Organizing Principles

Good things come in small articles. In this article from Harvard Business Review the authors reveal their research findings of a “century’s worth of legal theory and precedent”. 

Shareholders do not own the corporation, which is an autonomous legal person. What’s more, when directors go against shareholder wishes—even when a loss in value is documented—courts side with directors the vast majority of the time.

Consider for a moment what this truly means. A business, once incorporated, is free to act as it chooses. Executives are not legally obligated to uphold shareholder value at all costs. It turns out that this belief has in fact been a legal fallacy.

Managers and lawyers have failed to meaningfully collaborate on defining directors’ role. That lack of communication has led to the election of directors who, frankly, don’t know what their legal duties are. Indeed, they’re being taught the wrong things. The case still most often used in law schools to illustrate a director’s obligation is Dodge v. Ford Motor (1919)—even though an important 2008 paper by Lynn A. Stout explains that it’s bad law, now largely ignored by the courts. It has been cited in only one decision by Delaware courts in the past 30 years.

The “Delaware” mention is important because that is where the majority of US businesses are incorporated - not in the state of their headquarters.

Stop and really think this one through for a moment: we have been listening to a false story for decades. Consider who might have perpetuated this story. Think who might have benefited from this story. Now realize that there is another way.

If corporations are not solely accountable to shareholders, who else do they serve? Their customers? Their employees? Their suppliers? Their environment? Their peers?

This is not to say that corporations are free to abuse any one of these stakeholders. As in the case of an individual like myself, I have freewill but am counted on by my family, my boss, my friends, and so on. Consequently, I act in the way that I believe will best benefit all these groups. I do so because to do otherwise would be against my conscience. What then would be analogous to the conscience in the corporation?

How can a corporation choose to act in the best interest of all of its stakeholders? and not against its corporate conscience?