Since 1970, corporate America has marched lockstep
with Nobel Prize-winning economist Milton
Friedman's philosophy — that “the social responsibility of business is to
increase its profits.”
Now, submitted for your consideration is a 2010
article by Loizos Heracleous and Luh Luh Lan in the Harvard
Business Review which asked the legal question: Why are corporate directors
so convinced of their obligation to shareholders that they’d make decisions
with damaging social or environmental impacts?
Their research was informed by an earlier Journal of Business Ethics
study which showed that in a survey of 34 corporate directors (who each served
on an average of six Fortune 200 boards), 31 said they would “cut down a mature
forest or release a dangerous, unregulated toxin into the environment in order
to increase profits.” Moreover, these corporate directors believed they were required
to do whatever they could legally do to maximize shareholder wealth.
The authors point to the fact business schools continue
to a 1919 case from Michigan, Dodge
v. Ford Motor, to spread that mindset — even though an important 2008 paper
by Lynn A. Stout explains that Dodge was bad law, now largely ignored by
the courts. Moreover, Dodge has
been cited in only one decision by Delaware courts in the past 30 years. And, of course, Delaware is the venue for
most American corporate litigation.
The authors also pointed out that shareholders do
not "own" the corporation, which is an autonomous legal person.
What’s more, when directors go against shareholder wishes—even when a loss in
value is documented—the courts support the directors most of the time.
Long story short, there's no commanding legal
doctrine that compels environmental or social destruction ... even if that's
the most economically profitable choice.
