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The Supremacy Of The Narrative In Corporate Law (BY- AADRIKA MALHOTRA)

The Supremacy Of The Narrative In Corporate Law



The conception of how stock-market-driven short-termism damages the economy is simple and important: directors, brazened with a demanding stock market of dealers and activists, concentrate too deeply on boosting their immediate quarterly financial results, rather than on the business’s long-term health. Employee well-being, critical analysis and development, and long run capital investment each deteriorate. Because in this view the stock market blocks numerous large companies from allowing for the long term, the whole economy suffers.
The main culprits in this popular view are stock traders and shareholder activists, both of whom are looking for a quick profit and bend large public corporations’ investments to align with the traders’ and activists’ short-run time horizons. Among policymakers, the media, and executives, the consensus is that the short-termism problem is widespread and pernicious— and getting worse.2


Stocks, corporate, narrative, laws

What explains this wide gap between queried academic substantiation and assured perniciousness in the popular view? In this Article we examine the part of narrative power. Because short-termism’s negatives are fluently stated, fluently understood, and regularly repeated, while the positives (although they appear in the data) need a little moments to fantasize and articulate, it’s easy for the short-termism narrative to be popular. We highlight the psychological, behavioral biases that boost the narrative’s believability, as well as the interest-group dynamics that the narrative bolsters and who in turn forcefully push it.
Why do we say that the initial connotations make short-termism seem worse that it is? A deeper analysis than most people’s initial impression leads to the converse as equally plausible: long-term corporate decision makers can be stubborn and self-interested, while short-term decision makers can be flexible and innovative.3
Narrative power depends not just on the connotations that compass how our minds originally admit the idea, but also on how frequently our terrain reminds us of the idea. This is where order confusion comes in. Salient marvels not arising primarily from malformed commercial time midairs are regularly but inaptly labeled as substantially performing from commercial short- termism. Environmental declination, for illustration, is frequently portrayed as due to stock request short- termism, when it primarily emanates from the pot’s capability to discharge costs externally to third parties, not from investors ’ time midairs. The pot cheapens its operations to save plutocrat at the terrain’s expenditure, thereby serving not just short- but also long- term investors. 
1 Student at Guru Gobind Singh Indraprastha University
2 See infra notes 3, 31, 60, 125 & 127 and accompanying text (reviewing statements by Joseph Biden, Hilary Clinton, Donald Trump, Elizabeth Warren, Joe Donelly, and Jay Clayton); Joe Biden, How Short-Termism Saps the Economy, WALL ST. J. (Sept. 27, 2016), https:// on.wsj.com/3cNjdS0; see also David Brooks, President
Biden’s First Day, N.Y. TIMES (July 16, 2020), https://nyti.ms/3dpgldm (“[A]sked . . . to describe the big forces that have flattened working-class wages over the decades . . . [,] Biden pointed to two institutional failures [one being the] broken [character of] Washington and [the other being] the way Wall Street forces business
leaders to focus obsessively on the short term.”).
to-measure inputs.6 And while the wider legal literature is not devoid of narrative analysis,7 corporate legal scholarship has largely ignored it. It is time to adopt the tools now available in adjacent disciplines to analyze narrative power in corporate law.

The Dominant Narrative

In the court of public opinion, the notion goes largely unquestioned and has been gaining saliency: the short-term-focused stock market’s vociferous demands on corporate executives damage the whole economy. Major media mentions of short-termism are rising sharply: mentions of financial short termism in the past five years in the New York Times are five times as frequent as those for the preceding fifteen.8 This consensus is not mirrored in academic work, where the issue is contested, with a mixed body of evidence. Studies have examined whether a defined category of firms—activist influenced, quarterly-oriented, or institutional-investor-owned—is more short-term than others. Further, even when some firms are excessively focused on the short term (as some surely are), other firms have the incentive to pick up the shortfall. The shortfall need not be a major economy-wide problem as long as enough other public firms (or private firms or venture capital) do enough of the long-term business that short-term firms shirk.

