Particularly in the context of benefit corporations, a lot of us have used this space to talk about whether corporate directors are in fact required to adhere to a shareholder-wealth-maximization norm.  The flipside of this inquiry is to ask what shareholder wealth maximization means from the shareholders' viewpoint.

In his article Fictional Shareholders: For Whom are Corporate Managers Trustees, Revisited, Daniel Greenwood uses the term “fictional shareholders” to describe the mythical share-value-maximizing shareholder to whom corporate directors are theoretically beholden, who does not possess any interests, values, or priorities beyond shareholder wealth maximization.

One of the most striking examples of the “fictional shareholder” notion can be found in the D.C. Circuit’s opinion in Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011), where the court rejected the SEC’s proxy access rule in part on the ground that some shareholders might put forth director-nominees for the “wrong” reasons – i.e., reasons specific to their idiosyncratic interests outside of their status as shareholders, unrelated to corporate wealth maximization.  See generally Grant M. Hayden and Matthew T. Bodie, The Bizarre Law and Economics of Business Roundtable v. SEC.

Of course, in real life, shareholders do in fact have interests other than increasing prices of the shares they own in an individual company.  They may care about shares they own in other companies, or care about things unrelated to shares entirely – like the environment in which they live, the wages they are paid for their jobs, the prices they pay for goods as consumers, and so forth.  These varied considerations may "maximize" their wealth overall, even if they do not maximize the value of shares in any specific company.

Which is why I found this article so interesting.  The AFL-CIO is objecting to Wall Street’s practice of paying out deferred compensation to executives who depart for government.  Deferred compensation packages are intended to encourage employees to remain with the company; the compensation is forfeited if the employee leaves for a competitor.  So why should it be accelerated for government?  (Copies of the letters sent by AFL-CIO can be found here.)

Andrew Ross-Sorkin, adorably, believes the practice encourages “public service” even if it doesn’t benefit shareholders.

I believe the practice – at least in the eyes of the firms that employ it – likely directly maximizes shareholder wealth in particular companies by maintaining close ties between Wall Street and regulators.  Not in crude sense that government regulators “go easy” on Wall Street firms because they wish to curry favor or repay a debt, but in the more subtle sense that firms believe that if they maintain lines of communication and friendly relationships between themselves and their regulators, they can persuade regulators to adopt Wall Street priorities and sensibilities.  And, of course, when Wall Street firms have close ties to regulators, they can use friendship and informal networking to obtain information and cooperation –  the case of Rohit Bansal  is simply an extreme example.  (Probably Mary Jo White is more typical – after she left public service to work at Debevoise, she was accused of using her government connections to assist John Mack in avoiding SEC penalties for insider trading.)

So AFL-CIO’s objection, to me, does not come from its status as an adviser to investment funds investor seeking the highest possible value for their shares.  It comes from its status as a union federation, with members who have interests outside of their status as shareholders. 

AFL-CIO tacitly acknowledges as much.  In its press release describing its objections, it writes, “Unless the position of these companies is that this is just a backdoor way to pay off a newly minted government official to act in Wall Street’s private interests rather than the public interest, it is very difficult to see how these policies promote long-term shareholder value.”

Which is another way of saying that if these employees do act to further Wall Street’s interests, then they do promote shareholder value.  

So that leads to the question – is it legitimate, for the AFL-CIO to object to these practices, even if they increase the value of the pension fund's holdings?  Do corporate managers have any obligation to consider such objections, if they are not motivated by a desire to maximize wealth at a particular firm?

And what if the AFL-CIO did decide to call the banks' bluff by filing a lawsuit claiming that compensation incentives to decamp for government service do not benefit shareholders?  Would the directors have to admit that they hope for benefits like regulatory forbearance, or could the directors claim that, a la Andrew Ross-Sorkin, such pay practices provide a public benefit and represent a mark of good corporate citizenship?