on firm compensation practices are available. Nearly all of the largest firms to file for bankruptcy have traded debt or equity, and this larger sample is very close to the population of large companies that restructured their debt in Chapter 11 court proceedings between January 1, 2001 and December 31, 2012.

I identified the firms included in the larger sample through the following procedure.[66] For each of the 1,998 large firms that filed for Chapter 11 bankruptcy between 2001 and 2012, I looked for matches in the list of debt or equity issued by large firms that traded in the databases kept by TRACE, MarkIt, and Bloomberg.[67] For example, if I found that a firm filed for bankruptcy on January 3, 2003, I looked for trades in that firm’s debt or equity entered on or after that date. This larger sample consists of 408 cases. For each of the firms in the sample, I collected extensive information about the firm and the bankruptcy case from the court docket and important pleadings. Most importantly, I recorded whether the firm sought judicial approval of a bankruptcy bonus plan and identified which, if any, bonus plans were approved by the bankruptcy judge. For all of these firms, I also examined their securities filings to obtain additional information on how the firm historically compensated its executives.[68]

I collected the case study sample using a similar method. I again began with the list of all firms listed in Next Generation Research’s database of corporate bankruptcies, including those without traded debt or equity.[69] The case study sample comes from two time periods. First, I collected a “before” sample of every large bankruptcy case from Next Generation Research’s list of large corporate bankruptcies that filed between January 1, 2004 and April 20, 2005, the date that BAPCPA was signed into law by President George W. Bush. I begin with January 1, 2004, because older dockets are generally no longer available on the Public Access to Court Electronic Records database (“PACER”). The initial sample consisted of 140 potential Chapter 11 debtors, of which forty-one (approximately 30%) sought judicial approval for a key employee retention or incentive plan. These forty-one Chapter 11 debtors constitute the pre-BAPCPA sample, which I term the “pre-reform” or “pre-2005 reform” sample.

The second case study sample period consists of all firms that filed for Chapter 11 bankruptcy between January 1, 2009 and December 31, 2010 that implemented bankruptcy bonus plans. I choose a period four years after the reform because it took several court decisions to settle on a legal standard for adjudicating proposed post-reform incentive plans and lawyers needed time to develop customs to meet that standard.[70] I began with the list of 375 large bankruptcy cases and examined each court docket to look for a proposed bonus plan. The final sample consists of fifty-seven bonus plans filed by debtors that filed for bankruptcy in 2009 and 2010.[71]

I studied each case in the case study sample very closely. In addition to examining the docket and acquiring basic information from court filings, I examined all objections filed by creditors and the United States Trustee to managements’ motions seeking approval of bonus plans. I also compared the bonus plans approved by the court to the original bonus plans to track changes made over the course of the bargaining process. Next, I examined the goals created by the plans and used the date of bankruptcy events, the disclosure statement and subsequent securities disclosures, news stories, and press releases to determine whether management achieved the incentive payout.

Finally, I examined all of the legal bills filed by the debtor’s counsel for the period between the petition date and the bonus plan being approved by the court. When large firms are in Chapter 11 bankruptcy, they ask for (and receive) a court order allowing them to retain a law firm to help them with their bankruptcy.[72] The Chapter 11 debtor then submits its law firm’s legal bills to the court and asks for permission to pay them.[73] The Federal Rules of Bankruptcy Procedure require a detailed statement of the time the attorneys spent on the firm’s legal problems, which in practice translates to the full record of all time charged to the client. I oversaw a team of research assistants that worked together to identify the amount and value of time that law firms spent on bonus plans for both time periods in the case study sample. I provide an illustrative example of this analysis in the Appendix. To my knowledge, this is a new method in the bankruptcy practice literature, and a very labor-intensive one, but it holds significant promise in terms of aiding our understanding of bankruptcy costs.

B. Assessing Evidence of Design Flaws in the 2005 Reform

The 2005 reform aimed to reduce public outrage over bankruptcy bonuses, force managers to earn their pay, and reduce the overall level of executive compensation. Section III.B uses evidence from the sample to test the hypotheses developed in Part II. In general, I begin with the high-level portrait painted by the larger sample, test for obvious confounding explanations of the findings using regression analysis, and then look closely at the case study sample to reveal a more detailed picture.

1. Assessing the Effect of the Reform: Evidence of Higher Costs and Regulatory Evasion.

Hypothesis one predicts that the reform will increase the costs associated with bankruptcy bonus plans and lead to regulatory evasion. I begin by assessing the impact of the reform on bankruptcy costs before moving on to the observed frequency of bonus plans and evidence that points to rampant regulatory evasion.

a. The Effect of the Reform on Bankruptcy Costs

As a threshold matter, by requiring the debtor’s counsel to do extra work to approve a bonus plan, the 2005 reform and Dana Corp. may have increased the costs of bankruptcy.[74] To estimate the size of the increase, I reviewed all of the debtor’s counsel’s bills and identified the time entries corresponding to work on a bankruptcy bonus plan. Pre-reform, the median debtor’s counsel billed $30,484 (mean of $65,198) for work on a bankruptcy bonus plan in constant 2010 U.S. dollars.[75] Post-reform, the median debtor’s counsel billed $86,411 (mean of $140,218) for their work on their debtor’s bonus plans, an increase of 64%. For comparison’s sake, the debtor’s counsel’s bill for the entire bankruptcy case was $5,191,576 in the post-reform sample, as compared to $3,449,969 pre-reform—an increase of 33%. The costs associated with a bankruptcy bonus plan grew twice as fast as the debtor’s counsel’s fees as a whole, suggesting that the new standard significantly increased the amount of legal work the debtor’s attorneys needed to do to comply.[76]

b. The Effect of the Reform on Bonus Plan Utilization

The observed increase in costs associated with bonus plans is likely to deter other Chapter 11 debtors from implementing them. Sure enough, as Figure 1 shows, relying on the larger sample of the population of Chapter 11 debtors between 2001 and 2012, the percentage of firms filing for bankruptcy that seek a bonus plan falls precipitously after the 2005 reform, going from nearly 60% in 2004 to less than 40% in 2007.

It is difficult to conclude too much by examining the raw proportion of Chapter 11 firms with bonus plans, as the observed change could be a composition effect. For example, 2004 may have featured more firms in industries where bonuses are a larger part of executive compensation than did 2007.[77] I cannot eliminate the possibility that a composition effect drives the shift observed in Figure 1, although it seems unlikely that this would be the whole explanation. I can, however, control for some observable firm characteristics in a regression analysis to test the robustness of the observed post-reform decline in the utilization of bankruptcy bonus plans, specifically by controlling for firm size, industry, and the debtor’s law firm. Table 1 displays those regression results. In Models 1, 2, and 3, I regress a dummy variable for post-2005 reform filing on the likelihood of a bonus plan being proposed, with the second Model adding control variables. In Models 4, 5, and 6, I instead study the likelihood that a bonus plan is approved. In the cases of both proposal and approval, the results are the same: controlling for firm characteristics, firms become less likely to implement bankruptcy bonus plans after the 2005 reform.

c. The Effect of the Reform on the Overall Level of Executive Compensation

Given that proportionately fewer firms used court-approved bonus plans, it is possible that the overall level of executive compensation was reduced by the reform. To the extent the pre-reform equilibrium was characterized by managerial rent extraction, the reform might have eliminated some opportunistic retention bonus plans that effectively overcompensated managers.

While I am not able to measure overcompensation, I can look for evidence of a change in the level of compensation that managers receive before and after the 2005 reform. I take two approaches to doing so. First, for a subset of the large sample with available data, I calculate the percentage change in CEO compensation in the year prior to bankruptcy and the year the firm filed for bankruptcy.[78] This facilitates comparison of bankruptcy-period compensation to pre-bankruptcy–period compensation, controlling for the firm’s historic level of compensation.

Second, to make sure that industry changes do not bias the analysis, I adjust each firm’s observed CEO compensation to control for the firm’s industry. For each firm in the sample, I identify the firm’s industry using its three digit SIC code. I then use the ExecuComp dataset to identify S&P 1,500 firms in the same industry as each sample firm to understand how the sample firm’s compensation compared to its industry peers. I then calculated a percentile ranking that reflects how the Chapter 11 debtor compared to its peers in each observed calendar year. So, for example, a firm in the 90th percentile in terms of compensation is a firm that paid their CEO more than 90% of all other firms in the same industry.

As Table 2 shows, I fail to find any statistically significant effect suggesting that the overall level of executive compensation in bankruptcy was altered by the reform. To be sure, my failure to find this relationship does not mean there is not one. This analysis is conducted on a subset of the sample firms highly constrained by data availability, and it is possible that if the analysis included the missing firms the result would be different.[79] There may also be an omitted variable that would uncover an otherwise hidden relationship. However, at the very least, the results suggest that the lower rate of bonus plans might not have changed the overall level of compensation of Chapter 11 executives, relative to pre-bankruptcy compensation and industry trends.

d. Anecdotal Evidence of Regulatory Evasion

A potential explanation for this result is that firms may simply sidestep court-approved bonus plans to engage in regulatory evasion. I cannot offer comprehensive statistics on how frequently Chapter 11 debtors utilize these strategies, as firms do not necessarily go out of their way to disclose these strategies and are not necessarily required to do so. I also cannot rule out the possibility that the observed change in bonus plan utilization reflects improved governance of executive compensation. However, I find extensive anecdotal evidence suggesting that many firms are simply paying managers in ways that evade the judicial scrutiny demanded by the reform. There are three main strategies to get around the 2005 reform: (1) adjusting compensation pre-bankruptcy; (2) paying bonuses as part of other bankruptcy court orders that the 2005 reform does not regulate; and (3) waiting until after the firm emerges from bankruptcy to pay bankruptcy related-bonuses. I explain each strategy in turn.

First, the reform does not affect compensation adjustments that firms made before filing for Chapter 11 bankruptcy, and some firms appear to have taken advantage of this.[80] A Chapter 11 debtor cannot simply pay management a large bonus on the eve of bankruptcy, as doing so might create an avoidable transfer that creditors could recover.[81] However, at least some firms implemented bankruptcy-related bonus plans prior to filing for Chapter 11 that were overt and open attempts to evade the 2005 reform. For example, OTC Holdings, a manufacturer of party supplies and children’s toys, set up a Key Employee Performance Incentive Plan (“KEPIP”) to “align the interests of OTC’s key employees with the interests of OTC and its creditors” prior to the firm’s bankruptcy petition.[82] This plan was designed to pay bonuses only after the firm emerged from bankruptcy, which, the firm argued, meant that the Bankruptcy Code’s restrictions on executive bonuses would not apply to the incentive plan.[83] Similarly, the board of directors of Regent Communications implemented a “Special Bonus Plan . . . [which] was triggered upon commencement of the Chapter 11 Cases,” suggesting that OTC is, at the very least, not the only firm that engaged in this sort of bankruptcy planning.[84]

Second, some firms simply “bundled” bankruptcy bonus plans with other, more important motions to evade close court monitoring of bankruptcy-related compensation.[85] When large firms file for bankruptcy, they usually also file a variety of intermediate motions while they try to reorganize their business—a motion for a bonus plan is an example of such an intermediate motion—before filing a proposed plan of reorganization for the approval of the bankruptcy judge. The plan of reorganization is a lengthy document that contains hundreds of provisions that describe how the firm will leave bankruptcy, how it will pay its creditors, and what the post-bankruptcy life of the company will be. Bankruptcy law instructs the judge to evaluate this document under section 1129 of the Bankruptcy Code.[86] The approval of this document will normally end the bankruptcy case and allow the firm to emerge as a restructured company. Adding a retroactive bankruptcy bonus plan into this document is as simple as adding a single line of text.

By “bundling” the executive bonus plan with the larger plan of reorganization, a Chapter 11 debtor can evade the scrutiny that comes when the bonus plan is squarely before the court. This strategy also puts the judge in a difficult position, as it creates a choice between approving the plan of reorganization (with the bundled executive bonus plan) or rejecting the plan, when rejecting the plan might mean forcing the company to remain in bankruptcy with unknown costs for the business and its employees.

As such, it should not be surprising that “bundling” was the most commonly observed regulatory evasion strategy. For example, in the bankruptcy of Journal Register, management abandoned an attempt to obtain judicial approval of a bankruptcy bonus plan after the pension fund objected. But management did not abandon the goal of paying itself for bankruptcy-related performance. Instead, the company bundled a “bankruptcy emergence bonus” into the plan of reorganization, which, it reasoned, was governed by a different part of the Bankruptcy Code than section 503(c).[87] In evaluating this attempt at bundling, the court first noted that the debtors “filed a motion during the cases for approval of the Incentive Plan, but thereafter withdrew that motion and incorporated the Incentive Plan in the Reorganization Plan.”[88] However, the court also pointed out that the plan process involved creditor voting and the creditors—whose money was going to the executives—supported the plan.[89] Accordingly, the judge approved the payment of the bonuses.[90]

Finally, a third strategy to evade court monitoring of bankruptcy-related executive compensation is deferring bonuses for bankruptcy-related conduct for the post-bankruptcy board of directors.[91] Once a firm leaves bankruptcy, it is no longer under judicial supervision and can pay its employees however much it wants. As such, boards of directors can sidestep the 2005 reform by promising management a bonus that is never formally contracted for or paid until the firm emerges from bankruptcy.

While post-bankruptcy executive compensation is, by definition, hard to survey in detail, I did observe strange behavior in the bankruptcy of Citadel Broadcastings, a radio station conglomerate that filed for bankruptcy in late 2009.[92] Citadel proposed a plan of reorganization that, like most cases in the sample, included setting aside a percentage of the firm’s post-reorganization equity for managers.[93] This plan of reorganization was hotly contested by hedge fund creditors, who charged that management was undervaluing the firm and going to profit in the form of underpriced post-bankruptcy stock grants.[94] In response to the criticism, the CEO testified in court, “I have tried to get stock and each time I was told I am getting options at market value . . . [that] will vest one-third each year on the anniversary from the time I got those options. So they will be actually vest[ed] three years from now.”[95]

The company thus dealt with the charge of self-dealing in an elegant way. Instead of an outright stock grant, management received out-of-the-money or market value stock options, which meant that management could not use those stock grants to extract value that should have gone to creditors. After hearing this testimony, the judge confirmed the plan of reorganization.[96]

This testimony appears to have been forgotten shortly after the firm exited bankruptcy. Less than a month after leaving Chapter 11, reorganized Citadel distributed the stock in the form of restricted stock grants that vested on a two–year schedule.[97] The CEO alone received $55 million, making him the highest paid manager in the history of the radio industry.[98] These stock grants were only publicly disclosed due to Citadel’s obligations as an issuer of public debt. The disclosures caught the ire of the activist investors who had lost in court at the confirmation hearing.[99] They filed a motion seeking to “prevent one of the most egregious frauds by a company emerging from bankruptcy under Chapter 11.”[100] They noted that this conduct was “fraudulent because Citadel representatives, including [the CEO] himself, repeatedly told this Court, under oath, that they were not getting under the Plan the very securities that they gave themselves only weeks later immediately upon emergence [from bankruptcy.]”[101]

The Citadel Broadcasting Corp. case is an outlier, however. I have not come across any other cases with similar facts. However, the 408 firms in the large sample set aside more than $400 million in post-bankruptcy equity for post-bankruptcy management incentive plans. To be sure, most large companies have some sort of equity incentive plan, and it is entirely in the ordinary course for companies to compensate managers with stock. But other research has noted that creditors sometimes persuade managers to support their incentive plan with lucrative post-bankruptcy employment contracts.[102] Thus, it remains an open question how often managers are rewarded after the firm emerges from bankruptcy for conduct that took place during bankruptcy.

2. Assessing the Limitations of the Bankruptcy Judge

As hypothesis two discussed above,[103] bankruptcy judges suffer from an informational asymmetry and lack of expertise that make it difficult for them to make the determination that the 2005 reform wants them to—that a bonus plan is an “incentive plan” with challenging goals and not a “disguised retention plan.” To assess this hypothesis, I first examine how the structure of bonus plans changed after the reform and then determine whether the post-2005 bonus plans are substantively different than the retention plans that Congress banned.

a. Changes in Bonus Plan Structure

Table 3 summarizes differences in the structure of bonus plans from the case study sample before and after the reform. As Table 3 shows, the reform clearly changed the structure of bankruptcy bonus plans.[104] While bonus plans did not appear to change much in terms of the amount of money set aside for bonuses, the bonus plans after the reform are much more likely to include some sort of operational or financial target that rewards management for meeting specific performance objectives.[105] Bankruptcy-related objectives remain very popular, such as paying management a bonus when the court confirms a plan of reorganization. But in the post-reform era, approximately 20% of the plans with bankruptcy “milestone” bonuses were tied to the specific milestone occurring by a specific date, which makes them more challenging to accomplish.

b. Do the Post-Reform Bonus Plans Appear to Be Challenging Incentive Plans?

Of course, these changes could very well be superficial. Unfortunately, much like a bankruptcy judge, I cannot directly measure the extent to which these plans created “truly incentivizing goals,” because that would require perfect knowledge of the facts and circumstances at the time the bonus plan was adopted. Whether a revenue goal is challenging, for example, would depend on observing the probability distribution of hitting the revenue goal, which I obviously cannot do.

I can, however, examine theoretical predictions that indirectly capture an aspect of how challenging the bonus plans would have been considered. First, we would expect the post-reform plans to pay managers at a lower rate than the pre-bankruptcy bonus plans, because challenging performance goals are likely to be missed more often than the pre-bankruptcy retention plans that rewarded managers for staying at their desks. Second, theory would predict that, as the risk associated with a bonus increases, so too should the size of the bonus, to compensate management for the increased risk of not hitting the challenging goal. For example, a $100 bonus might be an effective motivating tool if management knows there is a 100% chance of receiving the payment. But if there is only a 10% chance of receiving the payment, management would need a much larger bonus to provide the same motivation to perform.[106] I assess each of these predictions in turn.

First, I analyzed every stated goal from every court-approved bankruptcy bonus plan in the case study sample. I then used information from the court docket and subsequent public information (such as securities filings) to determine whether the bonus plan paid out.[107] As Table 4 shows, the rate of payout appears to be similar across both time periods.[108] This finding at least casts doubt on the view that the post-reform bonus plans are different as a matter of substance, in addition to being procedurally different from the pre-reform plans.[109]

Second, I examine the schedule of payments under the bonus plan to look for evidence that the payouts were increased to compensate management for the increased risk of an incentive plan. After adjusting the proposed maximum payouts for inflation, I find that CEOs received nearly identical bonuses after the reform as they did under the pre-bankruptcy retention bonus plans. Post-2005, firms implementing court-approved bonus plans planned to pay a 30% year-over-year increase in CEO compensation for the first year of bankruptcy, as compared to 29.3% for the firms implementing bonus plans in the sample years before the reform. A caveat to this analysis is that firms may have wanted to implement bonus plans but felt restricted by the bankruptcy judge, so the observed maximum bonus plans might be censored. However, this finding casts doubt on the argument that these “incentive” bonuses are much riskier than the pre-bankruptcy retention plans.

3. Assessing the Role of Creditors and the U.S. Trustee

Bankruptcy law, of course, understands that the bankruptcy judge cannot ever know as much about a debtor as its management team and relies on creditors and the Department of Justice’s U.S. Trustee Program to police abuses. As hypothesis three predicts, there are two theoretical problems that might constrain the willingness and ability of the creditors and U.S. Trustee to monitor executive compensation. The first is that the creditors lack strong incentives to invest time and money into monitoring relatively small bonus plans, as bonus plans represent only a small percentage of the overall value on the table in a bankruptcy plan. The second is that the U.S. Trustee suffers from a similar expertise deficit as the judge, making it just as hard for the U.S. Trustee to distinguish challenging incentive plans from disguised retention plans. I analyze evidence of the role played by creditors and the U.S. Trustee Program in turn.

a. The Observed Role of Creditors

In theory, creditors have limited incentives to police executive compensation. While it is true that creditors are generally the residual claimants of the firm, and thus the party that loses if management extracts unearned compensation,[110] their economic incentives are to focus more on the hundreds of millions or billions of dollars that are at stake in large bankruptcy cases, not the relatively small amount of money involved in bonus plans.

To see how creditors actually used their bargaining power, I reviewed all of the objections the official committee of unsecured creditors filed in response to the firm’s motion seeking bonus plan approval; those objections are summarized in Table 5.[111] There are limits to reviewing the objections of the official committee, as doing so does not reveal how creditors may have negotiated in the shadow of their right to object, nor does it capture how creditors might have influenced bonus plans before they were even proposed by the court. Accordingly, caution is needed in interpreting this Section, as it relies on an incomplete record of creditor influence on negotiations. In the Appendix, I present a summary Table, which shows how bonus plans changed between being proposed on the docket and being approved by the court. The Appendix Table suggests, at least on paper, that Chapter 11 debtors are forced to make performance goals more challenging in response to creditor demands.[112]

As Table 5 shows, official committees became much more litigious after the 2005 reform. They filed written objections to 33% of the proposed bonus plans, a 79% increase from the pre-reform sample. Categorizing the objections, the most common legal argument—expressed in every case in which the official committee objected—was that the bonus plan was a disguised retention plan, violating the 2005 reform. This observed litigation is obviously only a small part of their influence, as they almost certainly negotiated in the shadow of their right to object and may have influenced many bonus plans in unobserved ways.

However, creditor objections seldom presented particularized criticisms of the proposed bonus plan. Creditors did file objections to the proposed bonus plans alleging that the compensation level exceeded industry standards in 26% of cases (as compared to 9% before the reform), but that was only 40% of the cases for which an objection was filed. More importantly, creditors only offered evidence from an opposing expert in 8% of cases (as compared to 11% prior to the reform). For the five cases where the official committee complained about the bonus plan exceeding industry standards, one offered evidence from other Chapter 11 cases,[113] one simply pointed to the dire climate of the industry,[114] two complained that the numbers were high without supporting evidence of “competitive compensation in the [company’s] industry,”[115] and one asked for management to provide more information.[116] In no objection in the case study sample was the judge provided with concrete numbers that could be used to compare the bonus plan to an industry standard.

The Foamex Int’l, Inc. bankruptcy litigation provides a representative example of a typical official committee objection to a proposed bonus plan. Foamex’s management originally sought approval of a bonus plan that would pay out in the event that the company successfully sold its assets.[117] The committee first complained that the bonus plan motion was filed “within the first few weeks of the case” and while the debtors were attempting to sell the firm on a faster schedule than the committee wanted.[118] The committee then complained that management was likely not only to get the bankruptcy bonuses but also “generous employment agreements” if the planned sale went through.[119] The committee further deemed the bonus plan targets “effortless” and instead demanded that the company link incentive compensation to “the payment of a dividend to general unsecured creditors.”[120] Nowhere in the objection is there any analysis of the underlying compensation plan itself. There are only bald complaints about how the committee disagreed with the idea of rewarding management for a sale and preferred management receive a bonus in the event a plan of reorganization was approved, preferably one paying unsecured creditors a significant recovery.[121]

Other official committee objections in the sample served as a similar opportunity for the official committee to negotiate the plan of reorganization through litigation. The lack of substance in some of these objections suggests that the objection itself is better understood as a chance to express a partisan view about how the Chapter 11 case should proceed. For example, in the bankruptcy case of Trico Marine Servs., Inc., the official committee informed the court that it objected because the committee was at loggerheads with management over how the case would proceed.[122] In the bankruptcy of NEFF Corp., the official committee complained that the Management Incentive Plan incentivized management to approve a plan favored by senior lenders and not “explore alternative plan strategies.”[123] Similarly, in the Hayes Lemmerz bankruptcy, the creditor’s committee complained that bonuses should not be paid “for merely confirming a plan quickly for the benefit of the Debtors’ secured lenders who . . . were involved in the design and approval of the [bonus plan.]”[124]

b. The Observed Role of the Department of Justice’s U.S. Trustee Program

Unlike creditors, the Department of Justice’s U.S. Trustee Program only has incentives to enforce bankruptcy policy. The trouble with the U.S. Trustee’s frequent interventions, as described further below, is that the body largely lacks the expertise needed to effectively police executive compensation.

Sure enough, as Table 5 shows, the U.S. Trustee became far more litigious after the reform, objecting to almost half of filed bonus plans, a 300% increase from the pre-reform sample.[125] The U.S. Trustee objection in the Lear Corporation bankruptcy is fairly representative of U.S. Trustee objections in the sample.[126] The Trustee first asserted that the proposed incentive plan is actually a disguised retention plan on the grounds that the milestones are too easy to achieve.[127] To support this claim, the U.S. Trustee pointed out that the major bankruptcy-related milestones have to do with filing a plan of reorganization, which, the U.S. Trustee noted, has already been mostly negotiated by the time the firm filed for bankruptcy.[128] Accordingly, this is not the type of “challenging result ” that “warrant[s] a bonus.”[129] The U.S. Trustee also noted that the responsibility of preparing a plan of reorganization mostly falls on the debtors’ lawyers—not the managers—meaning managers do not deserve a bonus for work done by their lawyers.[130] The Trustee then noted that the financial targets for part of the bonus payment were not disclosed, and therefore, may be too easy. Therefore, the Trustee demanded that management produce more evidence to satisfy its burden of proof.[131]

This sort of conclusory analysis characterizes many other U.S. Trustee objections in the sample. In one case, the U.S. Trustee condemned a bonus plan linked to asset sales by declaring that the plan simply “require[s] the employees to do their jobs” and was not “tied to any specified sales activity or task.”[132] In another case, the U.S. Trustee objected that a bonus plan linked to an asset sale paid managers “based on the first dollar of proceeds” and was thus insufficiently incentivizing.[133] In another example, the U.S. Trustee pointed out that a different sale incentive plan would create rewards “determined in large part by complicated macroeconomic, market and industry-specific forces” and that management’s contribution to the effort would be minimal, calling the incentivizing nature of the plan into question.[134]

Another noteworthy change in the U.S. Trustee’s litigation activity after the 2005 reform is that the written objections became visibly more alike, with similar allegations and complaints about the bonus plans. I can quantify this using a cosine–similarity analysis. At a high level, a cosine–similarity analysis measures the textual similarity between two documents—it can be used to detect whether, for example, documents are based on a single template.[135] To quantify the similarity between the written objections before and after the 2005 reform, I calculated the cosine similarity score of every filed objection with every other written objection and took a mean for each case. I then took the mean for the U.S. Trustee for all objections filed in each period of the case study sample. Prior to the 2005 amendment, the mean cosine similarity score for each objection in the dataset filed by the U.S. Trustee was 0.68. After the change, the mean cosine similarity score was 0.87, a roughly 28% increase. If nothing else, this analysis suggests that the written objections became much more generic and much less individualized after the change, which also required the various U.S. Trustee’s offices to file many more objections than they had in the past.

One possibility is that the U.S. Trustee’s vigorous, yet-generic, litigation after the reform reflects a policy of objecting to bonus plans under political pressure from Congress, and there is some public evidence of that pressure. On February 7, 2012, Senator Charles Grassley, the ranking member of the United States Senate Judiciary Committee, wrote the U.S. Trustee to ask for information on how that office’s role in policing bankruptcy bonus plans was going after the 2005 reforms.[136] The Trustee responded that

[t]he United States Trustee Program (USTP) of the Justice Department vigorously seeks to enforce the [2005 amendments restricting bankruptcy bonus plans.] . . . Although all parties in interest in a chapter 11 case have standing to object to [bankruptcy bonus plans], the USTP often is the only party in a case to do so. . . . [A]necdotal evidence suggests that the USTP’s section 503(c) litigation success rate before the bankruptcy courts is lower than its success rate for any other litigation on which the USTP maintains data.[137]

IV. The Case for RETHINKING the 2005 Reform

This Article’s account of the 2005 reform suggests that various institutional limitations and incentive problems have undermined the ability of the bankruptcy system to achieve the policy goals that prompted the reform. The main challenge in designing a further legal change that solves the issues previously identified is that many of the problems are structural. Bankruptcy judges are not suddenly going to become experts in executive compensation, and the incentives of creditors will continue to lead them to focus on larger bankruptcy issues, rather than the relatively small amounts of money at stake in discussing executive compensation. The Department of Justice’s U.S. Trustee Program will continue to litigate aggressively, but the underlying problems of informational asymmetry and an expertise deficit will limit their ability to help the bankruptcy judge’s deliberation.

Moreover, this Article suggests that the reform may very well have had significant negative consequences for bankruptcy practice. By driving at least some executive compensation underground, the reform may have decreased, on average, the public’s view into the black box of executive compensation of Chapter 11 debtors. The reform may have increased bankruptcy costs and redistributed value from creditors to lawyers. The reform has put very real pressure on the bankruptcy judge and Department of Justice to conduct inquiries that they are poorly situated to perform, a difficult situation exacerbated by the continuing public interest in executive compensation of Chapter 11 debtors.

Of course, in a cost-benefit analysis, these flaws must be analyzed in light of the potential benefits of the 2005 reform, and the analysis above identified two potential benefits. First, it is possible that some firms that might have implemented opportunistic and unnecessary bonus plans are choosing not to do so in light of the more challenging legal path to obtaining approval of such plans. Second, it is possible that the reform may have improved public confidence in our bankruptcy system. After all, court consideration of executive bonus plans continues to invite public and press scrutiny.[138] To the extent the reform pushed boards of directors to engage in regulatory evasion to avoid the public spectacle of a hearing on executive compensation, the reform may have helped the bankruptcy courts avoid adverse headlines. While it is possible that the reform provided some benefit by forcing the development of compensation contracts that lead managers to perform better, the evidence supporting this view is difficult to assess and nothing in this study suggests that this is the case on average. However, this Article cannot dismiss the possibility that the structure of executive compensation was indeed improved by the 2005 reform.