3 For the oft-ignored perils of long-termism, see Michal Barzuza & Eric Talley, Long-Term Bias, 2020 COLUM. BUS. L. REV. 104 (2020).
4 See, e.g., Jon Agnone, Amplifying Public Opinions: The Policy Impact of the U.S. Environment, 85 SOC. FORCES 1593, 1597 (2007); Paul Burstein, The Impact of Public Opinion on Public Policy: A Review and an Agenda, 56 POL. RSCH. Q. 29, 29 (2003); EMERY ROE, NARRATIVE POLICY ANALYSIS: THEORY AND PRACTICE 1 (1994);
Benjamin I. Page & Robert Y. Shapiro, Effects of Public Opinion on Policy, 77 AM. POL. SCI. REV. 175, 175 (1983).

Whether short-termism is wide and deep is thus an empirical issue, and the empirical evidence is contested. Yet once a narrative grips both the public and opinion-leaders, divided empirical work in academic journals is not going to persuade believers in the contrary. There is more public talk of stock market short-termism’s detrimental impact than data supporting a broad, pernicious economic impact. Why is that?

One channel that affects popular belief is the narrative’s name and its connotations, which etch an original picture on our minds. original connotations condition further allowing,
creating presuppositions of validity and power, or of invalidity and impertinence. The “ short- termism ” words come with explosively negative connotations, embedded in deep- seated artistic and cognitive tendencies. Connotation and original print are important because “( a) lthough most public policy issues are unnaturally complex, public conversations of them are generally simple    ( C) omplex issues get whittled down to simplified choices amenable to
public discussion.    ”9
6 George A. Akerlof, Sins of Omissions and the Practice of Economics, 58 J. ECON. LITERATURE 405, 405, 413– 15 (2020).
7 E.g., Alex Raskolnikov, Narratives Versus Facts in Distributional Debates (Colum. L. Sch. Working paper, 2019) (on file with author); WILLIAM HALTON & MICHAEL MCCANN, DISTORTING THE LAW: POLITICS, MEDIA AND
THE LITIGATION CRISIS 153–54 (2004) (noting that tort reform was boosted by the belief in a “litigation crisis,” when the on-the-ground evidence was that there was no such crisis); Joseph J. Thorndike, The Durability of a Dysfunctional Tax: Public Opinion and the Failure of Corporate Tax, 21 KAN. J.L. & PUB. POL’Y 347, 359–60 (2012).
8 The New York Times data comes from our own Factiva search. We controlled for the number of articles published over the period (by putting the number of mentions in the numerator and the number of articles in the denominator). Others have found a similar increase in Wall Street Journal mentions. KIM M. WILLEY, STOCK MARKET SHORT-TERMISM: LAW, REGULATION, AND REFORM 2 (2019).
The Vocabulary Of Short Terminism

Some basics: short- termism need not be bad, nor must long- termism be good. Short- term abandonment of a failed technology is good. Long- term investment in a plant whose product has no future is not. But the connotations of short- and long- termism don't bring that
indeterminacy to the fore of the speaker’s or listener’s knowledge. utmost of us want to be seen as long- term( and, hence, dependable and loyal), not shortterm( and, hence, perfidious, unreliable, and capricious).

Dictionary delineations bed these differences, with short- termism but not long- termism defined pejoratively — as having a cost but no natural value. Indeed the Financial Times — the largely- admired review that's hardly negative to stock requests and finance — embeds negatives when it refers to short- termism, associating it with “ destructive( ness), ” indicating that it comes at the expenditure of the long- term, and criminating it of undermining request credibility.10

10 E.g., John Plender, Shareholder Short-Termism is Damaging the Economy, FIN. TIMES (Nov. 7, 2015),
https://on.ft.com/3tsu2PH. For another example, see the definition of “shorttermism” in OXFORD DICTIONARY OF BUSINESS AND MANAGEMENT (5th ed. 2009) (“Any policy that aims to maximize current profits rather than long-term development and wealth [I]nstitutional and individual shareholders often overreact to a
company’s short-term results and policies, causing the company to lose the longer-term focus that is

Connotations of morality, intentionality, and seriousness attach to differing words whose meanings are substantially similar, with the word chosen shaping action and attitude. Short-
termism’s negative overtones are rooted in deep-seated cultural norms. Religious norms extol long-term incentives to resist short-term temptations. David Hirshleifer states, and tapping into concepts as simple as the fable of the ant and the grasshopper. Indeed, civilization plausibly depended on humans shifting from immediate hunter-gatherer norms to longer-term agricultural norms: planting seeds today for harvesting in the longer-term.11 Famous research bolsters this idea. Patience is a key to success, we are told; children’s futures can be predicted based on whether they can resist eating one marshmallow now in return for two later.

