Understanding the Purpose of a Corporation: An Introduction

Article excerpt

I, THE DEBATE OVER DUTIES ................................ 807

II. SHAREHOLDER PRIMACY FAILS: A BETTER ALTERNATIVE ..........................809

III. THE IMPORTANCE OF IT ALL-To BENEFIT SOCIETY ............................................ 810

IV. HOW THE DIFFERENT MODELS COMPARE .............................................................. 810

V. THE NEED FOR THE CORPORATE CONSTITUENCY STANDARD ................................ 812

VI. THE WELL-INTENTIONED STAKEHOLDER MODEL (AND WHY IT FALLS SHORT) ... 812

VII. SHAREHOLDER PRIMACY Is NOT Now-AND NEVER HAS BEEN-THE LAW OF THE LAND ............................................................................. 813

VIII. THE FAILURE To DISTINGUISH BETWEEN SECURITIES LAWS PROTECTING INVESTORS AND CORPORATE FIDUCIARY DUTIES .................................................. 814

IX. THE OFT-MISCITED FoRD MoToR CASE ..............815

X. ELECTING SOMEONE DOES NOT MEAN YOU OWN THE PERSON ........................816

XI. LOSING SOMETHING IN THE TRANSLATION ............................................................ 817

XII. CONCLUSION ......................................................................................................... 817

I. THE DEBATE OVER DUTIES

Much academic time and attention over the last few decades have been devoted to debating the purposes of corporations and, in particular, debating the obligations of those who direct corporations.1 Understanding the directors' task would allow for the formulation of rules that would permit arbiters, judges, and those who study law and economics to gauge corporate action. Much like having a speed limit, it would then be easy to tell who-is driving too fast.

And so there has been a great deal written in academic literature about the obligations of directors. Over the course of that examination and the resulting debate, a consensus has emerged from some parts of the academic community,2 and others,3 that the duties of directors are owed to the shareholders.4

The meaning of that conclusion itself is not, of course, without ambiguity. Which shareholders? Today's or tomorrow's (presumably not yesterday's)?5 Do the directors have to do what is best for the shareholders of the moment? Or can they take action they believe will be detrimental to the current shareholding body but that will, at least in the directors' view, benefit the shareholders, whoever they might be, at some much later date? For example, can the directors reject a premium-priced cash bid for all the company's stock if they believe that the shareholders, at some future date, will be better off due to the rejection? To resolve this potential conflict between today's shareholders and tomorrow's, some commentators have focused on a measure that presumes to join across time the interests of the continuous body of shareholders-namely, the current share price. Maximizing current share price supposedly harmonizes present and future shareholders' interests because, in a relatively efficient stock market, corporate action taken today to benefit the shareholders of tomorrow will, or at least supposedly should, be reflected in an increase in the current share price.6 Consequently, a director's obligation to act in the best interests of shareholders can be translated generally into an obligation to maximize current share price.7

Once this determination is made as to directors' obligations, only a little effort is required to create rules that permit easy judgment and review. For example, directors responding to a takeover should simply ensure that the price received for the company's shares is as high as possible.8 Similarly, when directors consider action that would result in the corporation breaching an explicit contract, choosing to act in whatever manner maximizes current share price-whatever the "market" believes is best at the momentresolves the issue of what to do. …

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