In light of the evidence presented in this Article, Congress and bankruptcy judges should re-think the 2005 reform. Two changes seem particularly worthwhile. First, Congress should consider providing the Department of Justice (“DOJ”) with funding to hire their own executive compensation experts who can assist with policing executive compensation. Bonuses for senior managers are an important part of modern corporate governance, and reflexive objections without detailed analysis to all proposed bonus plans are unlikely to improve the administration of bankruptcy law. The current situation would be improved if the DOJ had access to greater expertise, whether through new employees or money to hire consultants.

Second, Congress (or bankruptcy judges) should consider creating new post-bankruptcy reporting requirements to force post-bankruptcy Chapter 11 debtors to report their overall level of senior management compensation for a period of two years after bankruptcy. This will not solve all of the problems described above, but it would curtail the ability of managers to extract promises from creditors in bankruptcy that lead to excess compensation once the firm leaves bankruptcy court. Very few Chapter 11 debtors emerge from bankruptcy as public companies these days, which creates a regulatory blind spot that might be aided through additional disclosure that discourages the worst abuses, such as the example of Citadel Broadcasting.

Conclusion

This Article’s account of the 2005 reform is one of the most detailed analyses of an executive compensation regulation in the scholarly literature to date. As the results above show, the reform clearly appears to have reduced the usage of bankruptcy bonus plans and forced firms to style their bonus plans as “incentive plans.” However, the incentive plans that are approved create similarly sized bonuses to the retention plans approved before the reform, which suggests that the risk associated with the probability of bonus payment might not have been materially increased. This may be why incentive bonus plans after the reform appear to result in pay-outs just as often as the pre-reform retention plans did. I also do not find evidence that the reform altered the overall level of compensation of the CEOs of Chapter 11 debtors. At the same time, the evidence suggests that the reform may have made the process of formulating a bonus plan more expensive than it had been prior to the enactment of a more demanding legal standard.

While the new statutory scheme does appear to have succeeded in giving new bargaining power to creditors, they do not, at the least, appear to use this bargaining power to inform the judge of substantive problems with the underlying bonus plan. They appear, instead, to use their right to object mostly to pursue their partisan bankruptcy interests of influencing the overall plan of reorganization. This conclusion is qualified because I do not observe the work they might do outside of court negotiating the terms of the bonus plan––work which is clearly ongoing. But it is hard to say based on the evidence that creditors are using their new governance power to make executives more accountable, implement true pay-for-performance, or reduce the overall level of compensation, as Congress intended. Indeed, more than ten years after its implementation, the putative benefits of the reform are hard to identify.

Appendix: Methodology FOR Analyzing Bankruptcy Costs

A team of research assistants, acting under my supervision, reviewed all of the legal bills filed by the debtor’s attorneys for every Chapter 11 bankruptcy in the case study sample. For each case, the research assistants began with the first fee request and reviewed all of the bills until the time period including the day that the first bankruptcy bonus plan (in the pre-reform period, usually key employee retention plans, and in the post-reform era, key employee incentive plans (“KEIP”)) was approved by the court. The review team stopped reviewing time entries after the day the KEIP was approved.

A representative example from the post-reform 2009 bankruptcy case of Foamex International, filed by the debtor’s counsel Akin Gump, includes the following entries:

03/26/09 SLN 0018 Review asset purchase agreement for Tax issues. 0.6
03/01/09 AQ 0019 Emails re KEIP. 0.2
03/01/09 PMA 0019 Review and respond to email re KEIP motion (.1). 0.1
03/02/09 ISD 0019 O/C AQ re: KEIP. 0.7
03/03/09 RJR 0019 Telephone conference w/1. Rosenblatt re Asset Purchase Agreement and relevant labor issues. 0.3 [139]

Time entries #1 and #5 have nothing to do with the key employee incentive plan (or at least were not written down by the attorney to reflect that they do), so those time entries were discarded by the research assistant. Time entries #3, #4, and #5 reflect work on the incentive plan. The research assistant recorded all of the time each attorney spent on the KEIP, multiplied those numbers by the court approved attorney’s billing rate, and tabulated the amount the debtor’s attorneys charged for work on the bankruptcy bonus plan. The research assistant also obtained the debtor’s final fee applications to record the total amount billed for the bankruptcy case to understand what percentage of the overall bankruptcy costs (at least the portion owed to the debtor’s main attorney) was devoted to bankruptcy bonus plan matters, before and after the reform.

The total review constituted more than 103,781 pages of attorney time entries and cover notes from 792 fee applications.

Appendix Table 1 displays ordinary least squared regression with robust standard errors in parenthesis. Industry Fixed Effects are Fama-French 12. “Debtor Counsel Bonus Plan Fees” are the logged total fees in constant 2010 dollars associated with negotiating, writing, and obtaining the approval of a bonus plan. “Debtor Counsel Bonus Plan Hours” are the logged total hours in constant 2010 dollars associated with negotiating, writing, and obtaining the approval of a bonus plan. “Debtor Counsel Bonus Plan Fees as a Percentage of Total Case Fees” are the percentage of the debtor’s overall bill that are associated with the bonus plan. Appendix Table 2 summarizes the observed changes in bonus plans from the version first filed with the court to the version approved by the judge. For example, financial targets are raised in 22% of the post-2005 reform bonus plans between the original filing on the court docket and the judge’s approval order. Bankruptcy milestones are event dates in the bankruptcy process, such as the day a plan of reorganization is approved. In 10.5% of cases, the deadlines tied to those goals were lengthened, such as giving management 180 days to obtain approval of an order selling substantially all of the firm’s assets instead of 120 days.

[*] *.. Visiting Associate Professor of Law, Boston University School of Law; Associate Professor of Law, University of California, Hastings College of the Law. I appreciate helpful comments from Afra Afsharipour, Jordan Barry, Abe Cable, John Crawford, Ben Depoorter, Scott Dodson, Michael Klausner, Emily Murphy, Shu-Yei Oei, Elizabeth Pollman, Diane Ring, Natalya Schnitser, Fred Tung, David Walker, and faculty workshops at the University of California, Davis, Boston College, and Boston University.

[1]. See Gretchen Morgenson, MARKET WATCH; A Year’s Debacles, From Comic to Epic, N.Y. Times (Dec. 30, 2003), https://www.nytimes.com/2003/12/28/business/market-watch-a-year-s-debacles
-from-comic-to-epic.html (condemning American Airlines for negotiating wage concessions from its unionized workers while rewarding top executives with retention bonuses and setting aside $40 million to protect the pensions of executives); see also David Olive, Many CEOs Richly Rewarded for Failure; They Didn’t Suffer as Stocks Tanked in New Economy, Toronto Star, Aug. 25, 2002, at A10.

[2]. These bonus plans were very controversial because the payment of bonuses in bankruptcy is a public event, leading to press coverage. See Bloomberg News, Bankruptcy Court Approves FAO Executive Pay Plan, N.Y. Times (Feb. 15, 2003), https://www.nytimes.com/2003/02/15/business
/company-news-bankruptcy-court-approves-fao-executive-pay-plan.html (noting an approved FAO Inc. executive-retention plan paying $1.1 million in bonuses); see also Seth Schiesel, Revised Contract for WorldCom’s New Chief Executive Wins Approval from 2 Judges, N.Y. Times (Dec. 17, 2002), https://www.nytimes.com/2002/12/17/business/revised-contract-for-worldcom-s-new-chief-executive-wins-approval-from-2-judges.html (detailing the executive compensation plan for the CEO of WorldCom, which was approved during the company’s bankruptcy); Rhonda L. Rundle, FPA’s CEO Received Salary Increase Five Days Before Chapter 11 Filing, Wall St. J. (Aug. 3, 1998), https://www.wsj.com/articles/SB902097584655373000. Senator Charles Grassley, Republican of Iowa, summarized the populist argument against bankruptcy bonuses in a 2012 letter demanding that the Department of Justice police them more vigorously: “Corporate directors, executives and managers who were at the helm of a company as it spiraled into bankruptcy should not receive bonuses of any kind, let alone excessive bonuses, during a reorganization or liquidation.” Mike Spector & Tom McGinty, U.S. Is Asked to Review Bankruptcy Bonuses, Wall St. J. (Feb. 13, 2012), https://www.wsj.com
/articles/SB10001424052970204642604577218033661586936.

[3]. See, e.g., Kristine Henry, Beth Bonus Called Good Way to Keep Salaried Steel Talent, Balt. Sun (Jan. 6, 2002), https://www.baltimoresun.com/news/bs-xpm-2002-01-06-0201050169-story.html (detailing executive retention plans paid out in high-profile Chapter 11 bankruptcy cases); Nelson D. Schwartz, Greed-Mart Attention, Kmart Investors. The Company May Be Bankrupt, but Its Top Brass Have Been Raking It In, Fortune (Oct. 14, 2002), http://archive.fortune.com/magazines
/fortune/fortune_archive/2002/10/14/330017/index.htm. Many bankruptcy lawyers at the time were also upset by this behavior, fearing that managers were abusing Chapter 11 to extract excessive compensation at the expense of public confidence in the bankruptcy system. See generally Robert J. Keach, The Case Against KERPS, 041003 Am. Bankr. Inst. 9 (2003) (discussing issues with key employee retention plans (“KERPS”) at the American Bankruptcy Institute’s 2003 Annual Spring Meeting).

[4]. See In re U.S. Airways, Inc., 329 B.R. 793, 797 (Bankr. E.D. Va. 2005) (“Congressional concern over KERP excesses is clearly reflected in changes to the Bankruptcy Code that will become effective for cases filed after October 17, 2005.”); see also Dorothy Hubbard Cornwell, To Catch a KERP: Devising a More Effective Regulation than §503(c), 25 Emory Bankr. Dev. J. 485, 486–87 (2009) (discussing the amendments to the Bankruptcy Code); Rebecca Revich, The KERP Revolution, 81 Am. Bankr. L.J. 87, 88–92 (2007) (explaining how Congress restricted the ability of Chapter 11 debtors to “retain management employees under programs generally referred to as Key Employee Retention Plans (KERPs)”). In support of the ban, Senator Edward Kennedy delivered a memorable floor statement condemning “glaring abuses of the bankruptcy system by the executives of giant companies.” In re Dana Corp., 358 B.R. 567, 575 (Bankr. S.D.N.Y. 2006) (noting statement of Senator Kennedy in support of the amendments and discussing the legislative history of the amendments to section 503 of the Bankruptcy Code). It is worth noting that beyond the arguments over the propriety of paying bankruptcy bonuses, some observers questioned their efficacy, noting, for example, that after Kmart implemented a KERP plan, nineteen of the twenty-five covered executives left within six months and that Enron’s KERP failed to staunch the outflow of talented employees. Keach, supra note 3.

[5]. The executive compensation restrictions were a very minor piece of a much larger reform, as part of a bill called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Pub. L. No. 109-8, 119 Stat. 23 (2005) (codified as amended in scattered titles of the U.S. Code). While this paper is the first to study the executive compensation restrictions in this degree of detail, many other papers study other aspects of this reform. See generally, e.g., Kenneth Ayotte, Leases and Executory Contracts in Chapter 11, 12 J. Empirical Legal Stud. 637 (2015); Pamela Foohey et al., Life in the Sweatbox, 94 Notre Dame L. Rev. 219 (2018); Robert M. Lawless et al., Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors, 82 Am. Bankr. L.J. 349 (2008); Michael Simkovic, The Effect of BAPCPA on Credit Card Industry Profits and Prices, 83 Am. Bankr. L.J. 1 (2009).

[6]. For example, a Chapter 11 bonus plan might require management to increase earnings or move through Chapter 11 quickly. See infra notes 46 and 57 and accompanying text.

[7]. Bankruptcy lawyers largely share this skeptical view of the efficacy of the reform. See, e.g., Eric Morath, Bankruptcy Beat: ABI Poll Casts Doubt on Bonus Reforms, Wall St. J. (Oct. 21, 2009), https://blogs.wsj.com/bankruptcy/2009/10/21/abi-poll-casts-doubt-on-bonus-reforms (reporting survey results that a majority of respondents agree that the reform was not effective in limiting executive compensation). These poll results are consistent with other anecdotal evidence in the popular media. See, e.g., Nathan Koppel & Paul Davies, Bankruptcy-Law Overhaul Has Wiggle Room; Limits Set on Key Executives’ Pay, but Door Is Wide Open on Bonuses Linked to Achieving Certain Goals, Wall St. J., https://www.wsj.com/articles/SB114342447370208718 (last updated Mar. 27, 2006) (“[B]ankruptcy lawyers say companies have managed to sidestep some of the law’s provisions.”). Lee R. Bogdanoff, a founding partner of the law firm Klee, Tuchin, Bogdanoff & Stern LLP in Los Angeles, was quoted by Bloomberg News as saying that “[t]he amendment to the code changed the means, but not the value of these plans . . . It’s just changed the way you get there, not necessarily how much management gets at the end.” Steven Church, Buffets Rewards Managers Who Put Chain in Bankruptcy, Bloomberg News (Apr. 5, 2012), http://www.bloomberg.com/news/articles/2012-04-05/buffets-rewards-managers-who-put-chain-in-bankruptcy. A former Department of Justice official charged with supervising the bankruptcy system argues, “Congress took a stab at righting the problem and companies quickly found a way to circumvent their intent.” Mike Spector & Tom McGinty, The CEO Bankruptcy Bonus, Wall St. J. (Jan. 27, 2012), https://www.wsj.com/articles
/SB10001424053111903703604576584480750545602. A contemporaneous working paper provides suggestive evidence that at least some firms contracted around the reform. See Vedran Capkun & Evren Ors, When the Congress Says “PIP Your KERP”: Performance Incentive Plans, Key Employee Retention Plans, and Chapter 11 Bankruptcy Resolution (Feb. 15, 2009) (unpublished manuscript), https://people.hec.edu/ors/wp-content/uploads/sites/24/2018/02/PIP_your_KERP_20140104.pdf (“By trying to suppress KERPs, which were deemed to be ‘self-dealing’ plans proposed by unscrupulous managers, BAPCPA appears to have led to ‘structural arbitrage.’”).

[8]. See infra Section III.B.1.c.

[9]. See infra Section III.B.2.b. The fact that bonuses created by the post-2005 incentive bonus plans are similarly sized to the pre-reform retention plans casts doubt on the notion that these bonuses came with the additional risk that would come from truly challenging performance goals. Michael C. Jensen & Kevin J. Murphy, CEO Incentives—It’s Not How Much You Pay, but How, Harv. Bus. Rev., May–June 1990, at 138 (outlining the difficulty of adequately linking executive pay to compensation while simultaneously not appearing to overpay executives).

[10]. See Sreedhar T. Bharath et al., The Changing Nature of Chapter 11 at 12–14 (Fisher Coll. of Bus., Paper No. 2008-03-003, 2010), http://ssrn.com/abstract=1102366.

[11]. See, e.g., Motion of Debtor and Debtor in Possession Pursuant to 11 U.S.C. §§ 105, 507(a)(3), 507(a)(4) and the “Doctrine of Necessity” for an Order Authorizing It to Pay: (A) Prepetition Emp. Wages, Salaries and Related Items; (B) Prepetition Emp. Bus. Expenses; (C) Prepetition Contributions to and Benefits Under Emp. Benefit Plans; (D) Prepetition Emp. Payroll Deductions and Withholdings; and (E) All Costs and Expenses Incident to the Foregoing Payments and Contributions Filed by Debtor-in-Possession Bush Indus., Inc. at 13, In re Bush Indus., 315 B.R. 292 (Bankr. W.D.N.Y. 2004) (No. 04-12295).

[12]. In re Allied Holdings, Inc., 337 B.R. 716, 721 (Bankr. N.D. Ga. 2005) (“KERP programs such as the one the Debtors seek approval to implement have become customary uses of estate funds in large business reorganizations.”); see also David A. Skeel, Jr., Creditors’ Ball: The “New” New Corporate Governance in Chapter 11, 152 U. Pa. L. Rev. 917, 926–28 (2003) (discussing innovations in executive compensation and the evolution of bankruptcy bonuses); Mechele A. Dickerson, Approving Employee Retention and Severance Programs: Judicial Discretion Run Amuck, 11 Am. Bankr. Inst. L. Rev. 93, 96–97 (2003) (discussing the prevalence of retention bonuses offered in Chapter 11 cases); James H. M. Sprayregen et al., First Things First—A Primer on How to Obtain Appropriate “First Day” Relief in Chapter 11 Cases, 11 J. Bankr. L. & Prac. 275, 299 (2002) (suggesting Chapter 11 debtors consider bonus plans as part of bankruptcy planning). A contemporaneous press account suggests that bonuses became a common feature because many of the formerly high-flying tech firms had high bankruptcy costs associated with a prolonged stay in Chapter 11 that would leave little value for creditors in the event creditors were forced to hire new managers. In effect, the inability of Chapter 11 to preserve the going concern value of telecom firms provided managers with the power to extract holdout value in exchange for remaining at their desks. One investment banker was quoted as saying that sophisticated activist bondholders budgeted for bankruptcy bonuses when they made their investments in the firm’s debt. Ann Davis, Want Some Extra Cash? File for Chapter 11, Wall St. J., Oct. 31, 2001, at C1 (discussing the rise in popularity of Chapter 11 bonuses and the changing views among creditors). By keeping them at their desks with retention payments, creditors retain value in the firm that would otherwise be lost if they were to quit. Yair Listkoin criticizes retention payments for not being more closely related to positive bankruptcy outcomes. Yair Listokin, Paying for Performance in Bankruptcy: Why CEOs Should Be Compensated with Debt, 155 U. Pa. L. Rev. 777, 790 (2007) (summarizing arguments against “pay to stay” compensation). Robert Rasmussen makes an argument that Congress erred by eliminating retention bonuses because they usefully provided creditors—the new owners—with a real option regarding the debtor’s workers. That is to say, by retaining employees long enough to evaluate them, retention bonuses serve the useful purpose of allowing creditors or new managers to decide who to keep. See Robert K. Rasmussen, On the Scope of Managerial Discretion in Chapter 11, 156 U. Pa. L. Rev. PENNumbra 77, 80–85 (2007).

[13]. Sandra E. Mayerson & Chirstalette Hoey, Employee Issues from Pre-Petition Severance to Post-Petition Defaulted Pension Plans; and Standards for Permitting Senior Management Bonuses, 092002 Am. Bankr. Inst. 409 (2002).

[14]. See, e.g., In re Aerovox, Inc., 269 B.R. 74, 76 (Bankr. D. Mass. 2001).

The Debtor summarized the incentives it designed as follows: 1) to keep the eligible employees, including the Key Employees, in the Debtors employ; 2) to compensate the eligible employees, including the Key Employees, for assuming “additional administrative and operational burdens imposed on the Debtor by its Chapter 11 case;” and 3) to allow the eligible employees, including the Key Employees, to use “their best efforts to ensure the maximization of estate assets for the benefits of creditors.”

Id. (internal citations omitted).

[15]. Id. at 79.

Moreover, in the Board’s view, replacing the Key Employees would cause the Debtor to incur significant costs. Mr. Horsley testified that the process of replacing any one of the Key Employees could cost up to one years’ salary in order to cover the cost of a headhunter and other recruitment expenses. He added that, even if the Debtor were to find qualified replacements, it would not be able to quickly get these new employees “up to speed.” This cost-benefit analysis weighed heavily into the Board’s ultimate decision.

Id.

[16]. See id.

[17]. In the face of intense criticism, firms began to change their compensation practices to try to align pay with performance. See, e.g., Jensen & Murphy, supra note 9.

[18]. See Brian J. Hall & Jeffrey B. Liebman, Are CEOs Really Paid Like Bureaucrats?, 113 Q.J. Econ. 653, 661–63 (1998) (finding that most of the pay increase for chief executive officers between 1980 and 1994 was in the form of stock options, which increased the percentage of a firm’s total compensation package weighted towards performance compensation).

[19]. See Kevin J. Murphy, Executive Compensation, in 3B Handbook of Labor Economics 2485, 2491 (Orley Ashenfeller & David Card eds., 1999) (“[M]ost executive pay packages contain four basic components: a base salary, an annual bonus tied to accounting performance, stock options, and longterm incentive plans (including restricted stock plans and multi-year accounting-based performance plans).”). Stock compensation includes both outright grants of stock as well as restricted stock and stock options.

[20]. The compensation consulting firm Equilar reported that in 2013, 63.8% of S&P 1500 companies used some form of performance-based equity compensation, 82.8% used short-term cash incentives, 15% had a discretionary cash bonus, and 8.3% had a long-term incentive plan tied to multiyear performance goals. Equilar, CEO Pay Strategies Report 4–5 (2014), https://www2.deloitte.com/content/dam/Deloitte/us/Documents/regulatory/us-aers-ceo-pay-strategies-report-2014-equilar-july-2014-020915.pdf. While Equilar does not aggregate these numbers, it is fair to assume that virtually all large firms use bonus compensation. The pre-bankruptcy use of stock compensation can be in and of itself sufficient to require a new compensation policy, as Chapter 11 usually ends with pre-bankruptcy shareholders receiving no recovery. See generally Notice of Filing of Amended Disclosure Statement for Debtors’ Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankr. Code, In re Hawker Beechcraft, Inc., 486 B.R. 264 (Bankr. S.D.N.Y. 2013) (No. 12-11873) [hereinafter Hawker Beechcraft Disclosure].

[21]. See Hall & Liebman, supra note 18. Firms have two alternatives to adjusting compensation policy in bankruptcy, but they are unattractive, for different reasons. One option is to adjust management’s compensation pre-bankruptcy by giving them large base salaries, which effectively reweights their compensation away from bonus and towards base. Doing so creates important risks for a firm, as news of bonus payments can disrupt negotiations with creditors and create liability for the executive who might find the payment clawed back as a fraudulent conveyance. Alternatively, the firm can avoid adjusting compensation until after bankruptcy, which creates the risk that managers might leave the firm rather than wait for an uncertain payment. See James Sprayregen et al., Recent Lessons on Management Compensation at Various Stages of the Chapter 11 Process, Financier Worldwide (Mar. 2013), https://www.financierworldwide.com/recent-lessons-on-management-compensation-at-various-stages-of-the-chapter-11-process/#.XEZb6S3Myu4.

[22]. See, e.g., Mitchell A. Seider et al., Two Recent Decisions Highlight Pitfalls in Creating and Implementing Key Employee Incentive Plans for Executives in Bankruptcy Cases, Latham & Watkins: Client Alert (Sept. 24, 2012), https://www.lw.com/thoughtLeadership/employee-incentive
-plans-executives-bankruptcy (“[I]t may be difficult to replicate . . . employees’ pre-petition compensation during the Chapter 11 case because a significant part of their compensation may have been in the form of stock options (which are likely worthless in light of the bankruptcy proceedings) and performance bonuses based on metrics that are no longer achievable. Furthermore, these employees may seriously consider other employment opportunities that do not involve the risks inherent in working for a company in Chapter 11.”); Notice of (1) Filing of the Solicitation Version of the Amended Disclosure Statement for the Debtors’ Solicitation Version of the Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code and (2) Deadline for Parties to Object Thereto, In re Hawker Beechcraft, Inc., 486 B.R. 264 (Bankr. S.D.N.Y. 2013) (No. 12-11873) (“[C]urrent compensation levels for each of the KERP Participants are below market levels largely because no MIP or Equity Investment Plan bonuses have been paid in recent years and also due to a decrease in earned commissions. The Debtors believe the KERP will aid the Debtors’ retention of the KERP Participants and will incentivize them to expend the additional efforts and time necessary to maximize the value of the Debtors’ assets.”).

[23]. See, e.g., Nancy Rivera Brooks, Enron Execs Were Paid to Remain, L.A. Times (Dec. 7, 2001), http://articles.latimes.com/2001/dec/07/business/fi-12293.

[24]. See, e.g., Henry, supra note 3 (detailing executive retention plans paid out in high-profile Chapter 11 bankruptcy cases).

[25]. At the 2003 Annual Spring Conference of the American Bankruptcy Institute, a lawyer arguing against allowing KERPs worried very much that the failure to curb bankruptcy bonus abuse (in the form of the Key Employee Retention Plans that had become a routine part of bankruptcy practice) would result in congressional intervention. See Critical Vendor Motions, Retention Bonuses Headed for Endangered List, 39 Bankr. Ct. Decisions: Wkly. News & Comment 1 (Aug. 13, 2002); see also Keach, supra note 3.

[26]. See M. Todd Henderson, Paying CEOs in Bankruptcy: Executive Compensation When Agency Costs Are Low, 101 Nw. U. L. Rev. 1543, 1543–44, 1570 (2007) (“According to [academic accounts of bankruptcy], the Bankruptcy Code’s preference for management operation of the debtor allows managers to extract rents in the form of higher salaries, big option grants, and lavish retention and emergence bonuses.”); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. Pa. L. Rev. 669, 740 (1993) (“In the course of our study, we became suspicious that some CEOs were using leverage generated from the power vested in the debtor-in-possession by the Bankruptcy Code to negotiate increases in their personal compensation.”); Lucien Ayre Bebchuk & Howard F. Chang, Bargaining and the Division of Value in Corporate Reorganization, 8 J.L. Econ. & Org. 253, 267 n.14 (1992) (“In reality, the incumbent management controls the agenda during this initial period [of Chapter 11 Bankruptcy].”).

[27]. Alan Schwartz, A Contract Theory Approach to Business Bankruptcy, 107 Yale L.J. 1807, 1836 (1998) (noting Chapter 11 is preferable to Chapter 7 for current management, in terms of ability to manipulate the process for personal gain); see also Henderson, supra note 26, at 1574 (noting a potential factor favoring management in Chapter 11 is “the possibility that creditors will tolerate inefficient or unfair compensation to curry favor with CEOs, since the debtor has the exclusive right to propose a reorganization plan”); LoPucki & Whitford, supra note 26, at 692 (“[M]anagement of the debtor corporation routinely remains in office after [the bankruptcy] filing and has considerable power over both the business plan and the reorganization plan.”).

[28]. One student researcher interviewed legendary bankruptcy attorney Harvey Miller in 2005 and reported:

Eventually, according to Miller, the negotiations come to point where the controlling distressed investors tell the CEO, “if you want to be CEO of the company, don’t fight

us—because if you fight and we win, you’re dead.” According to Miller, some management teams will eventually give in, often after the distressed investors have agreed to provide them with post-emergence employment contracts.

Paul M. Goldschmid, Note, More Phoenix Than Vulture: The Case for Distressed Investor Presence in the Bankruptcy Reorganization Process, 2005 Colum. Bus. L. Rev. 191, 266–67 (2005).

[29]. See Henderson, supra note 26, at 1575–76 (2007) (“Thus, given the firm’s poor performance, whether or not it can be deemed to be the CEO’s fault, the firm should be able to pay the CEO less, but the costs of the next best alternative are so much higher that the CEO is actually in a stronger negotiating position.”).

[30]. See LoPucki & Whitford, supra note 26, at 742 (“[I]n some reorganization cases management derives considerable power from their incumbency.”).

[31]. See id. at 694–720 (describing the checks on management).

[32]. In re Salant Corp., 176 B.R. 131, 132 (S.D.N.Y. 1994) (“The Bankruptcy Court approved the bonus to [the CEO] at the confirmation hearing . . . .”); see also In re Velo Holdings Inc., 472 B.R. 201, 204 (Bankr. S.D.N.Y. 2012) (approving KERP during bankruptcy case).

[33]. See, e.g., In re W. Pac. Airlines, Inc., 219 B.R. 575, 578 (D. Colo. 1998) (“[A] creditors committee serves something of a ‘watchdog’ function in bankruptcy and enjoys unique rights and responsibilities under the Code.”).

[34]. Wei Jiang et al., Hedge Funds and Chapter 11, 67 J. Fin. 513, 527 n.10 (2012).

[35]. See generally Jared A. Ellias, Do Activist Investors Constrain Managerial Moral Hazard in Chapter 11?: Evidence from Junior Activist Investing, 8 J. Legal Analysis 493 (2016) (finding activist investors actually reduce self-dealing and promote the goals of bankruptcy); Michelle M. Harner & Jamie Marincic, Committee Capture? An Empirical Analysis of the Role of Creditors’ Committees in Business Reorganizations, 64 Vand. L. Rev. 749 (2011) (providing data on the impact of creditors on bankruptcy proceedings).

[36]. See Ellias, supra note 35, at 495 (“In Chapter 11, managers must obtain judicial approval for all major business decisions . . . [creditors] may inform the judge that management is abusing Chapter 11 and file motions seeking judicial relief.”).

[37]. See Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 Am. Bankr. Inst. L. Rev. 5, 35 (1995). (“In 1986 the United States Trustee system was established nationwide . . . . An attempt was made to relieve bankruptcy judges of administrative duties, thereby permitting them to focus more exclusively on their judicial role.”).

[38]. See id.

[39]. About the Program: The United States Trustee Program, U.S. Dep’t Just., https://www.justice.gov/ust/about-program (last updated Mar. 6, 2019).