Confirmation Inside Professional Silos
Repetition also comes from those who profit from wide belief. They unfeignedly believe the narrative to be true and promote it. The media give business leaders an followership. The narrative makes for a good story with emotional hooks that satisfy listeners, observers, and compendiums . Indeed, mentions of stock request short- termism in major journals have mainly increased.

Another megaphone for those with an interest is professional memoranda and newsletters, which regularly repeat that short- termism is a problem. Real cases of short- termism are proved and repeated. Contrary cases are explained else and left away, unrepeated. Prestigious law enterprises retained by directors and boards to fight stockholder influence promote the narrative in their memos, which are distributed to guests and the media, and published in
leading commercial governance blogs. The memos bolster directors ’ resolve to fight off shareholders. Administrative advisers do the same.12

The Interests And The Lawmakers: How Narrative Supremacy Affects Corporate Laws
The psychology of stock-market-driven short-termism strengthens two major political conduits that emphasize stock-market-driven short-termism. The first conduit is the public’s anti-Wall Street predilection. Politicians can win over voters with anti-short-termism messaging (and when they do so, they repeat and confirm the idea). The second conduit runs from executives to politicians: the narrative helps executives persuade policymakers to insulate the executives from Wall Street pressures.13
How The Narrative Affects Political Leaders
To the extent that lawgivers view stock request short- termism as seriously damaging the frugality, they presume that Wall Street is in the wrong and that loyal, long- term directors are in the right. The narrative’s conclusive power thereby lowers the cost to directors of getting their preferred programs from judges, lawmakers, and controllers.
ultimately in the interests of all stakeholders.”). The definitions themselves (and not just what the words
evoke) embed the pejorative for short-termism and neutrality for long-termism.
11 Along the same line, ancient myths celebrated Promethean foresight (in mastering fire) against short-term temptations. HESIOD, THEOGONY AND WORK AND DAYS 17–20 (M. L. West trans., 1988).
https://www.fcltglobal.org/wp-content/uploads/20140123-mck-quarterly- survey-results-for-fclt- org_final.pdf; DOMINIC BARTON, JONATHAN BAILEY & JOSHUA ZOFFER, FCLT Glob., Rising to the Challenge of Short-Termism (2016) (Barton was McKinsey’s managing director—its CEO); Rebecca Darr & Tim Koller, How to Build an Alliance Against Corporate Short-Termism, MCKINSEY INSIGHTS (Jan. 30, 2017), https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-tobuild-an- alliance-against-corporate-short-termism. But see Lawrence H. Summers, Is Corporate Short-Termism Really a Problem? The Jury’s Still Out, HARV. BUS. REV. (Feb. 16, 2017) (questioning the short-term interpretation in
McKinsey’s report).

The stock request short- termism narrative resonates with ananti-Wall-Street view. The ending of a business, with ministry grinding to a halt and workers leaving the plant gates for the last time, is pictorial, whereas a request signal that a business has no future is not. When businesses near, political leaders can and do characterize their fight to save a original business and ingredients ’ jobs as seeking to deliver innocent, pious workers from nocuous Wall Street short- termism.

How Executives And Their Allies Benefit
Evidence and transmission come also from the coffers devoted to repeating it. important groups with coffers and a simple but compelling narrative can succeed more fluently than weak groups lacking coffers and ready access to media, and with only a complex story to vend. These dynamics come apparent when we examine( 1) who flies the short- termism flag,( 2) how those who fly it profit if it's extensively believed, and( 3) how a important narrative can overcome introductory asthenia of interest group association.
To reiterate Our point isn't that directors and their abettors picked a transparently false conception up off the ground, and also contorted it into a extensively- believed idea. Rather, there was an intermittent and real problem that could be vividly imaged via real, concrete cases( our point in former sections). Opinion and substantiation as to its academic verity or falsity as explosively hurting the frugality was divided, yet the conception counterplotted onto popular pretensions and popular generalities. On top of that, well- deposited interests promoted the narrative (our point in this section) because they unfeignedly believed it, and it was in their interest to do so.

