Over on Crooked Timber, Daniel Davies has uncorked a hell of a rant on the fatuous absurdity of the old saw that "corporate officers have a fiduciary duty to maximize shareholder value." He starts off by pointing out that you could maximize the profits of the company for this quarter by, for example, firing everyone -- but that the next quarter would be pretty dismal. Then he gets into the meat of it, how every conceivable action
can be justified as "maximizing value."
In real life, the business judgement rule protects more or less anything that the Creative Capitalism gang might want businesses to do. Even the paradigm example used by Posner – of a corporate chief executive making charitable donations and specifically saying that they weren’t doing it for PR purposes and that they didn’t run the company in the interests of the shareholders – doesn’t actually necessarily give rise to a situation which would fail the business judgement test, because that’s pretty much the story of Body Shop, and if the only way that a company can secure the services of a talented and energetic cosmetics executive like Anita Roddick is to give away money without regard for shareholders, then that’s in the interests of shareholders. There is, of course, a cottage industry in business school cases and the funnies pages of the Economist in proving that instances of corporate philanthropy are actually in the interests of shareholders in the long term.
What obligation? Maximise what?
And, of course, the long term is a terribly difficult thing to forecast. It would, we can presume, be pretty bad for the S&P500 index if the Antarctic ice cap melted and we all drowned. Conversely, if the continent of Africa were to develop a billion consumers in a first world economy, that would be pretty good for the share prices of most companies on the stock exchange. There is a general long time interest of all humanity in doing good (that’s why it’s called “good”) and corporations and their shareholders do, in fact, share in this general interest of humanity. If you want to argue in any particular case that an act of corporate philanthropy isn’t connected tightly enough to a specific benefit which can be appropriated by the company and that this is wrong, then go for it but don’t expect the courts to agree with you.
There are three more stops on my tour for Walkaway: tomorrow at San Diego Comic-Con, next weekend at Defcon 25 in Las Vegas, and August 10th at the Burbank Public Library.
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