One of the longest standing debates in corporate law is the extent to which boards of directors should consider the interests of corporate constituencies other than shareholders in making decisions. (It came up again at the conference I'm attending today.)
Suppose, for example, that the board is considering whether to close an obsolete plant in a Rust Belt state. It is clear that doing so will increase the price of the stock. It is also clear that closing the plant will create serious economic dislocation for the plant's employees and, moreover, will have ripple effects throughout the community. Should the board consider these latter effects in making decisions.
There are a variety of reasons to think that the board should consider those latter effects only to the extent that they promote the primary goal of shareholder wealth (e.g., by enhancing employee morale). In my paper, In Defense of the Shareholder Wealth Maximization Norm, I identified many of those reasons, including this one:
[An] important consideration is the ability many nonshareholder constituencies have to protect themselves through the political process. Public choice theory teaches that well-defined interest groups are able to benefit themselves at the expense of larger, loosely defined groups by extracting legal rules from lawmakers that appear to be general welfare laws but in fact redound mainly to the interest group’s advantage. Absent a few self-appointed spokesmen, most of whom are either gadflies or promoting some service they sell, shareholders—especially individuals—have no meaningful political voice. In contrast, many nonshareholder constituencies are represented by cohesive, politically powerful interest groups. Consider the enormous political power wielded by unions, who purportedly represent the interests of employees .... Unions played a major role in passing state anti-takeover laws. Those laws had a significant part in killing off hostile takeovers. From the shareholders’ perspective, the unions helped kill the goose that laid the golden egg. From the union’s perspective, however, hostile takeovers were inflicting considerable harm on workers. The unions were probably wrong on that score, but the point is that the unions used their political power to transfer wealth from shareholders to nonshareholder constituencies.
Now I've got a new example of how the interests of nonshareholder constituencies are protected by general welfare legislation, such that boards should only be concerned with shareholder interests:
Margarita Restrepo's husband lost his job as a janitor when the business where he worked changed hands and decided it wanted a different company to vacuum the floors and empty the trash. With just one hour's warning, he lost his job, his health insurance, and was left without any job prospects. ...
[Massachusetts] lawmakers unveiled legislation yesterday that would require companies that change hands to keep janitors from the building's existing cleaning company for 90 days, instead of immediately bringing in a new custodial crew.
The bill is designed to protect workers from a sudden loss of insurance and a job, a problem that is growing as outsourcing cleaning crews becomes common practice for businesses. ... (Link)
In sum, director pursuit of shareholder wealth maximization often redounds to the benefit of nonshareholder constituencies. Even where shareholder and nonshareholder interests conflict, moreover, nonshareholders receive superior protection from contracts and both targeted and general welfare legislation. Because shareholders will place a higher value on being the beneficiaries of director fiduciary duties than will nonshareholder constituencies, gains from trade are available, and we would expect a bargain to be struck in which shareholder wealth maximization is the chosen norm. And that is exactly what corporate law does.
