Broad Shareholder Value and the Inevitable Role of Conscience
63 Pages Posted: 19 Sep 2014 Last revised: 11 Feb 2016
Date Written: September 17, 2014
This article proposes an integrative solution to the modern debate on corporate purpose, the question of whether directors and officers must solely maximize profits or whether they may consider the effects on employees, the environment or the community. Many find pure profit maximization unseemly and suggest alternative theories, typically arguing that corporations owe a duty to a broader range of stakeholders. This position is inconsistent with the case law and unnecessary to allow conscience in the boardroom. We resolve the issue more simply by acknowledging that the purpose of a corporation is to promote the shareholders’ interests, which includes the shareholders’ financial and nonfinancial interests. These nonfinancial interests could potentially encompass product safety, the treatment of employees or environmental concerns, among others. We refer to this focus as broad shareholder value. In this article we show that a broader view of shareholder value is superior to competing models in theory, in case law, and in explaining the empirical evidence.
First, our theories of what a corporation is (corporate identity) imply that the proper corporate purpose is promotion of broad shareholder value, not mere profit maximization or duties to other stakeholders. In this we show that considerations of conscience are not only permissible, they are inevitable. For each investor, there is some body count that would be unacceptable for a set level of profits. We argue that if the value of life can ever outweigh the desire for profits, then the value of life must already be on the scale. The same holds equally for other social concerns. That is, if directors are ever required to say that some situation is too extreme to prioritize profits, then the directors must always ask, “Is this that situation?” Conscience is inevitable, and this article advances corporate law by recognizing and explicitly incorporating this insight.
Second, we show that the case law does not require pure profit maximization, as has been claimed, but instead allows consideration of other shareholder interests. For support, we provide a new understanding of the case law using principles of game theory and applying evidentiary burdens.
Third, we build on the work of prior scholars to show that a theory of broad shareholder value best explains the empirical evidence of what directors and officers actually do and what shareholders actually want. In short, real world evidence shows that pure wealth maximization theories lack both explanatory power and a normative mandate in the real world. A broad shareholder value norm provides a stronger explanation and mandate than pure wealth maximization, without contradicting case law requirements that boards consider only the interests of shareholders, rather than other stakeholders.
A broad shareholder value norm provides a stronger explanation and mandate than pure wealth maximization, without contradicting the case law requirement that boards consider only the interests of shareholders, rather than other stakeholders
Keywords: CSR, Corporate Social Responsibility, Shareholder Wealth Maximization, Corporate Purpose, Revlon, eBay v. Newmark, Nexus of Contracts, Director Primacy, Shareholder Primacy, Broad Shareholder Value Norm, Shareholder Value, Business Judgment Rule
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