You probably didn't read the essay I linked? It shows through numerous court decisions that maximizing shareholder profit is the legal duty.
Yes, there's a lot of leeway for HOW to maximize the profit and on what timescale, but the purpose still has to be profit maximization. For example a court ruled against Henry Ford rising workers' wages for the benefit of the workers and the society.
I don't really understand why people struggle with this IMHO plain fact that for-profit is for-profit. Maybe it challenges the idea that "free market" will benefit us all?
> Responding to lower court judges' suggestion that the purpose of for-profit corporations "is simply to make money," the court said, "For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives.
The meme of "duty to maximize profit" has no grounding in fact beyond internet comments trying to excuse unscrupulous behavior of a company with the justification that it was maximizing profits.
There is a "maximize shareholder value" (which isn't profits) but this is also recognized to be fuzzy.
> Corporate law has long required directors to act in the best interests of the corporation and its shareholders. In practice, this duty sometimes translated into a mandate to maximize shareholder value—at all costs. But while some businesspeople may follow that practice, most recognize that promoting shareholder interests invariably entails protecting the interests of others, such as employees and customers. Corporate law accommodates this reality by giving directors wide latitude in exercising their business judgment. Rather than such an impractical mandate that directors maximize shareholder value, courts say they must act in the best interests of the corporation and its shareholders.
> The flexibility in this framework entices advocates of non-shareholder interests to argue that directors owe a duty not only to the corporation and its shareholders but also to its employees, customers, and other constituents or “stakeholders.” Although this is certainly not the law, stakeholder advocates urge a norm in which directors no longer prioritize shareholder value but feel an obligation to such other constituents as well. Yet if it would be impracticable for judges to enforce a rule of shareholder value maximization, it would be more difficult to formulate a workable legal rule requiring directors to optimize across such contending interests.
> This case is frequently cited as support for the idea that corporate law requires boards of directors to maximize shareholder wealth. However, one view is that this interpretation has not represented the law in most states for some time:
> Dodge is often misread or mistaught as setting a legal rule of shareholder wealth maximization. This was not and is not the law. Shareholder wealth maximization is a standard of conduct for officers and directors, not a legal mandate. The business judgment rule [which was also upheld in this decision] protects many decisions that deviate from this standard. This is one reading of Dodge. If this is all the case is about, however, it isn't that interesting. -- M. Todd Henderson
> However, others, while agreeing that the case did not invent the idea of shareholder wealth maximization, found that it was an accurate statement of the law, in that "corporate officers and directors have a duty to manage the corporation for the purpose of maximizing profits for the benefit of shareholders" is a default legal rule, and that the reason that "Dodge v. Ford is a rule that is hardly ever enforced by courts" is not that it represents bad case law, but because the business judgement rule means:
> The rule of wealth maximization for shareholders is virtually impossible to enforce as a practical matter. The rule is aspirational, except in odd cases. As long as corporate directors and CEOs claim to be maximizing profits for shareholders, they will be taken at their word, because it is impossible to refute these corporate officials' self-serving assertions about their motives. -- Jonathan Macey
Is maximizing shareholder value really law now ? Just trying to understand if CEOs are legally responsible to return maximum share of profits to shareholders.
Well... that's a slightly complicated question. It's definitely not quite as simple as "companies must maximize profit to the exclusion of all other concerns". But while directors and executives are given wide latitude to run the company according to their judgment, they don't have carte blanche to do "whatever they want" either.
More to the point, while a company as a whole can do more than simply "maximize profit to the exclusion of all else", the caveat seems to be that they can do so if the owners (eg the shareholders) agree.
From the SCOTUS decision in the Hobby Lobby case:
While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well.
The question I see then, is how much influence a single shareholder can truly yield based on this principle. That is, of course, assuming they don't single-handedly hold a controlling share of the company to the point that they can simply replace the board with whoever they want and enforce any arbitrary edict. Given a publicly traded company, it seems clear that some shareholders are going to want the "maximize my stock value at any expense" while others are going to go for more of a "do the humanitarian thing and treat (employees|the environment|whatever) well" or such-like.
> publicly traded companies are required by law to maximize their profits
Is that really true, though?
"[...] there is no legal requirement for for-profit companies to maximize returns to shareholders. When a company is for sale, its directors are required to do all they can to maximize its value. At any other time, corporate law simply dictates that directors are supposed to help the company prosper and do nothing to benefit themselves at the company’s expense. But no law requires corporations to maximize returns to shareholders."[0]
> There is a common belief that corporate directors have a legal duty to maximize corporate profits and “shareholder value” — even if this means skirting ethical rules, damaging the environment or harming employees. But this belief is utterly false. To quote the U.S. Supreme Court opinion in the recent Hobby Lobby case: “Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.”
