Daniel Davies has a killer post over at Crooked Timber. He puts to death the old hobbyhorse of scorched-earth capitalists that companies have a responsibility to the shareholders to maximise profits. Whenever people say this, I scream at the top of my lungs that they have to act like people first, goddamnit:
And at this point, of course, the Davies-Folk Theorem kicks in; if you allow strategic and reputational issues to be given weight in managerial decisions, then it is very hard indeed to think of something that can’t be justified as being in the best interests of maximising shareholder value over the long term. Paying above-market wages? Efficiency wage argument, maximises shareholder value. Donating to charity? Part of the marketing budget, don’tcha know. Voluntarily refusing to sell violent video games to children? Forestalls the danger of much more punitive government regulation down the line. Etc etc. It’s pretty much accepted that if the Dodge vs Ford case (which is more or less the basis of the view that directors’ common law fiduciary duty of care implies an obligation to maximise equity value) came to court tomorrow, it would be a pretty shoddy legal team that couldn’t win it for Henry Ford.
In real life, the business judgement rule protects more or less anything that the Creative Capitalism gang might want businesses to do. Even the paradigm example used by Posner – of a corporate chief executive making charitable donations and specifically saying that they weren’t doing it for PR purposes and that they didn’t run the company in the interests of the shareholders – doesn’t actually necessarily give rise to a situation which would fail the business judgement test, because that’s pretty much the story of Body Shop, and if the only way that a company can secure the services of a talented and energetic cosmetics executive like Anita Roddick is to give away money without regard for shareholders, then that’s in the interests of shareholders. There is, of course, a cottage industry in business school cases and the funnies pages of the Economist in proving that instances of corporate philanthropy are actually in the interests of shareholders in the long term.