The problem with holding that directors have duties to the “corporation” is that the corporation is composed of contracts among claimants with varying and possibly conflicting interests in the firmâ€™s wealth. In solvent firms this is not troubling. Serving the firmâ€™s interests effectively means serving the shareholders because the value of the shareholdersâ€™ interest in profits reflects the firmâ€™s economic well-being.
A recent paper by Jill Fisch, Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy, suggests that the connection between “a firm’s well being” and “serving the interests of shareholders” is more complicated. She writes:
The Article argues that the scope of fiduciary duties is not a statement that shareholder interests should be privileged above those of other corporate constituencies; shareholder interests are not the only interests that count. Rather, fiduciary duties are a mechanism for allocating protection of constituency interests through institutional specialization.
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This analysis explains why fiduciary principles and thus judicial access are limited to shareholders. Importantly the reason shareholders are protected with fiduciary duties is not because theirs are the only interests that count within the corporation. The interests of managers, customers, and employees count, but those interests are protected effectively through mechanisms other than fiduciary duty litigation. Indeed, at the point when creditor interests are in most jeopardy — when the corporation is in the zone of insolvency — the courts have extended fiduciary protection to them. [A claim surely to be revised post Ribstein & Alces?]. As a result, contrary to the claims of progressive scholars, the legitimacy of other stakeholder claims does not justify the extension of fiduciary principles to protect non-shareholder interests. Rather the scope of existing fiduciary principles can be understood, and defended, as a mechanism for institutional specialization, allowing the different institutions to serve the interests of different corporate participants.
Underlying Jill’s point is the claim (well-explored in the article) that, in fact, shareholder wealth maximization is not a good proxy for firm value. As she notes, “shareholder value is neither the equivalent of firm value nor a reasonable proxy for firm value, particularly when applied to the agency context upon which corporate law is focused. Existing legal doctrine and economic theory do not justify evaluating regulatory policy exclusively in terms of shareholder interests.” It’s a bold claim, and it is sure to engender a vigorous debate.
I like the notion that comparative institutional competency explains the allocation of fiduciary duties in the firm (shareholders get to use the courts; creditors have cheaper means at their disposal), although I wonder how the rule that directors may consider non-shareholder interests in non-Revlon takeover mode squares with this. Isn’t the takeover precisely the mechanism through which shareholders most effectively exert influence (or, really, have any influence at all)? If we were structuring duties to align institutions with the right constituencies, I would think that even non-Revlon takeovers would require vindication of shareholder interests and no one else’s. But perhaps given the persistent problem of director discretion versus shareholder control, the Revlon line is the right one, even in this context.