March 20, 2015 at 10:52 pm #8288missing_kskdParticipant
…which challenges the assumption that there is a duty to maximize profits.
The specific fiduciary duties of corporate directors, like much of the law, are not written down in any statute (what ordinary people call a “law”). Instead, they are part of what we law professors call the common law: legal principles that have been established by courts in the process of adjudicating cases over the years. As it turns out, in Delaware, which is the state that matters—not only because most large corporations are incorporated there, but because courts in other states tend to look to Delaware law when dealing with new issues of corporate law—there are exactly two fiduciary duties: the duty of loyalty and the duty of care.
Now, in any interesting context, what is best for the corporation is not obvious, and reasonable minds may differ. Let’s say that the board decides to do X, and a majority of the shareholders think the board should have done Y. What can they do? They can theoretically vote in a new board, but in any case that’s a pure exercise of shareholder democracy that has nothing to do with fiduciary duties. If they want to claim a breach of fiduciary duty, they have to bring a lawsuit against the board.
Here’s the money:
The bottom line is that even if you think that corporate boards have a duty to maximize stock prices, they can still choose any course of action that is plausibly related to that goal over any time period they choose. Henry Ford lost Dodge v. Ford — in which he was forced to pay dividends to shareholders — not because the court thought he chose the wrong way to maximize profits, but because he went out of his way to insist that he was more interested in the greater good than in the Ford Motor Corporation and its shareholders. That’s why there is no effective duty of a board to maximize profits.
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