An outfit named The Modern Corporation Project has launched the Purpose of the Corporation Project, which has issued The Modern Corporation Statement on Company Law. They've gotten a bunch of law professors to sign it, some of whom are quite good friends of mine for whom I have a lot of respect.
Most of the statement is perfectly anodyne. As for the more contestable bits, I agree with many of them (e.g., "shareholders do not own corporations; nor do they own the assets of corporations. Shareholders only own shares of stock – bundles of intangible rights, most particularly the rights to receive dividends and to vote on limited issues.").
But then we come to the final of the Statement's 10 principles:
Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes.
This strikes me as demonstrably wrong, for reasons I have frequently expressed here and elsewhere. See, e.g., The relationship between the shareholder wealth maximization norm and the business judgment rule, which explains why the business judgment rule is consistent with the director's' "legal obligation to maximise profits for their shareholders."
But don't take just my word for it. No less a personage that Delaware Supreme Court Chief Justice Leo Strine has just posted an article entitled The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, which is available at SSRN: http://ssrn.com/abstract=2576389.
Here's the abstract:
There is now a tendency among those who believe that corporations should be more socially responsible to pretend that corporate directors do not have an obligation under Delaware corporate law to make stockholder welfare the sole end of corporate governance within the limits of their legal discretion. These advocates of corporate social responsibility contend that Delaware directors may subordinate stockholder welfare to other interests, such as those of the company’s workers or society generally. That is, they do not argue simply that directors may choose to forsake a higher short-term profit if they believe that course of action will best advance the interests of stockholders in the long run, they argue that directors have no legal obligation to make – within the constraints of positive law – the promotion of stockholder welfare their end. But, the problem with that argument is that it is inconsistent with both judge-made common law of corporations in Delaware and the design of the Delaware General Corporation Law (“DGCL”).
More important, pretending that the nation’s leading corporate law is fundamentally different than it is runs contrary to the goal of ensuring that for-profit corporations behave lawfully, responsibly, and ethically. Lecturing others to do the right thing without acknowledging the rules that apply to their behavior and the power dynamics to which they are subject is not a responsible path to social progress. Rather, it provides an excuse to avoid tougher policy challenges, such as advocating for stronger externality regulation and encouraging institutional investors to exercise their power as stockholders responsibly. Those challenges must be confronted if we are to ensure that for-profit corporations are vehicles for responsible, sustainable, long-term wealth creation.
In the paper, Strine sharply criticizes those scholars who "pretend that directors do not have to make stockholder welfare the sole end of corporate governance within the limits of their legal discretion, under the law of the most important American jurisdiction – Delaware." Granted, Strine's talking about long-term shareholder welfare, not short-term profit maximization. And maybe you can reconcile Strine's position with that of the Statement's signatories by invoking that dichotomy. But I think those who attempt to do so need to grapple with the fact that in the accompanying footnote (note number 7 on page 3), Strine cites several of the signatories as being examples of those with whom he is taking issue.
The signatories of the Statement explicitly are seeking to set straight "business experts, the financial press, and economists" who hold "numerous common errors in the way corporate law concepts are understood and applied." But to whom should "business experts, the financial press, and economists" listen? Law professors or the chief judge of "the nation’s leading corporate law" jurisdiction?
Anyway, my thanks to CJ Strine for kindly citing my work in several places. Now kindly go read it.
