The shareholder maximization canard

Cite this Article
Larry Ribstein, The shareholder maximization canard, Truth on the Market (July 28, 2010),

Al Franken buys the old idea that corporate managers have a duty to maximize shareholder value. Todd Henderson appropriately sets Franken (and others ignorant of corporate law) straight. Todd reminds them that the business judgment rule gives managers the flexibility to do pretty much what they want, including help society, as long as they don’t self-deal. Steve Bainbridge adds some detail and wonders whether good faith might qualify this conclusion.

The Franken misconception is widely espoused by those in the radical anti-corporate camp, such as the author of the widely read screed The Corporation. That book and its adherents characterize corporations as psychotic amoral monsters driven to a “pathological pursuit of profit” (the subtitle of the book). This bolsters their argument that corporations, being monsters, shouldn’t have First Amendment rights.

Todd notes that corporations are free to do pretty much what we, the owners, managers and other parties to corporate contracts, want them to do, subject to regulation. As I have argued extensively in my article, Accountability and Responsibility in Corporate Governance, the major constraint on corporations is not law but markets.

This is why the corporate social responsibility debate is largely empty. While many corporate social responsibility proponents argue for giving managers more legal freedom to serve society’s needs, managers already have that freedom.

What the proponents really want but don’t always say is to give managers freedom from market discipline. But as I show in the above article markets already discipline managers to act in society’s interests. Giving managers more freedom would give them more freedom to act in their own interests. Do we really need that?