In a comment to the Haskell Murray post that prompted today's discourse, Bill Callison raises an interesting point about the role of "conventional wisdom" in development of law. Bill opines that "the CW that is driving benefit corp legislation is more or less as described by Haskell in his good post."
I frequently refer to the shareholder wealth maximization norm. This is a nod to the literature exploring the ways in which social norms supplement (and, in some cases) displace law as a constraint on behavior.
As suggested by Bill's observation that shareholder wealth maximization is the conventional wisdom, shareholder wealth maximization is a basic social norm of corporate governance.
Although some claim that directors do not adhere to the shareholder wealth maximization norm, the weight of the evidence is to the contrary.[1] A 1995 National Association of Corporate Directors (NACD) report, for example, stated: “The primary objective of the corporation is to conduct business activities with a view to enhancing corporate profit and shareholder gain,” albeit subject to the qualification that “long-term shareholder gain” may require “fair treatment” of nonshareholder constituents.[2] A 1996 NACD report on director professionalism set out the same objective, without any qualifying language on nonshareholder constituencies.[3] A 1999 Conference Board survey found that directors of U.S. corporations generally define their role as running the company for the benefit of its shareholders.[4] The 2000 edition of Korn/Ferry International’s well-known director survey found that when making corporate decisions directors consider shareholder interests most frequently, albeit also finding that a substantial number of directors feel some responsibility towards stakeholders.[5]
What people do arguably matters more than what they say. Director fidelity to shareholder interests has been enhanced in recent years by the market for corporate control and, some say, activism by institutional investors. Hence, for example, the widespread corporate restructurings of the 1990s are commonly attributed to director concern for shareholder wealth maximization.[6] In addition, changes in director compensation have created hostages ensuring director fidelity to shareholder interests.[7] Directors have long given shareholders reputational hostages. If the company fails on their watch, after all, the directors’ reputation and thus their future employability is likely to suffer. In addition, it is becoming common to compensate outside directors in stock rather than cash and to establish minimum stock ownership requirements as a qualification for election. Tying up a proportion of directors’ personal wealth in stock of the corporation creates another hostage, further aligning the directors’ interests with those of shareholders.
[1] See, e.g., Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 Va. L. Rev. 247, 286 (1999); D. Gordon Smith, The Shareholder Primacy Norm, 23 J. Corp. L. 277, 290-91 (1998).
[2] National Association of Corporate Directors, Report of the NACD Blue Ribbon Commission on Director Compensation: Purposes, Principles, and Best Practices 1 (1995).
[3] See National Association of Corporate Directors, Report of the NACD Blue Ribbon Commission on Director Professionalism 1 (1996).
[4] The Conference Board, Determining Board Effectiveness: A Handbook for Directors and Officers 7 (1999).
[5] Korn/Ferry International, 27th Annual Board of Directors Study 33-34 (2000).
[6] See, e.g., Michael Useem, Investor Capitalism: How Money Managers Are Changing the Face of Corporate America 137-67 (1996) (discussing corporate restructurings as a consequence of investor pressure).
[7] Hostages—reciprocal transaction-specific investments—are a central concept in institutional economics. Giving and taking hostages is a mechanism for making credible commitments. I’ll pay the ransom, because I know that you will kill the hostage if I do not.
