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Company leaders are legally obligated to act in the best interests of the company and the shareholders. That is related to profit maximization, but it's not th

Company leaders are legally obligated to act in the best interests of the company and the shareholders. That is related to profit maximization, but it's not the same thing.

2OEH8eoCRo0 4y ago
Right. I take it as meaning, "don't abuse your position as CEO to enrich yourself to the detriment of the company."
RockyMcNuts 4y ago
The cool thing about the business judgment rule is, you can define 'best interests' almost any way you want. Not that different from 'effective altruism', really. Maybe running a Ponzi is moral if you are taking the money from people who are not effective altruists, but you are saving the planet or something? Or Kant's categorical imperative, act in a way that you would want to make universal law. Then in order to act morally, you have to solve for all downstream impacts of the action over all time, if everyone acts that way. Seems computationally intractable, possible multiple local equilibria, problems with which discount rates to use and whatnot. Hence the popularity of simple ethical systems, just do what God says on the tablets and be done with it. That's the cool thing about shaky theoretical foundations and fuzzy data, you can project anything you want onto them and act with a great deal of moral certainty about everything.
gizmo 4y ago
In practice company leaders can do pretty much whatever they like. The "best interest" test doesn't hold up in court, except in cases of shameless looting of a company by insiders. Take a leveraged buyout for instance. The company takes on a perhaps fatal amount of debt, the employees stand to lose their jobs, the shareholders might benefit if the LBO works out, but they lose if the company goes bankrupt. Who wins? The vultures who organized the LBO, because their downside is limited and their upside is highly leveraged. Company suffers. Shareholders suffer. Some insiders benefit. And it's still legal. Another example. Executives award themselves generous option packages. Then they announce a massive buyback program, which drives the stock price up (by arithmetic). The executives' options go to the moon. Big companies like Facebook have incinerated hundreds of billions in shareholder value this way. But it's legal, shareholder interests be damned.
- tyre 4y ago
  > Big companies like Facebook have incinerated hundreds of billions with buybacks at absurd valuations at the expense of shareholders. But it's legal, shareholder interests be damned. Facebook returned profit to shareholders via buybacks. If you invest in a company, you expect to make a return. There are two ways to do this: dividends or selling your equity. Dividends drain cash from the company to repay investors. Stock buybacks drain cash from the company to repay investors. Both are in the interest of shareholders! What is the other option? Make profit forever and never return anything to shareholders? Then we’re not talking about an investment. It’s crypto-ponzi all over again.
  - gizmo 4y ago
    Share buybacks when a company is overvalued are bad for shareholders. Share buybacks when a company is undervalued are good for shareholders. When you buy shares the price matters! This is still true when a company buys its own shares! During the 2021 mania the share buybacks accelerated, even though executives could easily have waited a year or two and sat on their money as the zero interest rate era was coming to an end. You don't want to do buybacks at $300 a share when your company is going to trade at $100 in a year. Because the shares you bought will then be $200 underwater. A buyback is a stock transfer between a party that believes the stock to be overvalued to the company. And in this case of facebook the seller was right and facebook was wrong.
    - naasking 4y ago
      And on top of that, you don't want buybacks to happen at the expense of other operations. For instance, railway companies bought back a shitload of stock and then cut funding to inspections and other safety measures.
  - dfxm12 4y ago
    What is the other option? You can sell your stocks to someone else. The company doesn't have to be the one to buy it. Also, remember, investments do come with risk.
HDThoreaun 4y ago
Large public companies have diverse, non monolithic shareholders who very rarely have similar goals beyond making money. It is exceedingly rare for the majority of shareholders to agree on anything other than maximizing either short term, or long term discounted profits. Sure, it's possible to have other goals, but that almost never happens in practice.
Retric 4y ago
This is also false, but less obviously so. The most clear counter example is officers are allowed to negotiate increased compensation even if it hurts the company. Which illustrates the separation between acting as an individual and an officer. The actual legal obligations are fairly narrow such as protecting minority shareholders. But, that rule is only in effect for the most egregious situations as there isn’t a strict ranking between objectives. Reducing pollution more than legally mandated is a tradeoff between profits, reputation, and shareholder wellbeing. It’s simply not obvious what the correct tradeoff would be and things get even more fuzzy when you include risks.
- andrewmutz 4y ago
  That's not an example of why this is false, it's an example of a conflict of interests. The CEO, for example, needs to push for a compensation package that shareholders see as fair. If not, they can file a derivative lawsuit as a remedy.
  - Retric 4y ago
    Yes shareholders can sue, but they such sue the board not the CEO. In well run public company the CEO’s don’t set their own compensation package they negotiate with a board who does. In that negotiation the CEO has zero legal obligations with respect to the company they are in effect an independent entity at the time. Of course this is assuming an independent board, conflicts of interest can still happen.
rob74 4y ago
The problem with that is just that the best interest of the shareholders is making as much money as possible in the short term, while the best interest of the company is being able to survive long term, which it won't be if all profits are siphoned off by the shareholders rather than being invested in stuff like R&D...
- BurningFrog 4y ago
  As a shareholder myself, I'm much more interested in long term money.
- zuminator 4y ago
  Shareholders may be interested in other things beside making money. For example, a shareholder in Hain Celestial might be interested in ensuring that healthy organic food is available in as many retail locations as possible. Or a Fox Corp. investor might feel their best interests are in countering the dominance of leftist dogma in the media.
- ahtihn 4y ago
  Aren't most shareholders long-term investors? I personally want as much return as possible over a 20-30 year time span, I don't care about next quarter.
michaelt 4y ago
Not only that - the CEO has broad authority to decide what the best interests of the company and shareholders are, within reason. Shareholders can't sue the CEO of Whole Foods for failing to stock profitable Coca-Cola products. If the CEO says that's the right decision for their brand, reputation and market positioning - that's precisely the sort of professional judgement the CEO was hired to make.
kelseyfrog 4y ago
I'd like to be able to read the actual law on this. Happen to have a reference to the section of US Code where this is spelled out?
LatteLazy 4y ago
Of course, if all you do is profit maximise you will be fine. But if you divert from that you get to spend years and millions of dollars in court proving you were not wrong...

