Professor Bainbridge takes up my challenge to apply his theories about corporate governance to Yahoo’s betrayal to the Chinese secret police of a reporter who was a customer of its email service and Nestlé’s eager assurance to Islamic religious bigots that none of its products are of Danish origin. But he does so, it seems to me, without replying to my arguments against his view that corporate managers must serve always and only the interests of the shareholders, understood as maximizing the value of the shares.
Prof. Bainbridge points out, accurately but it seems to me irrelevantly, that doing wrong isn’t always the shareholder-value-maximizing course of action, even when it maximizes short-term profits. Sure. But what are the managers to do when wrongdoing (short of lawbreaking) would maximize long-term shareholder value?
He also points out that some things that are good for the wider society are also good for shareholder value. “Both society and their shareholders would have been well-served if German corporate managers had nipped Hitler’s rise in the bud instead of facilitating it, for example,” says the Professor. But this is simply a mistake, or rather two mistakes, one in economics and one in morals.
In economics, it ignores the public-goods/free-rider problem. Yes, it would have been for the good of all German shareholders had Naziism been prevented. But that doesn’t mean it would have been good for the shareholders of I.G. Farben if Farben had sacrificed its other interests to resist the Nazis. Similarly, preventing global warming is in everyone’s interests, but that doesn’t mean it’s in any one person’s or corporation’s individual interest to contribute to preventing it. What’s beneficial for all need not be rational for any one.
But it’s the error in morality that’s truly glaring here. Does Prof. Bainbridge really think that German industrialists were wrong to support the Nazis only because doing so turned out to be bad for shareholder value? By that standard, if the Battle of Stalingrad had gone the other way, the folks at I.G. Farben would have done something praiseworthy in helping to put Hitler into office. That can’t possibly be the right answer, can it?
Note also that if the corporate managers have no responsibility to the societies in which they exist except to avoid lawbreaking and maximize shareholder value, any assertion by a corporate manager or spokesman that Policy X is good (or bad) for the country ought always to be ignored, since it will be the duty of that manager or spokesman to say so if and only if Policy X is good (or bad) for shareholder value. Many of us think that corporations act as Prof. Bainbridge thinks they should act, but making that opinion more widespread surely isn’t in the interests of corporate shareholders generally.
Finally, Prof. Bainbridge suggests that if we disapprove of bad actions by corporations we should boycott their products, thus creating an incentive, in terms of shareholder value, for the managers to behave better in the future. Ignoring the difficulty of organizing such boycotts and the damage they do to innocent employees and suppliers (not to mention innocent shareholders, including all those pension funds), it seems incoherent to say that the managers of Nestlé merely did their fiduciary duty but we should boycott the company’s products in order to make their actions wrong retrospectively. This would, as I argued before, prescribe a kind of corporate sociopathy, where the company does exactly as much profitable wrong as its managers think it can get away with.
It seems to me that Prof. Bainbridge has been tricked by the distinction between “is” and “ought.” In his view, which has substantial authority behind it, the rule of shareholder value maximization embodies the legal duty of corporate managers under current law. He would like to believe that managers can perform that duty without acting immorally. So would I. But in fact sometimes they can’t.
When maximizing shareholder value means doing wrong, managers have to choose between their duty to the shareholders and their other duties as citizens and as human beings. Let’s admit that, and then we can reason about how managers should confront that conflict of duties.
Footnote Prof. Bainbridge has only contempt for the Congressional hearings at which executives of Google and Yahoo were pilloried for their dealings with China. I agree with him, but not for his reasons. My objection is to the Congressfolk’s failure to distinguish between Google’s agreement to do business in China without insisting that China adopt the First Amendment, which strikes me as eminently reasonable and probably good for the world on balance, and Yahoo’s craven collaboration with tyranny in its most active form.