[40]. Id.

[41]. See Objection of the U.S. Trustee to Debtors’ Motion Pursuant to Section 363(b) of the Bankr. Code for Authorization to Implement a Key Emp. Incentive Plan at 9, In re BearingPoint, Inc., 453 B.R. 486 (Bankr. S.D.N.Y. 2011) (No. 09-10691) [hereinafter BearingPoint Objection].

The Motion is not supported by any indication that the costs of the KEIP are reasonable under the circumstances. To the contrary, the currently-prevailing view here appears to be that such proceeds will be insufficient to generate a recovery for unsecured creditors. Also, there is no basis on which to conclude that the $7.0 million cost of the Debtors’ revised bonus plan is reasonable . . . .

Id.

[42]. That’s not to say that judges did not sometimes reject bonus plans. Levitz Judge Rejects Bankruptcy Bonus, Limits Severance Package, 2 Andrews Bankr. Litig. Rep. 7 (2005) (discussing Judge Burton Lifland’s rejection of a proposed retention bonus in the Levitz Homes bankruptcy when the company had mostly outsourced operation of its business to consultants).

[43]. See In re Montgomery Ward Holding Corp., 242 B.R. 147, 155 (D. Del. 1999) (noting the discretion the bankruptcy court has to defer to management’s business judgment in approving bankruptcy bonus plans). Bankruptcy courts approved executive bonuses upon a showing by the debtor that: (i) the debtor used proper business judgment in creating the plan, and (ii) the plan is “fair and reasonable.” Emily Watson Harring, Walking and Talking like a KERP: Implications of BAPCPA Section 503(c) for Effective Leadership at Troubled Companies, 2008 U. Ill. L. Rev. 1285, 1293 (2008); see also George W. Kuney, Hijacking Chapter 11, 21 Emory Bankr. Dev. J. 19, 78–80 (2004) (summarizing the standard in pre-BAPCA cases). Kuney notes that this standard was either considered overly permissive or unnecessarily restrictive, depending on the particular biases of the critic. Id. at 80; accord Cornwell, supra note 4, at 493–94 (summarizing the pre-BAPCA standard).

[44]. In re Brooklyn Hosp. Ctr., 341 B.R. 405, 409 (Bankr. E.D.N.Y. 2006); see also In re Aerovox, Inc., 269 B.R. 74, 79 (Bankr. D. Mass. 2001) (discussing the importance of the employees to the turnaround effort).

[45]. See Brooklyn Hosp. Ctr., 341 B.R. at 412 (discussing the deliberations of the Board); see also In re Georgetown Steel Co., 306 B.R. 549, 554 (Bankr. D.S.C. 2004) (“The CEO described the deliberations of the Board of Directors with respect to the Retention Motion as well as the processes utilized to arrive at the final amount of the Retention Plan.”); Aerovox, 269 B.R. at 81–82 (“[T]he Board utilized sound business judgment in evaluating the need for and financial implications of the KERP. . . . [T]he Board met five times before approving the original KERP.”); Dickerson, supra note 12, at 97–103.

[46]. See Paul R. Hage, Key Employee Retention Plans under BAPCPA? Is There Anything Left?, 17 J. Bankr. L. & Prac. 1, 15 (2008) (“[S]ection 503(c) prohibits payments to an insider ‘for the purpose of inducing such person to remain with the debtor’s business.’”). The BAPCPA mostly affected consumer bankruptcy, and the reform studied in this Article was one of the handful of provisions that altered business bankruptcy in a significant way.

[47]. In re Global Home Prods., L.L.C., 369 B.R. 778, 783–84 (Bankr. D. Del. 2007) (quoting Karen Lee Turner & Ronald S. Gellert, Dana Hits a Roadblock: Why Post-BAPCPA Laws May Impose Stricter KERP Standards, 3 Bankr. Litig. Rep. 2, 2 (2006)); see also Edward E. Neiger, Bankruptcy Courts Continue to Approve Performance-Based Bonuses for Executives of Companies in Chapter 11, 3 Pratt’s J. Bankr. L. 356, 357 (2007).

[48]. See 11 U.S.C. § 503 (2018); In re Dana Corp., 358 B.R. 567, 575–78 (summarizing the changes to the Bankruptcy Code); Skeel, supra note 12, at 928 (describing KEIPs). In sample cases, it is very clear that––in at least some instances––the KEIP was designed more with a view to what the court would approve than what actually needed to provide incentive compensation to senior executives. For example, in the bankruptcy of Nortel, the debtor’s compensation consultant examined other recent KEIPs and provided its senior managers with a maximum number of how much money could be distributed in bonuses and how many people could be paid, and this was used to generate an incentive plan. See Declaration of John Dempsey in Support Debtors’ Motion for an Order Seeking Approval of Key Emp. Retention Plan and Key Exec. Incentive Plan, and Certain Other Related Relief at 5, In re Nortel Networks Inc., 426 B.R. 84 (Bankr. D. Del. Feb. 27, 2009) (No. 09-10138) [hereinafter Dempsey Declaration].

In determining the appropriate number of employees eligible, maximum program cost, and the size of awards to be granted, I reviewed Key Employee Incentive Plans that had been approved by bankruptcy courts in a number of recent chapter 11 cases. The companies for which these plans were approved reflect entities both inside and outside the technology sector as well as companies facing multi-jurisdictional issues, including SemGroup LLP, Quebecor World, Delphi Corporation, Dura Automotive, and Calpine Corporation.

Id. In Dempsey’s defense, Nortel was a large firm and the compared firms, albeit engaged in entirely different lines of business and headquartered in different cities, were also large firms. Nonetheless, the selection of compared firms is curious. In terms of the number of managers, he testified, “I advised Nortel management to select participants that would result in a population of employees totaling approximately 5% of the aggregate Nortel population, as this amount was well within the range of competitive market practice.” Id.

[49]. See Skeel, supra note 12, at 928 (“[C]reditors have insisted in recent cases that the managers’ compensation be tied to the company’s progress under Chapter 11. The most straightforward strategy for rewarding managers who handle the case expeditiously is to base their compensation, at least in part, on the speed of the reorganization.”).

[50]. See Hage, supra note 46, at 22–27 (discussing the early decisions); see also Revich, supra note 4, at 94.

[51]. See In re Velo Holdings Inc., 472 B.R. 201, 211 (Bankr. S.D.N.Y. 2012) (analyzing a proposed KEIP plan to insure the targets are “difficult to achieve”).

[52]. See LoPucki & Whitford, supra note 26, at 694 (“Management also gains considerable power by being better informed than other interested parties.”).

[53]. Of course, in some cases a 10% revenue increase can result from changed market conditions or political developments that improve the firm’s prospects with no increased effort from managers.

[54]. In re Dana Corp., 351 B.R. 96, 102 n.3 (Bankr. S.D.N.Y. 2006).

[55]. In re Dana Corp, 358 B.R. 567, 576–77 (Bankr. S.D.N.Y. 2006) (emphasis in original) (internal citations omitted).

[56]. See Revich, supra note 4, at 116.

[57]. See Bharath et al., supra note 10, at 24 (suggesting the use of KERPs contribute to more equitable Chapter 11 outcomes, as measured by the frequency of Absolute Priority Deviations).

[58]. See, e.g., Victor Fleischer, Regulatory Arbitrage, 89 Tex. L. Rev. 227, 278–80 (2010).

[59]. For evidence supporting this hypothesis surveyed, see generally infra Section III.B.1.

[60]. See Margaret Howard, The Law of Unintended Consequences, 31 S. Ill. U. L.J. 451, 456 (2007); Allison K. Verderber Herriott, Toward an Understanding of the Dialectical Tensions Inherent in CEO and Key Employee Retention Plans During Bankruptcy, 98 Nw. U. L. Rev. 579, 615 (2004); Revich, supra note 4, at 112 (considering Judge Lifland’s decision in In re Dana Corp., which noted permissible incentive plans may have retentive effects).

[61]. For evidence supporting this hypothesis surveyed, see infra Section III.B.2.

[62]. Economic theory has long held that people respond to incentives. E.g., Gary S. Becker, Irrational Behavior and Economic Theory, 70 J. Pol. Econ. 1, 9 (1962).

[63]. Karen Dillon, The Coming Battle over Executive Pay, Harv. Bus. Rev. (2009), https://hbr.org/2009/09/the-coming-battle-over-executive-pay.

[64]. For evidence supporting this hypothesis surveyed, see infra Section III.B.3.

[65]. See generally Data & Research, Bankr. Data, http://bankruptcydata.com/p/data-research (last visited Apr. 8, 2019). Next Generation Research’s Bankruptcy Data service is a commonly used data source for empirical bankruptcy studies. Accord, e.g., Kenneth M. Ayotte & Edward R. Morrison, Creditor Control and Conflict in Chapter 11, 1 J. Legal Analysis 511, 517 (2009).

[66]. A portion of this larger sample was used previously in Jared A. Ellias, What Drives Bankruptcy Forum Shopping? Evidence from Market Data, 47 J. Legal Stud. 119, 124–26 (2018). I provide greater detail regarding construction of the larger sample. While this Article shares basic information on bankruptcy cases with that larger dataset, the data on executive compensation presented here were collected specifically for this project and are unique and new.

[67]. “TRACE” is a complete record of all buying and selling of corporate bonds, with transaction-level data on all trades during the sample period. It is the standard source for bond data in empirical finance literature. “MarkIt” is a data provider that compiles trading in corporate loans. Bloomberg maintains records in trading of both listed and over-the-counter equity. I do not report results using TRACE, MarkIt, or Bloomberg data in this Article.

[68]. Firms generally disclose executive compensation as part of their annual report or proxy statements for their annual meeting. See Fast Answers: Executive Compensation, U.S. Sec. & Exchange Comm’n, https://www.sec.gov/fast-answers/answers-execomphtm.html (last visited Apr. 8, 2019) (“The easiest place to look up information on executive pay is probably the annual proxy statement. Annual reports on Form 10-K and registration statements might simply refer you to the information in the annual proxy statement, rather than presenting the information directly.”).

[69]. This means that the case study sample is drawn from a slightly broader universe than the larger sample, which is restricted to public firms with traded claims. I do not believe this introduces bias into the analysis, and it avoids any bias that could result from looking only at public firms. The results presented below are the same if I restrict the case study sample to the universe of firms with traded claims.

[70]. In re Dana Corp, 358 B.R. 567, 576–77 (Bankr. S.D.N.Y. 2006) (emphasis in original). (internal citations omitted); see also supra note 55 and accompanying text.

[71]. One possible complaint about my methodology is that the 2009 and 2010 “post-reform” sample includes the bankruptcy cases that resulted from the financial crisis. The broad conclusions from the study come from the larger sample. The case study sample is used mostly to illustrate problems with the reform, provide institutional detail, and estimate the increase in costs, which should not be affected by the financial crisis and its aftermath.

[72]. 11 U.S.C. § 327 (2018).

[73]. See First Verified Monthly Application of Alston & Bird LLP as Counsel for the Debtors and Debtors-in-Possession for Allowance of Compensation and Reimbursement of Expenses Incurred for the Interim Period June 22, 2009 through July 31, 2009 at 2, In re Sea Launch Company, No. 09-12153 (Bankr. D. Del. Aug. 25, 2009); see also Fed. R. Bankr. P. 2016(a) (providing for the compensation of services provided to the debtor by professionals).

[74]. Others have speculated that the new, post-reform statutory regime requires more attorney time and expense. See Jonathan C. Lipson, Where’s the Beef? A Few Words About Paying for Performance in Bankruptcy, 156 U. Pa. L. Rev. 64, 68 (2007).

[75]. All of the nominal dollar amounts in the bills were adjusted to 2010 dollars using the Consumer Price Index.

[76]. In Appendix Table 1, I use regression analysis to try to verify that the observed fee increase is not due to a difference in observable firm characteristics between the population of pre-reform Chapter 11 debtors and post-reform Chapter 11 debtors. The results suggest that, controlling for firm financial characteristics and industry, the 2005 bankruptcy reform is associated with a 118% increase in the debtor’s fees for time spent on bonus plans, a 102% increase in attorney’s hours devoted to the bonus plan, and a 110% increase in the percentage of the total bill for the case devoted to matters related to the bankruptcy bonus plan.

[77]. Some firms may be more likely to enact bonus plans if, for example, a large part of their pre-bankruptcy compensation was in the form of stock that is unlikely to be worth anything after bankruptcy. Thus, it is possible that a composition effect drives the effect in Figure 1, if the cohort of Chapter 11 debtors pre-reform were firms that used more stock compensation than the cohort that came afterwards. I addressed the question of pre-bankruptcy compensation practices further in supra Part I.

[78]. For example, if a firm’s CEO was paid $100 in the year before bankruptcy and $120 in the year the firm filed for bankruptcy, the test statistic is ($120-$100)/$100, or 12%.

[79]. The firms in Table 2 all had historic and bankruptcy-year compensation data publicly available, either in securities filings or in the bankruptcy court documents that I reviewed to assemble the sample. It is possible that the missing firms are non-randomly selected, so the results in this Section should be interpreted cautiously. In general, firms tend to avoid disclosing executive compensation numbers if they can, viewing it as a trade secret, so the firms in Table 2 tend to skew towards the largest firms.

[80]. From the large sample, both OTC Holdings and Regent Communications engaged in this type of planning. I studied both cases closely for my article, Do Activist Investors Constrain Managerial Moral Hazard In Chapter 11?: Evidence from Junior Activist Investing, supra note 35. Stumbling upon them—and their thoughtful and successful attempts to use bankruptcy planning to evade court review—inspired this project.

[81]. One law firm that represents many large debtors in bankruptcy expressly warned its clients against this strategy, saying that it risked upsetting negotiations with creditors and created fraudulent conveyance risk. Sprayregen et al., supra note 21. Anecdotal evidence suggests that this practice is both common and continuing to this day. See Andrew Scurria, Takata Insiders Took in Millions Before Bankruptcy, Wall St. J. Pro: Bankr. (Aug. 10, 2017), https://www.wsj.com/articles/takata-insiders-took-in-millions-before-bankruptcy-1502405497.

[82]. Disclosure Statement Under 11 U.S.C. § 1125 in Support of the Debtors’ Third Amended Joint Plan of Reorganization at 26–27, In re OTC Holdings Corp., No. 10-12636 (Bankr. D. Del. Nov. 2, 2010), ECF No. 263.

[83]. See id.

[84]. First Amended Disclosure Statement for the First Amended Joint Plan of Reorganization for Regent Commc’ns Corp., et al. at 24, In re Regent Commc’ns, Inc., No. 10-10632 (Bankr. D. Del. Mar. 22, 2010), ECF No. 128. A third non-case study sample, the 2009–2010 Chapter 11 of CCS Medical, involved similar bankruptcy planning and similarly allowed management to be paid bankruptcy-related bonuses without a judge finding that the plan satisfied the revised statute. See Transcript of Hearing re Debtors’ Motion for Order (a) Approving Bidding Procedures in Connection with Mktg. and Proposed Sale of Substantially All of the Debtors’ Assets, and (b) Granting Related Relief at 37–38, In re CCS Medical, Inc., No. 09-12390 (Bankr. D. Del. Nov. 23, 2009), ECF No. 673.

[85]. Importantly, I only count bankruptcy bonuses that are bundled with the plan of reorganization and pay cash consideration as part of the analysis in this paragraph.

[86]. See 11 U.S.C. § 1129 (2018).

[87]. See In re Journal Register Co., 407 B.R. 520, 527, 537 (Bankr. S.D.N.Y. 2009) (noting the court agreed that the confirmation of a plan is governed by section 1129, not section 503(c), of the Bankruptcy Code).

[88]. Id. at 535.

[89]. Id. at 528, 537.

[90]. Id. at 538. In collecting data for Ellias, supra note 35, I observed other firms engage in similar behavior without first seeking court approval of a bonus plan. For example, Caraustar Industries paid management 50% of its 2009 incentive compensation on the effective date of the plan of reorganization. See Disclosure Statement for Debtors’ Joint Plan of Reorganization at 40, In re Caraustar Indus., Inc., No. 09-73830 (Bankr. N.D. Ga. May 31, 2009), ECF No. 21. Orleans Homebuilders paid $2.3 million in bonuses to forty senior managers as part of its plan of reorganization. See Debtor’s Second Amended Joint Plan of Reorganization at 44, In re Orleans Homebuilders, Inc., 561 B.R. 46 (Bankr. D. Del. 2010) (No. 10-10684). Other firms paying large bonuses as part of the plan—presumably for performance during the bankruptcy case—that filed for bankruptcy in 2009 and 2010 include: Lyondell Chemical Company ($27.75 million); Reader’s Digest Association ($12.9 million); Visteon Corporation ($8.1 million for twelve managers); Mesa Air Group; Inc. ($5.5 million); Six Flags, Inc. ($5.025 million for seven managers); Innkeepers USA Trust ($4.5 million); Almatis B.V. ($4.3 million); Tronox Incorporated ($3 million for four managers); Cooper-Standard Holdings, Inc. ($2.49 million for thirteen managers); Orleans Homebuilders, Inc. ($2.38 million for forty managers); NTK Holdings, Inc. (Nortek, Inc.) ($2 million); FairPoint Communications, Inc. ($1.8 million); Journal Register Company ($1.7 million); Affiliated Media, Inc. ($1.6 million for fifty employees); Centaur, L.L.C. ($1.5 million for three managers); Great Atlantic & Pacific Tea Company, Inc. ($1.48 million for 146 managers); Panolam Industries International, Inc. ($1 million); EnviroSolutions Holdings, Inc. ($1 million); Pliant Corporation ($0.87 million for one manager), International Aluminum Corporation ($0.65 million); Newark Group, Inc. ($0.5 million); Oriental Trading Company, Inc. ($0.45 million for fourteen managers); Neff Corp. ($0.35 million for two managers); and Regent Communications, Inc. ($0.31 million).

[91]. Congress has long recognized the need for public disclosure of post-bankruptcy compensation and retention of bankruptcy insiders. See, e.g., 11 U.S.C. § 1129(a)(5)(B) (2018) (requiring disclosure of the identity of insiders who will be employed or retained by the debtor as well as their compensation).

[92]. See Voluntary Petition (Chapter 11), In re Citadel Broadcasting Corp., No. 09-17442 (Bankr. S.D.N.Y. Dec. 20, 2009).

[93]. Objection of Virtus Capital LLC and Kenneth S. Grossman Pension Plan to the Disclosure Statement for the Joint Plan of Reorganization of Citadel Broadcasting Corp. and Its Debtor Affiliates Pursuant to Chapter 11 of the Bankr. Code at 4–5, In re Citadel Broadcasting Corp., No. 09-17442 (Bankr. S.D.N.Y. Mar. 5, 2010), ECF No. 172. Post-bankruptcy equity incentive plans are largely outside the scope of this study because of data constraints. While I often observe firms setting aside post-reorganization equity for a management incentive plan as part of the plan of reorganization, I do not systematically observe the post-bankruptcy payouts. Citadel is an outlier case because it involved management misrepresenting the post-bankruptcy incentive plan to the court, with creditors learning about it and seeking some sort of remedy. The vast majority of Chapter 11 debtors do not become publicly traded immediately after bankruptcy; accordingly, there is little disclosure of post-bankruptcy equity compensation. The value of post-bankruptcy equity compensation is substantial and dwarfs all observed bankruptcy bonus plans (for the 2009 and 2010 sample, the aggregate amount of value in all of the bonus plans in the case study sample is $70 million; those same firms set aside approximately $387 million in aggregate management post-bankruptcy equity incentive plans). However, without information on post-bankruptcy distributions and understanding how equity was allocated across the employee base, it is impossible to determine how much of this equity actually flowed to management and how much may have flowed to management as a form of compensation for performance while the firm was in Chapter 11.

[94]. See id.

[95]. Reply of R2 Investments, LDC in Support of Motion Pursuant to 11 U.S.C. §§ 1142 and 105(a) to Direct Reorganized Debtors to Comply with Plan ¶ 5, In re Citadel Broadcasting Corp., No. 09-17442 (Bankr. S.D.N.Y. Oct. 29, 2010), ECF No. 507. scienter
1

[96]. Motion Pursuant to 11 USC §§ 1142 and 105(a) to Direct Reorganized Debtors to Comply with Plan at 2, In re Citadel Broadcasting Corp, No. 09-17442 (Bankr. S.D.N.Y. Oct. 6, 2010), ECF No. 498.

[97]. Id. at 3.

[98]. Id. at 2.

[99]. See id. 1–5.

[100]. Id. at 1.

[101]. Id. at 2.

[102]. Goldschmid, supra note 28, at 266–67.

[103]. See supra Part II.

[104]. An important limitation of the data is that in many cases, bonus plans were either incomplete when filed with the court or filed under seal. Accordingly, Table 3 reports the information that was publicly available both from bankruptcy court filings and from contemporaneous or post-bankruptcy SEC filings that filled in gaps from the court filings.

[105]. This is consistent with anecdotal reports of practitioners. For example, a prominent creditor’s attorney told Bloomberg that “the amendment to the code changed the means, but not the value of these plans . . . [i]t’s just changed the way you get there, not necessarily how much management gets at the end.” Church, supra note 7.

[106]. In expectation, the expected value of $100 in the future that will be received with 100% certainty is $100 ($100*100%). If management only has a 10% chance of receiving the bonus, in expectation that bonus is worth $10 ($100*10%). Thus, the board would need to propose a bonus plan that paid $1000 as part of a challenging incentive plan with a 10% ex ante probability of payout (because $1000*10% = $100) to provide the same level of motivation as a guaranteed retention bonus of $100.

[107]. For example, if a bonus plan was tied to confirming a plan of reorganization by a certain date, we examined whether the bonus plan was approved by that date or if there was a subsequent extension.

[108]. The exception is a higher observed rate of payout for firms with whole firm sale targets and payouts for emerging from bankruptcy. This likely reflects changes in bankruptcy practice, as it became more common for firms to go into Chapter 11 and conduct going-concern sales. See, e.g., Douglas G. Baird & Robert K. Rasmussen, The End of Bankruptcy, 55 Stan. L. Rev. 751, 751, 786–88 (2002) (discussing the rise in the use of Chapter 11 as a platform for the sale of a firm’s assets, often as a whole firm going-concern sale).

[109]. This finding deserves two qualifications. As Table 4 shows, there is enough missing data to potentially bias the result. Additionally, bonus plans often have “tiers” of goals (as where, for example, a 10% revenue increase might yield $100 and a 15% revenue increase might yield $200), and I do not systematically examine enough information to determine which payout tier was reached in enough cases to report results.

[110]. For example, if management would have worked for $100, but extracts extra rents of $50 for total compensation of $150, the extra $50 is money that could have otherwise been paid (in some form or another) to unsecured creditors in the event they are not being paid in full.

[111]. In some cases, creditors file their own objections, either because they are secured creditors who are not represented by any official committee or because they want to act on their own, apart from the committee, for strategic reasons. I also summarize the litigation of these creditors as part of Table 4. The qualitative trends I discuss in this Section, while focusing on the official committee, are the same as the trends observed by unsecured creditors acting on their own.

[112]. It is difficult to evaluate this because managers may simply propose an unreasonable bonus plan before moving the plan to what they know creditors will accept after negotiations and litigation. It is hard to know if management actually “moved” or simply went to where they always planned to be.

[113]. Objection of the Official Comm. of Unsecured Creditors to the Motion of the Debtors and Debtors in Possession for Entry of an Order Approving a Key Employ. Incentive Plan at 8, In re Midway Games, Inc., No. 09-10465 (Bankr. D. Del. Mar. 27, 2009), ECF No. 203.

[114]. Objection of the Official Comm. Of Unsecured Creditors to Debtor’s Motion for Order Approving the Implementation of Key Emp. Incentive Plan and Short Term Incentive Plan at 2, In re Hayes Lemmerz Int’l, Inc., No. 09-11655 (Bankr. D. Del. Aug. 14, 2009), ECF No. 460 [hereinafter Hayes Lemmerz Objection].

[115]. Objection of the Official Comm. Of Unsecured Creditors to Debtor’s Motion for Order Authorizing Use of Cash Collateral for Payments Regarding HVM LLC Incentive Program at 28, In re Extended Stay Inc., No. 09-13764 (Bankr. S.D.N.Y. Oct. 26, 2009), ECF No. 530; Objection of Official Comm. Of Unsecured Creditors to Motion of the Debtors for an Order Authorizing the Debtors to Continue Their Short-Term Incentive Plan at 12–13, In re Merisant Worldwide, Inc., No. 09-10059 (Bankr. D. Del. Mar. 20, 2009), ECF No. 211.

[116]. Objection of the Official Comm. Of Unsecured Creditors to: (A) Debtors’ Motion for an Order Authorizing the Debtors to Implement Severance and Non-Insider Retention Programs; and (B) Debtors’ Motion for an Order Authorizing the Implementation of the Visteon Incentive Program at

8–10, In re Visteon Corp., No. 09-11786 (Bankr. D. Del. Jul. 13, 2009), ECF No. 528.

[117]. Objection of the Official Comm. of Unsecured Creditors to Debtors’ Motion for Order Authorizing Debtors to Adopt and Implement an Incentive Plan for Certain Key Employ. Pursuant to Sections 363(b)(1), 503(c)(3), and 105(a) of the Bankr. Code at 13, In re Foamex Int’l, Inc., 368 B.R. 383 (Bankr. D. Del. 2007) (No. 09-10560).

[118]. Id. at 1–2.

[119]. Id. at 2.

[120]. Id. at 2–4.

[121]. See id. at 2–5.

[122]. Official Comm. Of Unsecured Creditors’ Objection to Debtors’ Motions to Shorten Notice Relating to Their (I) Motion for Approval of Exec. Comp. and Emp. Incentive Plan for Non-Debtor OpCo Subsidiaries and (II) Motion to File Related Exhibits Under Seal at 2–3, In re Trico Marine Servs., Inc., 450 B.R. 474 (Bankr. D. Del. 2011) (No. 10-12653).

[123]. Debtors’ Reply to the Objection of the Official Comm. of Unsecured Creditors to Motion of the Debtors for Entry of an Order Approving the Debtors’ Key Employee Incentive Plan at 2, In re NEFF Co., No. 10-12610 (Bankr. S.D.N.Y. Jun. 28, 2010), ECF No. 199. In response, the debtors moved the “emergence incentive award” to the plan of reorganization. Id. at 3; see also supra note 90 and accompanying text.

[124]. Hayes Lemmerz Objection, supra note 114, at 3.

[125]. In one case, the Debtor complained that the U.S. Trustee’s objection “appears to be based on a form and ignores the evidence [the debtor] submitted.” Tronox’s Response to the Objection of the U.S. Tr. to Tronox’s Motion for Entry of an Order Approving Tronox’s Key Emp. Incentive Plan at 2, In re Tronox, Inc., 503 B.R. 239 (Bankr. S.D.N.Y. 2009) (No. 09-10156).

[126]. See generally Objection of the U.S. Tr. to Debtor’s Motion for Order Approving Debtors’ Key Mgmt. Incentive Plan, In re Lear Corp., No. 09-14326 (Bankr. S.D.N.Y. Jul. 20, 2009), ECF No. 161.

[127]. Id. at 1–2, 6.

[128]. See id. at 7.

[129]. Id.

[130]. Id.

[131]. See id.

[132]. U.S. Tr.’s Objection to Debtors’ Motion for Entry of an Order Authorizing Incentive Payments to Debtors Employees at 3, In re Noble Int’l Ltd., No. 09-51720 (Bankr. E.D. Mich. Apr. 22, 2009), ECF No. 60.

[133]. U.S. Tr.’s Objection to the Debtors Motion for Entry of an Order Approving the Debtor’s Incentive Plan and Authorizing Payments Thereunder Pursuant to §§ 363(b) and 503(b) at 2, In re Vermillion, Inc., No. 09 -11091 (Bankr. D. Del. May 6, 2009), ECF No. 42.

[134]. BearingPoint Objection, supra note 41, at 7.

[135]. See Kan Nishida, Demystifying Text Analytics Part 3 — Finding Similar Documents with Cosine Similarity Algorithim, Medium: Learn Data Science (June 23, 2016), https://blog.exploratory
.io/demystifying-text-analytics-finding-similar-documents-with-cosine-similarity-e7b9e5b8e515.

[136]. See Letter from Assistant Attorney Gen. Ronald Weich, to U.S. Senator Charles E. Grassley 1 (Mar. 5, 2012), http://online.wsj.com/public/resources/documents/Letter031312.pdf.

[137]. Id. at 2.

[138]. See Jonathan Randles, Westmoreland Paid Millions in Executive Bonuses in Year Before Bankruptcy, Wall St. J. (Nov. 9, 2018), https://www.wsj.com/articles/westmoreland-paid-millions-in-executive-bonuses-in-year-before-bankruptcy-1541804141.

[139]. See Second Monthly Application of Akin Gump Strauss Hauer & Feld LLP, Co-Counsel for Debtors and Debtors in Possession, for Interim Allowance of Compensation and for the Reimbursement of Expenses for Services Rendered During the Period from March 1, 2009 through March 31, 2009, Ex. B at 14, In re Foamex International Inc., No. 09-10560 (Bankr. D. Del. May 11, 2009), ECF No. 390.

