2024 Election Outcomes: Corporate America Should Be Prepared
By Arthur Kohn, Skytop Contributor / November 18th, 2024
Arthur Kohn has practiced law since 1986, focusing on compensation and benefits matters, including executive compensation, pension compliance and investment, employment law, corporate governance and related matters. In 2021, he was appointed as a fellow to the American College of Governance Counselors.
Arthur is an adjunct professor at New York University School of Law. He frequently speaks and writes about executive compensation, taxation and corporate governance matters. He repeatedly has been recognized for his work by the business and legal press, including Best Lawyers, Chambers USA, The Legal 500, Super Lawyers of New York and others.
Arthur received a B.A. from Columbia University and a J.D. from Columbia Law School, where he was admitted into the Accelerated Interdisciplinary Legal Education program, was appointed a Harlan Fiske Stone Scholar and received Phi Beta Kappa honors.
The Perceived Risks Are Now Present
While the initial reaction from the equity markets to the results of Trump’s win were favorable, signals from the markets can be fickle. Similarly, we don’t know what results the markets were hoping for, as that is hard to tease out from other factors.
Interpreting the actions of important businessmen can be much easier. Elon Musk took sides and placed a big bet, influenced the outcome and seems poised to see his business benefit from his efforts. Others seem to have recognized the risks to corporate America from Trump’s election, but also the arguably bigger risks from taking sides about the outcome, and kept their heads down.
As it turned out, we avoided the issues that would have arisen from a dispute over the results. But clearly, large parts of corporate America perceived risks from a Trump victory that were not avoided. Those risks need to be addressed now that we have a Trump win.
Democracy is Good for Business
There has been a general consensus in this country that democracy is good for business. One can try to challenge that consensus by pointing to economic success stories in undemocratic places, most notably China. One can also try to challenge that consensus with theoretical arguments based on efficiency, noting that authoritarian governments are better able to quickly organize and adjust resources.
However, the consensus about capitalism and freedom generally holds. The answer to the example of China is the Soviet Union, and the answer to the efficiency argument is Adam Smith, who long ago had the insight that free markets are the key to the efficient allocation of resources.
To an extent, Trump uses the argument that (1) success in business requires strong, non-democratic leadership, (2) he is successful in business, (3) this success must translate to the government and the economy and (4) therefore, he could be successful in those realms even though, generally, democracy and free markets are good for business.
Putting aside the merits of the factual premises and the extent to which that argument is appealing to the electorate, the important point is that Trump himself seems clearly to believe it. It is doubtful that the consensus in corporate America does. Therefore, corporate America must be prepared to confront it.
Stability is Good for Business
Trump feeds off change. One could argue whether that’s an understatement, and that he really feeds off chaos, but that’s largely beside the point.
Among other things, Trump wants to dramatically change decades-long immigration policies, tariff policies (and perhaps income tax policies generally, although that idea is impractical and was probably just thrown out as an electioneering whim) and fundamentally, international relations policies and the way in which the government functions – that is, the regulatory “deep state”. There are of course many more important changes in the offing.
Corporate America for the most part benefits from stability. Big business involves the management of enormous amounts of capital and labor. The logistics, mechanics and psychology of change are challenging.
There are, however, two important caveats regarding business. First, there are those whose business is the financial markets and whose opportunities for profit increase with volatility. Trading firms that can benefit from volatility may welcome the opportunity for large swings in market sentiment that Trump’s leadership seems likely to bring.
Second, there are the “creative destroyer” types. The term describes an economic theory (originally attributed to Karl Marx, by the way) that capitalist economies must involve the regular destruction of wealth through various means, including economic crises and war. The term’s modern usage evokes the destruction of wealth by businessmen that upend an existing business framework, often through risky efforts that rack up huge losses, to eventually profit by their positioning in the new framework.
A second Trump administration will provide a context for rapid change and instability, perhaps involving exacerbated volatility in the markets and an acceleration of creative destruction. Corporate America and individual businesses should think about the best strategy for navigating in that context.
The Risks are Present and Real
It is worth recalling that in the aftermath of the 2020 election dispute, separate groups of retired military leaders (https://www.nytimes.com/2022/07/21/opinion/january-6-trumpmilitary.html) and retired secretaries of defense and chairman of the joint chiefs of staff (https://warontherocks.com/2022/09/to-support-and-defend-principles-of-civilian-control-andbest-practices-of-civil-military-relations/) thought it necessary to publish public statements concerning the relationship between the military and civilian government.
Questioning whether the rule of law in this country would survive a second Trump administration may seem to be hyperventilating. All politics aside, there is a lot at stake and good reason to be cautious. Nothing in the most recent election or its immediate aftermath suggests that the risks seen by military leaders to the rule of law have diminished, and there is no good reason not to think seriously about the risks that lie ahead.