The narrative conditions lawgivers to accord directors more autonomy from stock requests. And it flatters directors ’ tone- image by allowing them to view themselves not as pursuing
13 Andrew Verstein, Wrong-Termism, Right-Termism, and the Liability Structure of Investor Time Horizons, 41
SEATTLE U. L. REV. 577, 580 (“Long-termism can also be code for managerialism.”).
their tone- interest but as heroically prostrating the shortsightedness of fiscal requests for the good of all. further subtly, the important narrative can help directors integrate public wrathfulness — diverting the counterreaction against Corporate America and turning it into an enmity against Wall Street..14

Corporate directors aren't naturally popular in America and if they sought autonomy directly, that might not be popular. But the anti-short-termism station supports their autonomy. The anti-short-termism “ask ” is more licit than a direct “ ask. ” The price label for autonomy would be advanced if directors asked lawgivers directly than if sought for the purpose of fighting stock- request short- termism. Law makers and judges might not, and we believe would not, as willingly heed directors ’ direct call for autonomy.

How The Narrative Affects Corporate Laws
Consider the Polaroid litigation in the Delaware courts. When shareholder activists pressured the camera and filmmaker, management resisted, using the rhetoric of resisting short-termism for a more privileged longterm.15

The Delaware corporate courts supported management and its long-term practices. Yet Polaroid was failing to face up to digital photography’s threat to traditional film photography, and its resistant management kept their long-term strategic emphasis on photochemistry. The company went bankrupt a few years later and shut down.1

One recent example: when Silicon Valley interests sought SEC approval of a new corporate structure enhancing the voting rights of some stockholders (via a variant on dual-class stock, which accords some stockholders more votes than others), they promoted the effort as creating a Long- Term Stock Exchange.

How Narrative Powers Can Boost Persuasiveness And Reduce Interest
A critic of our analysis might expostulate that if the interests ’ power is strong enough, or if policymakers ’ view on the graces is clear enough, also the result is fated. Narrative powers make no difference. The review can not be completely combated , as we can not test what the policy results would be with and without the pictorial narrative. But the critic would have the same problem how do we know that the interests or the graces would have prevailed without a forcefully conclusive narrative? The interests might have lost.
Traditional political frugality. In traditional political frugality analysis, the “ public interest approach ” emphasizes the graces ’ significance and sees policymakers choosing the policy that they suppose would be stylish for the American people.17 In discrepancy, the “ public choice approach ” emphasizes the interests of the policymakers themselves and the groups
that impact them. occasionally the interests ’ pretensions align with the graces, occasionally they do not. crusade benefactions, votes, or officers ’ unborn job openings can secure favorable programs, indeed if they aren't in the public interest
When When politicians can package a policy as being in the public interest( that is, as better for the frugality, for the average American, for taxpayers, for America itself), they will be more successful than if pushing it as serving a important interest group or a select cohort of choosers. Ideas have power. Applied then, these dynamics operate strongly, since the short- termism narrative unites two important interests directors seeking autonomy with workers seeking stability. Politicians can censure short- termism without alienating moreover.

14 Costly regulation is raised as a consequence if short-termism is mishandled. Martin Lipton, Corporate Purpose: ESG, CSR, PRI and Sustainable Long-Term Investment, HARV. L. SCH. F. ON CORP. GOVERNANCE (May 4, 2018), https://corpgov.law.harvard.edu/2018/05/04/corporate-purpose-esg-csr-pri-and-sustainable-long- term-investment.
15 Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 257, 268 (Del. Ch. 1989). Defending the long-term would not, however, said the defenders, harm short-term shareholders. Id. at 283.
16 See In re Polaroid Corp., 420 B.R. 484, 486 n.1 (Bankr. D. Minn. 2009).
The two — operation and workers generally aren't united in either the opinion of what ails America or in what programs they want to fix it. The rhetoric of stock request short- termism lowers the costs to policymakers of favoring directorial interests for lawgivers, similar as the Delaware council, its bar, the Securities and Exchange Commission, and Congress. It lowers the visibility of their favoritism “ We ’re not doing operation’s bidding, ” they can say( and unfeignedly believe, retaining a tone- image of their own public-spirited courage). rather,
they can say “ we are fighting to make the frugality more, to make investment for the long- term more likely, to make a better, stronger country for us all. ”