Just Transitions – Article by Ann M. Eisenberg

January 2019March 2019Southern California Law Review Admin

From Volume 92, Number 2 (January 2019)
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Just Transitions

Ann M. Eisenberg [*]

The transition to a low-carbon society will have winners and losers as the costs and benefits of decarbonization fall unevenly on different communities. This potential collateral damage has prompted calls for a “just transition” to a green economy. While the term, “just transition,” is increasingly prevalent in the public discourse, it remains under-discussed and poorly defined in legal literature, preventing it from helping catalyze fair decarbonization. This Article seeks to define the term, test its validity, and articulate its relationship with law so the idea can meet its potential.

The Article is the first to disambiguate and assess two main rhetorical usages of “just transition.” I argue that legal scholars should recognize it as a term of art that evolved in the labor movement, first known as a “superfund for workers.” In the climate change context, I therefore define a just transition as the principle of easing the burden decarbonization poses to those who depend on high-carbon industries. This definition provides clarity and can help law engage with fields that already recognize just transitions as a labor concept.

I argue further that the labor-driven just transition concept is both justified and essential in light of today’s deep political polarization and “jobs-versus-environment” tensions. First, it can incorporate much-needed economic equity considerations into environmental decisionmaking. Second, it can inform a modernized alternative to the environmental law apparatus, which must evolve to transcend disciplines. Third, it offers an avenue for climate reform through coalition-building between labor and environmental interests. I offer guidance for effectuating the principle by synthesizing instances of its embodiment in law in the Trade Act of 1974 (assisting manufacturing communities), the President’s Northwest Forest Plan (assisting timber communities), the Tobacco Transition Payment Program (assisting tobacco farmers), and the POWER Initiative (assisting coal communities), among other examples.

TABLE OF CONTENTS

Introduction

I. What is a “Just Transition”? Background and Rhetoric

A. The Transition to a Low-Carbon Economy and the Transition’s Potential Consequences

B. Defining a “Just Transition”

II. Can a Law of Just Transitions Be Justified?

A. An Environmental Theory of Just Transitions

B. Fossil Fuel-Dependent Communities: An Exemplary
Case Study for Just Transitions

C. A Political Economy Theory of Just Transitions

III. Just Transitions as Law: Filling in the
Contours

A. Federal Transitional Policies

1. The Trade Act of 1974

2. The President’s Northwest Forest Plan

3. The Tobacco Transition Payment Program

4. The POWER Initiative

B. Synthesizing Federal Transitional Policies

C. Locally-Driven Transitions

D. Additional Considerations for Pursuing Just
Transitions

Conclusion

Introduction

Political obstacles notwithstanding, many in the United States agree that carbon emissions must be quickly and dramatically reduced in order to avoid further catastrophic effects of climate change. Whether the path to a decarbonized world is more winding or straightforward, the effects of a transition to a low-carbon society will fall unevenly on many communities, which raises serious normative questions of justice.[1] In response to this concern, many call for a “just transition” to a low-carbon future.[2] While this phrase has gained significant traction,[3] its meaning remains unclear.[4]

“Just transition” has at least two primary usages. First, the phrase is used to mean that the transition to a low-carbon society should be fair to the most vulnerable populations.[5] The current fossil fuel-based economy has been characterized by inequality and environmental injustice, or environmental hazards that are inequitably distributed.[6] The new, low-carbon economy should not repeat or exacerbate these injustices; in fact, the transition is a new opportunity, indeed an obligation, to counteract them.[7]

The second meaning of “just transition” calls for protecting workers and communities who depend on high-carbon industries from bearing an undue burden of the costs of decarbonization.[8] It proposes that the shift to a low-carbon economy will affect certain livelihoods disproportionately, and that this impact should be mitigated.[9] As one labor advocate explains, a just transition “means tackling climate change in a way that respects workers.”[10]

This Article demonstrates that the latter, labor-driven concept of a just transition is not only justified but is key to overcoming many of the obstacles that plague climate reform. Environmental policy remains thwarted by a variety of problems old and new. Longstanding “jobs-versus environment” tensions persist, as well as the more general notion that environmental protection represents a zero-sum game with winners and losers.[11] Even before the current presidential administration, scholarship contemplated the future of environmental law in an era of legislative stagnation.[12] Many have called for environmental law to adapt to the times by reshaping itself in various ways—letting go of some of its traditional emphases,[13] crossing over into other doctrinal areas,[14] and becoming more malleable in one manner or another in order to better interact with the political, economic, and social realities of a complex world.[15]

The labor-driven concept of a just transition is powerfully poised to address these deep concerns if scholars and policymakers embrace it. First and most clearly, it reroutes jobs-versus-environment tensions into a principle of “jobs and environment,” taking one of the longstanding thorns in environmentalism’s side and marshaling it toward productive pathways.[16] Second, by blurring the boundaries between environmental law and labor law, it can help align environmental decisionmaking more with the realities of complex social-ecological systems.[17] Third, by aligning environmental interests with labor concerns, it creates potential for coalition-building, thus informing both the ends of climate policy and the ever-elusive means for achieving it.[18] Finally, in an age of dramatic populist alienation,[19] it would inject much-needed economic equity considerations into environmental decisionmaking.

The Article also demonstrates that it is worth choosing one meaning for this term and that the labor-driven meaning makes more sense than the alternative. “Just transition” is a term of art that evolved in the labor movement, first known as a “superfund for workers.”[20] Its specificity gives it potency, and it has already gained traction in other disciplines and with major international organizations.[21] The broader usage, while important, seems redundant alongside comparable but better-known concepts, such as climate justice and energy justice.[22] It is confusing and less productive for different disciplines, and different scholars within law, to use the same term with different understandings of its meaning.[23]

I therefore argue that in the context of climate change, the just transition concept should be defined as some form of help for fossil fuel workers. Yet the broadest theoretical impetus for this help goes beyond environmental law. The just transition is an equitable principle of easing the burden that publicly-driven displacement poses to workers and communities who are highly dependent on a particular industry, especially a hazardous one. The theory has flavors of an estoppel concept, an unclean hands argument, or something akin to a call for takings compensation.[24] It is a principle of distributive economic justice, insisting that those displaced should not alone sustain their economic losses. This idea arises most frequently in response to environmental progress, but it bears relevance to other contexts as well.[25]

The prospect of a law of just transitions raises many questions, however, some of which labor law scholar David Doorey has begun to explore in a germinal article examining the desirability of a potential new field combining aspects of labor law, environmental law, and environmental justice.[26] How would just transitions relate to other models of distributive justice, such as environmental justice, which maintains that the burdens of pollution should be less discriminatorily and more equitably distributed?[27] How would it relate to sustainable development, which aims to reconcile environmental and economic considerations?[28] Would it merely create new employment opportunities when climate-related regulations affect a certain sector, or is it what one union president called it—“a really nice funeral”?[29] Must there be a causal link between regulatory initiatives and impacts on jobs, or does a just transition also concern industry contractions that stem from market forces?[30] Can the two be meaningfully differentiated?[31]

This Article attempts to answer these questions. Part I provides background necessary for understanding the just transitions concepts, disambiguates the two different usages of the term, and argues that legal scholarship should embrace the labor-driven definition. Part II explores three avenues that could serve as theoretical justifications for the labor-driven just transition principle in the context of climate change. Based on a theory of distributive environmental decisionmaking, the history of injustice in coalfield communities, and principles of political economy and interest-group theory, the discussion concludes that the labor-driven just transition principle is indeed legitimate, consistent with relevant norms, and necessary in the face of climate change. Part III synthesizes major federal transitional policies of the past several decades and argues that an effective law and policy of just transitions, especially when targeting regional displacement, must do more to untangle and address the complex, intertwined factors that shape communities’ dependency relationships with particular industries.

The stakes of this inquiry are high. Coal miners have become a symbol for broader national divisions, and commentators still strive to understand the “urban/rural divide” that made its way into the national consciousness via the 2016 presidential election. This analysis offers insights for the plight of coal miners and other rural communities, as well as certain workers’ relationship with environmentalism and climate policy. It also implicates a reconsideration of work, workplace safety, well-paying jobs, abrupt societal change, and private and public accountability for many workers’ abject vulnerability in a period that has been contemplated as a “new Lochner era.”[32] Major social and economic changes will continue to come. Scholars and policymakers would be well-advised to contemplate more robust transitional policy and baseline protections in light of the despair and instability unmitigated transitions can yield.

I. What is a “Just Transition”? Background and Rhetoric

A. The Transition to a Low-Carbon Economy and the Transition’s Potential Consequences

The term “just transition” tends to arise in two contexts. Some use the expression to refer to more general principles of equity in the transition to a low-carbon economy.[33] In other words, the shift to a low-carbon economy is an opportunity to rectify the injustices of the fossil fuel economy, and to not do so, or to allow inequalities to worsen, would itself effectuate injustice. On the other hand, some use the expression to refer to the nexus of labor and environmental reform, or the approach of taking work and jobs into account in or after environmental decisionmaking.[34] Yet both meanings derive from overlapping circumstances.

First, the fossil fuel-based economy characterizing the past century has had many casualties.[35] They run the full gamut from a child developing asthma in rural Australia,[36] to executions of community advocates in Nigeria,[37] to fishermen’s damaged livelihoods in the U.S. Gulf,[38] to victims of geopolitical machinations, including war.[39] People of color, indigenous communities, and people living in poverty have borne the worst burdens of the fossil fuel economy, in large part because of energy production.[40] The ultimate “externality” is, of course, climate change, the impacts of which we are already beginning to feel.[41]

The global community is currently experiencing substantial momentum toward a low-carbon, “clean energy” economy.[42] This transition is driven in part by a prevalent desire to mitigate climate change, both in the United States and elsewhere.[43] While the U.S. federal government is hostile to environmental regulation,[44] many U.S. states, cities, and institutions have confirmed their ongoing commitment to reducing carbon emissions.[45] For instance, “[d]ays after President Trump announced that he would be pulling the U.S. out of a global agreement to fight climate change, more than 1,200 business leaders, mayors, governors and college presidents . . . signaled their personal commitment to the goal of reducing emissions.”[46] The transition is also driven by market forces and concomitant evolutions in policy forces—with “widespread recognition, including among utilities, that low-carbon policy drivers are here to stay.”[47] Internationally, countries have taken the opposite approach to the Trump administration’s, such as with China’s plan to invest $360 billion in renewable energy by 2020.[48] Altogether, these factors have compelled some commentators to deem the transition to a low-carbon society “inevitable.”[49]

Nevertheless, a world with low carbon emissions does not somehow transform into a utopia. A shift to a clean-energy economy stands to perpetuate or exacerbate current patterns of inequity. Those patterns could specifically relate to low-carbon industries, for instance, through land theft to develop wind and solar farms, forced labor to extract the natural resources necessary to create solar panels, or impositions of health hazards from biomass fuels.[50] The patterns could also arise in other contexts in the low-carbon world, such us through inequitable access to clean energy.[51]

While these novel risks have begun to receive more attention in dialogues on climate change and the clean-energy transition, so, too, has the slightly more controversial question of “jobs.” “Jobs versus environment” tensions surround nearly every environmental policy debate.[52] Industry advocates and workers argue frequently that environmental reform will destroy individual livelihoods and communities’ entire way of life.[53]

Environmental groups—who have good reason to be cynical—have historically responded to these claims with dismissiveness.[54] Environmental advocates have argued that concerns about jobs are either industry propaganda or misinformed in some way.[55] Complaints that environmental reforms undermine jobs thus often encounter arguments that job losses are not as bad as claimed, or even if they are, environmental reform provides a net benefit to all that outweighs the cost of a few lost jobs.[56]

This tension raises the question: do environmental regulations cause people to lose their jobs—with “lost jobs” often used as a rhetorical stand-in for lost good jobs?[57] And if they do, does the benefit to the greater good offset the lost jobs? These questions are more complicated than they may seem. A first, critical point is that the changes that are necessary for the United States to reduce its greenhouse gas emissions adequately are dramatic.[58] Thus, climate reform that is meaningfully suited to climate change is not the same as the incremental environmental reforms of the past. According to one interpretation, carbon emissions in the United States need to decline by 40% over the next twenty years.[59] Methane and other greenhouse gas emissions also need to be reduced at some level.[60] “To accomplish this goal will require across-the-board cuts in both production and consumption in all domestic fossil fuel sectors”[61] and likely, in other industries as well.[62]

The “transition” is therefore a new era, which could involve a relatively rapid restructuring of society. This rapid restructuring could involve quicker, more extreme contractions of certain industries. According to economists Robert Pollin and Brian Callaci, in this scenario, “workers and communities whose livelihoods depend on the fossil fuel industry will unavoidably lose out in the clean energy transition. Unless strong policies are advanced to support these workers, they will face layoffs, falling incomes, and declining public-sector budgets to support schools, health clinics, and public safety.”[63]

Yet even if the transition to a clean-energy economy involves more incremental changes, it is worth contemplating whether the environmental movement has itself periodically had a misinformed stance on the question of work. As many have pointed out, environmental regulations have been shown not to result in a net loss of jobs for a given society and may in fact produce net gains in employment.[64] This may seem to support the “greater good” argument. Indeed, the clean-energy transition is anticipated to yield dramatic growth in the ever-burgeoning green energy sector, creating millions of new jobs over the course of the coming decades.[65]

However, regulations and other measures have at times also been shown to catalyze job losses for discrete regions and sectors.[66] Viewed through a legal geographies lens—which holds that questions of scale, scope, and place may show that what is “just” at one level is “unjust” at another [67]—this collateral damage of environmental reform does seem more problematic. As one commentator articulated, “[i]f you’re a coal miner in West Virginia, it’s not a great comfort that a bunch of guys in Texas are employed doing natural gas.”[68] While industry advocates undoubtedly exploit, or sometimes invent, such harms, it is possible that the environmental movement has also turned a blind eye to them.

Do job losses that are not clearly the proximate cause of legal reform, but that stem from the evolution of market forces, also deserve attention? Society did not, after all, provide special support to the employees of Blockbuster when mail-order DVDs and online streaming took their place because those services were more convenient and in demand. Why should workers who lose in the transition to a low-carbon economy be given preferential treatment over the many other workers who lose in diverse, market-driven scenarios, if policymakers are not intentionally causing them to lose for the greater good?

The question of causation is addressed in more depth in the subsequent discussion, in which I argue that, especially in the energy sector, it is very difficult to disentangle causal forces among law, policy, and market operations. But further, workers’ dependency relationship with a particular industry and lack of alternative options may be what trigger the need for a just transition; in other words, equitable factors may drive this theory just as much, if not more, than causal ones. Yet, again, these tensions also raise the question of a possible choice between more robust transitional policies and more robust protections for workers and communities in general.

B. Defining a “Just Transition”

The idea of a just transition originated with the labor movement in the late twentieth century, in part in response to the environmental movement.[69] Labor and environmental activist Tony Mazzocchi is credited with coining the term, with the original version called a “Superfund for Workers.”[70] Referencing the superfund—a federally-financed program to clean up toxic wastes in the environment—suggested Mazzocchi’s proposal was an analogous remedial measure, but for human beings. It was based on the idea that workers who had been exposed to toxic chemicals throughout their careers should be entitled to minimum incomes and education benefits to transition away from their hazardous jobs.[71] Mazzocchi believed “that both nuclear workers and toxic workers, ‘because of the danger of their jobs and their service to the country, should be entitled to full income and benefits for life even if their jobs are eliminated,’” although he later gave in to pressure to reduce his demand to four years of support.[72] After environmentalists complained that the word “superfund” “had too many negative connotations,” the proposal’s name was changed to “[j]ust [t]ransition.”[73]

In the 1970s and through his death in the early 2000s, Mazzocchi and his associates were involved in creating “powerful labor-environmental alliances” that pursued the just transition campaign with the hope of addressing “the jobs-versus-environment conundrum.”[74] He was “the first union president to negotiate partnerships with Greenpeace and the environmental justice communities.”[75] He also developed educational programs for workers on the environment.[76] Mazzocchi’s advocacy thus forms the basis of the modern iteration of the labor-driven “just transition” concept. This foundation shapes the term’s modern usage as the idea that workers and communities whose livelihoods will be lost because of an intentional shift away from hazardous activity deserve some sort of support through public policy.[77]

Meanwhile, the broader usage of “just transition” is of less certain origin. It appears to be the plain-language interpretation of the labor movement’s term of art, thereby calling for “justice” more generally, and not just for workers. In other words, it emphasizes the importance of not continuing to sacrifice the well-being of vulnerable groups for the sake of advantaging others, as has been the norm in the fossil-fuel-driven economy. Thus, the broad concept of a “just transition” may in fact be even more radical than the narrow one because the former calls for a grand restructuring of societal inequality.

This discussion focuses on the labor-driven usage of just transitions and argues that legal scholars should do the same for two main reasons, beyond the fact that it is confusing for scholars in different spheres to be using the same emergent term with different meanings, and in addition to the theoretical discussion below. First, the labor-related usage seems to predate the broad usage and to have gained more traction. Major international organizations have embraced the labor-related meaning. Just transitions for workers have been adopted as goals by the United Nations Environment Program, the International Labour Organization (“ILO”), and the World Health Organization.[78] In 2013, the ILO published a policy framework for a just transition, which focused specifically on workers, noting that “[s]ustainable development is only possible with the active engagement of the world of work.”[79]

In addition, the labor-related usage’s specificity makes it stand out. The broad call for justice shares similarities with other models used to call for equity in the face of climate change, including environmental justice, climate justice, and energy justice.[80] This overlap may suggest that the broad concept has less of a niche to fill than the narrow one, and more risk of redundancy. By contrast, the labor usage’s narrowness may give it more potency.[81] In other words, it is not clear what a broad call for a just transition adds to these powerful and better-known concepts of justice, which all relate directly to the low-carbon shift.

Scholarly commentary complicates the choice somewhat because the literature seems split between the two usages. The broad meaning appears in at least some social science and legal scholarship. In a 2012 book entitled Just Transitions, two sustainability scholars defined a just transition as one “that addresses the widening inequalities between the approximately one billion people who live on or below the poverty line and the billion or so who are responsible for over 80 percent of consumption expenditure.”[82] Environmental justice scholar Caroline Farrell has characterized a just transition as one that avoids “the problems with the fossil fuel economy . . . [and aims] to create a truly just economy,” or as a “transition to an economy that does not create disparate environmental impacts.”[83]

Sociologists, political scientists, and several legal scholars who have explored the labor-related meaning provide a solid foundation from which to continue examining it.[84] They have also begun filling in the contours of what, exactly, this usage of “just transitions” means. Rural sociologist Linda Lobao interprets a just transition as one that “mov[es coal] communities toward economic sectors that offer a better future.”[85] Interdisciplinary scholars Evans and Phelan define it more broadly as “a political campaign to ‘ensure that the costs of environmental change [towards sustainability] will be shared fairly. Failure to create a just transition means that the cost of moves to sustainability will devolve wholly onto workers in targeted industries and their communities.’”[86]

In the legal sphere, David Doorey’s definition emphasizes work somewhat more. He explains the concept as “a policy platform that advocates legal and policy responses and planning that recognizes the need for economies to transition to lower carbon economic activity, while at the same time respects the need to promote decent work and a fair distribution of the risks and rewards associated with this transition.”[87] Climate law scholar J. Mijin Cha describes a just transition as “protecting workers who are impacted by climate protection policy,” including by re-training workers and providing them with education funds.[88] Ramo and Behles emphasize the need to recognize communities’ economic dependency on high-emissions activity as those communities transition away from that activity, suggesting, like Labao, that a just transition “help[s] revitalize . . . fossil-fuel dependent communities.”[89]

Calls for just transitions appear to arise the most in union advocacy, which again lends weight to the choice of the labor-driven definition. The International Trade Union Confederation has described a just transition as a “tool the trade union movement shares with the international community, aimed at smoothing the shift towards a more sustainable society and providing hope for the capacity of a ‘green economy’ to sustain decent jobs and livelihoods for all.”[90] Generally, just transitions advocates “highlight the need to engage affected workers and their representative trade unions in institutionalised formal consultations with relevant stakeholders including governments, employers and communities at national, regional and sectoral levels.”[91]

Despite the appearance of “justice” in the name of just transitions, few legal commentators have delved more deeply into the legitimacy, significance, or traits of the idea of a just transition. The next Part reviews Doorey’s article, further characterizes the labor-driven just transition concept, and explores what principles may or may not support the concept.

II. Can a Law of Just Transitions Be Justified?

This Part asks whether incorporating the just transition principle into law is a worthwhile endeavor, theoretically and practically. Exploring three potential justifications for doing so—one based on environmental theory, one based on the experiences of coal communities, and one based on strategic considerations—the discussion reveals that pursuing just transitions is not merely a nice thing to do. Rather, this discussion supports the conclusion that the concept not only fits neatly within the sustainable development framework—an internationally accepted framework for reconciling competing interests in environmental decisionmaking—but that it in fact injects a long-overlooked, much-needed consideration of economic equity.[92] This Part argues further that coal communities are particularly worthy of attention because of their history of combined exploitation and dependence. This Part’s third argument relies on interest-group theory to propose that the pursuit of just transitions is desirable because it could unite environmental and labor groups around the goal of a potentially more attainable and more equitable climate policy than prior efforts have secured.

David Doorey’s article is the first piece of legal scholarship to explore the worthiness and potential contours of a body of Just Transitions Law (“JTL”). He notes that labor law scholars have “mostly ignored” the effects that climate change will have on labor markets, while environmental law scholars have generally disregarded labor relationships.[93] Because neither legal field seems adequately equipped to handle climate change, he considers whether a new field is needed that combines the strengths of each.[94]

Doorey suggests that areas of common ground between labor and environmental scholarship might be ripe for doctrinal synthesis, such as the fact that both are in the business of “impos[ing] a countervailing power on unbridled economic activity.”[95] Yet he also notes that “jobs versus environment” tensions and other conflicting interests have tended to keep the fields apart.[96] Without coming to a firm conclusion as to whether JTL is worthwhile as a new legal field, Doorey does conclude that a just transition strategy is critical in the face of climate change, and that “[t]o implement a just transition strategy, governments need to design policies that cross existing government ministerial portfolios and legal regimes.”[97]

Doorey explores three potential forms for a body of law that marries aspects of labor and environment, including: 1) “[a] [l]aw of [e]conomic [s]ubordination and [r]esistance” that combines environmental justice’s and labor law’s overlapping recognition of power relations and embrace of collective, bottom-up resistance;[98] 2) a law of “[h]uman [c]apital or [c]apacities,” which would assess the fairness of rules, both environmental and labor-related, based upon whether they further human capabilities and freedom; and 3) an explicitly-named body of “Just Transitions Law,” (“JTL”), which would draw upon existing just transitions policy strategies, such as the ILO’s, aimed at joint consideration of environmental and labor goals, including pursuing cross-sectoral collaboration, incentivizing sustainable industries, and offsetting impacts to workers affected by environmental policies.[99]

For his third proposal, the explicit body of JTL, Doorey provides three “normative claims (NC) drawn from climate science, environmental law, environmental justice, and labour law.”[100] They include:

Firstly, climate change is a pressing global problem that market forces alone will not adequately address. Therefore, states should respond through public policy and law (NC1). Secondly, public policy should encourage a transition towards “greener”, lower carbon economies (NC2). Thirdly, there will be social and economic costs and benefits associated with climate change, and with the transitional policies aimed at responding to it, and those costs and benefits will also not be equitably distributed by market forces alone. Therefore, governments should seek to minimize the economic and social harms associated with the desired transition to a greener economy, and attempt, through law and policy, to distribute those harms and any resulting benefits in an equitable manner (NC3).[101]

This discussion begins with Doorey’s third proposal and adopts his normative claims for reference. While his first two proposals have great appeal, his third one seems to capture the already-existing evolution of this area of law.

However, like with the broadly-defined just transition described above, one might ask what this set of normative claims adds to the concept of climate justice. A centerpiece of the evolving theory of climate justice is public policy geared toward equitable sharing of the burdens and benefits of climate change through transparent consultation with diverse stakeholders.[102] Climate justice also espouses recognition of the fact that some communities are more vulnerable to the effects of climate change than others, and are more likely to be excluded from benefits.[103]

In order to capture the potency that more specific concepts may yield, to avoid duplicative efforts, and to recognize the labor movement’s role in formulating this theory of justice, I would add a fourth normative claim to Doorey’s third proposal, whether explicitly or implicitly, which is justified in more depth below: the needs of the workers and communities that have developed dependency relationships with high-carbon industries, often with substantial past and present socioeconomic costs, should specifically factor into calculating the equitable distribution of harms and benefits in the transition to a decarbonized economy. This consideration is not proposed as a competitor to environmental justice, climate justice, or any other framework concerned with vulnerability. It is, rather, a call for the specific recognition of work and existing economic dependencies in the decarbonization process, which have often gone overlooked.

This discussion does not take up the question of whether JTL should be an entirely new area of law. Like Doorey’s, it is intended as an “early contribution” to this emerging field.[104] The discussion therefore explores instead whether the just transition principle is worthwhile, and how it could be incorporated into law—which is perhaps also a worthwhile consideration as an alternative to establishing a new legal field.

A. An Environmental Theory of Just Transitions

The discussion in this Section argues that the labor-driven just transition concept has a natural and important place within current prominent distributive environmental decisionmaking frameworks. In other words, this discussion seeks to legitimize the concept and situate it in relevant literature. The discussion shows that the idea is neither foreign nor frivolous in relation to environmental theory. But further, I argue that it adds a point of consideration that other frameworks have tended to overlook, suggesting all the more that it is a worthwhile idea.

The just transition concept, understood in the context of climate change, is a call for distributive justice in (or after) environmental decisionmaking.[105] In order to understand or define it, then, it is important to assess it in relation to existing models for environmental distributive justice. Sustainable development and environmental justice are two of the most prominent of these models.[106] Each model strayed from traditional environmentalism, which is largely focused on pro-conservation, anti-pollution measures, in order to try to establish a framework that takes more socioeconomic realities into account, including the need for equitable distribution of benefits and burdens.[107]

Environmental injustice was originally known as environmental racism, calling attention to the fact that communities of color bear a disproportionate burden of environmental hazards.[108] Sustainable development, meanwhile, is a forward-looking decisionmaking paradigm that seeks to harmonize conservation priorities with economic considerations as well as social equity.[109] While environmental justice adds a civil rights component to environmentalism, sustainable development aims to mitigate standard development by incorporating historically overlooked priorities into development decisions.[110]

The just transition concept exhibits a significant parallel with environmental justice in that both ideas were born as social movements in the late twentieth century in response to the environmental movement.[111] Environmental justice calls for racial equity (and other forms of non-discrimination), while just transitions calls for labor equity. The movements are thus not dissimilar in that each advocates a distributive component on top of traditional environmentalism’s conservation priorities. Another parallel is that each is a broad, equitable principle that is at times embodied in laws in different ways. Yet the movements and legal schemes associated with each concept have rarely interacted, in part because of conflicting priorities and cultural backgrounds.[112]

Sustainable development, as compared to environmental justice, has perhaps more direct applicability to the question of work. The sustainable development approach aims to “capture[] the interrelationship between the environment, the economy, and human well-being in the effort to meet ‘the needs of the present without compromising the ability of future generations to meet their own needs.’”[113] In other words, it is “a decisionmaking framework to foster human well-being by ensuring that societies achieve development and environment goals at the same time.”[114] Sustainable development directly aims to undermine the fossil fuel economy. It thus, in turn, creates the need for a “just transition,” in that it is fundamentally premised on a shift to renewable energy sources.[115] Yet it also may provide tools for ensuring a just transition because of its concern for economic and equity-related priorities.

While sustainable development as a theory faces many criticisms, it is “not simply an academic or policy idea; it is the internationally accepted framework for maintaining and improving human quality of life.”[116] For instance, based on the overall aim of sustainable development, international frameworks have adopted as goals both poverty eradication and addressing “[t]he deep fault line that divides human society between the rich and the poor and the ever-increasing gap between the developed and developing worlds . . . .”[117] Sustainable development’s actual implementation takes on many forms, as the approach “needs to be realized in the particular economic, natural, and other settings of each specific country,”[118] as well as each specific state or city. “The key action principle of sustainable development is integrated decisionmaking. Essentially, decisionmakers must consider and advance environmental protection at the same time as they consider and advance their economic and social development goals.”[119] This contrasts with conventional development, where environmental concerns historically arose only as afterthoughts.[120]

Sustainable development decisionmaking is often represented as a triangle. Its three points are the economy, the environment, and equity or social justice.[121] The points are a simplified representation of the three values or priorities that sustainable development seeks to reconcile.[122] The standard sustainable development triangle is represented in Figure 1.

Figure 1. Sustainable Development Framework

The triangle represents an accessible conceptualization of the harmony that the decisionmaking paradigm seeks to achieve. In turn, these three values are embodied in law and policy in varied ways. For example, a traditional building code, reworked through the lens of sustainable development values, could transform into a “green” building code, prioritizing materials with minimal environmental impacts and low-carbon energy sources. The “equity” prong might dictate that new housing developments, as an example, should not only be green, but also affordable.

