Etsy’s I.P.O. and Public Corporations’ Obligations
to Shareholders
Etsy just became the second company to
go public
while maintaining social and environmental standards. But the age-old debate over
whether corporations’ primary duty is to shareholders has already been
reignited
by the corporate
sustainability movement — the idea that companies can pursue
social and environmental welfare, even if it seems at odds with the goal of
maximizing profits and stock prices. Businesses must make a profit, but do they
have to work to increase earnings even at the expense of
customers, employees or the environment? Does the law allow corporations to
pursue social goals like environmental sustainability or worker well-being?
* go public = (기업이) 주식을 공개(상장)하다/ age-old = 아주
오래된/ reignite = 재점화되다(하다)/ corporate sustainability movement(management) = 지속가능
경영, 경제성장, 환경보전, 사회발전을 동시에 추구하는 21세기형 경영운동(방식)/ at odds with ~ = ~와 불화하여/ at the
expense of ~ = ~의 비용으로(희생으로)
법은 기업이 환경 감수성 또는 직원 복지와 같은 사회적 목표의 추구를
허락하나요?
1. A Duty to Shareholder
Value
If directors were allowed to deviate from shareholder
wealth maximization, they could turn to indeterminate balancing standards, which
provide no accountability.
2. Corporations
Don’t Have to Maximize Profits
The business judgment rule
gives directors protection from judicial second-guessing about how to best serve
their companies and shareholders.
3. Social
Good Is Not Inconsistent with Profit
To falsely divide the
world between “profit” and “social good,” and to limit corporate participation
to the former, cheapens the value of the corporate form.
4. It’s Law, But It Shouldn’t Be
As long as
Citizens United is good constitutional law, shareholder primacy will be bad for
society.
5. A Good Corporate Accounting of
Social Costs Is Needed
Sustainability factors can improve
financial performance. The trick is identifying which factors affect the bottom
line.
Sample
Essay
Corporations Don’t
Have to Maximize Profits
There is a common belief that
corporate directors have a legal duty to maximize corporate profits and
“shareholder value” — even if this means skirting ethical rules, damaging the
environment or harming employees. But this belief is utterly false. To quote the
U.S. Supreme Court opinion in the recent Hobby Lobby case: “Modern corporate law
does not require for-profit corporations to pursue profit at the expense of
everything else, and many do not.”
The Hobby Lobby case dealt with a
closely held company with controlling shareholders, but the Court’s statement on
corporate purpose was not limited to such companies. State codes (including that
of Delaware, the preeminent state for corporate law) similarly allow
corporations to be formed for "any lawful business or purpose,” and the
corporate charters of big public firms typically also define company purpose in
these broad terms. And corporate case law describes directors as fiduciaries who
owe duties not only to shareholders but also to the corporate entity itself, and
instructs directors to use their powers in “the best interests of the
company.”
Serving shareholders’ “best interests” is not the same thing as
either maximizing profits, or maximizing shareholder value. "Shareholder value,"
for one thing, is a vague objective: No single “shareholder value” can exist,
because different shareholders have different values. Some are long-term
investors planning to hold stock for years or decades; others are short-term
speculators.
Also, most investors care not only about their portfolios,
but also about their jobs, their tax burdens, the products they buy and the air
they breathe. Which is to say, companies that maximize profits by firing
employees, avoiding taxes, selling shoddy products or polluting the environment
can harm their shareholders more than helping them.
More to the point,
corporate directors are protected from most interference when it comes to
running their business by a doctrine known as the business judgment rule. It
says, in brief, that so long as a board of directors is not tainted by personal
conflicts of interest and makes a reasonable effort to stay informed, courts
will not second-guess the board’s decisions about what is best for the company —
even when those decisions predictably reduce profits or share
price.
Outside the rare case of a public company that decides to sell
itself to a private bidder, the business judgment rule gives directors nearly
absolute protection from judicial second-guessing about how to best serve the
company and its shareholders.
Although some Delaware cases talk about
maximizing shareholder value in the long run, Delaware (like other states)
applies the business judgement rule to protect directors of corporations that
reduce profits and share price when directors claim this will ultimately help
the corporation. In the 2011 case of Air Products, Inc v. Airgas, the business
judgement rule allowed Airgas directors to refuse to sell the company, even
though a sale would have given Airgas' shareholders a hefty profit.
So,
where did the mistaken idea that directors must maximize shareholder value come
from? The notion is especially popular among economists unburdened by knowledge
of corporate law. But it has also been embraced by increasingly powerful
activist hedge funds that profit from harassing boards into adopting strategies
that raise share price in the short term, and by corporate executives driven by
“pay for performance” schemes that tie their compensation to each year’s
shareholder returns.
In other words, it is activist hedge funds and
modern executive compensation practices — not corporate law — that drive so many
of today’s public companies to myopically focus on short-term earnings; cut back
on investment and innovation; mistreat their employees, customers and
communities; and indulge in reckless, irresponsible and environmentally
destructive behaviors.