1. Traditionally, American scholars and practitioners tend to view a corporation's primary goal in terms of 'shareholder wealth maximization'. It is therefore refreshing to read Professor Lyman Johnson's recent post about this subject, in the broader context of the relationship - if any - between corporate law and faith. (see, e.g., here). The post includes the following.
Shareholder primacy, in other words, is one goal of many. Companies could, to varying degrees, and consistent with raising capital (shareholders have choice too and can stay away from companies they think are "too" socially responsible), pursue profits but not only profits. Thus, rather than the current organizational dichotomy of profit/nonprofit, we would have a continuum of companies on the profit side (hedge funds being maximizers of wealth and others more diverse). That would give investors choice along with managers and employees and customers, etc. I think the decided turn toward "green" companies and the local food movement are examples of this growing diversity. (Alternatively, maybe there are more such companies out there than we know about--here we need some empirical work-- and it is we law and business teachers who parody this by our reductionism).
2. Professor Stephen Bainbridge weighs in on the discussion here, and quite vigorously dissents from the position taken by Johnson. Let me quote Bainbridge as well.
I must respectfully--but strenuously--dissent. Obviously, there are many situations in which a corporation can make a Pareto optimal move (a win-win decision) that makes everybody--shareholders and nonshareholder corporate stakeholders--better off. In some cases, however, boards of directors must make Kaldor-Hicks (or, if you prefer, zero sum) decisions. In the latter cases, the law requires that directors maximize shareholder wealth. To be sure, the business judgment rule frequently precludes judicial review of board decisions that appear to have made trade offs between shareholder wealth maximization and nonshareholder interests. (Shlensky v. Wrigley being the canonical example.) The fact that judges choose to abstain from reviewing board decisions in such cases, however, does not mean that the underlying legal norm has changed. I've addressed this issue in several articles, but most directly in The Bishops and the Corporate Stakeholder Debate (April 2002). Villanova Journal of Law and Investment Management. 3. This is all interesting stuff, going to the core of what corporate law is/should be about, as Johnson also notes in what seems to be a response to the position taken by Bainbridge. (...) descriptively, many on this blog may agree that shareholder primacy is not mandated by law, but that remains a contested point, rather remarkably. I doubt Steve Bainbridge, to cite one respected commentator, would yield readily to my assertion on the corporate goal issue but I think the authority he would rely on is thin and largely a matter of custom and other factors, as I noted before. Many corporate law professors/casebooks seem to assume shareholder primacy and I can't tell you the number of business people and economists, among others, who I have encountered who think such a goal is the 11th commandment, apparently based on the gospel according to Milton Friedman, vintage 1970. Yes, markets constrain as Elizabeth notes, but markets work at a pretty crude level and shareholders themselves are not always the narrow, stereotyped money-maximizers we sometimes portray them as being, as Einer Elhauge argued in his 2005 NYU piece. Thus, corporate law as taught, written about, and practiced, requires candid attention to the question of what does the law really does require/permit. This is true both in law schools and in B schools. 4. My impression is that, at least in Delaware, courts seem to be focused on shareholders' interests as the interests that should be taken into account primarily by corporate directors, when charting the course for the company to take. See for example the Delaware Supreme Court's 2006 - unanimous en banc - opinion re NACEPF, Inc. v. Gheewalla, where the court explained that whether a corporation is solvent or "navigating in the zone of insolvency", the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners. This emphasis on shareholders' interests is no longer the expected way to go from the moment the company is actually insolvent, as from that moment on - at least that's how I read the opinion - the directors have the "duty to maximize the value of the insolvent corporation for the benefit of all those having an interest in it." Also see, e.g., Katz v. Oak Industries, Inc., 508 A.2d 873 (Del. Ch. 1986), where the court noted that: [i]t is the obligation for directors to attempt, wihtin the law, to maximize the long-run interests of the corporation's stockholders; that they may sometimes do so 'at the expense' of others (...) does not for that reason contitute a breach of duty. and Production Resources Group, LLC v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004), where the court noted that: directors - as fiduciaries in equity - are primarily focused on generating economic returns that will exceed what is required to pay bills in order to deliver a return to the company's stockholders who provided equity capital and agreed to bear the residual risk associated with the firm's operations. To me this case law seems more in line with the analysis of Bainbridge than that of Johnson, which is not to say Johnson's analysis has no merit; on the contrary, but that's more on an aspirational level. But see for a more nuanced take, in an important recent essay, Delaware's VC Strine (here). 5. American doctrine and case law seem less concerned with the way corporate directors deal with - competing - interests of the company's stakeholders, including those of the shareholders, than say continental doctrine and case law. England, for example, has codified in 2006 a new Companies Act, that contains the following section (172 Duty to promote the succes of the company): (1) 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 members as a whole, and in doing so have regard (amongst other matters) to: This system has been called the 'enlightened shareholder primacy' approach. Dutch doctrine and case law is another nice example. One of the Dutch core legal concepts is that a corporate board is expected to take into account in the decision making process the interests of all those involved with the company and its enterprise, which includes - not: equates to - the interests of the shareholders. One could call this - a bit bluntly - the 'stakeholder' approach, as there is no default emphasis on shareholders' interests, at least not distinguishable in doctrine and case law. See, e.g., the Supreme Court's decision of July 13, 2007 re ABN AMRO. 6. In my view, the whole discussion about whether some stakeholder interests are fundamentally more important than others in this setting seems a bit distracting. Of course, it matters whether one is talking about a large listed company or about a small privately organized entity, and there are special situations (think of insolvency and sale of the company), but doesn't it make more sense to generally expect from corporate directors of commercial corporations - that typologically operate for gain - 'simply' the following? I touched upon this more in detail in Judicial Review of Director Conduct - Under Dutch and Delaware Law, Deventer: Kluwer 2007, no. 7. My guess is that, in reality, this provides directors with more guidance than some vague notion of 'shareholder wealth maximization' (also as there is no such thing as 'the' shareholder). Things are obviously different if the legal entity does not operate for gain, but that's a different story for another day. UPDATE For Professor Johnson's response to this post see the comment section and his interesting additional post here, that starts with the following. I strongly urge readers to read the Defining Tension comment to my second post, Why It Matters. The link noted in that comment takes you to a very thoughtful, balanced, and helpful essay. It is must reading for those interested in the debate over corporate goals. It convinces me that this debate over corporate purpose is critically important both here and abroad as it touches on a fundamental matter that cannot be dismissed.
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(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, and
(f) the need to act fairly as between members of the company.
I compliment Defining Tension on a very fair, balanced, and thoughtful contribution. I think the concept of acting for the best interests of "the corporation and its stockholders" in Delaware law always has been a way to capture the ambivalence about the basic question of corporate purpose. Gheewalla slightly modified the language doctrinally but in a very specific context: the verge of insolvency and so the court perhaps emphasized shareholders over the enterprise as such to negate any particular duty running to specific nonshareholder interests. But DT's position at the end serves to advance the debate. Ultimately, in a democracy, underlying social views must be reflected in law. I have always found it incredible to believe that legal scholars think the American people, any more than Europeans, believe they are toiling daily only to maximize shareholder wealth. With Peggy Lee--that dates me--we could ask in song :"Is that all there is?" The strong shareholder primacy view within the academy lacks strong social footing. Like it or not, this debate will continue, as it should, because it is vital, especially now at a time of great societal disenchantment with business. Reform can and should come from within the ranks of those who believe in the private sector as well as those who propose more statist reforms.
Posted by: Lyman Johnson | May 08, 2009 at 14:45