Da Beers!

Da Beers!

Thursday, March 17, 2016

The Myth of Shareholder Supremacy


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.

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