Environmental justice and sustainable development may seem like they occupy different spheres of environmental theory, but Uma Outka has observed that they have the potential for synergy. She notes a risk of conflict between the two models as the broader sustainable development agenda might prove insensitive to environmental justice concerns.[123] For instance, at the project level, sustainable development and environmental justice can face tensions, such as if the siting of wind farms (comporting with sustainable development’s driving concern for carbon reduction) harms indigenous cultural resources (violating environmental justice’s concern for communities’ autonomous decisionmaking and the non-discrimination principle).[124] Yet Outka argues that environmental justice in fact refines sustainable development by adding the particular environmental justice conception of equity.[125] She concludes that for sustainable development to be consistent with environmental justice, the significant differences among renewable energy sources require more recognition and concrete definition, so that each pathway’s potential for inequity can be better understood and addressed.[126]

Outka’s articulation of this relationship can thus perhaps be represented by Figure 2 below, which highlights environmental justice as an aspect of the sustainable development framework at the nexus of the environment and equity points of the triangle. In other words, environmental justice becomes another value that must be harmonized with other values in environmental decisionmaking, including the three Es. As a principle of environmental equity, environmental justice aligns with sustainable development at the nexus of sustainable development’s environment and equity prongs.

Figure 2. Sustainable Development with Environmental Justice Refinement

Figure 2 is not meant to suggest that environmental justice is the only refinement to sustainable development, or the only point of interest on the environment-equity leg. However, in a decisionmaking framework that is intended to manage complex scenarios, understanding these relationships can help inform the characteristics of normative paradigms. Environmental justice is a call for environmental equity, and it has a natural locus in the sustainable development paradigm.

When viewed through the framework of sustainable development, just transitions no longer seems like such a foreign concept to environmental law. Primarily, environmental decisionmakers already have a framework for considering questions of economic equity as they relate to environmental decisionmaking. Just transitions, with its concern for avoiding or mitigating inequitable impacts to livelihoods in environmental decisions, is ultimately a doctrine of economic equity. Thus, a natural place for just transitions is running parallel to environmental justice and in the analogous position along the economic and equity side of the triangle, as shown in Figure 3.

Figure 3. Sustainable Development Framework with Environmental Justice and Just Transitions

This visualization is powerful because it suggests that, like environmental justice, a just transition is simply a refinement to a framework upon which decisionmakers already rely. While it might also be said to have already existed along the economy-equity side, it has largely gone unrecognized. Just as environmental justice is a principle of environmental equity that must be harmonized with other values, the just transition is a principle of economic equity that should also factor into the calculus—and it appears to have a natural place within that calculus.

Another reason this visualization is powerful is that it builds upon increasingly vocal calls for environmental justice to inform the transition to a low-carbon society.[127] These calls, in fact, circle back on the broad meaning of the just transition—the idea that the decarbonization process must be done fairly in general.[128] One may be concerned that these paradigms might all conflict with each other in the transition, or pose difficult zero-sum choices. The visualization in Figure 3 shows that these principles are complementary, and in fact, bring environmental decisionmaking toward a more holistic picture of societal needs.[129]

This visualization may also help reconcile some of the tensions between sustainable development theory and resilience theory. Resilience theory has emerged as a counter-framework to sustainable development.[130] Resilience theorists’ criticisms of sustainable development are that sustainable development assumes stationary, controllable circumstances; potentially sanctions current patterns of harmful development and an ethic of “green consumerism;” and fails to account for complexity, or the interrelatedness of complex social-ecological systems.[131] This latter point is particularly concerning to resilience theorists in the age of climate change, which will involve more drastic changes in ecological and social regimes than previously seen.[132] Resilience theorists instead advocate decisionmaking paradigms that are iterative, or ongoing, rather than traditional planning processes; that involve “principled flexibility;”[133] and that anticipate constant change in social-ecological systems.[134] Adaptive management and adaptive governance have been considered potential vehicles for pursuing resilience governance, although scholars agree that a gap remains between theory and practice.[135]

Although the rift may be large, perhaps the addition of environmental justice and just transitions to the sustainable development framework brings sustainable development a modest inch closer to resilience thinking. The more points of interest that are added to the sustainable development framework, the more sustainable development would seem to wield potential for decisionmaking that accommodates social-ecological systems. Figure 4 illustrates that the framework above can in fact represent a continuum of social, economic, and natural concerns.[136] While there are infinite points of interest on the continuum, environmental justice and just transitions show points of particular concern based on society’s historical and potential inequities. If one recognizes that the sustainable development paradigm could have infinite points, the next natural inference must be an acceptance of uncertainty because infinite interacting aspects of social-ecological systems could never be stationary.

Figure 4. Making Sustainable Development Work for Social-Ecological Systems

In any case, the frameworks above show how the just transition concept has a natural place with several prominent environmental theories of today. But it can also follow the path of environmental justice and sustainable development in that it may at times be a principle warranting contemplation, rather than all or part of a framework in and of itself. Both environmental justice and sustainable development are “normative conceptual framework[s]” that are in turn embodied in law in various ways, sometimes simply as policy goals.[137] Just transitions can join their ranks as such a principle as well, offering an additional equitable priority, or a more concrete framework for decisionmaking.

In general, environmental law scholars have increasingly recognized the need to account for the jobs question, rather than to dismiss it.[138] As Richard Lazarus articulates, “there has been at best only an ad hoc accounting of how the benefits of environmental protection are spread among groups of persons.”[139] Environmental law scholars have recently contemplated how to overcome the perception and reality of “zero-sum” environmentalism, in which some segments of society must lose, or think they are losing, in pursuit of environmental progress.[140] This realization has come about at the same time as the recognition that environmental law is overall inadequate in the face of climate change.[141] The placement of just transitions into the framework above helps address both these concerns. It provides a way to think about contemplating livelihoods in environmental decisionmaking, as well as making decisionmaking align better with social-ecological systems.

B. Fossil Fuel-Dependent Communities: An Exemplary Case Study for Just Transitions

The discussion in this Section examines what, exactly, is meant by “fossil fuel-dependent communities” and why they have prompted so much interest in just transitions in the climate change era. Many communities that depend on high-carbon industries have a unique history and relationship to work, and many have borne profound costs associated with energy production for over a century.[142] Yet the rest of society has alternately encouraged, acquiesced in, or benefited from this hazardous, economically depleting way of life.[143] Based on these troubling circumstances, this Section argues that the labor-driven just transition concept is legitimate because it is fair to these specific communities. A critical point is to understand that fossil fuel-dependent communities were not born in a vacuum. They were created. This discussion uses Appalachia as an example, but its story is relevant to comparable scenarios throughout the country.[144]

As early as the 1700s, companies played a central role in developing isolated Appalachian mono-economies, or monopsonies, where workers and communities became hostage to desperate dependency relationships.[145] The dependence stemmed in part from a rush of speculators in the 1800s seeking to acquire Appalachian land.[146] Locals, mostly subsistence farmers, did not know the worth of the minerals under their land and sold property interests for well under market value.[147] “Others who refused to sell their land became victims of legal traps, such as being jailed and then offered bond in exchange for their land.”[148]

Appalachia evolved into what some scholars call an “internal colony” or a “sacrifice zone,” which was “created to provide cheap resources to fuel the rest of the country.”[149] Companies dominated land ownership and isolated communities from penetration by other industries.[150] Through isolating people and dispossessing them of land, coal companies sought to turn local residents “into a docile workforce” that lived and breathed extractive work, residing in company towns and coal camps and paid in “scrip” instead of money.[151] While company towns are no longer the norm, the effects of these relationships are still felt in Appalachia today. Yet this was all in the name of “the greater good,”[152] with fossil fuel communities serving as the nation’s cheap energy powerhouse.[153]

Serving as the nation’s energy powerhouse has been costly. For decades, coal miners have lost their lives in and because of the mines.[154] Some of these deaths were in major disasters that caught the public’s attention, but most of them were a regular procession of daily accidents and health harms.[155] These hazards are not a phenomenon of history, either. “Between 1996 and 2005, nearly 10,000 miners died of black lung disease.”[156] As of this writing, black lung rates have in fact been rising.[157] Yet the costs have not been limited to miners themselves. Residents living near mountaintop removal sites suffer high rates of disease and morbidity.[158] In addition to compromised health and safety, residents of fossil fuel communities have seen the destruction of irreplaceable cultural and ecological resources, as well as entrenched poverty and limited economic alternatives.[159]

Yet throughout the evolution of this exploitative dynamic, these relationships were encouraged and actively supported by the rest of the country through law and policy, evolving with the knowledge and acquiescence of the larger political body despite intermittent recognition of Appalachian problems. When coal miners sought to improve their conditions in the early twentieth century, federal actors intervened on behalf of companies.[160] In Hitchman Coal & Coke Co. v. Mitchell, the Supreme Court sanctioned mine operators’ power to contract with workers to prevent unionization.[161] In the 1921 Battle of Blair Mountain, the United States Army intervened to stop an uprising of miners, after which the Army left West Virginia to resolve the conflict internally, much to the detriment of the miners.[162] Black lung, a “chronicle of a preventable disease that was not prevented,” was ignored by state and federal public health authorities for most of the twentieth century “[d]espite the fact that physicians working among coal miners in the nineteenth century recognized and called attention to . . . [this] public health disaster.”[163] These egregious conditions notwithstanding, throughout the twentieth century, tax incentives and subsidies to the fossil fuel industry became a part of law.[164] As of 2017, the federal government continued to support fossil fuel production with $14.7 billion in subsidies, and state governments provided a total of $5.8 billion in incentives.[165]

Meanwhile, coal communities’ suffering was not unknown. Congress made a show of helping Appalachian residents with measures such as the Surface Mining Control and Reclamation Act (“SMCRA”). Yet SMCRA “has fallen far short of its potential;”[166] indeed, with provisions providing for oversight by states known to be dominated by industry,[167] it could hardly be deemed an earnest effort to remedy Appalachian suffering. Similarly, the Black Lung Benefits Act of 1973 nominally addressed black lung, only to help a mere 7.6% of claimants in “a system that miners, unable to attract attorneys and financially incapable of matching the coal companies’ development of medical evidence, wholeheartedly despise[d] as unjust.”[168]

U.S. society thus has a decades-long tradition of propping up the fossil fuel industry and acquiescing in its creation of exploitative mono-economies. Viewed in this light, workers’ and communities’ anticipation or hope that support might continue for their sole economic lifeline seems less unreasonable than if one views that anticipation standing alone in the context of today’s changed markets, or viewed through the lens of communities with more resources or alternative options.[169] The argument that fossil fuels are harmful and that people simply have to find other jobs overlooks a longstanding history of exploitation and isolation, an abusive tradition from which the majority has benefited. A swift, unmitigated shift away from these industries stands to exacerbate the injustices that fossil fuel communities have already experienced. The transition has, in fact, already begun, and fossil fuel communities have not fared well.[170] Coal country has already lost a substantial portion of employment opportunities, and with those lost jobs have come lost tax resources, businesses, population, and spirit.[171]

One might argue that this is the nature of economic developments: markets change and workers and communities who bear the losses of those transitions must adapt, evolve, and potentially relocate. Yet attempts to distinguish between the public and private spheres in this context ring hollow. First, fossil fuel workers and communities have been engaged in what should be characterized as quasi-public activity.[172] While their contributions to the nation’s energy supply were through direct relationships with private companies, those companies were empowered by the public. The workers’ and communities’ labor and losses fueled a public electricity grid and provided fundamental public benefits for which they bore immeasurable externalized costs.

Second, one would be hard-pressed to disentangle the diverse public and private factors that converge to shape discrete sectors, especially in the energy context.[173] Many have pointed to the cheapness of natural gas as a driving force undermining the coal industry in order to suggest that coal’s decline is a private phenomenon not warranting mitigation.[174] However, Congress’s decision to impose minimal regulations on the natural gas industry was an intentional public policy development that shaped the status quo in foreseeable ways.[175]

These circumstances illustrate that, if nothing else, principles of fairness and equity weigh in favor of a just transition for these communities. Yet these principles also implicate some of the basic premises of our legal system. Communities’ expectations and reliance have been encouraged, even coerced, through law and policy. While formal legal avenues have been of little help to them—to demand, for instance, the delayed closure of a plant, collective compensation for environmental degradation to the region, or meaningful assistance with the black lung pandemic—the ethical impetus to help these communities transcends a mere nicety.

Several lines of scholarship have insisted upon the materiality of expectations at the community level. Joseph Sax was concerned with community reliance and formal property law’s silence on communities.[176] He argued “that the law offered no opportunity even to raise a question about the non-economic losses incurred when an established community is destroyed . . . for ‘just compensation’ includes only the value of the economic interests taken.”[177] He noted that:

there is a widespread sense that community is important, and a willingness exists to protect community interests; yet there is no principle or doctrine to which to turn in those cases where, for whatever reasons, the people affected are unable to generate the political support necessary to induce an act of grace.[178]

Sax argued that “[t]he idea of justice at the root of private property protections calls for identification of those expectations which the legal system ought to recognize,” including at the community level.[179]

The concern for community reliance evokes the related concern that frustrated expectations can lead to social instability and political upheaval.[180] For instance, Sax argued that the public trust doctrine was not merely a state’s obligation to conserve natural resources, as many understand it, but is also a means of marrying customs with formal law in order to respect common expectations and ward off social unrest.[181]

This line of thinking seems to suggest that where formal law fails to recognize the meaningful nature of coal communities’ reliance upon their way of life, the lens of first principles illuminates the way of life as meaningful and worth respecting. The reasons for undermining that way of life seem meaningful too. Fossil fuel communities have already been sacrificed for the sake of collective progress through their energy production activities. They stand to be sacrificed anew if their majoritarian-encouraged dependency relationships are ignored in the transition to clean energy, as state and federal policy drivers continue to curtail or undermine these communities’ economic activities in the name of collective progress.[182]

While the majority’s willingness to destroy coal communities’ dependency relationships is not a “takings,” it nonetheless raises the prospect of a discrete minority being sacrificed for “the greater good”—an approach to progress that legal ethicists have considered at best morally questionable.[183] Indeed, when federal legislators passed provisions of the Trade Act of 1974 to offset displacement caused by reduced restrictions on trade,[184] one decisionmaker reasoned, “much as the doctrine of eminent domain requires compensation when private property is taken for public use,” increased fair trade required compensation to displaced workers.[185] “Otherwise the costs of a federal policy [of free trade] that conferred benefits on the nation as a whole would be imposed on a minority of American workers.”[186]

It might be suggested that Appalachia and other carbon-dependent communities are not unique in their situation. Workers in the United States are often displaced and left vulnerable for a variety of reasons including changes in technology, new trade regimes, other policy developments, or the absence of legal protections.[187] This comparison is worthwhile. The story of Appalachia, while unique in some respects, shares many analogies, as with tenants and sharecroppers who were displaced by the mechanization of the cotton harvest, plant employees who lost manufacturing jobs when businesses moved overseas, and aerospace workers who were displaced during the 1990s with the end of the cold war, to name some examples.[188] The question becomes one of drawing lines. Where takings analyses stop, economic transitions begin. We ask people to bear the costs of the latter, not the former, and by not recognizing property interests in work,[189] we disfavor the property-less in decisions as to who receives compensation.[190]

This line-drawing may make sense. Otherwise, it could become cost-prohibitive to pass new laws. Yet certain factors weigh in favor of contemplating either more effective transitional policies or more robust baseline protections for workers and communities. First, as technology continues to evolve and render more work obsolete, the future will be replete with ongoing displacement.[191] As more and more people and professions are displaced, it seems unrealistic to assume that the supply of work will match the demand for it. Second, the egregious ramifications of the transition away from coal indicate that asking those workers and communities to bear the losses, adapt, and relocate has simply not worked for a substantial segment of those communities. While such a proposed allocation of losses may make sense in theory, in practice, the result has been poverty, deaths of despair, and regional stagnation.[192]

To be clear, none of this discussion is intended to suggest that deep decarbonization should not be pursued as swiftly and effectively as possible. The question of livelihoods should not hold the broader community hostage to the dire fate associated with a failure to reduce carbon emissions adequately.[193] This is also not a call for some form of reparations, especially considering other communities, such as indigenous populations and the descendants of slaves, whose under-acknowledged exploitation also fueled national wealth in even more dire ways. The argument is rather that fossil fuel communities have already borne loss after loss to the benefit of others. To ask them to bear yet another disproportionate loss in the clean-energy transition on behalf of the rest of society would be to effectuate yet another distributive injustice. In other words, these communities should not be forgotten in the decarbonization calculus. They deserve a just transition.

C. A Political Economy Theory of Just Transitions

This Section explores a pragmatic and strategic argument in favor of embracing the just transition concept. In short, the United States is in urgent need of environmental and climate policy reform at the federal, state, and local levels.[194] Reform is often unachievable, however, because of entrenched political obstacles.[195] This Section argues that the pursuit of law and policy informed by just transitions principles may be more achievable than more traditional modes of seeking environmental reform.

Most scholars now agree that environmental reform had a zenith of sorts, and that the zenith has passed.[196] The late 1960s and early 1970s saw the passage of the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation, and Liability Act, and the Resource Conservation and Recovery Act.[197] Still today, these major federal statutes make up the foundation of the environmental legal apparatus. The reforms largely came out of a national social movement.[198] Reacting to works such as Rachel Carson’s Silent Spring [199] and the incident of the Cuyahoga River catching fire,[200] the public realized that their welfare in part depended upon some measure of environmental protection.[201]

Sporadic successes have been achieved since the peak of environmental reform. As recently as 1993, Daniel Farber observed how environmentalism’s successes undermined the idea that interest groups could warp governmental policy through lobbying.[202] He explained:

[A]ir pollution legislation benefits millions of people by providing them with clean air; it also imposes heavy costs on concentrated groups of firms. The theory predicts that the firms will organize much more effectively than the individuals, and will thereby block the legislation. We would also expect to find little regulation of other forms of pollution. Similarly, we would also expect firms to block legislation limiting their access to public lands. Thus, the two basic predictions are that environmental groups will not organize effectively and that environmental statutes will not be passed.[203]

Yet Farber concluded that “the reality is quite different.”[204] “Environmental groups manage to organize quite effectively. . . . . Nor, obviously, is there any dearth of federal environmental legislation.”[205] He thus argued that “the political system manages to overcome the inherent advantages of special interests.”[206]

A more recent article by the same author recognizes a largely different status quo, however. In his 2017 article, The Conservative as Environmentalist, Farber recognizes that interest groups do indeed now stand in the way of environmental reform.[207] He suggests that conservatives’ shift away from moderate environmental sympathies over the past several decades can be explained by the “emergence of a coalition of disaffected westerners and business interests (particularly in the fossil-fuel industry) supported by an interlocking network of foundations, donors, and conservative-policy advocates.”[208]

A movement does exist today that is not all that different from the environmental movement of the 1960s and 70s.[209] Much of the American public is deeply concerned about climate change.[210] The movements for climate reform and related principles, such as climate justice and energy justice, use activism, litigation, and lobbying to pursue much-needed changes.[211] Many successes have been achieved.[212] Most commentators concede, however, that progress to date has simply been inadequate to ward off the disastrous effects of climate change.[213]

Anti-environmental forces today seem to have become more powerful than in prior eras.[214] The fossil fuel industry manages to undermine the environmental movement even at the grassroots level.[215] Pat McGinley describes, for example, the so-called “War on Coal” campaign, a massive, industry-financed public relations effort “buttressed by think-tank studies” that has successfully fueled public antipathy toward environmental regulations.[216] According to sociologists Bell and York, despite its waning contributions to the economy and employment, the fossil fuel industry manages to “gain[] compliance from substantial segments of the public” by “actively construct[ing] ideology that furthers its interests.”[217]

As the fossil fuel industry and conservative politicians have joined forces, labor and workers’ groups have often sided with them.[218] According to sociologist Brian Obach, “workers are not typically the lead opponents of environmental measures.”[219] Rather, industry executives recruit workers with the threat of layoffs or total shutdowns of operations. In addition, as “a threat to corporate profits” is not particularly concerning to the public, workers also become the more sympathetic faces of environmental opposition.[220]

Commentators have observed the largely untapped potential of collaboration between environmental and labor groups. The longstanding “work-environment” rift often puzzles scholars.[221] While jobs-versus-environment tensions serve to divide the two camps, other areas seem like they should be unifying—for instance, workplace safety, shared concerns about basic human needs, and as Doorey observes, the fact that both fields serve as checks on what would otherwise be “unbridled” corporate activity.[222]

One explanation for the rift is environmentalism’s association with the middle class and upper middle class. In its early days, the environmental movement was spurred in large part based on a philosophy embracing a veneration for nature.[223] As one activist articulates,

environmental heroes like John Muir, Teddy Roosevelt, and Aldo Leopold—and the romanticizing of wilderness through art, poetry, essays, and music—created a catalyst for men to see communing with nature as a way of defining their manhood. Exploration, solitude, and game hunting became the foundation for saving and preserving nature. But for whom was nature being saved?[224]

As the activist suggests, this philosophy arguably disregards the needs of society’s less privileged ranks, for instance, by failing to prioritize issues such as immediate access to clean drinking water, or being overly dismissive of livelihoods that depend on natural resources.[225] Pruitt and Sobczynski have argued, for example, that poor, white rural residents may be seen as “trash[ing] pristine nature by their very presence.”[226]

Yet, in the instances when labor and environmental groups have combined their efforts, these efforts have proven quite potent. Many attribute the passage of the Clean Air Act and the Clean Water Act to a coalition between workers and environmental organizations.[227] A prior article, Alienation and Reconciliation in Social-Ecological Systems, examined the fruitfulness of collaborative partnerships between ranchers and bird conservationists on public lands.[228]

Compared with the fossil fuel industry, then, the modern environmental movement has two problems: (1) a power problem and (2) a branding problem. Pursuing more aggressive, concerted appeals to labor interests could help address both of these problems.

The power problem is evidenced in the modern environmental movement’s inability to penetrate the thick web of interest groups that benefit from impeding climate reform and other environmental measures.[229] The political process is indeed “dominated by the rent-seeking activities of special–interest groups.”[230] Naturally, coalitions and alliances stand to fare better than interest groups that work alone. While outreach to the fossil fuel industry may involve mere tilting at windmills given the industry’s track record,[231] labor and environments’ overlapping interests may have more potential to give climate advocates more allies and leverage.

But further, joining forces with workers’ advocates could also help the environmental movement win more hearts and minds. As an example of why the branding of environmental reform matters, many conservatives said in one public opinion poll that they opposed the Obama administration’s Clean Power Plan because they thought it would cost people jobs.[232] If the environmental movement addressed the jobs concern directly and in coordination with labor advocates—which they could do by lobbying for reform through the lens of the just transition—they could proactively address one of the arguments against environmental reform.

A potential concern in addressing work and labor more directly in environmental advocacy is that such efforts could result in sustaining livelihoods in hazardous industries and delaying much-needed environmental action. However, as discussed below, it is not necessarily contemplated that just transitions law and policy must entail actually sustaining hazardous industries; the more important principle is instead attempting to offset or mitigate some of the losses to livelihoods and communities as those industries’ activities are curtailed. Further, even if some compromises were to be made, it is worth considering whether the movement risks letting the perfect be the enemy of the good, and whether compromise outcomes may still be preferable to substantively preferable outcomes indefinitely delayed by political obstacles.[233]

III. Just Transitions as Law: Filling in the Contours

This Part asks what are perhaps the most challenging questions surrounding the prospect of embracing just transitions in law and policy: What, exactly, does a just transition look like? Who deserves a just transition? What are the avenues for achieving it?

A helpful starting point is the fact that the pursuit of just transitions is not entirely alien to United States law and policy. This Part therefore starts in Section III.A with a brief summary and critique of four of the most prominent instances when federal institutions have authorized transitional policy to address worker and community displacement: (1) the Trade Act of 1974 providing assistance to manufacturing workers displaced by reduced restrictions on trade; (2) the President’s Northwest Forest Plan providing assistance to timber communities displaced by reductions in timbering on public lands; (3) the Tobacco Transition Payment Program assisting tobacco farmers displaced by public litigation against tobacco companies in the 1990s; and (4) the Obama administration’s Partnerships for Opportunity and Workforce and Economic Revitalization (“POWER”) Initiative assisting coalfield communities in the face of coal’s decline.

Interestingly, only two of the programs—the Forest Plan and POWER—have an explicit environmental component. This suggests that in practice, the understanding of just transitions has not been simply as a corollary to environmental progress. Rather, the consistent conditions among these scenarios are (1) a dependency relationship between a community and an industry that is (2) undermined by some public action, or perhaps in the case of coal, public inaction. Section III.B therefore also explores other, non-environmental scenarios where just transitions may be warranted, such as the example of New York City taxi drivers being displaced by ride-sharing services, or of longstanding community residents facing displacement by gentrification. Section III.B also revisits the argument that the line between economic and legal transitions is often blurrier than some might suggest, indicating that a scenario should not necessarily require a clear act of direct public complicity in order to trigger a just transition.

Section III.C discusses instances of locally-driven approaches to just transitions and posits that these examples offer important insights alongside the federal programs, particularly since the federal programs have, as a whole, not been considered particularly successful (while the effects of the POWER Initiative remain to be seen as of this writing). Local land use planning processes and similar mechanisms help account for the complex, interconnecting factors that shape mono-economies’ dependency relationships. They thus may have benefits to offer as an alternative or complement to the standard practice of using federal agencies to implement transitional policy.

Finally, Section III.D offers additional thoughts as to how and when just transitions should be pursued and who should pay for them. Yet this discussion again raises the question of whether transitional policy is the answer for worker and community vulnerability in the face of climate change or in other contexts, or whether more robust baseline protections may be the simpler, more efficient approach. This latter approach may also be the fairer, more inclusive one, in that transitional policy directs resources to workers who are losing “good jobs,” while other workers, particularly disproportionate numbers of women and people of color in the service industry, have benefited inequitably from such jobs in the first place.

A. Federal Transitional Policies

1. The Trade Act of 1974

The Trade Act of 1962 established the Trade Adjustment Assistance Program (“TAA”), while the Trade Act of 1974 gave birth to the modern program still operational today.[234] The program has become a quid pro quo component of modern trade policy. That is, in order to open more trade avenues, more trade assistance for injured domestic workers is often a necessary political compensatory measure.[235]

Crafted in the name of fairness, the program’s goal is to provide aid to workers who lose their jobs, hours of work, or wages because of increases in imports.[236] Congress was “of the view that fairness demanded some mechanism whereby the national public, which realizes an overall gain through trade readjustments, can compensate the particular . . . workers who suffer a loss . . . .”[237] Returning to the idea that certain forms of displacement are ethically similar to takings, even if not cognizable as such in law, a federal court observed that TAA was pursued in as “much as the doctrine of eminent domain requires compensation when private property is taken for public use. Otherwise the costs of a federal policy [of free trade] that conferred benefits on the nation as a whole would be imposed on a minority of American workers . . . .”[238]

Individuals eligible under the program may file a petition to the U.S. Department of Labor within one year of losing work.[239] Once certified, workers are then eligible to apply for TAA program benefits, which are administered through state agencies.[240] The benefits include “weekly cash benefits, job retraining, and allowances for job searches or relocation.”[241] “According to [2011] White House statistics, the average worker receiving benefits is a 46 year-old male with a high school education who is the primary breadwinner for his family and has worked for at least ten years at a factory that is closing.”[242]

Since the program’s inception, however, studies have shown that trade adjustment benefits have simply not gone far enough to compensate displaced workers for their losses. In one survey of displaced shoe workers in the 1970s, researchers concluded that

even if benefits were granted to a larger number of workers, each individual would be compensated for only a very small portion of his actual loss. The actual payments have been characterized by organized labor as band-aid treatment, because the subsequent wage loss as well as the many nonmonetary losses from displacement are not directly addressed.[243]

More recently, economist Lori Kletzer found that almost forty percent of displaced workers did not find new jobs within one to two years after a job loss resulting from increased competition.[244] Another economist described trade assistance programs as “a collection of ad hoc, out-of-date, and inadequate programs that provide too little assistance too late to those in need.”[245] Legal scholars—who tend to treat TAA as a component of international trade law—have also critiqued trade adjustment assistance programs. Some deem TAA “a grave failure,” for reasons including “failures at the administrative and state levels, to Federal incompetence, to lack of resources and outreach for displaced workers,” as well as the inadequacy of judicial review available for workers unfairly denied assistance.[246] Its flaws notwithstanding, many agree that the program is preferable to not offering assistance at all and that reforms may stand to improve it.[247]

2. The President’s Northwest Forest Plan

The President’s Northwest Forest Plan (“NWFP”) was formed in the aftermath of a 1992 decision in which the U.S. District Court for the Western District of Washington imposed an injunction prohibiting over 66,000 acres of timber from being harvested on Washington public lands because of dangers the harvesting posed to the northern spotted owl.[248] The Ninth Circuit Court of Appeals upheld this and a series of related decisions.[249] The Clinton administration then developed the NWFP, aimed toward enhancing conservation in the region. In 1994, the Forest Service and the Bureau of Land Management adopted the NWFP.[250]

The circumstances surrounding the NWFP’s enactment were famously contentious.[251] This scenario is at times considered a classic case study of “jobs versus environment.” Timber harvesters were outraged based on the perception that the habitat of a single species should wield such an impact on their livelihoods. Predictions of “economic devastation” followed the court decisions, with fears of “a new ‘Appalachia in the Northwest.’”[252] Environmentalists, meanwhile, saw the decisions as a necessary conservation win.

