In eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010), then-Delaware Chancellor William Chandler opined that “Directors for a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization--at least not consistently with the directors' fiduciary duty under Delaware law.”
In a recent Wake Forest law review article, current Delaware Chancellor Leo Strine opined that Chandler's holding "drew fire from both ends of our corporate law political spectrum, if there be such a thing." Passing over Strine's analysis of the corporate law left, we come to the following:
From a different political perspective come those who seem to take umbrage at plain statements like the Chancellor's for unmasking the face of capitalism. These commentators seem dismayed when anyone starkly recognizes that as a matter of corporate law, the object of the corporation is to produce profits for the stockholders and that the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation. Maxwell Kennerly, in his review of the eBay decision, noted what he perceived to be a triad of conservative academic commentators who were unhappy with Senator Al Franken's statement that “it is literally malfeasance for a corporation not to do everything it legally can to maximize its profits”--a statement, that in Kennerly's view, encapsulates a material portion of the holding in the eBay opinion. [FN48]
One suspects that this vein of commentary does not fear the unmasking because these commentators believe that courts would actually prevent corporations from pursuing profit in an enlightened manner. [FN49] To the contrary, one senses that they may be uncomfortable with a plain acknowledgment that corporate managers' primary duty is to seek as much profit as can be achieved within the limits of the law, precisely because to do so emphasizes the importance of the law in channeling corporate behavior. Preferable is suggesting that corporate managers themselves while seeking to maximize corporate profits will take care of the public interest, and that government should leave it to corporate managers.
[FN48]. Kennerly, supra note 44. As recounted by Kennerly, Professor Todd Henderson argued that although “the duty to maximize shareholder value may be a useful shorthand for a corporate manager to think about how to act on a day-to-day basis, this is not legally required or enforceable.” Id. (quoting Todd Henderson, The Shareholder Wealth Maximization Myth, Truth on the Market (July 27, 2010), http://truthonthemarket.com/2010/07/27/the-shareholder-wealth-maximization-myth/). Professor Stephen Bainbridge agreed, positing that “[t]he fact that corporate law does not intend to promote corporate social responsibility, but merely allows it to exist behind the shield of the business judgment rule, becomes rather significant in--and is confirmed by--cases where the business judgment rule does not apply.” Stephen Bainbridge, Al Franken, Shareholder Wealth Maximization, and the Business Judgment Rule, ProfessorBainbridge.com (July 27, 2010), http:// www.professorbainbridge.com/professorbainbridgecom/2010/07/shareholder-wealth-maximization-and-the-business-judgment-rule.html#tp. Finally, Professor Larry Ribstein was also quick to contest Franken's comment: “The Franken misconception is widely espoused by those in the radical anti-corporate camp....This is why the corporate social responsibility debate is largely empty. While many corporate social responsibility proponents argue for giving managers more legal freedom to serve society's needs, managers already have that freedom.” Larry Ribstein, The Shareholder Maximization Canard, Truth on the Market (July 28, 2010), http://truthonthemarket.com/2010/07/28/the-shareholder-maximization-canard/. Kennerly attributed this dismissal of Franken's views to an underappreciation of what he describes as a legal requirement that corporations, even if allowed to engage in certain philanthropic efforts, undertake to maximize profits. See Kennerly, supra note 44 (“[T]he duty to maximize profits isn't, as Henderson said, a ‘canard.’ It's an enforceable...legal doctrine, and it was just enforced against craigslist.”).
[FN49]. This sense comes from the conservative response discussed supra in note 48, in which the commentators appear to argue that corporations already enjoy the prerogative to pursue philanthropic ends to the extent that those who would argue, as Al Franken does, that corporations are legally required to maximize profits, underemphasize the wide latitude managers already enjoy under the business judgment rule.
I've read this passage several times and remain puzzled. In contrast to Strine's usual clarity, this passage is convoluted and challenging to parse. If I've ultimately interpreted him correctly, however, he's attributed to me views that I demonstrably do not hold.
