In yesterday's WSJ, William Galston opined that shareholder wealth maximization norm harms workers, citing as an example Timken Corp.:
Timken survived the deep recession of the 1980s, which drove many American manufacturers out of business, only because it made massive investments in state-of-the-art production facilities that meant, says Mr. Schwartz, “lower profits in the short term and less capital to return to shareholders.” Because of this patient approach, Timken was able to dominate the global market in specialized steel while providing good wages to workers and contributing to schools and public institutions in its hometown of Canton, Ohio.
It is often argued that managements, such as Timken’s once was, are violating their fiduciary responsibility to “maximize shareholder value.” But Washington Post economics writer Steven Pearlstein argues that there is no such duty, and UCLA law professor Stephen Bainbridge, past chairman of the Federalist Society’s corporate-group executive committee, backs him up. In practice, Mr. Bainbridge has written, courts “generally will not substitute their judgment for that of the board of directors [and] directors who consider nonshareholder interests in making corporate decisions . . . will be insulated from liability.”
Well, yes, but. Galston took that quote out of context. For the full context, see this post.
In short, there is a fiduciary duty to maximize shareholder wealth. To be sure, current law allows boards of directors substantial discretion to consider the impact of their decisions on interests other than shareholder wealth maximization. This discretion, however, exists not as the outcome of conscious social policy but rather as an unintended consequence of the business judgment rule. To be sure, some scholars find an inconsistency between the business judgment rule and the shareholder wealth maximization norm. I concede that the business judgment rule sometimes has the effect of insulating a board of directors from liability when it puts the interests of nonshareholder constituencies ahead of those of shareholders, but deny that that is the rule’s intent. Most importantly, the rule is not inconsistent with the indea that the board of directors' duty is to the shareholders.