The economic concerns were not fictional. According to one commentator, “[n]o economic analysis [could] ignore the suffering of some rural communities, which [bore] the brunt of the economic pain associated with reduced federally subsidized timber supplies.”[253] When the injunction issued, it threw “between 60,000 and 100,000 people out of work.”[254] The NWFP sought to address some of this pain:

[It] extend[ed] assistance to workers and communities, payments to counties to compensate for reduced income, removal of tax incentives for the export of raw logs, and assistance to encourage growth and investment of small businesses and secondary manufacturing. Similarly, the Economic Adjustment Initiative . . . provided over $550 million to aid communities and individuals affected by reduced timber harvests.[255]

The NWFP also illustrates the causal complexity of factors that influence regional decline. Because of automation, “many jobs in the federally subsidized timber industry were on their way out long before the owl was listed as threatened under the Endangered Species Act.”[256] Generally, “rural areas dependent on the federal land-based timber industry” were not faring as well as other regions as of the 1990s.[257] Nonetheless, federal actors saw fit to intervene in this scenario involving mixed technological, economic, and legal factors contributing to the decline.[258]

The NWFP “never truly satisfied the warring factions, the timber industry and the environmentalists.”[259] However, it was considered an achievement for the Clinton administration.[260] Much analysis of the NWFP’s implementation has focused on its ecological successes. Yet, in all, “the NWFP has been more successful in stopping actions thought to be harmful to conservation . . . than it has been in promoting active restoration and adaptive management and in implementing economic and social policies set out under the plan.”[261]

The NWFP provided for “payments to timber-dependent counties suffering from cutbacks” due to the law’s implementation in 2000.[262] Since the NWFP’s implementation, counties formerly dependent on timber harvests for tax revenues have received millions of dollars.[263] Today, many of these counties are considered to be “in crisis” because of curtailments in direct federal subsidies.[264] The NWFP was criticized as failing to “provide long-term economic growth and security” for former timber counties.[265]

3. The Tobacco Transition Payment Program

The tobacco industry has several unique quirks, but the parallels between the tobacco industry and the fossil fuel industry are notable. Both industries have invested aggressively in science-denial and public relations initiatives, both have rendered entire communities dependent upon them, and both have seen major shifts in public awareness contribute to their decline.[266] In addition to increased anti-tobacco sentiment and knowledge of health risks among the public, a mass tort action against tobacco companies in the 1990s brought them to the brink of extinction—which perhaps signifies a parallel to ongoing climate-related litigation against fossil fuel companies.[267]

Because of the economic hardships associated with decreased tobacco demand and government pushback against the tobacco industry, in the late 1990s, a settlement between states and large tobacco companies provided for billions of dollars of economic assistance to be paid to tobacco farmers.[268] The ten-year Tobacco Transition Payment Program (“TTPP”) was created to “ease tobacco farmers’ worries” and give them “time to diversify their crop to include other commodities separate from tobacco, or to allow [them] . . . to cease planting tobacco altogether.”[269] The TTPP also terminated a federal price-fixing program that had supported tobacco farmers since the 1930s.[270]

The TTPP is often referred to as a “buy-out” program.[271] However, the term is somewhat misleading because farmers were not necessarily paid to stop growing tobacco.[272] Tobacco producers received government assistance by signing up for the TTPP through the U.S. Department of Agriculture Commodity Credit Corporation, which “provide[d] payments to tobacco quota holders who voluntarily enter[ed] into appropriate contracts with the government”[273]—including for the cessation of tobacco production.[274] The TTPP provided eligible producers with ten equal annual payments “designed to transition tobacco producers into a free market for their produce.”[275]

The program’s effects were mixed and may be the subject of debate. The number of tobacco farmers was reduced dramatically just after deregulation was implemented.[276] Each participating farmer received on average a total of approximately $17,000 over the course of the program, while 75% of payments went to the top ten percent of farms.[277] Some have suggested that these payments offered important “injections of cash” for struggling rural communities.[278] On the other hand, the program may have had the effect of shackling some farmers to their crops involuntarily, as many were “unable to break free of the cycle of debt” associated with restructured relationships.[279] Some farmers, in response to the program, actually expanded their production of tobacco.[280]

The TTPP model may have some lessons to offer just transitions law and policy. The fact that the TTPP helped transition workers and communities away from a production activity that had been publicly subsidized for decades, with minimal public attention or controversy, seems like a success. At the very least, the TTPP recognized that the political majority was complicit in fostering farmers’ dependency on the hazardous activity through national legislative intervention since the 1930s, and complicit in undermining that dependency relationship.

On the other hand, the TTPP model’s slow-sunsetting approach may stand in direct tension with the urgency associated with decarbonization. It also seemed to rely somewhat on tobacco farmers’ capacity for autonomous decisionmaking over their own production activities, which may not apply to many other scenarios or address regional economic dependencies with necessary robustness.

4. The POWER Initiative

In 2016, the Obama administration announced a nearly forty million dollar program for twenty economic and workforce development projects to assist communities affected by changes in the coal and power industry.[281] The POWER Initiative was a joint effort involving ten federal agencies with the goal of either creating or retaining several thousand jobs, in addition to broader economic development, such as economic diversification, attracting new sources of investment, and providing workforce services and skills training. Through the POWER Initiative, the Appalachian Regional Commission (“ARC”) and other agencies have received over $100 million in appropriations to assist displaced coal workers.[282]

For instance, the ARC alone has received $50 million from Congress since 2016 in order to:

target federal resources to help communities and regions that have been affected by job losses in coal mining, coal power plant operations, and coal-related supply chain industries due to the changing economics of America’s energy production. To date, ARC has invested $94 million in projects serving 250 coal impacted counties. These projects are expected to create or retain 8,800 jobs, train 25,400 workers or students, and leverage an additional $210 million to the Region.[283]

ARC receives applications for funding from local governments, states, other political subdivisions, non-profit organizations, and institutions of higher education.[284] As of this writing, little commentary has assessed the program’s outcomes. The proposed POWER Plus Plan, meanwhile, focused on more direct assistance to workers; yet it and similar proposals have failed to make their way through Congress.[285]

B. Synthesizing Federal Transitional Policies

Several themes emerge from the programs above. These themes illuminate the conditions that have been considered appropriate for triggering intervention in pursuit of a just transition. These programs’ strengths and weaknesses in design and implementation can also inform future efforts.

The first theme is that policymakers have implemented transitional policy when there is foreseeable, widespread displacement to workers as the result of some form of public action. Embedded in the foreseeable displacement is the existence of some kind of dependency relationship or longstanding regional mono-economy. This theme may explain why transitional support beyond unemployment benefits is not specifically provided when a sector like Blockbuster goes out of business: unlike with each of the sectors above, there are no company towns or regions where substantial portions of the population have been employed at Blockbuster for decades.

Critically, though, the programs do not require some sort of showing that a loss is the proximate result of an intentional public act. In fact, the Trade Act of 1974 specifically undid such a requirement imposed by the 1962 Act. The 1962 Act required that increased imports were the “major cause” of beneficiaries’ unemployment.[286] Yet it became clear shortly thereafter that most workers simply would not be able to meet such a burden.[287] One reason for the absence of a causality requirement is that economic and legal transitions in the United States are fundamentally entangled. Further, the absence of regulations may affect transitions in similar ways as the creation of regulations. As discussed above, commentators often point to the cheapness of natural gas as the “real” reason for the coal industry’s decline; yet Congress could easily have chosen to regulate natural gas more stringently or otherwise intervene into energy markets.

One weakness, at least with the NWFP and TAA, is that neither is considered to have achieved successful economic mitigation in the face of the loss being addressed. One reason for this may be that directing large aid packages to benefits such as relocation assistance will inevitably be a “band-aid” approach if those packages do not address the root cause of workers’ and communities’ vulnerability. The root cause is the development of the dependency relationship or mono-economy in the first place. In this sense, it is possible that federal actors—unless they create a New Deal-style form of transitional employment themselves—may be too detached from regional realities to meaningfully reshape a region. Similarly, the very nature of these programs may reflect a “too little, too late” approach to addressing longstanding histories of regional under-investment. The TTPP may have been more successful in part because many tobacco farmers were near retirement anyway, few depended solely on tobacco-farming income, and tobacco farmers may have been better able to exercise control over their own economic activities as compared to laid-off manufacturing or timber workers.[288]

The second problem with these programs is that as jobs like timbering and mining decline, no comparably lucrative, low-skill jobs are, in fact, available as alternatives for displaced workers. The three main traditional rural livelihoods—natural resource extraction, manufacturing, and farming—have declined dramatically.[289] The sectors that have taken their place are lower-paying positions in the service industry.[290] These positions lack the security, culture, and regional influence of the traditional livelihoods. Transitional policy geared toward moving a worker from a traditional livelihood to a modern one will almost inevitably be moving that worker a step down in the world of work. In turn, the region may be fated to suffer, as each individual experiences a loss in wages and security, effectuating ripple effects on local tax coffers.

The POWER Initiative does align with this Article’s theoretical discussion of how a just transition should be defined. The program’s focus on diverse forms of regional stakeholders and initiatives may make it better poised to succeed than programs focused more heavily on one approach, such as worker retraining or providing direct subsidies to local governments. Yet it is not clear that POWER is adequate to address the likely-intensified losses anticipated to be associated with deep decarbonization.

In any case, these programs indicate that circumstances triggering just transitions are not limited to what is arguably the perfect case study of the coalfield community. The case of the New York City taxi drivers illustrates yet another scenario where workers formed a longstanding dependency relationship with one industry; their industry performed a quasi-public function; and the public’s failure to act left the workers vulnerable to an abrupt collapse of their industry, leaving them without meaningful alternatives. As with manufacturing or mining jobs, taxi drivers, once part of a lucrative, regulated community, were suddenly in competition with options that were cheaper, faster, and less secure in the form of app-directed ride-sharing services.[291] Many drivers had invested their life savings in coveted taxi medallions, the value of which dropped dramatically due to the rise of Uber and Lyft. Six driver suicides over the course of six months in 2018 brought the City’s attention to this community’s struggle.[292] As of this writing, “New York’s city council is poised to approve a one-year cap on new licenses for Uber . . . and other ride-sharing vehicles as part of a sweeping package of regulations intended to reduce traffic and halt the downward slide in drivers’ pay.”[293]

Just transitions considerations also seem relevant to communities displaced by gentrification. In those instances, the community has developed a dependency relationship on an existing way of life. This way of life could have relied, in fact, on a history of under-investment, the absence of industry, or a mix of industries that are not necessarily lucrative. When more lucrative industries arrive to take advantage of that history of under-investment—bringing with them wealthier residents and higher home and goods prices—political inaction in the face of the communities’ vulnerability to displacement may be an analogous version of an unjust transition.[294]

The next Section looks at alternatives, or potential complements, to federal aid packages in transitional programs. It posits that locally-driven transitions may stand to more meaningfully untangle the diverse issues at play in a mono-economy or dependency relationship. This more intimate process could in turn wield more benefits in shaping regional economic fates.

C. Locally-Driven Transitions

Alan Ramo and Deborah Behles examined the experience of Navajo and Hopi communities with the Mohave Generating Station along the Nevada-Arizona border in the late 1990s and early 2000s.[295] Their case study provides an illustration of a scenario in which local actors addressed the impending cessation of hazardous industrial activity that a community also depended upon economically.

The U.S. Department of the Interior decided in the early nineteenth century that the Mohave Station would receive its coal and water from nearby Hopi and Navajo reservations.[296] This decision commenced a longstanding exploitative relationship that gave Native groups little control over their coal and water resources.[297] For years, both Hopi and Navajo tribes advocated to set aside the original decree, protesting highly undervalued royalties they received for use of their coal and water.[298] Yet the communities also depended on the royalties, as well as the fact that about 250 Navajo were employed at Mohave’s mine.[299]

In 1998, two environmental groups sued Mohave’s owners, alleging violations of Clean Air Act emissions limits, compliance orders, and reporting requirements; simultaneously, the U.S. Environmental Protection Agency concluded that the plant posed a risk to visibility in the Grand Canyon.[300] Thus began the transition toward the closure of the Mohave Plant, which risked leaving the native communities in even worse circumstances than before, despite the closure’s likely environmental benefits.

The Mohave plant was closed in 2006.[301] It was not closed because of environmental hazards, but because it was no longer cost-effective—which again raises the question of untangling the causal factors that trigger the need for a just transition. The communities were “devastated by Mohave’s operation,” but also devastated by its closure.[302]

Issues concerning the plant arose in another proceeding around the same time, however, where Mohave’s former owner, Southern California Edison, was involved in a rate case with the California Public Utilities Commission (“CPUC”).[303] Local groups formed an organization called the “Just Transition Coalition” in order to intervene in the proceeding. The coalition was an “alliance of environmental and grassroots Native American interests including the Indigenous Environmental Network, Black Mesa Trust, Black Mesa Water coalition, To’ Nizhoni Ani, Grand Canyon Trust, and the Sierra Club.”[304] The coalition intervened “to demand that the CPUC allocate funds from the sale of Acid Rain SO2 allowances, which were an unneeded windfall if Mohave remained closed, to help transition the Hopi and Navajo communities to cleaner energy alternatives.”[305] The group emphasized that a transition that invested in the communities “was equitable due to Mohave’s operation and closure’s devastating economic and social impacts and decades of . . . subsidized cheap coal power.”[306] The CPUC then ordered Mohave’s former owner to set aside acid rain allowances to be disbursed in the future.[307]

The process of transitioning the communities away from their dependency relationship with the plant involved “years of mediation, workshops, and litigation,” which resulted in the Hopi and Navajo agreeing with the Just Transition Coalition that revenues should be used to incentivize renewable energy generation.[308] The CPUC, relying on its authority to “exercise equitable jurisdiction as an incident to its express duties” to regulate utilities in its jurisdiction, as well as California’s Renewable Portfolio Standard, decided “to disburse the allowance revenues to incentivize renewable generation that benefited Hopi and Navajo communities.”[309]

While the procedural evolution of this case study may appear to be a unique or idiosyncratic approach to a just transition, it offers lessons for pursuing just transitions elsewhere. Ramo and Behles argued that this scenario “presents a roadmap for other states to consider creative solutions to help communities transition away from fossil-fuel generation.”[310] As of this writing, many commentators seem to view the Mohave transition as a success story.[311]

The Mohave process in fact mirrors several procedural models that can be embodied in law and policy in different ways. First, it resembles new governance. According to new governance theory, diverse stakeholders must be involved in decisionmaking, where traditional networks and hierarchies are emphasized less, and the exchange of information and pursuit of win-win solutions are emphasized more.[312] More traditionally, though, this process resembles land use planning processes, which also involve bringing stakeholders together to pursue collaborative decisionmaking.[313] Administrative law and policy can provide for mechanisms that facilitate communities’ ability to pursue these processes.

Diverse local and state jurisdictions in the United States and internationally are in the process of approaching transitions in different ways. In 2008, the State of Kentucky passed a tax incentive to attract new employers to the region.[314] The struggling coal town of Hazard, Kentucky, has developed a former surface mine site into a research and testing facility for drone companies, while also offering new skills courses through the local community college.[315] The Canadian province of Alberta has earmarked $40 million to help approximately 2,000 workers, who are “losing their jobs as the province transitions away from thermal coal mines and coal-fired power plants over the next decade,” by providing “tuition vouchers, retraining programs, and on-site transitioning advice.”[316] These varying approaches indicate that the ideal model for pursuing a just transition may be context-specific. At least, as much of the global community seeks to transition to low-carbon energy emissions in the coming years, more success stories and replicable models should emerge.

The Mohave study suggests that certain conditions may be conducive to a more transformative transition than an approach focused more narrowly on a measure such as worker retraining. These conditions include equal bargaining power among stakeholders, stakeholders with adequate resources, and a procedural mechanism to pursue a long-term decisionmaking or dispute resolution process. An effort toward transition that is more transformative also must involve some iterative decisionmaking—the “messiness” often associated with successful stakeholder collaboration—rather than single instances of legislative reform. Appropriate venues could be state, local, or federal administrative agencies, local governments, and courts.

The Mohave study also shows how a just transitions policy can, and often should, be pursued in tandem with remedies for a history of environmental injustice. Many communities that depend upon high-carbon industries have also been harmed by them; many communities harmed by high-carbon industries have not benefited economically at all. Yet the choice of remedy does not pose an “either/or” choice between remedying environmental injustice or remedying just transitions. A holistic, democratic process can account for both past harms and future risks.

D. Additional Considerations for Pursuing Just Transitions

A pressing question in the pursuit of just transitions policy is, who pays for just transitions? More specifically, why should the public pay and not the employers who have left these regions and workers vulnerable?

The discussion in this Article is primarily concerned with public options for facilitating collective transitions. It is presumed that employers will often not be in a position to facilitate just transitions themselves. First—consistent with the above-mentioned concerns about interest groups—accountability for fossil fuel companies has been elusive.[317] Congress has virtually declined to regulate the natural gas industry, for example.[318] Second, many employers have become insolvent, as evidenced by the spate of coal companies that have filed for bankruptcy in recent years.[319]

Nonetheless, future research should address the prospect of employer involvement in just transitions law and policy, especially where employers have knowingly pursued hazardous industrial activity to society’s detriment. In addition to tobacco companies’ involvement in funding the TTPP program described in Section III.A.3, a starting point for this consideration would be the federal Worker Adjustment and Retraining Notification Act of 1988 (the “WARN Act”).

The WARN Act “was enacted in 1988 in response to the rash of plant closings and layoffs that had occurred in the immediately preceding years.”[320] It sought “to enable workers, their families, and local community leaders sufficient time to prepare for mass layoffs or plant closures.”[321] It “obligates employers to provide at least 60-days notice to employees and local government officials of a covered plant closure or mass layoff.”[322] The Act covers employers who plan to lay off fifty or more employees during any thirty-day period, excluding part-time employees.

The WARN Act has been heavily criticized. Not only does it do little for workers and communities beyond providing a strikingly brief notice period before entire communities may be upended, but it also was deemed “imprecise, vague, difficult to interpret, and . . . may be very difficult to apply sensibly to particular fact situations.”[323] But the idea could be helpful. Perhaps a modernized WARN Act of just transitions law and policy would require six to twelve months’ notice and options for assisting workers to retrain and relocate, for example.

Finally, perhaps the real concern underlying the justice or injustice of transitions is not about transitions at all. Measures such as guaranteed employment or universal basic income, for example, would preclude the need to manufacture new regional or sectoral economies in anticipation of the ebb and flow of industries. A more robust baseline of worker and community support would make the vulnerability associated with transitions less dire and help preclude difficult decisions as to who should win and lose in the distribution of benefits and burdens.

Conclusion

In the context of climate change, legal scholars should embrace the just transition as an equitable principle of easing the burden decarbonization poses to workers and communities who depend on carbon-heavy industries. Embracing this definition will be clarifying, will allow legal scholarship to engage with other fields and institutions that already recognize this definition, and will give the labor movement its due for originating the term. In turn, the concept finds support in important principles relevant to the environmental condition today, such as the need to account for complex social-ecological systems, to address jobs-versus-environment tensions, and to better consider economic equity. In short, if scholars and policymakers embrace the just transition concept, it stands to serve principles of economic equity, it might help make climate reform more achievable through coalition-building, and it is poised to bring environmental law more in line with the needs of the climate era.

Yet the just transition concept bears relevance to diverse scenarios where workers and communities face large-scale displacement from the longstanding industries on which they have relied. The moral impetus to help in the face of displacement may be the strongest where a public initiative is the clear cause of the displacement. This scenario is the most analogous to the state’s use of eminent domain, where the “taking” of something is compensated because a discrete group is not asked to bear the costs of an initiative pursued for the greater good. While one might suggest that workers and communities should bear the costs of such displacement as the natural price of regulation, U.S. transitional policy illustrates prominent instances where Congress was compelled to intervene.

The cause of displacement is often unclear, however. Our economic and legal evolutions tend to be intertwined. Thus, transitional policy may still be warranted where the cause of the displacement is less clear than the obvious, and relatively rare, “job-killing” law. Further, even if purely private forces caused large-scale displacement, considerations of fairness, compassion, and equity suggest it is the wrong choice to simply leave workers in the lurch where they lack other alternatives, or where their work contributed a public or quasi-public function—especially if, as Mazzocchi articulated and as is the case with fossil fuel workers, that work was particularly hazardous. This calculus does yield inherent problems with line-drawing. As an alternative, measures such as universal basic income or other provisions of a more robust social safety net could preclude the need to pick winners and losers in these scenarios.

Given federal agencies’ track record of failing to sustainably untangle regional dependency relationships, to adequately offset workers’ and communities’ losses, or to nurture forward-looking economic diversification for regions and sectors in decline, it may be time to question whether federal agencies are indeed the most appropriate forum for large-scale transitional policy. It is possible that the largely-untested POWER Initiative uses novel substantive approaches that may not repeat the mistakes of past policies. Processes driven by state and local institutions and stakeholders may allow for a more involved, context-specific approach that can help better address the challenges associated with historical mono-economies. Additional research can help illuminate the best mechanisms for achieving just transitions in practice, especially as the clean-energy transition gains momentum. Perhaps most importantly, when environmental decisions are made, just transitions can and should be among values decisionmakers seek to harmonize.

[*] *.. Assistant Professor of Law, University of South Carolina School of Law. I thank Lauren Aronson, Derek Black, Josh Eagle, Katherine Garvey, Joy Radice, Ed Richards, Kathryn Sabbeth, Emily Suski, Gavin Wright, and participants at the 2018 Texas A&M University School of Law’s Property Roundtable and the 2018 Just Transitions Workshop at the University of South Carolina School of Law for their thoughtful feedback on this project.

[1]. Cf. Ann Eisenberg, Civil Society Versus Transnational Corporations in International Energy Development: Is International Law Keeping Up?, in China and Good Governance of Markets in Light of Economic Development 27 (Paolo Davide Farah ed., Routledge Pub., forthcoming 2019) (on file with author) (arguing that civil liberties may be sacrificed in the name of clean-energy development projects).

[2]. While this Article refers to “low-carbon” policy goals, these goals are assumed to also contemplate other greenhouse gas emissions with similar effects relating to climate change. The discussion focuses on carbon both for the sake of succinctness and because of carbon’s prominence among the greenhouse gases as a driver of climate change.

[3]. See Ngram Viewer: Just Transition, Google Books, https://books.google.com/ngrams
/graph?content=just+transition&year_start=1800&year_end=2017&corpus=15&smoothing=3&share=&direct_url=t1%3B%2Cjust%20transition%3B%2Cc0 (last visited Jan. 25, 2019) (searching for the frequency of the use of the term “just transition”).

[4]. Cf. Dimitris Stevis & Romain Felli, Green Transitions, Just Transitions? Broadening and Deepening Justice, 3 Kurswechsel 35, 35 (2016) (Ger.) (“In short, there are varieties of Just Transition, reflecting the politics of its various advocates.”).

[5]. See infra Section I.A.

[6]. See Peter Newell & Dustin Mulvaney, The Political Economy of the ‘Just Transition’, 179 Geographical J. 132, 132–33 (2013) (discussing inequality and fossil fuel usage).

[7]. See Mark Swilling & Eve Annecke, Just Transitions: Explorations of Sustainability in an Unfair World, 50–52 (2012); Victor B. Flatt & Heather Payne, Not One Without the Other: The Challenge of Integrating U.S. Environment, Energy, Climate, and Economic Policy, 44 Envtl. L. 1079, 1085 (2014) (discussing financial harms climate change has already posed to world economies and vulnerable populations). As an example, some scholarship has raised concerns about increased reliance on biofuels as a renewable energy source because of their potential to harm vulnerable populations—which would illustrate an unjust transition to renewables according to this definition. See, e.g., Nadia B. Ahmad, Blood Biofuels, 27 Duke Envtl. L. & Pol’y Forum 265, 282–94 (2017) (discussing impacts on small farmers and poor consumers in developing countries); Carmen G. Gonzalez, The Environmental Justice Implications of Biofuels, 20 UCLA J. Int’l L. & Foreign Aff. 229, 251–60 (2016) (discussing impacts on taxpayers, small farmers, and poor consumers in developing countries); Uma Outka, Environmental Justice Issues in Sustainable Development: Environmental Justice in the Renewable Energy Transition, 19 J. Envtl. & Sustainability L. 60, 77–85 (2012) (discussing impacts on Native American tribes and African American communities).

[8]. See infra Section I.A.

[9]. See David Doorey, Just Transitions Law: Putting Labour Law to Work on Climate Change, 30 J. Envtl. L. & Prac. 201, 206–07 (2017). In light of climate change,

energy and resource-intensive sectors are likely to stagnate or contract . . . new pressures will be brought to bear on unemployment, adjustment, and training strategies . . . . There will be winners and losers in domestic and international labour markets . . . . The idea of “just transition” to a greener, lower carbon economy has its roots in the global labour movement . . . . Just transition refers to a policy platform that advocates legal and policy responses and planning that recognizes the needs for economies to transition to lower carbon economic activity, while at the same time respects the need to promote decent work and a fair distribution of the risks and rewards associated with this transition.

Id.; Newell & Mulvaney, supra note 6, at 133–34.

[10]. Josua Mata, What is ‘Just Transition’?, New Internationalist, Sept. 2016, at 21.

[11]. See Shalanda Baker et al., Beyond Zero-Sum Environmentalism, 47 Envtl. L. Rep. 10328, 10330–32, 10340–43 (2017).

[12]. Todd S. Aagaard, Environmental Law’s Heartland and Frontiers, 32 Pace Envtl. L. Rev. 511, 511–12 (2015) (“Environmental law is currently—and has been for some time—in a phase that is simultaneously reassuring and worrisome. As a society, we have been generally well served by the forty-five years of modern federal environmental law since 1970. . . . The unfortunate flip side of stability, at least in this case, has been a marked degree of ossification.”); David W. Case, The Lost Generation: Environmental Regulatory Reform in the Era of Congressional Abdication, 25 Duke Envtl. L. & Pol’y Forum 49, 89 (2014) (“[T]he prospects that Congress will enact any such positive reform-minded environmental legislation in the foreseeable future appear nonexistent.”); J.B. Ruhl, Climate Change Adaptation and the Structural Transformation of Environmental Law, 40 Envtl. L. 363, 407 (2010). But see Dave Owen, Little Streams and Legal Transformations, 2017 Utah L. Rev. 1, 5–6 (2017) (arguing that environmental protections have expanded and become more sophisticated and that overly pessimistic narratives discount environmental law’s accomplishments).

[13]. See Todd S. Aagaard, Environmental Law Outside the Canon, 89 Ind. L.J. 1239, 1281–91 (2014) (calling for rethinking of environmental law as dominated and characterized by canon of major federal statutes enacted in 1970s, and proposing approaches that could work in antagonistic political climate, integrate with non-environmental laws, and better approach climate change); Todd S. Aagaard, Using Non-Environmental Law to Accomplish Environmental Objectives, 30 J. Land Use & Envtl. L. 35, 35 (2014); Daniel C. Esty, Red Lights to Green Lights: From 20th Century Environmental Regulation to 21st Century Sustainability, 47 Envtl. L. 1, 5 (2017).

[14]. See Aagaard, Environmental Law’s Heartland and Frontiers, supra note 12, at 512–13.

[15]. See Blake Hudson, Relative Administrability, Conservatives, and Environmental Regulatory Reform, 68 Fla. L. Rev. 1661, 1661 (2016) (arguing that geographic-delineation policies at state and local level offers environmental reform plan that would be palatable to conservatives); Dave Owen, Mapping, Modeling, and the Fragmentation of Environmental Law, 2013 Utah L. Rev. 219, 224–25 (2013) (arguing for applying quantitative spatial analysis to environmental law); Jedediah Purdy, American Natures: The Shape of Conflict in Environmental Law, 36 Harv. Envtl. L. Rev. 169, 169 (2012) (“Legal scholarship is in a bad position to make sense of [climate change] because the field has concentrated on making sound policy recommendations to an idealized lawmaker, neglecting the deeply held and sharply clashing values that drive, or block, environmental lawmaking.”); Rachael E. Salcido, Rationing Environmental Law in a Time of Climate Change, 46 Loy. U. Chi. L.J. 617, 621 (2015) (arguing that “rationing” environmental law, in other words, selectively applying environmental law to renewable energy because of climate change, is not ideal, but is nonetheless worthwhile “based on the reality of political failures, market forces, and horrifying consequences of unchecked fossil fuel dependence”); Michael P. Vandenbergh, Reconceptualizing the Future of Environmental Law: The Role of Private Climate Governance, 32 Pace Envtl. L. Rev. 382, 383 (2015) (arguing for “opportunity to buy time with private governance”).

[16]. Cf. Doorey, supra note 9, at 206–07.

[17]. Cf. Ruhl, supra note 12, at 407.

[18]. Cf. Mark Sagoff, The Principles of Federal Pollution Control Law, 71 Minn. L. Rev. 19, 82–83 (1986) (criticizing environmentalism as separating ends of environmental policy from means necessary to attain the ends). So-called “blue-green alliances”—instances of environmental groups and labor groups joining forces to advocate for joint environmental and work-related platforms—demonstrate the potency of measures that bridge the historical rift between labor and environmental concerns. Ann M. Eisenberg, Alienation and Reconciliation in Social-Ecological Systems, 47 Envtl. L. 127, 145 (2017). Notable examples exist of environmentalists acknowledging labor issues, and vice versa. In 1973, Sierra Club President Mike McCloskey called for “the government ‘to indemnify workers who are displaced in true cases of plant closures for environmental reasons.’” He argued, “[w]orkers should not be made to bear the brunt of any nation’s commitment to a decent environment for all. Society should assume this burden and aid them in every way possible.” Les Leopold, The Man who Hated Work and Loved Labor 309 (2007). Today, the Sierra Club and other environmental organizations have partnered with large labor unions in a “blue-green alliance” to advocate for environmental reform alongside policies that “create and maintain quality jobs.” Members, Blue Green Alliance, https://www.bluegreenalliance.org/about/members (last visited Jan. 25, 2019).

