New Faces of Corporate Responsibility: Will New Entity Forms Allow Businesses to Do Good?

By Schoenjahn, Ashley | Journal of Corporation Law, Winter 2012 | Go to article overview

New Faces of Corporate Responsibility: Will New Entity Forms Allow Businesses to Do Good?


Schoenjahn, Ashley, Journal of Corporation Law


I. INTRODUCTION

This Note examines the ability of corporations to be socially responsible in light of the traditional notion of shareholder primacy and the way courts interpret shareholder primacy today. The business judgment rule protects directors who decide to take actions that benefit constituents other than shareholders, but the rule has its limits. Newly developing forms of business entities hope to find middle ground between shareholder primacy and social responsibility. Even if these new entities find success, their ability to balance shareholder interests and societal goals, without violating fiduciary duties or losing competitive positioning in the marketplace, is still uncertain.

In Part II, this Note traces the history of the shareholder primacy norm and the business judgment rule. Part II also introduces the new business entities that aspire to make social responsibility more common in the business world. Part III analyzes the state of corporate responsibility in the traditional corporation and synthesizes scholarly scrutiny of each of the new forms. Part IV recommends changes to the new forms to increase their likelihood for success and suggests that while the future is uncertain for all of them, the L3C may be more likely to succeed than the others.

II. BACKGROUND

Profit-maximization has been a cornerstone of American corporate law and legal education for many years.1 As the Michigan Supreme Court stated, "A business corporation is organized and carried on primarily for the profit of the stockholders. . . . The discretion of directors . . . does not extend . . . to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes."2 Over the years, however, scholars and business people began to challenge this fundamental principle as incomplete because it ignores the interests of other corporate stakeholders.3 To determine where the balance between shareholder primacy and corporate social responsibility4 lies, it is important to understand the history of each concept.

A. Dodge v. Ford: Foundation of Shareholder Primacy

Almost every law student who takes a basic course in corporations encounters Dodge v. Ford.5 In the case, the Dodge brothers,6 minority shareholders of Ford Motor Company, sued for an injunction to stop Ford from expanding operations and asked the court for a decree commanding Ford to pay dividends.7 The court found that Henry Ford had philanthropic and altruistic sentiments regarding Ford Motor Company's profits.8 From Henry Ford's testimony, the court concluded his attitude toward shareholders was that they had already received great profits from Ford, and moving forward, they should be happy to receive whatever he decided to give them.9 The court further concluded that Henry Ford believed Ford Motor Company made too much profit and that he desired to share any further profits with the public in the form of more jobs, higher wages, and lower-priced cars.10

The court declined to file an injunction prohibiting Ford from expanding its operations, but it commanded the company to pay dividends.11 The court first penned the famous shareholder primacy quote cited above in this opinion.12 Since that day, the primacy of profit maximization for the benefit of shareholders has rested at the foundation of corporate law.13

B. The Business Judgment Rule: A Balance Between Shareholder and Stakeholder Primacy?

The business judgment rule "is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company."14 Unless the challenging shareholders prove that directors abused their discretion in pursuing a particular course of action, the court rarely disturbs the board's decision.15 This Part explores the applications and limitations of the business judgment rule. …

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New Faces of Corporate Responsibility: Will New Entity Forms Allow Businesses to Do Good?
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