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Thursday
Jul102014

Corporate Governance, Profit Maximization and Hobby Lobby (Part 1)

The Supreme Court mostly addresses issues of federal law. As a result, occasional diversions into tangential areas of state law can result in some unusual interpretations. This has occurred in a number of instances with respect to corporate governance.  

Citizens United is an example. There the Court suggested that the issue of campaign contributions by corporations was a matter better left to shareholders and "corporate democracy." See Citizens United ("Shareholder objections raised through the procedures of corporate democracy, can be more effective today because modern technology makes disclosures rapid and informative.").  

The opinion, however, did not discuss or even acknowledge the near impossibility of shareholders intervening in corporate affairs to affect campaign contributions (assuming there was adequate disclosure). Shareholders have no authority to dictate day to day expenditures (that is left to the board) and cannot vote out the board under the plurality system unless running a competing slate, something that rarely occurs. The statement was either wrong or naive. Either way, it was not particularly informed.  

Governance came up again in Hobby Lobby. There, the Court had this to say about for-profit companies: 

  • While it is certainly true that a central objective of forprofit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well. 

The quoted portion of the paragraph at least suggests that profit maximization is not required for for-profit companies. As Lyman Johnson recently noted: 

  • To hold that close corporations were “free” from the contraceptive mandate of the Affordable Care Act, because of RFRA, the Court thus had to determine that, under state corporate law, such companies are likewise “free” from some imagined state legal mandate to maximize profits. Readily concluding that corporations clearly do have the liberty not to maximize profits, the Court concluded that, as a legal matter, they were necessarily “free” to exercise religion. But critically, that means business corporations, being free in this respect under state corporate law, can pursue a whole host of objectives other than making money. Those objectives include various humanitarian, social, and environmental objectives of the sort progressives have long championed.   

As Lyman notes, the debate over the obligation to profit maximize is a longstanding one that divides corporate governance faculty. So given the depth of the dispute, the intimation that it was not required ought to have at least been backed with citations to authority supporting the view rather than appear as an unsubstantiated observation (there were no citations in the quoted portion of the paragraph).

Steve Bainbridge takes another view.   

  • Hobby Lobby's meaning will be contested on many levels for a long time to come, but I think it is best understood as recognizing the well-established principle that shareholders of a closely held corporation can alter the default rules of corporate law, including the issue of corporate purpose. I don't think Hobby Lobby should be understood as changing the default rule, especially by why of what is arguably dicta. 

The lively debate reflects something of a division among corporate scholars. Unfortunately, there is nothing in the unsupported quote set out in Hobby Lobby that really reflects the complexity of the debate. Moreover, as we will discuss in the next post, the issue was stated in a manner that was decidedly unhelpful and adds little meaningful insight into the ongoing debate about the role of profit maximization.  

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