[19]. Cf. Scott D. Campbell, Sustainable Development and Social Justice: Conflicting Urgencies and the Search for Common Ground in Urban and Regional Planning, 1 Mich. J. of Sustainability 75, 75 (2013) (noting that “middle-class environmental interests typically trump the interests of the poor and marginalized, too often leading to an exclusionary sustainability of privilege rather than a sustainability of inclusion”); Eisenberg, supra note 18, at 127.

[20]. Leopold, supra note 18, at 417.

[21]. See discussion infra Section I.A.

[22]. See Randall S. Abate, Public Nuisance Suits for the Climate Justice Movement: The Right Thing and the Right Time, 85 Wash. L. Rev. 197, 199 (2010) (“Climate justice embraces a human rights approach to advocating for rights and remedies for climate change . . . climate justice focuses on the rights of those disproportionately affected by the impacts of climate change.”); Shalanda H. Baker, Mexican Energy Reform, Climate Change, and Energy Justice in Indigenous Communities, 56 Nat. Resources J. 369, 379 (2016) (though not yet a cohesive field of study, energy justice provides overall framework to view related areas of climate justice, environmental justice, and energy democracy); see also Flatt & Payne, supra note 7, at 1081 (noting that “[e]nergy poverty” recognizes inextricable linkage between energy and “economics of the human condition.”).

[23]. Cf. Geoff Evans & Liam Phelan, Transition to a Post-Carbon Society: Linking Environmental Justice and Just Transition Discourses, 99 Energy Pol’y 329, 333 (2016).

[24]. Both unclean hands and estoppel are longstanding doctrines of equity that attempt to inject principles of fair play into parties’ dealings with one another. The unclean hands doctrine prevents parties from profiting from their own wrongdoing, while the estoppel doctrine prevents parties from taking inconsistent positions. See T. Leigh Anenson & Gideon Mark, Inequitable Conduct in Retrospective: Understanding Unclean Hands in Patent Remedies, 62 Am. U. L. Rev. 1441, 1450 (2013). Of course, it is not contemplated that fossil fuel workers could raise such claims in court successfully. Rather, the ideas underlying calls for just transitions seem to invoke similar principles: society should not profit substantially from its hazardous industries only to abandon the workers in those industries, and nor should it encourage fossil fuel development only to abruptly take the opposite stance. For a discussion of a takings analogy, see infra Section II.B.

[25]. See discussion infra Section III.B for brief treatments of displacement resulting from taxi drivers competing with ride-sharing services and displacement resulting from gentrification. A forthcoming article, Distributive Justice and Rural America, further explores the just transitions concept as a principle of distributive economic justice. See generally Ann M. Eisenberg, Distributive Justice and Rural America (unpublished manuscript) (on file with author).

[26]. See generally Doorey, supra note 9.

[27]. See Richard J. Lazarus, Pursuing “Environmental Justice”: The Distributional Effects of Environmental Protection, 87 Nw. U. L. Rev. 787, 829 (1993).

[28]. See Outka, supra note 7, at 62–63 (“[S]ustainable development . . . means more than ‘greener’ economic development. Instead, it captures the interrelationship between the environment, the economy, and human well-being in the effort to meet ‘the needs of the present without compromising the ability of future generations to meet their own needs.’”).

[29]. Dylan Brown, Mining Union Faces ‘Life-and-Death’ Test, E&E News (Apr. 11, 2017), https://www.eenews.net/stories/1060052929.

[30]. See infra Section II.B; see also Naomi Seiler et al., Legal and Ethical Considerations in Government Compensation Plans: A Case Study of Smallpox Immunization, 1 Ind. Health L. Rev. 3, 14 (2004) (noting that the question of whether government should compensate someone raises the question of whether government actor caused harm in question; noting, too, that government can act either way out of compassion rather than obligation, and that causation by a non-government actor also raises question of whether government failed to protect from harm).

[31]. Cf. Holly Doremus, Takings and Transitions, 19 J. Land Use & Envtl. L. 1, 4–5 (2003) (“Focusing more directly on law as a dynamic phenomenon, on the benefits and costs of transitions, and on other factors that may encourage or impede transitions might bring some coherence to [the] famously incoherent area of [takings] law.”); Louis Kaplow, An Economic Analysis of Legal Transitions, 99 Harv. L. Rev. 509, 534 (1986) (“[N]one of the distinctions they offer for treating government and market risks differently withstands scrutiny.”).

[32]. See, e.g., Mark Joseph Stern, A New Lochner Era, Slate (June 29, 2018), https://slate.com
/news-and-politics/2018/06/the-lochner-era-is-set-for-a-comeback-at-the-supreme-court.html.

[33]. Swilling & Annecke, supra note 7; Caroline Farrell, A Just Transition: Lessons Learned from the Environmental Justice Movement, 45 Duke F.L. & Soc. Change 45, 45 (2012) (“As we transition away from a fossil fuel economy, we should . . . plan the transition not only to change the way we use fuel, but to create a truly just economy.”).

[34]. Doorey, supra note 9, at 7.

[35]. See, e.g., Outka, supra note 7, at 68 (listing harmful health and environmental effects of fossil fuel production and consumption).

[36]. Cf. Evans & Phelan, supra note 23.

[37]. See Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88 (2d Cir. 2000), cert. denied, 532 U.S. 941 (2001); see also Uma Outka, Fairness in the Low-Carbon Shift: Learning from Environmental Justice, 82 Brook. L. Rev. 789, 792 (2017) (explaining that the U.S. petroleum industry has caused devastating human rights abuses in Africa and South America).

[38]. Debbie Elliot, 5 Years After BP Oil Spill, Effects Linger and Recovery Is Slow, Nat’l Pub. Radio (Apr. 20, 2015), http://www.npr.org/2015/04/20/400374744/5-years-after-bp-oil-spill-effects-linger-and-recovery-is-slow.

[39]. E.g., Luis E. Cuervo, OPEC from Myth to Reality, 30 Hous. J. Int’l L. 433, 494 (2008).

[40]. Shannon Elizabeth Bell & Richard York, Community Economic Identity: The Coal Industry and Ideology Construction in West Virginia, 75 Rural Soc. 111, 139 (2010); Jeanne Marie Zokovitch Paben, Green Power & Environmental Justice—Does Green Discriminate?, 46 Tex. Tech L. Rev. 1067, 1108 (2014).

[41]. See Outka, supra note 7, at 790 (explaining that the energy sector’s reliance on fossil fuels, primarily coal, makes it the primary source of greenhouse gas emissions in the United States, a country which has contributed more to climate change than any other country); Salcido, supra note 15, at 618–19 (listing effects of climate change already occurring, such as more severe, frequent storms).

[42]. Evans & Phelan, supra note 23, at 330 (describing social movement for “post-carbon society,” which ranges from grassroots, “bottom-up surveillance” and demands for more democratic and decentralized energy sources, to major U.S. banks that have moved away from ever-riskier coal investments).

[43]. See, e.g., Tom Murray, China Is Going All in on Clean Energy as the U.S. Waffles. How Is that Making America Great Again?, Forbes (Jan. 6, 2017), https://www.forbes.com/sites
/edfenergyexchange/2017/01/06/china-is-going-all-in-on-clean-energy-as-the-u-s-waffles-how-is-that-making-america-great-again/2/#769f3bac340f.

[44]. Michael Greshko et al., A Running List of How President Trump Is Changing the Environmental Policy, Nat’l Geographic (Oct. 19, 2018), http://news.nationalgeographic.com/2017
/03/how-trump-is-changing-science-environment.

[45]. Devashree Saha & Mark Muro, Growth, Carbon, and Trump: State Progress and Drift on Economic Growth and Emissions ‘Decoupling’, Brookings (Dec. 8, 2016), https://www.brookings.edu
/research/growth-carbon-and-trump-state-progress-and-drift-on-economic-growth-and-emissions-decoupling.

[46]. Camila Domonoske, Mayors, Companies Vow to Act on Climate, Even as U.S. Leaves Paris Accord, Nat’l Pub. Radio (June 5, 2017), http://www.npr.org/sections/thetwo-way/2017/06/05
/531603731/mayors-companies-vow-to-act-on-climate-even-as-u-s-leaves-paris-accord.

[47]. Outka, supra note 7, at 793; Murray, supra note 43.

[48]. Nigel Topping, The Irreversible Rise of the Clean Economy in 2017, GreenBiz (Feb. 7, 2017), https://www.greenbiz.com/article/irreversible-rise-clean-economy-2017.

[49]. Id.

[50]. Outka, supra note 7, at 77–85; Stevis & Felli, supra note 4, at 43 (“Like the grey economy before it, this Green Transition can be as exploitative of people and nature as the grey economy was, if there is no countervailing power and vision.”).

[51]. Lakshman Guruswamy, Energy Justice and Sustainable Development, 21 Colo. J. Int’l Envtl. L. & Pol’y 231, 271 (2010).

[52]. Alex Geisinger, Uncovering the Myth of a Jobs/Nature Trade-Off, 51 Syracuse L. Rev. 115 passim (2001); Carey Catherine Whitehead, Wielding a Finely Crafted Legal Scalpel: Why Courts Did Not Cause the Decline of the Pacific Northwest Timber Industry, 38 Envtl. L. 979, 981 (2008) (describing the “classic” jobs-versus-environment “story”).

[53]. See, e.g., Garrett Ballengee & Michael Reed, Clean Power Plan: All Pain, No Gain for West Virginia, The Hill (Aug. 3, 2016), http://thehill.com/blogs/pundits-blog/energy-environment/289694-clean-power-plan-all-pain-no-gain-for-west-virginia.

[54]. See, e.g., Geisinger, supra note 52.

[55]. E.g., id. See generally Lois J. Schiffer & Jeremy D. Heep, Forests, Wetlands and the Superfund: Three Examples of Environmental Protection Promoting Jobs, 22 J. Corp. L. 571 (1997) (describing as a “myth” that conflict exists between protection of environment and protection of jobs).

[56]. See, e.g., Isaac Shapiro & John Irons, Econ. Policy Inst., Briefing Paper #305 Regulation, Employment, and the Economy: Fears of Job Loss Are Overblown 12 (2011) (“Regulations can have broad economic benefits that may not be apparent at first blush. Clean air regulations, for instance, significantly improve the health of workers and children, resulting in lower health care costs and more productive workers.”); Jan G. Laitos & Thomas A. Carr, The Transformation on Public Lands, 26 Ecology L.Q. 140, 174 (1999) (noting benefits to communities of shifts away from extractive industries); Schiffer & Heep, supra note 55.

[57]. Cf. Fran Ansley, Standing Rusty and Rolling Empty: Law, Poverty, and America’s Eroding Industrial Base, 81 Geo. L.J. 1757, 1763 (1993) (noting that plant closures of 1980s and 90s were “both quantitatively and qualitatively different” than regular layoffs and socioeconomic transitions in the number, size, and frequency of closings, as well as “disturbing patterns in the types of jobs lost and the types of jobs gained”).

[58]. See Robert Pollin & Brian Callaci, A Just Transition for U.S. Fossil Fuel Industry Workers, 27 Am. Prospect 88, 89 (2016).

[59]. Id.

[60]. Maanvi Singh, Gassy Cows Are Warming the Planet and They’re Here To Stay, Nat’l Pub. Radio: The Salt (Apr. 12, 2014), https://www.npr.org/sections/thesalt/2014/04/11/301794415/gassy-cows-are-warming-the-planet-and-theyre-here-to-stay (methane from livestock accounted for 39% of agricultural greenhouse gas emissions in 2011).

[61]. Pollin & Callaci, supra note 58, at 89.

[62]. See generally, e.g., Int’l Civil Aviation Org., Environmental Report 2010: Aviation and Climate Change (2010) (reporting that aviation accounts for around 2% of total CO2 emissions); Lisa J. Hanle et al., CO2 Emissions Profile of the U.S. Cement Industry (2004) (noting that cement production is a substantial CO2 emitter); U.S. Envtl. Prot. Agency, Fast Fact: U.S. Transportation Sector Greenhouse Gas Emissions 1990–2015, at 1 (2017) (noting that transportation accounted for 27% of U.S. greenhouse gas emissions in 2015).

[63]. Pollin & Callaci, supra note 58, at 89.

[64]. Geisinger, supra note 52.

[65]. Pollin & Callaci, supra note 58, at 88.

[66]. Doorey, supra note 9, at 221 (“[N]ew regulations limiting emissions or requiring ‘green’ production equipment or techniques can affect production systems in ways that impact working conditions, cause layoffs, or create downward pressure on labour costs.”); Alana Semuels, Do Regulations Really Kill Jobs?, Atlantic (Jan. 19, 2017), https://www.theatlantic.com/business
/archive/2017/01/regulations-jobs/513563 (“Regulations that seek to make air and water cleaner can also cause concentrated job losses in certain industries and locations.”); see also Lands Council v. McNair, 494 F.3d 771, 779 (9th Cir. 2007) (finding that an injunction of timber harvest would force timber companies to lay off some or all of their workers); Schiffer & Heep, supra note 55, at 582.

No economic analysis can ignore the suffering of some rural communities, which bear the brunt of the economic pain associated with reduced federally subsidized timber supplies. In addition to lost jobs and the associated closure of local businesses, county governments are receiving lower U.S. Treasury payments resulting from timber sales at the same time the county’s social services are most in demand.

Id. (footnotes omitted).

[67]. Cf. Hari M. Osofsky, The Geography of Justice Wormholes: Dilemmas from Property and Criminal Law, 53 Vill. L. Rev. 117, 122 (2008).

[68]. Jia Lynn Yang, Does Government Regulation Really Kill Jobs? Economists Say Overall Effect: Minimal., Wash. Post (Nov. 13, 2011), https://www.washingtonpost.com/business/economy
/does-government-regulation-really-kill-jobs-economists-say-overall-effect-minimal/2011/10/19
/gIQALRF5IN_story.html?noredirect=on&utm_term=.f23e96256dfa.

[69]. Doorey, supra note 9, at 203; Newell & Mulvaney, supra note 6; Evans & Phelan, supra note 23, at 333; Stevis & Felli, supra note 4, at 35.

[70]. Leopold, supra note 18, at 417.

[71]. Id.

[72]. Id. at 416.

[73]. Id. at 417.

[74]. Id. at 468.

[75]. Id.

[76]. Id.

[77]. But see Caleb Goods, A Just Transition to a Green Economy: Evaluating the Response of Australian Unions, 39 Austl. Bull. of Lab. 13, 15 (2013) (“A just transition clearly seeks to resolve the divisive jobs versus environment problem; however, actual union commitments to what a just transition response constitutes can be assessed as variable and unclear.”).

[78]. Evans & Phelan, supra note 23, at 333.

[79]. Int’l Labour Org., Guidelines for a Just Transition Towards Environmentally Sustainable Economies and Societies for All 3–4, 13 (2015) (advising governments to include implementing workers’ skills training and engaging workers and their representatives in the means to achieve low-carbon policies while creating and protecting employment).

[80]. Farrell, supra note 33, at 45 (discussing environmental justice); Shelley Welton, Clean Electrification, 88 U. Colo. L. Rev. 571, 573 (2017) (discussing “clean energy justice,” or the idea that “the suite of policies boosting green jobs also creates a new genre of environmental justice challenges,” and other inequitable effects of clean energy policies); see Ruhl, supra note 13, at 407 (noting “climate justice” refers to the fact that climate change impacts will be felt unevenly throughout the world; the capacity to adapt to climate change is also unevenly distributed).

[81]. See infra Section III.C; cf. Frederico Cheever & John C. Dernbach, Sustainable Development and Its Discontents, 4 Transnat’l Envtl. L. 247, 282 (2015) (rejecting criticisms of “sustainable development” as too vague to be useful).

[82]. Swilling & Annecke, supra note 7, at xiii.

[83]. Farrell, supra note 33, at 45, 49.

[84]. Linda Lobao et al., Poverty, Place, and Coal Employment Across Appalachia and the United States in a New Economic Era, 81 Rural Soc. 343, 343 (2016); Judson Abraham, Just Transitions for the Miners: Labor Environmentalism in the Ruhr and Appalachian Coalfields, 39 New Pol. Sci. 218, 218 (2017); Alan Ramo & Deborah Behles, Transitioning a Community Away from Fossil-Fuel Generation to a Green Economy: An Approach Using State Utility Commission Authority, 15 Minn. J. L., Sci. & Tech. 505, 507 (2014) (“A significant barrier to transitioning to clean energy sources is the local economic dependency fostered by a fossil fuel economy.”).

[85]. Lobao et al., supra note 84, at 377.

[86]. Evans & Phelan, supra note 23, at 331 (alterations in original) (internal quotation omitted).

[87]. Doorey, supra note 9, at 207.

[88]. J. Mijin Cha, Labor Leading Climate: A Policy Platform to Address Rising Inequality and Rising Sea Levels in New York State, 34 Pace Envtl. L. Rev. 423, 446 (2017).

[89]. Ramo & Behles, supra note 84, at 508.

[90]. Evans & Phelan, supra note 23, at 333.

[91]. Id. Australia and Canada have also embraced the narrow just transitions meaning. The Canadian Labour Council defines just transitions “as a political campaign to ‘ensure that the costs of environmental change [towards sustainability] will be shared fairly. Failure to create a just transition means that the cost of moves to sustainability will devolve wholly onto workers in targeted industries and their communities.’” Id. at 331.

[92]. Should Equity Be a Goal of Economic Policy?, Int’l Monetary Fund (Jan. 1998), https://www.imf.org/external/pubs/ft/issues/issues16 (discussing economic equity as a principle that economic resources, such as income, wealth, and land ownership, should be distributed fairly).

[93]. Doorey, supra note 9, at 201.

[94]. Id.

[95]. Id.

[96]. Id. at 214.

[97]. Id. at 238.

[98]. Id. at 225 (“Also like labour law, environmental justice has roots in a bottom-up resistance movement critical of a dominant legal system that benefits economically and politically powerful, privileged segments of society. [Environmental justice] is a natural ally to labour law in a re-imagined legal field organized around . . . subordination and resistance.”).

[99]. Id.

[100]. Id. at 234.

[101]. Id.

[102]. Principles of Climate Justice, Mary Robinson Found., https://www.mrfcj.org/principles-of-climate-justice (last visited Feb. 1, 2019).

[103]. Maxine Burkett, Just Solutions to Climate Change: A Climate Justice Proposal for a Domestic Clean Development Mechanism, 56 Buff. L. Rev. 169, 196 (2008); Ruhl, supra note 12, at 408.

[104]. Doorey, supra note 9.

[105]. See generally John Rawls, A Theory of Justice (1971).

[106]. Alice Kaswan, Distributive Justice and the Environment, 81 N.C. L. Rev. 1031 passim (2003). See generally Guruswamy, supra note 51.

[107]. Outka, supra note 7, at 64–65.

[108]. Id.

[109]. See generally Guruswamy, supra note 51.

[110]. Outka, supra note 7, at 64.

[111]. Evans & Phelan, supra note 23, at 333.

[112]. Id. at 331.

[W]hile there is potential synergy between environmental justice and just transitions campaigns, a harmonious resolution of the two concepts is not guaranteed if the interests and aspirations within the community are poorly negotiated between the parties involved. A melding of environmental justice campaign goals on the one hand and labour movement goals on the other, is particularly challenged by the continuing hegemony of the ‘jobs versus environment’ discourse.

Id.

[113]. Outka, supra note 7, at 62–63.

[114]. John C. Dernbach, Creating Legal Pathways to a Zero Carbon Future, 46 Envtl. Law Rep. 10780, 10782 (2016).

[115]. Outka, supra note 7, at 72–74.

[116]. Dernbach, supra note 114, at 10782 (footnote omitted); see also Campbell, supra note 19, at 75.

[D]espite the perhaps inevitable criticisms of immeasurability and vagueness, sustainability has endured as a central principle in urban planning because its oppositional engagement with social justice and economic development continually reinvigorates sustainability planning, keeps the term relevant and inclusive, and grants the task of urban planning greater urgency.

Campbell, supra note 19, at 75.

[117]. Rep. of the World Summit on Sustainable Dev., U.N. Doc A/CONF.199/20, at 2 (2002).

[118]. Outka, supra note 7, at 64.

[119]. Dernbach, supra note 114, at 33 (footnotes omitted).

[120]. Id.

[121]. See, e.g., Campbell, supra note 19, at 83; Edward H. Ziegler, American Cities and Sustainable Development in the Age of Global Terrorism: Some Thoughts on Fortress America and the Potential for Defensive Dispersal II, 30 Wm. & Mary Envtl. L. & Pol’y Rev. 95, 110 (2005) (“[S]ocial equity, and particularly intergenerational equity, along with resource conservation and environmental protection, are central concepts in sustainable development philosophy.”).

[122]. These values are also referred to as “the three Es (Economy, Environment, and Equity)[.] [S]ustainable development is often defined as an endeavor that strives to maintain equilibrium between these domains.” Catherine L. Ross et al., Measuring Regional Transportation Sustainability: An Exploration, 43 Urb. Law. 67, 69 (2010).

[123]. Outka, supra note 7, at 66; see also Campbell, supra note 19, at 76 (“The sustainability and social justice movements may be coming closer together, yet much still divides them into two separate conversations that frequently overhear each other without easily merging.”).

[124]. Outka, supra note 7, at 85.

[125]. Id. at 63; see also Campbell, supra note 19, at 77 (suggesting that environmental justice is an “important subset of the larger field of urban sustainability”).

[126]. Outka, supra note 7, at 91.

[127]. Id. at 122.

[128]. Farrell, supra note 33, at 45.

[129]. Cf. id. at 51. Farrell uses the broad just transitions meaning, but she also concludes that holistic decisionmaking is necessary going forward.

[130]. Eisenberg, Alienation and Reconciliation, supra note 18.

[131]. Melinda Harm Benson & Robin Kundis Craig, The End of Sustainability, 27 Soc’y & Nat. Res. 777, 779–80 (2014).

[132]. Id.

[133]. Robin Kundis Craig, “Stationarity Is Dead”—Long Live Transformation: Five Principles for Climate Change Adaptation Law, 34 Harv. Envtl. L. Rev. 9, 63–64 (2010).

[134]. Robin Kundis Craig & J.B. Ruhl, Designing Administrative Law for Adaptive Management, 67 Vand. L. Rev. 1 (2014); Flatt & Payne, supra note 7 at 1081.

[135]. Benson & Craig, supra note 131.

[136]. The President’s Northwest Forest Plan, discussed below as an example of just transitions policy that aided communities hurt by the decline in the timber industry, lends weight to the potential of the just transitions concept to help bring sustainable development goals more in line with resilience theory, although the Plan itself is considered a mixed success. Susan Charnley, formerly of the U.S. Department of Agriculture, said of the Plan:

From a social perspective, the Northwest Forest Plan as a model for broad-scale ecosystem management is perhaps most valuable in its attempt to link the biophysical and socioeconomic goals of forest management by creating high-quality jobs for residents of forest communities in restoration, research, monitoring, and other forest stewardship activities that protect the environment.

Susan Charnley, The Northwest Forest Plan as a Model for Broad-Scale Ecosystem Management: A Social Perspective, 20 Conservation Biology 330, 338 (2006).

[137]. See Cheever & Dernbach, supra note 81, at 251.

[138]. Flatt & Payne, supra note 7, at 1079.

[139]. Lazarus, supra note 27, at 787.

[140]. Baker et al., supra note 11.

[141]. Craig & Ruhl, supra note 134.

[142]. Bell & York, supra note 40.

[143]. Anne Marie Lofaso, What We Owe Our Coal Miners, 5 Harv. L. & Pol’y Rev. 87, 87 (2011).

[144]. See, e.g., discussion infra Section IV.C about Native American community in mixed environmental justice/economic dependency relationship with coal-fired power plant.

[145]. Ann M. Eisenberg, Beyond Science and Hysteria: Reality and Perceptions of Environmental Justice Concerns Surrounding Marcellus and Utica Shale Gas Development, 77 U. Pitt. L. Rev. 183, 199 (2015); see also Bell & York, supra note 40, at 119.

[146]. Bell & York, supra note 40, at 119.

[147]. Id.

[148]. Id.

[149]. Id.

[150]. Id.

[151]. Id. at 120.

[152]. Lofaso, supra note 143, at 88.

[153]. Bell & York, supra note 40, at 119–20.

[154]. Lofaso, supra note 143, at 89.

[155]. Id.

[156]. Id.

[157]. David J. Blackley et al., Continued Increase in Prevalence of Coal Workers’ Pneumoconiosis in the United States, 1970-2017, 108 Am. J. of Pub. Health 1220, 1221 (2018).

[158]. Appalachian Voices, The Human Cost of Mountaintop Removal Coal Mining: Mapping the Science Behind Health and Economic Woes of Central Appalachia 1 (2012).

[159]. See generally Chad Montrie, To Save the Land and the People: A History of Opposition to Surface Coal Mining in Appalachia (2003).

[160]. Lofaso, supra note 143, at 94–95.

[161]. Hitchman Coal & Coke Co. v. Mitchell, 245 U.S. 229, 250–52 (1917).

[162]. Evan Andrews, The Battle of Blair Mountain, History (Aug. 25, 2016), http://www.history.com/news/americas-largest-labor-uprising-the-battle-of-blair-mountain.

[163]. Brian C. Murchison, Due Process, Black Lung, and the Shaping of Administrative Justice, 54 Admin. L. Rev. 1025, 1026 (2002).

[164]. Mona L. Hymel, Environmental Tax Policy in the United States: A “Bit” of History, 3 Ariz. J. Envtl. L. & Pol’y 157, 162 (2013).

[165]. Janet Redman, Oil Change Int’l, Dirty Energy Dominance: Dependent on Denial: How the U.S. Fossil Fuel Industry Depends on Subsidies and Climate Denial 5 (2017).

[166]. Mason Adams, A 40-Year-Old Federal Law Literally Changed the Appalachian Landscape, W.Va. Pub. Broadcasting (Aug. 5, 2017), http://wvpublic.org/post/40-year-old-federal-law-literally-changed-appalachian-landscape#stream/0.

[167]. See Robert E. Beck, The Current Effort in Congress to Amend the Surface Mining Control and Reclamation Act of 1977 (SMCRA), 8 Fordham Envtl. L.J. 607, 617–18 (1997).

[168]. Murchison, supra note 163, at 1027.

[169]. Cf. Bailey H. Kuklin, The Plausibility of Legally Protecting Reasonable Expectations, 32 Val. U. L. Rev. 19, 19 (1997) (“[E]xpectations, particularly reasonable expectations, are at the heart of many legal doctrines. Contract, property and tort claims are often justified on the grounds that they protect reasonable expectations.”).

[170]. See, e.g., Chris McGreal, America’s Poorest White Town: Abandoned by Coal, Swallowed by Drugs, Guardian (Nov. 12, 2015), https://www.theguardian.com/us-news/2015/nov/12/beattyville-kentucky-and-americas-poorest-towns.

[171]. See Annalyn Censky, Coal ‘Ghost Towns’ Loom in West Virginia, CNN Money (May 26, 2011), http://money.cnn.com/2011/05/26/news/economy/west_virginia/index.htm.

[172]. See Patrick McGinley, Collateral Damage: Turning a Blind Eye to Environmental and Social Injustice in the Coalfields, 19 J. Envtl. & Sustainability L. 305, 425 (2013) (noting that coal country’s sacrifice “ha[s] helped power and build a nation”).

[173]. Kaplow, supra note 31, at 534 (“[M]ost commentators . . . defend mitigation of government risks, but not of market risks. Yet none of the distinctions they offer for treating government and market risks differently withstands scrutiny . . . . [T]here is little to distinguish losses arising from government and market risk.”).

[174]. Trevor Houser et al., Columbia Ctr. on Global Energy Policy, Can Coal Make a Comeback? passim (2017), https://energypolicy.columbia.edu/sites/default/files/Center_on_Global
_Energy_Policy_Can_Coal_Make_Comeback_April_2017.pdf; Matt Egan, What Killed Coal? Technology and Cheaper Alternatives, CNN (Aug. 21, 2018), https://money.cnn.com/2018/08/21
/investing/coal-power-trump-epa/index.html; Andrew Sorensen, Natural Gas and Wind Energy Killed Coal, Not ‘War on Coal’, CU Boulder Today (May 7, 2018), https://www.colorado.edu/today/2018
/05/07/natural-gas-and-wind-energy-killed-coal-not-war-coal.

[175]. Eisenberg, Beyond Science and Hysteria, supra note 145, at 207 (discussing exemptions for hydraulic fracturing in federal environmental statutes); see also Michael Pappas, A Right to be Regulated?, 24 Geo. Mason L. Rev. 99, 118–20 (2016) (arguing that regulatory changes may destroy the value of previously regulated utilities); cf. Christopher Serkin, Passive Takings: The State’s Affirmative Duty to Protect Property, 113 Mich. L. Rev. 345, 372–74 (2014) (“The harm resulting from inaction can be just as damaging as the harm resulting from overt action.”).

