Bankruptcy Cases Frequently Involve Noneconomic Issues
Bankruptcy professionals know that insolvency situations are not always about the bottom line. Consider the following list of recent, high-profile cases where noneconomic concerns were the focus of attention:
- Purdue Pharma: The infamous opioid manufacturer’s bankruptcy proceedings spotlighted public health and accountability, both retrospectively and prospectively.
- The Diocese Cases, Boy Scouts of America, and USA Gymnastics: These proceedings involved claims of sexual abuse and failure of oversight, the obligations of religious and charitable organizations, and the need for transparency, responsibility, and reform.
- The Weinstein Company: This case illustrated the interplay between corporate governance and accountability in light of longstanding, prebankruptcy allegations of abuse and misconduct.
- Alex Jones/Free Speech Systems: The controversial Internet personality’s bankruptcy raised thorny questions about accountability for the spread of misinformation and whether bankruptcy should be an occasion for maximizing value or preventing further harm.
- FTX: Here, the role of government regulators loomed large, with scholars questioning whether the government overstepped its role by forcing FTX into bankruptcy prematurely.
These examples (and others too numerous to list) force us to acknowledge that bankruptcy proceedings often extend beyond financial recovery. As a result, we should, at a minimum, consider the social and ethical ramifications of corporate missteps.
It’s Not All Mass Torts and Bad Actors
To be clear, the bigger picture goes beyond bad actors. Bankruptcy proceedings also encompass noneconomic concerns when enterprises committed to “doing good while doing well,” especially nonprofit entities and benefit corporations, end up in bankruptcy court.
The leadership of many for-profit entities now commit their endeavors to profit-making through the lens of Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) metrics.
CSR is a collective term covering corporate citizenship and all aspects of nonfinancially focused corporate initiatives. Historically, the term has almost exclusively been used to describe optional corporate activities that generate positive goodwill, such as employee volunteer programs and charitable contributions. At its core, CSR refers to a company’s commitment to ethical behavior and contributions to economic development while improving the quality of life for employees, their families, local communities, and society at large.
ESG, on the other hand, is focused more on risk management and less on voluntary programs. The term “ESG” was coined in 2004 in a UN Global Compact report, and the goal of ESG was to manage the nonfinancial risks and opportunities inherent in a company’s day-to-day activities. The three pillars within an ESG framework are as follows:
- The Environmental Pillar: What impact (positive or negative) does the company have on the environment? Considerations include environmental risks and opportunities, reducing carbon footprint, and opportunities related to the use and development of clean energy.
- The Social Pillar: What impact does the company have on society generally? Considerations include labor relations, human rights, safety, community impact, product integrity, privacy, and employee morale.
- The Governance Pillar: How is the company run? Considerations include board and senior management diversity, board independence, executive compensation, reporting and disclosure, and internal controls (e.g., related to bribery, corruption, political contribution policies, and cybersecurity).
Similarly, we see more focus on noneconomic concerns with benefit corporations, a type of legal entity with a statutory mandate to balance the pursuit of profit against a general or specific “public benefit,” which could be generating a positive impact on society, the environment, or local workers. Unlike their nonprofit cousins, however, benefit corporations can distribute profits to shareholders. Notable examples include Patagonia, Warby Parker, and Allbirds.
Plainly, the expectation for businesses to act responsibly has escalated. Customers, employees, investors, and other stakeholders increasingly expect it and often demand it. While some may disagree, we think those business principles should continue through insolvency and should remain no less important inside bankruptcy than they are outside it. Of course, we recognize the challenge in shifting even the slightest focus toward noneconomic concerns when that shift may naturally reduce the current focus on maximizing value for creditors. But perhaps that is the wrong way to look at this problem.
Rethinking What We Mean When We Maximize “Value”
Instead, perhaps we should rethink what bankruptcy professionals mean when we say we maximize “value.” Traditionally, the principal role of a trustee, debtor in possession, or creditors’ committee in bankruptcy has been to maximize monetary value. And indeed, bankruptcy’s “turn to market value” over the last several decades, as Professors Roe and Simkovic have helpfully sketched out, has had a positive effect on our industry, with chapter 11 cases moving more quickly and efficiently. But that is no reason to turn a blind eye to broader questions of reputational value, community impact, and long-term sustainability.
In bankruptcy, these issues can manifest through various channels:
- Stakeholder Engagement: Ensuring that all stakeholders are considered in restructuring plans, from employees facing job loss to victims seeking accountability.
- Reputation Management: Maintaining an organization’s reputation in the wake of bankruptcy, which can be profoundly affected by its actions and commitments to social responsibilities.
- Long-Term Sustainability: Considering how the business can not only emerge from bankruptcy but do so in a manner that positions it for sustainable, ethical growth in the future.
Committees and Conflicts
Even so, bankruptcy professionals must be careful to operate within their role, with a keen eye for potential conflicts. When monetary recovery and nonmonetary values diverge, some creditors may focus primarily on financial returns, while others may push for recognition of nonmonetary benefits—such as regulatory relief, enhanced corporate governance, or more robust reporting practices.
One of us has pointed out that the Bankruptcy Code already authorizes courts to appoint committee members for their unique perspectives, or to appoint a special committee, like a benefit committee. Beyond that, we may want to get creative. In certain cases, out-of-the-money (OOM) committees could play an enhanced role, offering a critical voice for stakeholder interests that extend beyond financial recovery.
Conclusion
In most bankruptcy cases, noneconomic concerns are ancillary or subordinate considerations. Yet, they are integral to the ethical landscape of corporate responsibility. With the new wave of interest in hybrid models, this approach to corporate governance will increasingly spill over into the insolvency world. Balancing the demands of creditors with the interests of multiple stakeholders presents a complex challenge, but one that can ultimately lead to more sustainable and responsible corporate practices. With this shift, bankruptcy professionals and courts will be compelled to consider how best to integrate CSR and ESG principles into the fabric of their practices. Only through this lens can we hope to redefine what “value” or “success” means in the context of corporate restructuring.
This is a question worth exploring as we strive to create a more ethically grounded and socially responsible business insolvency environment.
