The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law
43 Pages Posted: 11 Mar 2015 Last revised: 30 Sep 2016
Date Written: 2015
There is now a tendency among those who believe that corporations should be more socially responsible to pretend that corporate directors do not have an obligation under Delaware corporate law to make stockholder welfare the sole end of corporate governance within the limits of their legal discretion. These advocates of corporate social responsibility contend that Delaware directors may subordinate stockholder welfare to other interests, such as those of the company’s workers or society generally. That is, they do not argue simply that directors may choose to forsake a higher short-term profit if they believe that course of action will best advance the interests of stockholders in the long run, they argue that directors have no legal obligation to make – within the constraints of positive law – the promotion of stockholder welfare their end. But, the problem with that argument is that it is inconsistent with both judge-made common law of corporations in Delaware and the design of the Delaware General Corporation Law (“DGCL”).
More important, pretending that the nation’s leading corporate law is fundamentally different than it is runs contrary to the goal of ensuring that for-profit corporations behave lawfully, responsibly, and ethically. Lecturing others to do the right thing without acknowledging the rules that apply to their behavior and the power dynamics to which they are subject is not a responsible path to social progress. Rather, it provides an excuse to avoid tougher policy challenges, such as advocating for stronger externality regulation and encouraging institutional investors to exercise their power as stockholders responsibly. Those challenges must be confronted if we are to ensure that for-profit corporations are vehicles for responsible, sustainable, long-term wealth creation.
Keywords: Corporations, Delaware General Corporation Law, DGCL, fiduciary duties, duty of loyalty, short-term profit maximization, Dodge v. Ford Motor Co., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Unocal v. Mesa Petroleum Co., corporate constituency statutes
JEL Classification: D21, G34, G38, K22, L21, L50, M14
Suggested Citation: Suggested Citation