Narratives reduce the interest groups ’ enervating free- riding problem. The alternate classic political frugality weakness of interest groups is that they can fail because they must coordinate conduct and costs; free- rider problems torment them, as they torment so numerous other groups. An presumably important group can readily fail if its members can not coordinate, as Mancur Olson’s notorious analysis emphasized.18

Powerful narratives can help narrow interest groups get the programs they want indeed on issues of high salience. And in our period of adding populism, salience in commercial legislator may come more nonstop and less intermittent than in the history, as commercial law is now not as frequently only made in retired political corridors — a change that makes mastery of a strong narrative all the more important to the interest groups.

17 For a concise overview, see Nicholas Bagley & Richard L. Revesz, Centralized Oversight of the Regulatory State, 106 COLUM. L. REV. 1260, 1284–85 (2006).

Lawmakers do not regularly and scientifically investigate in depth the pluses and minuses of policy. Narratives, impressions, and interests often drive policymakers. Evidence is only part of the picture. Popular narratives, perceptions, and opinions have traditionally not been in play for much corporate law making, however, because corporate law is technical and does not typically attract public scrutiny. To better understand the channels through which popular narratives can influence corporate law, we analyze a specific, ongoing issue: the wide perception of stock market short-termism as impeding capital investment, employe well- being, and the American economy’s R&D prowess. The narrative is simple: stock traders and shareholder activists, looking for a quick profit, systematically induce large public corporations to manage for the short-run. Among policymakers, the media, and executives, the view is one-sided that the problem is a pernicious and worsening economy-wide scourge.

Yet a wide gap separates this broadly-held belief—which is being discussed more frequently than ever in the media and has been endorsed by multiple political leaders, including Joseph Biden19—from the disputed academic evidence as to its importance. A few specifics to be clear on the scope of our project here: By narrative power, we do not mean simple persuasiveness in affecting the decision maker— be it the judge, the administrator, or the legislator. Our concept of narrative is rather that some notions, conclusions, and preferences in corporate lawmaking affect public views of the issue. Lawmakers respond to the voters.
Once voters have a strong opinion on one side of a corporate issue, then that public preference enters the mix of inputs into lawmakers’ Decision making. As an example, if lawmakers are conceptualizing the appraisal remedy, the lawyers’ persuasiveness skills reach t he lawmaker but go no farther, as the public and voters have no interest in, and generally no knowledge of, the appraisal remedy. 

But if the issue implicates stock market  time horizons— for example, should directors be shielded from activist shareholders and takeovers?—then public opinion is one of the lawmaking inputs. 
With short-termism, we saw that the corporate and media environment regularly propagates the idea in ways that make it easy for people to retrieve it from memory, helping it to persist and prosper as it is repeated. Information cascades can convince many that there’s a problem as they rely on the opinions of others. A groupthink then evolves, seeing short-termism as a deep and widespread problem, not an intermittent and occasional one.
Public-regarding public servants need a narrative to communicate what they believe to other lawmakers. Policymakers can justify their decisions by aiming them at short-termism. Critics of American capitalism can shrug off being labelled as outcasts by rhetorically supporting capitalism in general, but rejecting the bent results attributed to stock market short-termism. And executives seeking autonomy can persuade SEC policymakers, senators, judges, and themselves that they are not simply self-interested when they seek more autonomy but are fundamentally fostering the American economy’s long-term health. 
19 Brooks, supra note 1 (discussing President Biden’s view that Wall Street short-termism and broken Washington institutions hold worker prosperity down). The remedy regularly proposed for stock market short- termism to corporate and securities lawmakers is to increase executives’ and boards’ autonomy from stockholders. Anti-short-termism is a policy proposal readily captured by executives for their own benefit without bolstering worker prosperity. Alternative means to bolster worker prosperity are more likely to actually benefit them and the American economy—such as Biden’s parallel proposal to boost manufacturing with heavy government support for new research and development. See Shane Goldmacher & Jim Tankersley, In “Buy American” Speech, Biden Challenges Trump on the Economy, N.Y. TIMES (July 9, 2020), https://nyti.ms/3dQBnll.


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