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.