Regulatory Affairs
The project of dismantling the regulatory state will affect different companies and industries in different ways, but here are some of the likely constants. First, we are likely to see an extraordinary exodus of experienced employees in career positions at the regulatory agencies, across the board. This, together with budget cuts, is likely to lead to greater difficulty in getting things done with regulators and greater importance for political appointees relative to career employees. Second, it is likely that enforcement efforts will increase in importance relative to regulation. Third, influencing regulatory action will likely be more heavily focused on lobbying in the personal sense, rather than other traditional more policy-oriented and reasoned approaches.
In this environment, there will be increased opportunities for companies or industries to achieve important goals. For example, for public companies generally, some of the more controversial disclosure proposals by the Securities Exchange Commission will be quashed. But the results could be idiosyncratic, particularly around merger regulation. Industry trade groups will have to be especially careful about taking positions that may cut in different ways for different members. Broader trade groups will have an even harder time finding issues in which there is a strong consensus among increasingly diverse business perspectives.
Impact of International Relations and Tariffs on Trade and Supply Chains
Tension and actual conflict among nations arising from changes in global trade rules and the conduct of foreign affairs is likely to increase, causing problems for truly global businesses as well as interruptions in supply chains for companies that rely on a global supply network. These could come quickly in the new administration, particularly in the case of China and its relationship with Taiwan. The resulting tension could specially impact specific industries – e.g., the semiconductor industry in the case of China and Taiwan – which could have substantial ripple effects across the economy. In addition, the tension could expose areas of vulnerability in our cybersecurity infrastructure, significantly affecting particular industries or companies that are targeted.
Stakeholder Engagement
The political backlash against “woke” has already begun, but it is not yet in full swing. Companies will continue to be cautious about positions they take on controversial issues, whether those issues affect their business directly or not. Engagement by corporate America with social and environmental issues will be challenged in two specific ways.
First, such engagement brings not just long-term hard-to-privatize benefits, but also near-term and direct benefits for many businesses. Evidence of this exists in the early entreaty by ExxonMobil to Trump not to abandon the Paris climate accords. In a generally hostile political and cultural environment for engagement by business with social and environmental issues, how will those businesses that perceive such engagement to be in their economic interest navigate the tensions?
Second, the stakeholders that have championed such issues, including institutional shareholders, customers and employees, will likely not all fold their cards. Many companies have already toned down their public support of progress on these issues, while quietly trying to mitigate the pullback of their actual support. Tactics for maneuvering between the competing sides will require new creative thinking, as each tries to exert public pressure on companies.
Shareholder Primacy
Milton Friedman famously said that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
The worst idea of the last fifty years is the idea that when people get together for the purpose of economic activity and wealth creation the only ethical constraint on their activities should be compliance with the law. For about 2500 years, decent humans have been thinking about what is good, just and right in all sorts of situations. To think that when it comes to pursuing profit and wealth – i.e., business - the simple answer is that anything goes within the boundaries of law defies common sense. If it were that easy, either Plato or Aristotle would have come up with it.
The idea of stockholder primacy has so penetrated the culture over these last fifty years that many people in business can’t imagine a different rule. Maximizing shareholder value above all else has become akin to a law of nature, answering the questions of whether it’s ok to sacrifice product safety, introduce dangerous chemicals to the environment or consumers directly or withhold important information from the public, all for the sake of squeezing out a little extra profit and notwithstanding potentially immense (non-privatized) cost.
Every presidential administration has its ethically challenged representatives, but there are good reasons to believe that the second Trump administration will break new ground. It will be a challenge for many businesses not to adapt to the prevailing zeitgeist in all sorts of spheres where a little ethical judgment or socially responsible thinking – what lawyers frequently call “passing the smell test” – would be welcome. Boards and executives should take steps to mitigate the risk.
Legal Obligations
Every board should ask what legal obligation it must consider because of the risks arising from Trump’s victory. The basic and fundamental analysis under Delaware corporate law arises from the well-known 1996 Caremark decision. That case involved a claim that the board of Caremark International breached its fiduciary obligations by failing to adequately monitor the risks facing the company, a drug manufacturer, from the criminal sale of its drugs for unapproved uses. The basic question addressed by Caremark concerns the standard of diligence to which a board is subject in exercising its oversight function. That is, at what point is a board responsible for a failure to exercise sufficient care in monitoring risks facing the company?
On the one hand, the challenge for a plaintiff seeking to hold a board accountable for such an oversight failure is famously difficult. The Delaware Court of Chancery has said that Caremark claims are “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment”. On the other hand, the most notable aspect of the Caremark analysis regarding the risks noted above is that those risks are eminently foreseeable.
In sum, the risks of legal liability from keeping one’s head down again may seem lower than the risks of acting to address the risks described above. However, clear thinking about addressing the situation and what a company can do to prepare is necessary. The case for taking a step back to consider the current situation should be simple. The fact that maybe it is not speaks to the novel challenges facing us.