How corporate directors (mis)understand their legal responsibilities

January 10th, 2012 by Briana Cummings

31 of 34 directors surveyed said they would cut down a mature forest or release a dangerous toxin into the environment in the name of profit, because they believed it to be their legal responsibility to maximize shareholder value. (See Jacob M. Rose, “Corporate Directors and Social Responsibility: Ethics vs. Shareholder Value,” Journal of Business Ethics, Vol. 73, No. 3 (Jul., 2007), pp. 319-331.)

This belief is, unfortunately a misconception. As noted in a recent Harvard Business Review article,

The idea that shareholder value should be the organizing principle of the corporation is of relatively recent vintage — it was only in the 1990s that it really became widely accepted — and as legal scholar Lynn Stout keeps explainingcorporate law has far from fully embraced it.

Justin Fox, “How’s that Shareholdery-Valuey Stuff Working Out for You?,” Harvard Business Review.

Cornell University law professor Lynn Stout recently wrote a book, The Shareholder Value Myth, arguing that nothing in the law requires corporate directors to maximize shareholder wealth above other concerns.

Maximizing shareholder value is not only not required, it is also probably inadvisable. In a Harvard Business Review article called “What Good Are Shareholders?,” Harvard Business School professor Jay W. Lorsch and Justin Fox, editorial director of the HBR Group, argue that shareholders make very poor “corporate bosses.” Their interests are too diffuse and they are too short-term-oriented. Requiring corporate directors to follow the dictates of shareholder democracy is a bit like passing legislation through Congress by means of a national referendum.

In a recent New York Times article, “Down With Shareholder Value,” Joe Nocera describes the birth of the shareholder value movement in the 1980s and describes the results of that movement in the present day:

They’re not pretty. Too many chief executives succumb to the pressure to boost short-term earnings at the expense of long-term value creation.


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