As noted in a prior post, Senator Elizabeth Warren has introduced a bill that would require "corporate directors to consider the interests of all major corporate stakeholders—not only shareholders—in company decisions. Shareholders could sue if they believed directors weren’t fulfilling those obligations."
In a future post, I will take on the task of defending the shareholder wealth maximization norm on the merits.
Here I just want to point out the bizarre enforcement mechanism she's chosen: She wants directors to consider the interest of non-shareholder constituents who making corporate decisions, but if the directors fail to do so it is left to shareholders to sue. That makes no sense.
The problem here is that the decisions that matter are often zero sum ones in which the board must chose between shareholder and non-shareholder interests. After all, if a decision seems likely to lift all boats on a rising tide of corporate success, there are good reasons to respect director discretion. See my blog post on the business judgment rule. (By the way, would Warren allow the business judgment rule to apply to these suits? If not, that just makes it worse.)
So let's imagine a zero-sum decision in which the board has chosen to side with shareholder interests. Presumably, the shareholders are happy and the rational ones will not sue (although some plaintiff lawyer might find a stooge to bring a strike suit so as to extort legal fees from the corporation).
Conversely, imagine a zero-sum decision in which the board has chosen to side with non-shareholder interests. Now the shareholders will be unhappy and the rational ones will sue.
Bottom line? If you think the basic idea of giving directors discretion to consider non-shareholder interests is a good idea, Warren's enforcement proposal gets it exactly backwards. Shareholder standing to sue will to advance stakeholder interests but will only impede those interests.