You will find many more citations with a search like this:
I personally know executives in food manufacturing/preparation companies, both public and private, who gladly pay close attention to worker safety, food safety, and all the things you say a company would do only if forced by law.
They do it because they know it's the right thing to do. And it helps them recruit and retain employees, and keep their customers happy and coming back for more. Their shareholders support them in this and would complain very loudly if the company ever put pure profit above all other goals.
And they definitely don't view the line workers as resources to be exploited. They view them as their colleagues.
Nonsense--there is no "legal duty to maximize profits". That concept isn't really meaningful: maximize over what term? In fact Amazon is probably the number one counter-example to that idea, they've never prioritized profits and have plowed everything they can back into infrastructure. There's also no "legal duty to pay employees as little as possible", nor "legal duty to fight unionization" nor a hundred other things that some corporations do against the interests of their employees. For publicly traded companies the only recourse shareholders have is to vote out the board if they don't think things are being run correctly, but there's no law that's defining what correctly is.
Isn't that an "old wives tale" that doesn't have any basis in reality?
You are correct. Nobody has ever been able to point to a law requiring companies to maximize profits for shareholders at all costs.
In fact, there are thousands and thousands of companies that exist with a primary purpose of doing things other than making money for their shareholders.
Any "legal" obligation to "maximize shareholder value" started out as a way to excuse the greed of other people, but falls flat upon even cursory examination.
Yeah, it's not hard to find knowledgeable commentary to the effect that the duty of directors to act in the interests of the shareholders does not mean a simple-minded duty to maximize profits. The interests of shareholders are complicated, and boards can make nuanced decisions about short-term vs long-term profits, risks, reputation, and such things that are difficult to capture using financial reports.
"There is a common belief that corporate directors have a legal duty to maximize corporate profits and 'shareholder value' — even if this means skirting ethical rules, damaging the environment or harming employees. But this belief is utterly false. To quote the U.S. Supreme Court opinion in the recent Hobby Lobby case: 'Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.'"
"Serving shareholders’ 'best interests' is not the same thing as either maximizing profits, or maximizing shareholder value. 'Shareholder value,' for one thing, is a vague objective: No single 'shareholder value' can exist, because different shareholders have different values. Some are long-term investors planning to hold stock for years or decades; others are short-term speculators."
"More to the point, corporate directors are protected from most interference when it comes to running their business by a doctrine known as the business judgment rule. It says, in brief, that so long as a board of directors is not tainted by personal conflicts of interest and makes a reasonable effort to stay informed, courts will not second-guess the board’s decisions about what is best for the company — even when those decisions predictably reduce profits or share price."
Is maximizing shareholder value really law now ? Just trying to understand if CEOs are legally responsible to return maximum share of profits to shareholders.
Well... that's a slightly complicated question. It's definitely not quite as simple as "companies must maximize profit to the exclusion of all other concerns". But while directors and executives are given wide latitude to run the company according to their judgment, they don't have carte blanche to do "whatever they want" either.
More to the point, while a company as a whole can do more than simply "maximize profit to the exclusion of all else", the caveat seems to be that they can do so if the owners (eg the shareholders) agree.
From the SCOTUS decision in the Hobby Lobby case:
While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well.
The question I see then, is how much influence a single shareholder can truly yield based on this principle. That is, of course, assuming they don't single-handedly hold a controlling share of the company to the point that they can simply replace the board with whoever they want and enforce any arbitrary edict. Given a publicly traded company, it seems clear that some shareholders are going to want the "maximize my stock value at any expense" while others are going to go for more of a "do the humanitarian thing and treat (employees|the environment|whatever) well" or such-like.
There is no legal doctrine for corporations to maximize profits. This is largely think-tank idealogy that has successfully won over the public mind. "Legal or moral duty to maximize profits" was a rarely uttered phrase in the 60s and one would hardly call the United States "not as capitalist" back then.
> Third, corporate directors are not required to maximize shareholder value. As the U.S. Supreme Court recently stated, "modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so." (BURWELL v. HOBBY LOBBY STORES, INC.) In nearly all legal jurisdictions, disinterested and informed directors have the discretion to act in what they believe to be the interest of the business corporate entity, even if this differs from maximizing profits for present shareholders. Usually maximizing shareholder value is not a legal obligation, but the product of the pressure that activist shareholders, stock-based compensation schemes and financial markets impose on corporate directors.
