Corporation Purpose Cases

Corporation Purpose Cases - Our Schizophrenic Conception of...

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“Our Schizophrenic Conception of the Business Corporation” William T. Allen Corporation law not just a system of legal rules – dynamic product formed by historical and social context o Junk bond market and takeover entrepreneurs o Growth of institutional investors and emergence of global economy 1980s corporate law changed and asked true purpose of corporation and whose benefit it serves Schizophrenic: two inconsistent models of corporate law (1) Property conception – corporation is private property of owners/stockholders with purpose of advancing purpose of owners (increase their wealth) o Directs are agents of owners – increase financial interests of the owners, carried on for stockholder profit o Duty: maximize profits of the firm for the benefit of the shareholders o Arguments: political and normative, maximizes wealth creation (2) Entity conception – corporation is institution with public purpose, including advancement of the general welfare o Corporation is distinct from each individual that fills social role that its internal rules and culture define o Capable of bearing legal and moral obligations o National securities markets with stockholders as detached investors, so corporation like a separate entity o Purpose of corporation is social, not individual o Assure sufficient rate of return to investors, then fulfil other purposes of equal dignity o Make large scale enterprise productive over the long-term (don’t just focus on short-term profits) Long-term/short-term distinction: social actions are long-term profit maximizing actions o Preserves form of stockholders oriented property theory while allowing behavior consistent with view that owes social responsibilities to all affected by operation Takeover movement put a lot more at stake and short-term/long-term distinction was of no legal use o Whose interests to protect with substantially all shareholders want to sell control? Core duty of director: maximize financial interests of shareholders through lawful means over some time period See legal rules and principles as constructs, affected by social world in which they exist Global emerging markets & dominance of institutional shareholders will cause claims of inefficiency o Today, more focus on shareholder value than social responsibility “The Social Responsibility of Business is to Increase its Profits” Milton Friedman
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