This is legally incorrect. It's a meme that should die. This idea is based on the assumption that not acting to maximize shareholder value is defrauding investors. But this isn't at all true. Corporations are free to do whatever they want, as long as they're transparent about doing so.
Or to make the same point in the opposite direction: companies must act ethically, because not doing so ends up being securities fraud[0]. Since stock price is in a large part based on perception, things that negatively affect perception that aren't disclosed could be (and are) construed as defrauding investors.
[0]: https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...
Right, and acting unethically can be securities fraud. Hence illegal. Even if the unethical thing is on its own not illegal, and in pursuit of higher short term profits.
>A corporation cannot do what it wants, but it can do what shareholders want.
Yes it can, as long as it makes sure to inform shareholders of what it intends to do. As long as shareholders have information with which to make an informed decision, it doesn't matter what that information is.
As for information, management of the corporation works for the shareholders. If the shareholders don’t like management decisions,they can replace management. So, ultimately the corporation is an entity designed to advance the interests of shareholders.
Not exactly no, I made the claim that a lot of unethical, but not directly illegal, behavior has been successfully called securities fraud.
> So, ultimately the corporation is an entity designed to advance the interests of shareholders.
Which is not the same as "generating returns for shareholders". Of course this also gets even more confusing with voting/non-voting shares, where for the majority of shareholders, your interests don't matter at all.
No, they can't. If management took an action that is within their power to take it cannot be reversed at shareholder whim. They can certainly throw out the current management and install new management who will attempt to reverse what the old management did, but what is done is done.
"The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. "
And the same agreement vests in the officers the ability to do whatever is necessary to further that purpose. You obviously can't go against the results of a direct shareholder vote but officers have enormous leeway. If they decide to forgo profits in order to make customers happy, whether or not that is meant to drive long term growth, that is completely legal as long as there are no conflicts of interest.
But why? This line of thinking typically assumes that people start companies strictly to make money--an assumption that I see as patently false. There are plenty of for-profit social enterprises (which is to say nothing of non-profits).
For example, Patagonia recently changed their mission statement "We’re in business to save our home planet" [1]. To think that they continue to exist just because Yvon Chouinard doesn't have enough cash in the bank is laughable.
I am uncertain how this letter changes the established case law regarding C Corps.
No corporation is required to "maximize shareholder value". In fact, they cannot be because there is no possible legal standard for what constitutes "maximizing value".
B Corporations have no special legal standing. It's just a certification created by a group that tries to push corporations towards responsibility (or, more cynically, provides virtue-signalling-as-a-service). Any corporation can adopt any or all of the principles set out for B Corporations, if the changes to their charter and by-laws are approved. It is the existence of such requirements in the corporate governance documents that provides the legal requirement, not a private certification.
You're correct that B Lab's certification has no special legal standing. A "benefit corporation", however, is a recognized legal entity in many US states [1]. Patagonia is both a certified B Lab B Corp and a private benefit corporation. I should have made this point clearer.
> No corporation is required to "maximize shareholder value"
The rise in benefit corporation legislation was in part caused by the 2010 eBay v. Newmark decision in Delaware, which included the statement, "Promoting, protecting, or pursuing nonstockholder considerations must lead at some point to value for stockholders." [2] Note that this is still a vague statement, not using "profit" or any specific timeframe. I know that this case is still hotly debated, and I don't know enough to comment on all its implications.
Outside of a legal framework, it can be argued that all corporate directors that are non-majority owners of their public companies do have a requirement to "maximize shareholder value", or, to radically oversimplify the process, they will be replaced by shareholder vote.
So I should drop the "legal" modifier to my comments, and just refer to "obligations" to the shareholders and "action" by the shareholders.
Again, I do not know what significance the recent letter has on any of this.
[1] https://en.wikipedia.org/wiki/Benefit_corporation [2] https://www.delawarelitigation.com/uploads/file/int51%281%29...