I addressed the law governing corporate social responsibility in, inter alia, Corporation Law and Economics 410-414 (2002). As I have consistently done elsewhere, I made two basic points in that passage: (1) The relevant legal rule can be succinctly stated as “It is the obligation of directors to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders.” (413, quoting Katz v. Oak Indus., Inc., 508 A.2d 873, 879 (Del. Ch. 1986).) Why then would I be dismayed when a judge "starkly recognizes that as a matter of corporate law, the object of the corporation is to produce profits for the stockholders and that the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation"? To the contrary, would you not expect me to congratulate the judge for his perspicacity?
In any event, while I have said little about Chandler's eBay opinion, it would be hard to find any hint of dismay in this post or this one.
(2) While the governing legal norm is one of shareholder wealth maximization, I believe the case law also teaches that directors who consider nonshareholder interests in making corporate decisions, like directors who do not, will be insulated from liability by the business judgment rule. Any fair reading of my post on Al Franken (among which I do not count Kennerly's critique) would recognize that this was the focus of my point. Franken insinuated that directors who pursue "profit in an enlightened manner" would face liability. As my post discussed, however, directors simply do not face any realistic prospect of liability outside the narrow class of cases subject to the so-called Revlon duties. Put another way, Strine is correct to the extent that he characterizes my critique of Franken's position as one based on Franken's "underemphasi[s] [of] the wide latitude managers already enjoy under the business judgment rule."
Turning from what I have said, let us now consider things I have not said but am apparently neverthelss charged with believing.
Apparently, I am "uncomfortable with a plain acknowledgment that corporate managers' primary duty is to seek as much profit as can be achieved within the limits of the law." Untrue. I discuss the relevant policy issues at pages 418-429 of Corporation Law and Economics. In the course of that analysis, I flatly state--or, if you prefer, plainly acknowledge--that: "Society therefore appropriately adopts the shareholder wealth maximization norm as a governing principle—it is the majoritarian default that emerges from the hypothetical bargain."
My supposed lack of comfort with such an acknowlegdement is ascribed to a purported reluctance to "emphasize[] the importance of the law in channeling corporate behavior." I really still don't fully grasp the point Strine is trying to make in this specific claim. But just to set the record straight, I have never denied "the importance of the law in channeling corporate behavior." Indeed, why would I do so? If that were true, it would sort of moot the 20-plus years I've spent studying how law affects corporate behavior!
Granted, I have opined that "General welfare laws designed to deter corporate conduct through criminal and civil sanctions imposed on the corporation, its directors, and its senior officers are more efficient than stakeholderist tweaking of director fiduciary duties." (429) But how does that amount to a denial of "the importance of the law in channeling corporate behavior."
To the contrary, I have squarely stated that:
Because the shareholder wealth maximization norm is central to director socialization, the norm provides a forceful reminder of where the director’s loyalty lies. Even if the business judgment rule renders its rhetoric largely unenforceable, the shareholder wealth maximization norm is an ever present goad.
Does not that passage explicitly recognize "the importance of the law in channeling corporate behavior"?
(To be sure, I have sometimes taken into account the role that social norms can play in affecting behavior, including cases in which norms may outweigh the law in determining behavior, but not to my recollection in a context relevant to the present discussion.)
Next, do I believe that "corporate managers themselves while seeking to maximize corporate profits will take care of the public interest"? Well, I certainly share Adam Smith's view that “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."
But I have also stated that:
Corporate conduct doubtless generates negative externalities. In appropriate cases, such externalities should be constrained through general welfare legislation, tort litigation, and other forms of regulation. The question here is whether the law should also seek to constrain them through the fiduciary duties of corporate directors. (425)
So, on the one hand, contra Strine, I have recognized that corporate directors and officers will not necessarily "take care of the public interest." On the other hand, also contra Strine, my argument that "targeted legislative approaches are a preferable solution to the externalities created by corporate conduct" (429) does not rest on a claim "that government should leave it to corporate managers." For one thing, as the passage from page 425 confirms, I don't think government should leave the problem of externalities to management (where government intervention is the efficient solution). For another, my preference for target solutions rests not on a laizze-faire "leave it to management" argument. Instead, my preference rests on the claim that "By virtue of their inherent ambiguity, fiduciary duties are a blunt instrument. There can be no assurance that specific social ills will be addressed by the boards of the specific corporations that are creating the problematic externalities." (429)
In sum, it remains unclear to me what work Strine intends to accomplish in this portion of his article. What is clear is that I don't hold most of the views ascribed to me therein.
