[The previous essays in this series are here and here.]
In the 1987 movie Wall Street, the corporate raider Gordon Gekko (a performance for which Michael Douglas won an Academy Award) excoriates the management of the fictional Teldar Paper as bloated, self-serving, and incompetent.
Gekko’s most memorable maxim, delivered from the aisle of a hotel ballroom during the company’s annual meeting of shareholders, was apparently inspired by a 1986 commencement speech at the University of California, Berkeley’s business school: Ivan Boesky (who, late the following year, would be sentenced to prison for insider trading) proclaimed, “I think greed is healthy. You can be greedy and still feel good about yourself.”
However, most people misquote Gekko’s iconic remark (from a speech that could be called Icahnic, since it elsewhere echoes several statements, reported in Connie Bruck’s The Predators’ Ball (1988), of raider Carl Icahn—who, like Gekko, had attempted to take over a paper company).
Gordon Gekko did not say, “Greed is good.”
He said, “Greed, for lack of a better word, is good.”
As has been suggested, it might not have been noteworthy, in 1987, had Gekko instead said, “Profit-maximizing is good,” before elaborating that it “clarifies, cuts though, and captures the essence of the evolutionary spirit, and . . . will not only save Teldar Paper but that other malfunctioning corporation called the USA.”
But in 2023, pure profit-maximizing, and its role in the culture and future of the nation, are themselves controversial.
The various “Corporate Social Responsibility” (CSR) initiatives of Gekko’s day prefigured the current ESG movement, which seeks to enhance a company’s Environmental, Social, and Governance practices, including: sustainability; fair treatment of the company’s employees, and those of its suppliers; diversity, equity, and inclusion (DEI), on the worker, management, and boardroom levels; product safety; consumer protection and privacy; internal and public statements on issues of social concern; increased transparency and disclosure; evaluation of the potential applications, and customers, of the (especially, high-tech) company’s products and services; and, executive compensation (compared to the average employee’s compensation, and/or correlated with the company’s progress towards its ESG goals).
Like its predecessor, ESG propels boards to consider the interests of such non-stockholder “stakeholders” as customers, employees, governments, and suppliers, as well as the communities in which the company’s facilities are located.
Debates over whether, and how much, to accommodate such concerns date back at least ninety years (when Columbia’s Adolf Berle and Harvard’s E. Merrick Dodd published opposing law review articles on the topic).
Yet Gekko, and even some of today’s real-life lawyers, might be surprised to learn that, as the late Cornell law professor Lynn Stout asserts in her brief, non-technical, and engaging overview, The Shareholder Value Myth (2012), “United States corporate law does not, and never has, required directors of public corporations to maximize either share price or shareholder wealth.”
In “debunking” the “shareholder primacy” perspective for “executives, investors, and informed laypersons,” Stout reexamines the “core assumptions” that shareholders own corporations; that they are residual claimants (that is, entitled to receive any funds remaining after the company’s debts have been paid); and that they are the principals whom corporate directors and officers serve as agents.
She also minimizes the import of the Michigan Supreme Court’s 1919 declaration, in Dodge v. Ford Motor Co. (a decision featured in a number of today’s corporate law casebooks), that “a business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.”
Stout argues that this statement: was extraneous, and non-binding, dictum; was qualified by the word, “primarily”; was contained in a decision that “was not really a case about a public[ly-traded] corporation at all”; and was from a court in Michigan, which “has become something of a backwoods of corporate jurisprudence.” She adds that, as of 2012, the Dodge decision had not been followed, and had rarely even been cited, by Delaware’s state courts, which are by far the most influential in the corporate context.
(Delaware is not among the more than thirty states that, beginning in 1983 with Philadelphia, adopted “other constituency” statutes permitting, but generally not requiring, directors to consider the interests of non-shareholders. Moreover, in 2010, Delaware’s Court of Chancery rejected what it characterized as “a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders.”)
Stout also shatters the shibboleth of “maximizing shareholder value,” exposing its inaccurate implication that shareholders are a homogeneous group.
She argues that, unlike those investors inclined to hold shares for long periods, short-term traders like “activist hedge funds” are most likely to attempt aggressively to influence a company’s management, because these funds scrutinize (even if only for relatively brief periods) the operations of a limited number of companies.
