The myth of shareholder capitalism (2010)

The main takeaway, as I read it, is that the widespread belief that CEOs are legally obligated to maximize shareholder value is not really borne out by legal precedent or the current understanding of legal scholars (though it's widely taught by management scholars). The current law appears to be that, while CEOs can be fired by shareholders, as long as the shareholders choose to retain them, the CEOs have a wide range of leeway for what values they can legally take into account when making decisions. Those values don't have to be solely focused on maximizing shareholder returns, and courts will generally not second-guess them except in really extreme cases (though shareholders are welcome to second-guess them by voting in a new board that fires the CEO).

"31 of 34 directors surveyed (each of whom served on an average of six Fortune 200 boards) said they’d cut down a mature forest or release a dangerous, unregulated toxin into the environment in order to increase profits. Whatever they could legally do to maximize shareholder wealth, they believed it was their duty to do"

The article points out that this isn't the case. What's interesting to me is the idea that this activity maximizes shareholder wealth anyway. It might maximize the value of entities holding shares in a short-term outlook, but on a long-term outlook (10 year horizon) this is foolish not just because it weakens the brand of the company, but risks future contracts (boycotts from public pressure), and opens settlement possibilities (even a legally released toxin can result in settlements if they were aware it was dangerous at the time).

Here is a much clearer article on the same issue.

http://www.directorship.com/stout-shareholders-as-owners/

One excerpt: Under the doctrine known as the business judgment rule, a shareholder can’t successfully sue a board for failing to maximize shareholder value. To the contrary, directors enjoy wide legal discretion to sacrifice “shareholder value” in order to protect employees, customers, creditors and the community.

Never ever treat a blog post on legal issues as definitive when written by non-lawyers, especially when it cites no sources.

I'm not a lawyer, but the statement "we conducted a systematic analysis of a century’s worth of legal theory and precedent" is utter twaddle. There are disciplines of law on which people build careers attempting to sort out these issues.

Worse yet, a post that discusses conflict between shareholders' interests and directors' actions in the context of an acquisition but that doesn't even mention Revlon duties, which arose from the seminal case in this area (http://en.wikipedia.org/wiki/Revlon,_Inc._v._MacAndrews_%26_...), is seriously suspect. The case law has evolved significantly since then and it is difficult for those without legal training to fully grasp (not to mention that US corporate law has its quirks, which two academics from other countries may not be fully familiar).

Point being, this is a complex area on which there are hundreds of publishing corporate law professors and practitioners. The "myth" is a strawman.

This is a simple matter of people doing what they are incentivized to do. The vast majority of directors have incentives tied to short term gains (short term in the sense of a company - quarterly or yearly), and so their actions are to seek short term gains. They might say they are required to act in the best interest of the stock holder... but it just so happens that they have compensation which is tied to short term gains in the stock price.

I think we're mixing up a bit of stuff, mainly the training and legal structure of corporations and the actions their directors might or might not take.

Let's be very clear: directors who release a toxin into the environment, if done purposely, will end up in jail. Corporations who do it accidentally will end up paying for damages. If they don't, that's a failure of our criminal justice system, not the way corporations are formed. most directors may be very amoral sorts only caring for the bottom line. That's fine. Our system is full of folks only looking for short term gain, yet the greater good is still served. That's the beauty of our system. No matter how hard we try and how much we want it, nobody has ever created a complex system of people that worked solely on altruism.

What it looks like to me is that directors have evolved corporations into sort of a representative republic. Shareholders elect them to be autonomous and free to manage as they see fit -- not move hither and fro based on the opinion-of-the-day. Just like with Congress, there's probably a very good reason corps have evolved like this. It'd be interesting to see a study of more participatory shareholders and how things shook out. I'm willing to bet there are a lot of problems with direct shareholder rule and that what we're seeing is at least a local maximum.

What about Dodge v. Ford Motor Company?

http://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Company

This is the case which is often cited to establish that the corporation's primary duty is to its shareholders, and that this duty overrides all others.

EDIT: never mind, this is already discussed in the article. Sorry.

The article seems to be confusing fiduciary duty with accountability. As a director, if you make your shareholders unhappy enough, they will fire you. If you breach your fiduciary duty, they will sue you. The article is only addressing breach of fiduciary duty. So I don't agree with conclusion that "In short, directors are to a great extent autonomous.".

In 2005, Reason magazine had an excellent discussion with Milton Friedman, John Mackey (Whole Foods), and T.J. Rodgers (Cypress Semiconductors) that is relevant to this discussion (http://reason.com/archives/2005/10/01/rethinking-the-social-...).