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Prof. Bainbridge yesterday posted about The Modern Corporation Statement on Company Law.  The statement has ten fundamental rules, of which number ten is:

Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes.

Prof. Bainbridge is with Delaware Chief Justice Strine in that profit maximization is the only role (or at least only filter) for board members.  As he asserts, “The relationship between the shareholder wealth maximization norm and the business judgment rule, . . . explains why the business judgment rule is consistent with the director’s “legal obligation to maximise profits for…

(Note:  This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides.  The previous installments can be found here and here (NLPB) and here and here (BLPB).)

In prior posts we talked about what a benefit corporation is and is not.  In this post, we’ll cover whether the benefit corporation is really necessary at all. 

Under the Delaware General Corporation Code § 101(b), “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes . . . .” Certainly there is nothing there that indicates a company must maximize profits or take risks or “monetize” anything. (Delaware law warrants inclusion in any discussion of corporate law because the state’s law is so influential, even where it is not binding.) 

Back in 2010, Josh Fershee wrote a post questioning the need for such legislation shortly after Maryland passed the first benefit corporation legislation:

I am not sure what think about this benefit corporation legislation.  I can understand how expressly stating such public benefits goals might have value and provide both guidance and cover for a board of directors.  However, I am skeptical it was necessary. 

Not to overstate its binding effects today, but we learned from Dodge v. Ford that if you have a traditional corporation, formed under a traditional certificate of incorporation and bylaws, you are restricted in your ability to “share the wealth” with the general public for purposes of “philanthropic and altruistic” goals.  But that doesn’t mean current law doesn’t permit such actions in any situation, does it? 

The idea that a corporation could choose to adopt any of a wide range of corporate philosophies is supported by multiple concepts, such as director primacy in carrying out shareholder wealth maximization, the business judgment rule, and the mandate that directors be the ones to lead the entity.  Is it not reasonable for a group of directors to determine that the best way to create a long-term and profitable business is to build customer loyalty to the company via reasonable prices, high wages to employees, generous giving to charity, and thoughtful environmental stewardship?  Suppose that directors even stated in their certificate that the board of directors, in carrying out their duties, must consider the corporate purpose as part of exercising their business judgment. 

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