I’ve had this post sitting in my drafts collection for ages, but after reading yet another person make this claim about corporations, I’ve decided to post it. I believe that my sources are correct and accurate, note that the main source now links to the internet archive, rather than the original paper, because the congressional committee site has been rearranged. Please comment or email if you have any questions or concerns.
This is something that pops up fairly frequently, the idea that corporations are required as their sole duty to maximise profits to shareholders.
While a handy tool to create a nice documentary, this statement has been described [pdf] by Professor Margaret Blair of Vanderbilt University Law School as
“… [A]t best, a misleading overstatement”. “At worst, this claim is simply false”… “There is no statutory requirement in the U.S. that corporations must maximize profits, or that directors are responsible for maximizing share value.”
“Case law ” … “also does not require share value maximization, except in one very narrow circumstance: When, in the course of buyout negotiations it becomes inevitable that a corporation will be sold” … “directors’ duties then change” … “to auctioneers charged with getting the best price for stockholders at a sale of the company”
And in other places like the UK?
“In Britain, for example, the British Companies Act 2006 explicitly codified what lawmakers believed to be the rule under their case law, which provides that directors have duties to multiple stakeholders”
So what makes directors focus on profit maximisation? Prof. Blair offers the following:
“… pressure comes from the media, from shareholder advocates and financial institutions in whose direct interest it is for the company to get its share price to go up, and from the self-imposed pressure created by compensation packages that provide enormous potential rewards for directors and managers if stock prices go up.”
NOTE: The above has been slightly edited for length. Hopefully without affecting original meaning and intention.
(Original Testimony to US House Of Representatives Committee [PDF])
Originally I found much of this from [Economic Populist: Corporate Citizen – An Oxymoron”]
This doesn’t in any sense excuse companies that behave badly. In fact it adds criticism to them; if they are NOT legally required to behave badly, why do they still continue to do so?