I'm not well versed in US corporate law, and few of us probably are given the complexity of common law systems. Leo E. Strine, Jr. I linked to definitely is:
"By so stating, I do not mean to imply that the corporate law requires directors to maximize short-term profits for stockholders. Rather, I simply indicate that the corporate law requires directors, as a matter of their duty of loyalty, to pursue a good faith strategy to maximize profits for the stockholders. The directors, of course, retain substantial discretion, outside the context of a change of control, to decide how best to achieve that goal and the appropriate time frame for delivering those returns."
In Finnish law I'm more familiar with it's very clear: "The purpose of a company is to make profit for its stockholders, unless otherwise prescribed in the company bylaws." (my translation)
My claim is that the idea that for-profits somehow have some benevolent interests is the main lie that keeps the populace from demanding more control over the corporations.
It would probably be more accurate to say maximize shareholder value but, that aside, you're reading a bit too much into that statement.
It is, in fact true, that the board of a company incorporated as a for-profit has a fiduciary duty to shareholders which does, yes, translate into trying to make money for them. And there have been (rare) cases that this has come up an issue. It factored into a lawsuit Ebay brought against Craigslist at one point. If Apple's Board of Directors suddenly decides that they're going to donate all of Apple's profits to the Save the Whales Foundation, they would doubtless be sued. (I'm assuming for purposes of argument the BoD would even have the legal authority to do so.)
That said, boards are not required to maximize short-term profit. They can make modest philanthropic contributions. They can do things for their local communities. They can pay their employees well and give them lots of time off. And so forth.
The argument, in the context of fiduciary responsibilities, would be that all these things can contribute to the long-term value of the firm.
If, however, you honestly don't care much about making money and want to give most of your profits back to the local community of whatever, you really shouldn't be incorporating as a for profit.
> “There is a widespread and completely erroneous belief out there that there is some sort of legal duty that corporate managers have to ‘maximize profits’ or ‘maximize shareholder value,’” said Cornell law professor Lynn Stout, author of “The Shareholder Value Myth.” In Stout’s view, the misplaced assumption comes from an old case that cites stockholders’ interests. That case did not set legal precedent, she said, compared to a more recent case.
> “You can just pick up the Supreme Court case ‘Hobby Lobby’ decided just a few years ago,” she said. “Read the majority opinion, where Justice Alito says, and I quote, ‘modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else.’”
> By contrast, Delaware Chancery Court Judge Leo Strine, now chief justice of the state Supreme Court, wrote in the Wake Forest Law Review: “Corporate law requires directors, as a matter of their duty of loyalty, to pursue a good faith strategy to maximize profits for the stockholders.” The debate goes on.
> We evaluate the U.S. Supreme Court’s controversial decision in the Hobby Lobby case
from the perspective of state corporate law. We argue that the Court is correct in holding
that corporate law does not mandate that business corporations limit themselves to pursuit
of profit. Rather, state law allows incorporation for any lawful purpose. We elaborate on
this important point and also explain what it means for a corporation to “exercise religion.”
In addition, we address the larger implications of the Court’s analysis for an accurate understanding both of state law’s essentially agnostic stance on the question of corporate purpose and also of the broad scope of managerial discretion.
It is not as black and white as "you must maximize profits" although this is consistently parroted by folks.
> The purpose of a corporation... to maximize returns for its investors.
That's a common misunderstanding.
"In nearly all legal jurisdictions, disinterested and informed directors have the discretion to act in what they believe to be the interest of the business corporate entity, even if this differs from maximizing profits for present shareholders. Usually maximizing shareholder value is not a legal obligation, but the product of the pressure that activist shareholders, stock-based compensation schemes and financial markets impose on corporate directors." [1]
The idea that corporate directors (of whichever kind) have an legal obligation to maximize profits/shareholder value is a myth. Taken directly from Alito's (non-dissenting) opinion in Hobby Lobby:
"While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so."
Additionally, even if there were such a requirement, it would be toothless. The corporate directors of a company facing criticism from its shareholders that it is not maximizing profits (in the short-term) could simply retort that they are pursuing a strategy that maximizes profits in the long-run, and that investors should look elsewhere for short-term gains.
As a practical example, consider any company that pursues more environmentally sound practices, or tries to source materials more ethically. By doing more than the bare minimum, they are surely cutting into short-term profits, however they may in the process be building a more resilient and popular brand that profits more in the long-run.
Yes, there's a lot of leeway for HOW to maximize the profit and on what timescale, but the purpose still has to be profit maximization. For example a court ruled against Henry Ford rising workers' wages for the benefit of the workers and the society.
I don't really understand why people struggle with this IMHO plain fact that for-profit is for-profit. Maybe it challenges the idea that "free market" will benefit us all?
https://www.wakeforestlawreview.com/2012/04/our-continuing-s...
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