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this post was submitted on 24 Sep 2023
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The idea that publicly traded companies have a duty to maximize shareholder value is a myth, and anyone privileged enough to sit on a board of directors likely knows this. See this article for an explanation. Every time a board squeezes a company for short term profits at the cost of long term good will, long term profits, etc., that is because they chose to do so.
EDIT: See also This NY Times article. And note that I'm not saying that corporations, board members, etc., aren't pressured or incentivized to maximize shareholder value - I'm saying that they do not have a legal duty to do so.
It's not a myth, it's called Fiduciary Duty. The board, officers, and executives of a public company have a legal responsibility to put the financial interests and well-being of the company above other personal interests. The article you linked doesn't deny this, and it also isn't discussing the legal definition of it. It's discussing what you might call "toxic fiduciary duty", or more or less the Ferengi Rules of Acquisition. It's the idea that profit is the primary motive and should always trump all other considerations.
Fiduciary duty is important to create a concrete stance against corruption and misuse of the company's assets for personal gain. But when taken to an extreme, it becomes toxic and has negative consequences for the company. Employee wages are probably the most obvious example. There has to be a balance between underpaying and overpaying. If you chronically underpay, the best employees will seek more gainful employment elsewhere and the company will suffer from a poorly qualified workforce. If you overpay, like 100% revenue share with employees, the company will cease to make a profit and will be unable to function. A balance has to be struck to retain the best talent in order to drive success for the company; that is the point of the article you linked.
TL;DR extremism is always bad
(Please don't mistake this for a pro-capitalism rant, there's nuance to be had here)
All of that is true, but it doesn't contradict my point. Fiduciary duty isn't a duty to maximize shareholder value.
It literally is in practice.
It isn't. If it were, that would mean that in practice, board members act to maximize shareholder value because they are legally obligated to do so, and that simply isn't true.
In practice, board members and C-suite employees are incentivized to maximize shareholder value. They are not legally obligated to do so.
Fiduciary duty is a legal requirement, meaning that if you don't fulfill your fiduciary duty, you're liable. But nobody has been successfully sued for not maximizing shareholder value when their actions were in line with the business judgment rule ("made (1) in good faith, (2) with the care that a reasonably prudent person would use, and (3) with the reasonable belief that the director is acting in the best interests of the corporation"). Successful lawsuits regarding breach of fiduciary duty (in the context of corporate law) require the defendant to have acted with gross negligence, in bad faith, or to have had an undisclosed conflict of interest.
The closest instance of legal precedent that I know of (aside from "" of course) that eBay v. Newmark (Craigslist), which Max Kennerly took as meaning that corporations are legally required to maximize profits. In this case, Craigslist was found to have violated their fiduciary duties to eBay because Craigslist, in Max's words, "tried to protect the frugal, community-centric corporate culture that was a hallmark for their success."
Except, if you actually read the case notes, it's clear that the issue wasn't that Craigslist wasn't maximizing their profits, but that they were diluting the percentage of stocked owned and flexibility of selling those stocks of other stockholders. The issue wasn't that Craigslist wanted to spend half their profits supporting charities or anything like that - no, it was that they were trying to artificially limit, thus directly devaluing, the shares they had already sold. In other words, I agree that this was a case about minority shareholder oppression as opposed to being an edict to maximize profits / shareholder value.
And other than people threatening legal action, the most recent case we have (other than eBay v. NewMark) in favor of shareholder primacy is 124 years old - Dodge v. Ford. But the opposite is true:
The belief that a corporation is legally obligated to maximize shareholder value isn't just wrong; it also:
I said in practice, not in law
Just pointing out I'm a different person lol