By contrast, “Most [mutual and other] fund managers rationally conclude it is not in their clients’ interests for them to exercise an active governance role in the dozens or even hundreds of firms whose stocks the fund manager keeps in his portfolio. If there’s a problem, the fund manager will do the ‘Wall Street Walk’ and sell the shares quickly and quietly, before anyone else catches on.”
Yet, directors and officers forced to focus on short-term stock prices might (for instance, by short-changing research and development initiatives) short-sightedly deprive their companies of long-lasting benefits.
Stout summarizes her own holistic “team production” approach to corporate governance, (enunciated and expanded on in a series of law review articles co-written with Vanderbilt law professor Margaret Blair), which portrays directors as “’mediating hierarchs’ who can balance the. . . demands of shareholders against the interests of other stakeholders. . . that make essential contributions to firms.”
She observes that although a (for-profit) company could explicitly embrace the shareholder primacy approach by installing a provision to that effect in its own corporate charter (also known as its articles of incorporation, or its certificate of incorporation), “virtually no public[ly-traded] corporation does so.”
A hybrid approach (which might be abbreviated as, E$G) is carefully chronicled in Better Business: How the B Corp Movement is Remaking Capitalism (2020), by Christopher Marquis (then a professor at Cornell’s business school, and now a member of the faculty of the University of Cambridge’s business school).
Marquis examines the emergence of (mostly, privately-held) “social enterprises,” companies specifically dedicated to—and designated as—seeking to achieve not only (some) profits but also social goals.
He notes that, as of early 2020, the corporate statutes of thirty-five states (including Delaware) recognized for this purpose a special category of “benefit corporations,” and that “more than ten thousand” domestic corporations, including outdoor clothing and gear marketer Patagonia, had formally chosen that form of operation.
(In 2008-2009, the leading promoters of such legislation included Arnold Schwarzenegger, then governor of California; U.S. Rep. Jamie Raskin, then a state senator in Maryland, the first state to enact such legislation (in 2013); and principal drafter Bill Clark, a lawyer at Drinker Biddle & Reath.)
Often quoting from his personal interviews of key participants, Marquis reviews the creation (in 2006) and operations of the private organization B Lab, which invites companies to apply for its own third-party “B Corp” certification of their dual commitment to social goals and profits. He also profiles a variety of B Corps.
The home page of B Lab recently stated that there are 6,927 such companies, in a total of 91 countries. Prominent B Corps include Allbirds, King Arthur Baking Company, Klean Kanteen, Stonyfield, and Tom’s of Maine.
“The . . . founders [of B Lab] wanted to ensure that the certification process they created [featuring its initial, and then triennial, B Impact Assessment] was standardized across companies of different sizes and comparable across industries, allowing companies to assess the true social and environmental impacts of their operations and work to improve them, and giving consumers and investors the means to hold them accountable.”
Notably, a company that has met the requirements (if available) of its state of incorporation to be recognized as a benefit corporation might also choose to pursue private certification as a B Corp; but, B Lab requires “B Corps that are incorporated in [such] states. . . to become benefit corporations after certification.”
Marquis addresses the inception and growth of B Corp certification in other countries; efforts by B Lab to foster a “B Corp community” among its certified companies; the treatment of B Corps by “impact investors” interested in supporting social change, but also in some financial return; traditional corporations’ B Corp subsidiaries (such as Unilever’s Seventh Generation and Ben & Jerry’s, and Danone’s Happy Family); and the non-renewal of certification by some high-profile companies like Etsy (which became publicly-traded), actor Jessica Alba’s The Honest Company (which cited “a number of legal and compliance issues for our company that could lead to risk and uncertainty”), and Warby Parker. He also considers whether consumers are aware of, and influenced by, the certification of a given company as a B Corp.
Thirty-six years ago, profit-maximizer Gordon Gekko publicly warned Teldar’s management, “In my book, you either do it right, or you get eliminated.”
With the rise of social enterprises and the ESG movement, it remains to be seen whether, and to what degree, a new rule for corporate directors and officers will be, “You either do right, or you get eliminated.”
