Shareholders versus Stakeholders
At the beginning of the month I posted that corporate social responsibility tends to pay off or at least break even and said that I would blog about the issue further during my stint here this month. Well, I have since been delinquent in my blogging (how do you regulars do it?) but will try to make up for it today, now that my corporations exam is written and the one student who comes to my office hours has already stopped by.
The big, recurring debate in corporate social responsibility is between those who think that corporate decisionmakers must aim to maximize shareholder returns and those who think that corporate decisionmakers should act in the best interests of the entire firm—its shareholders, to be sure, but also its other, non-shareholder constituencies. When shareholder and non-shareholder interests diverge, the issue comes to a head. Where does corporate law stand?
In normal corporate governance (where the company is not undergoing a change in control governed by the Revlon lines of cases), the law is pretty clear: the business judgment rule will protect decisions meant to benefit the entire enterprise, even if shareholder profits are thereby sacrificed. Constituency statutes support this position, and, importantly, no corporate statute or case requires otherwise.
What about Dodge v. Ford, you say? Recent articles suggest that case was more about close corporations than a duty to maximize shareholder wealth, and subsequent cases cite Dodge v. Ford for its close corporation proposition, not its famous dictum on the purpose of the corporation. A more serious limitation comes from a line in the Relvon case, which requires that decisions that prioritize non-shareholder constituencies have “rationally related” shareholder benefits. What does this mean, and can’t a corporate manager genuinely argue that her decision in the best interests of the entire corporate enterprise will benefit the firm’s shareholders in the long term? If so, the line from Revlon is not such a limitation on corporate decisionmaking, and the supposed “duty to maximize shareholder wealth” should not be such an impediment to CSR-minded corporate managers.