[176]. Joseph L. Sax, Do Communities Have Rights—The National Parks as a Laboratory of New Ideas, 45 U. Pitt. L. Rev. 499, 499 (1983).

[177]. Id.

[178]. Id. at 500.

[179]. Joseph Sax, Liberating the Public Trust Doctrine from Its Historical Shackles, 14 U.C. Davis L. Rev. 185, 187 (1980) (emphasis added).

[180]. See id. at 186–88.

[181]. Id.

[182]. Cf. Legal Pathways to Deep Decarbonization in the United States (Michael B. Gerrard & John C. Dernbach eds. 2018); Chris Bataille et al., The Need for National Deep Decarbonization Pathways for Effective Climate Policy, 16 Climate Pol’y 1 (2016).

[183]. See Frank Michelman, Property, Utility, and Fairness: Comments on the Ethical Foundations of “Just Compensation” Law, 80 Harv. L. Rev. 1180–81 (1967).

[184]. Erin Fleaher Rogers, Agricultural Trade Adjustment Assistance: Food for Thought on the First Decade of the Newest Trade Adjustment Assistance Program, 23 Fed. Cir. B.J. 561, 562 (2014).

[185]. Int’l Union v. Marshall, 584 F.2d 390, 395 (D.C. Cir. 1978).

[186]. Id.

[187]. See, e.g., Malcolm Bale & John Mutti, Income Losses, Compensation, and International Trade, 13 J. Hum. Resources 278, 283–84 (1978); Joseph Singer, The Reliance Interest in Property, 40 Stanford L. Rev. 3 (1988); Seth Mydans, Displaced Aerospace Workers Face Grim Future in California Economy, N.Y. Times (May 3, 1995), https://www.nytimes.com/1995/05/03/us/displaced-aerospace-workers-face-grim-future-in-california-economy.html. See generally Does Regulation Kill Jobs? (Cary Coglianese et al., eds. 2015).

[188]. See Bale & Mutti, supra note 187; Singer, supra note 187; Mydans, supra note 187.

[189]. Philip Levine, Towards a Property Right in Employment, 22 Buff. L. Rev. 1081 (1973); Robert Meltz, Takings Law Today: A Primer for the Perplexed, 34 Ecology L.Q. 307, 321 (2007). Takings jurisprudence does not recognize as property “the mere ability to conduct a business, as something separate from the business’ assets” or “permits and licenses if nontransferable and revocable.” Meltz, Takings Law Today, supra, at 321. In a 1933 opinion in Lynch v. United States, the Court held that valid contracts could be property for takings purposes. Lynch v. United States, 292 U.S. 571, 571 (1933). In 1995, however, the U.S. Court of Appeals for the Seventh Circuit observed that the Court effectively overruled Lynch in 1986 “to the extent that [Lynch] flatly holds that contracts are property that the government may not take without compensation . . . [an] analysis [that] does not resemble the takings jurisprudence of today.” Pro-Eco, Inc. v. Bd. of Comm’rs of Jay Cty., Ind., 57 F.3d 505, 510 n.2 (7th Cir. 1995) (discussing Connolly v. Pension Benefit Guarantee Corp., 475 U.S. 211 (1986)).

[190]. Doremus, supra note 31, at 3 (“Regulatory takings claims are fundamentally conflicts over legal transitions. They arise when the rules change, those changes are costly (in economic or other terms), and the people bearing the costs believe that they are being unfairly singled out.”).

[191]. James Manyika et al., Jobs Lost, Jobs Gained: What the Future of Work Will Mean for Jobs, Skills, and Wages, McKinsey Global Inst. (Nov. 2017), https://www.mckinsey.com/featured-insights/future-of-work/jobs-lost-jobs-gained-what-the-future-of-work-will-mean-for-jobs-skills-and-wages; James Doubek, Automation Could Displace 800 Million Workers Worldwide by 2030, Study Says, Nat’l Pub. Radio (Nov. 30, 2017), https://www.npr.org/sections/alltechconsidered/2017/11/30
/567408644/automation-could-displace-800-million-workers-worldwide-by-2030-study-says.

[192]. See, e.g., Maggie Fox, Death Maps Show Where Despair Is Killing Americans, NBC (Mar. 13, 2018), https://www.nbcnews.com/health/health-news/death-maps-show-where-despair-killing-americans-n856231; Alec MacGillis, The Original Underclass, Atlantic (Sept. 2016), https://www.theatlantic.com/magazine/archive/2016/09/the-original-underclass/492731.

[193]. Cf. Intergovernmental Panel on Climate Change, Summary for Policymakers of IPCC Special Report on Global Warming of 1.5C Approved by Governments (2018), https://www.ipcc.ch/pdf/session48/pr_181008_P48_spm_en.pdf.

[194]. Ruhl, supra note 12, at 392.

[195]. See Todd S. Aagaard, Environmental Law Outside the Canon, 89 Ind. L.J. 1239, 1241 (2014).

[196]. Id. at 1240.

[197]. Id. at 1251–54.

[198]. Zygmunt J.B. Plater, From the Beginning, a Fundamental Shift of Paradigms: A Theory and Short History of Environmental Law, 27 Loy. L.A. L. Rev. 981, 1002 (1994).

[199]. See generally Rachel Carson, Silent Spring (1962).

[200]. Jonathon Adler, The Fable of the Burning River, 45 Years Later, Wash. Post (June 22, 2014), https://wapo.st/1lgHyz8?tid=ss_tw&utm_term=.e1b92a32a102.

[201]. Plater, supra note 198 passim.

[202]. See Daniel A. Farber, Politics and Procedure in Environmental Law, 8 J.L. Econ. & Org. 59, 60 (1992).

[203]. Id.

[204]. Id

[205]. Id.

[206]. Id. at 61.

[207]. Daniel A. Farber, The Conservative as Environmentalist: From Goldwater and the Early Reagan to the 21st Century, 59 Ariz. L. Rev. 1005, 1007 (2017).

[208]. Id.

[209]. See generally Jonathan Mingle, Fighting for the Future, 5 Environment@Harvard 1 (2013).

[210]. Lydia Saad, Global Warming Concern at Three-Decade High in U.S., Gallup (Mar. 14, 2017), http://news.gallup.com/poll/206030/global-warming-concern-three-decade-high.aspx; Robinson Meyer, What Americans Really Think About Climate Change, Atlantic (Apr. 22, 2017), https://www.theatlantic.com/science/archive/2017/04/climate-polling-burnout/523881.

[211]. Sebastien Malo & Sophie Hares, On the Boil: Five Climate Lawsuits to Watch in 2018, Reuters (Dec. 27, 2017), https://www.reuters.com/article/us-global-climatechange-lawsuit-factbox
/onthe-boil-five-climate-lawsuits-to-watch-in-2018-idUSKBN1EM0J7.

[212]. For example, California achieved its 2020 target for reduced greenhouse gas emissions four years early, see Cal. Air Resources Board, California Greenhouse Gas Emissions for 2000 to 2016 (2008), https://www.arb.ca.gov/cc/inventory/pubs/reports/2000_2016/ghg_inventory_trends_00-16.pdf, plaintiffs seeking more stringent regulations have succeeded in litigation based on the Clean Air Act, the Endangered Species Act, and the California Environmental Quality Act, see Sabrina McCormick et al., Strategies In and Outcomes of Climate Change Litigation in the United States, 8 Nature Climate Change 829 (2018), and major cities have committed to aggressive greenhouse gas reductions as well as the goal of limiting global warming to one-and-a-half degrees Celsius, Milman et al., The Fight Against Climate Change: Four Cities Leading the Way in the Trump Era, Guardian (June 12, 2017), https://www.theguardian.com/cities/2017/jun/12/climate-change-trump-new-york-city-san-francisco-houston-miami.

[213]. Ruhl, supra note 12, at 411–12.

[214]. Andrew Rowell, Green Backlash: Global Subversion of the Environmental Movement (1996).

[215]. Eisenberg, Beyond Science and Hysteria, supra note 145, at 200; Eisenberg, Alienation and Reconciliation, supra note 18, at 154.

[216]. McGinley, supra note 1702, at 316.

[217]. Bell & York, supra note 40, at 139.

[218]. Brian Obach, Labor and the Environmental Movement: The Question for Common Ground (2004).

[219]. Id. at 9.

[220]. Id. at 11.

[221]. Eisenberg, Alienation and Reconciliation, supra note 18, at 140–47.

[222]. Id.; Doorey, supra note 9, at 221.

[223]. Jenna Hanson, The Modern Environmental Movement’s Big Failure, Pac. Standard (Apr. 17, 2015), https://psmag.com/environment/the-modern-environmental-movements-big-failure. But see Montrie, supra note 159 (discussing the untold history of popular opposition to environmental degradation).

[224]. Hanson, supra note 223.

[225]. Id.

[226]. Lisa R. Pruitt & Linda T. Sobczynski, Protecting People, Protecting Places: What Environmental Litigation Conceals and Reveals About Rurality, 47 J. Rural Stud. 326, 326 (2016).

[227]. Eisenberg, Alienation and Reconciliation, supra note 18, at 145.

[228]. Id.

[229]. Farber, Politics and Procedure, supra note 202, at 60.

[230]. Id.

[231]. Cf. Kathy Mulvey et al., Union of Concerned Scientists, The Climate Accountability Scorecard: Ranking Major Fossil Fuel Companies on Climate Deception, Disclosure, and Action (2016), https://www.ucsusa.org/sites/default/files/attach/2016/10/climate-accountability-scorecard-full-report.pdf.

[232]. Eisenberg, Alienation and Reconciliation, supra note 18, at 173.

[233]. See generally Hari Osofsky & Jacqueline Peel, Energy Partisanship, 65 Emory L.J. 695 (2016) (discussing how environmental reform may be possible by tempering partisanship).

[234]. Trade Act of 1974, 19 U.S.C. § 2101 (2012); 20 C.F.R. § 617.2 (2018).

[235]. See, e.g., Trade Adjustment Assistance for Workers, Emp. & Training Admin., https://doleta.gov/tradeact (last visited Feb. 5, 2019).

[236]. 19 U.S.C.. § 2251(a) (2012); Rogers, supra note 184 (“While the program initially provided aid only to workers, businesses, and communities, it was expanded in 2002 to cover farmers and fishermen through the Agricultural Trade Adjustment Assistance program.”); see also Stephen Kim Park, Bridging the Global Governance Gap: Reforming the Law of Trade Adjustment, 43 Geo. J. Int’l L. 797, 817–39 (2012) (discussing rationales for trade adjustment assistance).

[237]. Int’l Union, UAW v. Marshall, 584 F.2d 390, 395 (D.C. Cir. 1978).

[238]. Id.

[239]. 19 U.S.C. § 2271 (2012); Petition Filing Frequently Asked Questions (FAQ), U.S. Dep’t of Labor (Aug. 31, 2018), https://doleta.gov/tradeact/petitioners/FAQ_Answers.cfm#G4.

[240]. Investing in Trade-Affected Workers, U.S. Dep’t of Labor (Aug. 31, 2018), https://doleta.gov/tradeact/petitioners/petitionprocess.cfm; see also Benjamin Collins, Cong. Res. Serv. Trade Adjustment Assistance for Workers and the TAA Reauthorization Act of 2015 (2018), https://fas.org/sgp/crs/misc/R44153.pdf (“Individual benefits are funded by the federal government and administered by state agencies through their workforce systems and unemployment insurance systems.”).

[241]. Rogers, supra note 184, at 568.

[242]. Id. at 568–69.

[243]. Malcolm Bale & John Mutti, Income Losses, Compensation, and International Trade, 13 J. Hum. Resources 278, 283–84 (1978).

[244]. See Lori G. Kletzer, Job Loss from Imports: Measuring the Costs 78 (2001).

[245]. Designing a National Strategy for Responding to Economic Dislocation: Hearing Before the Subcomm. on Investigations and Oversight of the H. Comm. on Science and Technology, 110th Cong. 1 (2008) (testimony of Howard Rosen, Executive Director, Trade Adjustment Assistance Coalition).

[246]. Shana Fried, Note, Strengthening the Role of the U.S. Court of International Trade in Helping Trade-Affected Workers, 58 Rutgers L. Rev. 747, 748 (2006); see also Steven T. O’Hara, Worker Adjustment Assistance: The Failure & The Future, 5 Nw. J. Int’l. L. & Bus. 394, 395 –96 (1983).

[247]. See Fran Ansley, Standing Rusty and Rolling Empty: Law, Poverty, and America’s Eroding Industrial Base, 81 Geo. L.J. 1757, 1881 (1993); see also Park, supra note 236 passim; Fried, supra note 246 passim.

[248]. Seattle Audubon Soc’y v. Mosley, 798 F. Supp. 1484, 1490 (W.D. Wash. 1992) (stating that endangering the northern spotted owl violated the National Forest Management Act, 16 U.S.C. § 1600).

[249]. See, e.g., Portland Audubon Soc’y v. Lujan, 795 F. Supp. 1489, 1510 (D. Or. 1992), aff’d sub nom. Portland Audubon Soc’y v. Babbitt, 998 F.2d 705 (9th Cir. 1993).

[250]. See Am. Forest Res. Council v. Shea, 172 F. Supp. 2d 24, (D.D.C. 2001); Michael C. Blumm & Tim Wigington, The Oregon & California Railroad Grant Land’s Sordid Past, Contentious Present, and Uncertain Future: A Century of Conflict, 40 B.C. Envtl. Aff. L. Rev. 1, 4–5 (2013); Robert B. Keiter, Toward a National Conservation Network Act: Transforming Landscape Conservation on the Public Lands into Law, 42 Harv. Envtl. L. Rev. 62, 122 (2018).

[251]. See, e.g., Seattle Audubon Soc’y v. Lyons, 871 F. Supp. 1291, 1307 (W.D. Wash. 1994) (rejecting a challenge to the scope of the federal government’s discretion in adopting the legislation); Kristin Carden, Bridging the Divide: The Role of Science in Species Conservation Law, 30 Harv. Envtl. L. Rev. 165, 245–48 (2006).

[252]. Schiffer & Heep, supra note 55, at 577.

[253]. Id. at 582.

[254]. Paul Koberstein, Will the Northwest Forest Plan Come Undone?, High Country News (Apr. 7, 2015), https://www.hcn.org/articles/will-the-northwest-forest-plan-come-undone.

[255]. Schiffer & Heep, supra note 55, at 582. Charnley, supra note 136, at 286–87 (noting that the program met with mixed successes but suggesting that certain changes could have made it more successful); Michelle W. Anderson, The Western, Rural Rustbelt: Learning from Local Fiscal Crisis in Oregon, 50 Willamette L. Rev. 465, 503 (2014) (noting that NWFP’s job development programs, focused on common phenomenon of overlap between areas with economic hardship and areas with at-risk species, indicate that economic development should be cornerstone of environmental activism).

[256]. Schiffer & Heep, supra note 55, at 577.

[257]. Id. at 582.

[258]. Carey Catherine Whitehead, Wielding a Finely Crafted Legal Scalpel: Why Courts Did Not Cause the Decline of the Pacific Northwest Timber Industry, 38 Envtl. L. 979, 1012 (2008) (discussing intermingled factors contributing to decline of regional timber industry, and economists’ struggle to separate effects of injunctions and general recession on regional timber industry).

[259]. Koberstein, supra note 254.

[260]. Id.

[261]. Jack Ward Thomas et al., The Northwest Forest Plan: Origins, Components, Implementation Experience, and Suggestions for Change, 20 Conservation Biology 277, 283 (2006); see also Ted Helvoigt et al., Employment Transitions in Oregon’s Wood Products Sector During the 1990s, 101 J. Forestry 42, 42–46 (2003) .

[262]. Michael C. Blumm & Tim Wigington, The Past as Prologue to the Present Managing the Oregon and California Forest Lands, Or. St. B. Bull., July 2013, at 24, 25.

[263]. Id. at 27.

[264]. Anderson, supra note 255, at 470.

[265]. Blumm & Wiginton, supra note 262, at 29.

[266]. Craig P. Raysor, From the Sword to the Pen: A History and Current Analysis of U.S. Tobacco Marketing Regulations, 13 Drake J. Agric. L. 497, 512, 525 (2008) (noting inter alia problem of non-diversification of tobacco farms in early twentieth century).

[267]. See id. See generally Juliana v. United States, 339 F. Supp. 3d 1062 (D. Or. 2018).

[268]. 7 C.F.R. § 1463.1 (2018); Ryan D. Dreveskracht, Forfeiting Federalism: The Faustian Pact with Big Tobacco, 18 Rich. J.L. & Pub. Int. 291, 308 (2015).

[269]. Dreveskracht, supra note 268, at 308; see also Tobacco Transition Payment Program: Examination Treatment of Assets Related to the Tobacco Transition Payment Program, Fed. Deposit Ins. Corp. (Aug. 3, 2005), https://www.fdic.gov/news/news/financial/2005/fil7305.html.

[270]. Tobacco Transition Payment Program, supra note 269; see also Fair and Equitable Tobacco Reform Act of 2004, Pub. L. No. 108-357, 118 Stat. 1521 (codified at 7 U.S.C. § 518 (2012)); Joseph C. Robert, The Story of Tobacco in America 210 (1949).

[271]. See, e.g., Tobacco Transition Payment Program, U.S. Dep’t of Agric., https://www.fsa.usda.gov/FSA/webapp?area=home&subject=toba&topic=landing (last updated Jan. 30, 2013).

[272]. See generally Helen Pushkarskaya & Maria I Marshall, Lump Sum Versus Annuity: Choices of Kentucky Farmers During the Tobacco Buyout Program, 41 J. Agric. and Applied Econ. 613, 614 (2009).

[273]. 5 West’s Fed. Admin. Prac. Income Support Programs—Tobacco § 5510, Westlaw (database updated July 2018) [hereinafter Income Support Programs—Tobacco].

[274]. 7 U.S.C. § 518b (2012).

[275]. Income Support Programs—Tobacco, supra note 273.

[276]. Nathan Bomey, Thousands of Farmers Stopped Growing Tobacco After Deregulation Payouts, USA Today (Sept. 2, 2015), https://www.usatoday.com/story/money/2015/09/02/thousands-farmers-stopped-growing-tobacco-after-deregulation-payouts/32115163.

[277]. Id.

[278]. Id.

[279]. Dreveskracht, supra note 268, at 312.

[280]. Blake Brown, The End of the Tobacco Transition Payment Program, N.C. St. Univ. (Nov. 14, 2013), https://tobacco.ces.ncsu.edu/wp-content/uploads/2013/11/The-End-of-the-Tobacco-Transition-Payment-Program.pdf?fwd=no.

[281]. Press Release, Office of the Press Sec’y, Fact Sheet: Administration Announces New Economic and Workforce Development Resources for Coal Communities Through POWER Initiative (Aug. 24, 2016), https://obamawhitehouse.archives.gov/the-press-office/2016/08/24/fact-sheet-administration-announces-new-economic-and-workforce.

[282]. POWER Initiative, Appalachian Regional. Commission (last visited Feb. 5, 2019), https://www.arc.gov/funding/power.asp; ARC Seeks Funds for Coal-Impacted Communities, Fayette Trib. (Feb. 5, 2018), http://www.fayettetribune.com/news/arc-seeks-funds-for-coal-impacted-communities/article_cbae624e-09dc-11e8-896a-1f98f0f3a842.html.

[283]. Appalachian Reg’l. Comm’n, FY 2019 Performance Budget Justification 5 (2018), https://www.arc.gov/images/newsroom/publications/fy2019budget/FY2019PerformanceBudgetFeb2018.pdf.

[284]. POWER Initiative, supra note 282; see also Appalachian Reg’l Comm’n, POWER Awards, October 2018, https://www.arc.gov/images/grantsandfunding/POWER2018
/ARCEconDiversificationAwardsSummaries10-11-2018.pdf.

[285]. Richard L. Revesz, Regulation and Distribution, 93 N.Y.U. L. Rev. 1489, 1550–55 (2018) (discussing both failed and implemented congressional and executive efforts to assist coal communities and workers, including the POWER Initiative (implemented), POWER Plus (failed), the Abandoned Mine Land Economic Revitalization (“AMLER”) Program (failed), and the Revitalizing the Economy of Coal Communities by Leveraging Local Activities and Investing More (“RECLAIM”) Act (failed)).

[286]. Malcom Bale & John Mutti, Income Losses, Compensation, and International Trade, 13 J. Hum. Resources 278, 280 (1978).

[287]. Id.

[288]. Brown, supra note 280.

[289]. See Council of Econ. Advisers, Strengthening the Rural Economy—The Current State of Rural America, White House: President Barack Obama (Apr. 27, 2010), https://obamawhitehouse
.archives.gov/administration/eop/cea/factsheets-reports/strengthening-the-rural-economy/the-current-state-of-rural-america.

[290]. See U.S. Dep’t of Labor, Current Employment Statistics Survey: 100 Years of Employment, Hours, and Earnings, Bureau Lab. Stat. (Aug. 2016), https://doi.org/10.21916/mlr.2016.38.

[291]. See Reihan Salam, Taxi-Driver Suicides Are a Warning, Atlantic (June 5, 2018), https://www.theatlantic.com/politics/archive/2018/06/taxi-driver-suicides-are-a-warning/561926.

[292]. Phil McCausland, Sixth New York City Cab Driver Dies of Suicide After Struggling Financially, NBC News (June 16, 2018), https://www.nbcnews.com/news/us-news/sixth-new-york-city-cab-driver-dies-suicide-after-struggling-n883886; Nikita Stewart & Luis Ferré-Sadurní, Another Taxi Driver in Debt Takes His Life. That’s 5 in 5 Months., N.Y. Times (May 27, 2018), https://www.nytimes.com/2018/05/27/nyregion/taxi-driver-suicide-nyc.html.

[293]. Henry Goldman, Hyperdrive: NYC Is Set to Impose a Cap on Uber, Bloomberg (Aug. 6, 2018), https://www.bloomberg.com/news/articles/2018-08-06/nyc-set-to-impose-cap-on-uber-as-ride-hail-vehicles-clog-streets.

[294]. See Just Transition: A Framework for Change, Climate Just. Alliance, https://climatejusticealliance.org/just-transition (Last visited Feb. 6, 2019) (listing gentrification as scenario warranting just transition considerations).

[295]. See Ramo & Behles, supra note 84, at 509.

[296]. Id. at 509–10.

[297]. Id. at 510.

[298]. Id. at 512–13.

[299]. Id. at 515.

[300]. Id. at 513.

[301]. Id. at 517.

[302]. Id. at 520.

[303]. Id.

[304]. Id.

[305]. Id. at 519.

[306]. Id. at 521.

[307]. Id. at 525–26.

[308]. See id. at 522.

[309]. Id. at 523–25.

[310]. Id. at 526.

[311]. See, e.g., J. Mijin Cha, Labor Leading on Climate: A Policy Platform to Addressing Rising Inequality and Rising Sea Levels in New York State, 34 Pace Envtl. L. Rev. 423, 447 (2017) (citing Mohave example as positive outcome).

[312]. Eisenberg, Alienation and Reconciliation, supra note 18, at 138.

[313]. Id.

[314]. See generally Ky. Ctr. for Econ. Dev., Just the Facts: Kentucky Business Investment Program (2018), http://thinkkentucky.com/kyedc/pdfs/KBIFactSheet.pdf?57.

[315]. Parija Kavilanz, How This Kentucky Coal Town Is Trying to Bring its Economy Back to Life, CNN (Nov. 8, 2017), https://money.cnn.com/2017/11/08/news/economy/hazard-kentucky-coal-jobs
/index.html.

[316]. Slav Kornik, Alberta Puts Up $40M to Help Workers Transition During Coal-Power Phase-Out, Global News (Nov. 10, 2017), https://globalnews.ca/news/3855043/alberta-puts-up-40m-to-help-workers-transition-during-coal-power-phase-out; see also A Just Transition: The Way Forward for Coal Communities, Energy Transition (Feb. 20, 2017), https://energytransition.org/2017/02/a-just-transition-the-way-forward-for-coal-communities (discussing transitions for coal communities in Germany).

[317]. See Joshua Macey & Jackson Salovaara, Bankruptcy as Bailout: Coal, Chapter 11, and the Erosion of Federal Law, 71 Stan. L. Rev. 137 passim (2019); see also Eisenberg, Beyond Science and Hysteria, supra note 145, at 207.

[318]. See Macey & Salovaara, supra note 317 passim.

[319]. See, e.g., Katy Stech Ferek, Coal Company Armstrong Energy Files for Chapter 11 Bankruptcy Protection, Wall St. J. (Nov. 1, 2017), https://www.wsj.com/articles/coal-company-armstrong-energy-files-for-chapter-11-bankruptcy-protection-1509548753.

[320]. Ethan Lipsig & Keith R. Fentonmiller, A WARN Act Road Map, 11 Lab. Law. 273, 273 (1996).

[321]. Nicole C. Snyder & Scott E. Randolph, Understanding the Federal WARN Act and Its Impact on the Sale of A Business, 52 Advocate 29, 29 (2009).

[322]. Id.

[323]. Lipsig & Fentonmiller, supra note 320, at 273.

Free Trade Through Regulation? – Article by David Zaring

May 2016February 2018Emma Tehrani

From Volume 89, Number 4 (May 2016)
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How should the executive branch respond to globalization? The president’s executive order on international regulatory cooperation provides a blueprint. The branch will turn to regulatory cooperation to make progress in freeing trade and will encourage a particular approach to that cooperation—harmonization—that was eschewed during the successful European integrative project. The executive order, which is assessed in this Article, represents a welcome political endorsement of a phenomenon that was previously pursued by agencies acting largely on their own remit. It is also an attempt to galvanize the use of regulatory cooperation by other agencies disinclined to pursue it in the past. In addition to analyzing how the executive order is meant to work, this Article argues that while the executive’s approach is promising, it must be paired with a commitment to political oversight to ensure that regulatory globalization remains legitimate. There are signs that the president is beginning to provide this commitment through the executive order; the Article identifies a roadmap for its continuation and a role for Congress as well.

89_863

International Law and the Limits of Macroeconomic Cooperation – Article by Eric A. Posner & Alan O. Sykes

July 2013February 2018Colleen Bazak

From Volume 86, Number 5 (July 2013)
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The macroeconomic policies of states can produce significant costs and benefits for other states, yet international macroeconomic cooperation has been one of the weakest areas of international law. We ask why states have had such trouble cooperating over macroeconomic issues when they have been relatively successful at cooperation over other economic matters such as international trade. We argue that although the theoretical benefits of macroeconomic cooperation are real, in practice it is difficult to sustain because optimal cooperative policies are often uncertain and time variant, making it exceedingly difficult to craft clear rules for cooperation in many areas. It also is often difficult or impossible to design credible self-enforcement mechanisms. Recent cooperation on bank capital standards, the history of exchange rate cooperation, the European monetary union, and the prospects for broader monetary and fiscal cooperation all are discussed. Finally, we contrast the reasons for successful cooperation on international trade policy.

86_1025

Can Legal Actors Play Equilibrium Strategies? Two Dubious Assumptions in the Game-Theoretic Analysis of the Law – Article by Daniel Enemark

March 2013February 2018Colleen Bazak

From Volume 86, Number 3 (March 2013)
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Strategic actors often require a great deal of informational and computational resources to calculate game-theoretic equilibria, and scholars need a precise accounting of incentives in order to model the decisions faced by these actors. Rarely are both of these conditions—player rationality and payoff quantifiability—met when scholars attempt to model the behavior of individual actors in the law (especially the behavior of lay people such as jurors, litigants, or criminals). Behavioral economists have proposed posthoc adjustments to account for the failure of player rationality, but these adjustments—if they are indeed correct—make the pursuit of equilibrium impossible for any actor with realistic informational and cognitive resources. This Article discusses the necessary conditions for the emergence of equilibrium strategies, and identifies examples of legal scholarship in which the use of equilibrium solution concepts is problematic because of the improbability that these conditions are met.

86_449

97 S. Cal. L. Rev. 417

INTRODUCTION

I. THE DATA REVOLUTION AND THE VALUE OF DATA

A. Digital Transformation

1. Generating Value from Data with AI

2. Increase in Data

3. Amount of Value

B. Disagreements on How to Think About Data Creating Value

II. THE IMPLICATIONS OF DATA VALUATION FOR LAW

A. Valuation Is Important to Many Areas of Law

1. Antitrust

2. Business Law

3. Synthesis

III. REAL OPTIONS AS A SOLUTION

A. Real Options

B. Real Options as a Model for Data Valuation

C. A Way Forward

CONCLUSION

96 S. Cal. L. Rev. 1545

From Volume 92, Number 3 (March 2019) DOWNLOAD PDF

From Volume 92, Number 2 (January 2019) DOWNLOAD PDF

From Volume 89, Number 4 (May 2016) DOWNLOAD PDF

From Volume 86, Number 5 (July 2013) DOWNLOAD PDF

From Volume 86, Number 3 (March 2013) DOWNLOAD PDF

From Volume 92, Number 3 (March 2019)
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From Volume 92, Number 2 (January 2019)
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From Volume 89, Number 4 (May 2016)
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From Volume 86, Number 5 (July 2013)
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From Volume 86, Number 3 (March 2013)
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