Company leaders are legally obligated to act in the best interests of the company and the shareholders. That is related to profit maximization, but it's not the same thing.

2OEH8eoCRo0 4y ago

Right. I take it as meaning, "don't abuse your position as CEO to enrich yourself to the detriment of the company."

RockyMcNuts 4y ago

The cool thing about the business judgment rule is, you can define 'best interests' almost any way you want. Not that different from 'effective altruism', really. Maybe running a Ponzi is moral if you are taking the money from people who are not effective altruists, but you are saving the planet or something? Or Kant's categorical imperative, act in a way that you would want to make universal law. Then in order to act morally, you have to solve for all downstream impacts of the action over all time, if everyone acts that way. Seems computationally intractable, possible multiple local equilibria, problems with which discount rates to use and whatnot. Hence the popularity of simple ethical systems, just do what God says on the tablets and be done with it. That's the cool thing about shaky theoretical foundations and fuzzy data, you can project anything you want onto them and act with a great deal of moral certainty about everything.

gizmo 4y ago

In practice company leaders can do pretty much whatever they like. The "best interest" test doesn't hold up in court, except in cases of shameless looting of a company by insiders. Take a leveraged buyout for instance. The company takes on a perhaps fatal amount of debt, the employees stand to lose their jobs, the shareholders might benefit if the LBO works out, but they lose if the company goes bankrupt. Who wins? The vultures who organized the LBO, because their downside is limited and their upside is highly leveraged. Company suffers. Shareholders suffer. Some insiders benefit. And it's still legal. Another example. Executives award themselves generous option packages. Then they announce a massive buyback program, which drives the stock price up (by arithmetic). The executives' options go to the moon. Big companies like Facebook have incinerated hundreds of billions in shareholder value this way. But it's legal, shareholder interests be damned.

tyre 4y ago
> Big companies like Facebook have incinerated hundreds of billions with buybacks at absurd valuations at the expense of shareholders. But it's legal, shareholder interests be damned. Facebook returned profit to shareholders via buybacks. If you invest in a company, you expect to make a return. There are two ways to do this: dividends or selling your equity. Dividends drain cash from the company to repay investors. Stock buybacks drain cash from the company to repay investors. Both are in the interest of shareholders! What is the other option? Make profit forever and never return anything to shareholders? Then we’re not talking about an investment. It’s crypto-ponzi all over again.
- gizmo 4y ago
  Share buybacks when a company is overvalued are bad for shareholders. Share buybacks when a company is undervalued are good for shareholders. When you buy shares the price matters! This is still true when a company buys its own shares! During the 2021 mania the share buybacks accelerated, even though executives could easily have waited a year or two and sat on their money as the zero interest rate era was coming to an end. You don't want to do buybacks at $300 a share when your company is going to trade at $100 in a year. Because the shares you bought will then be $200 underwater. A buyback is a stock transfer between a party that believes the stock to be overvalued to the company. And in this case of facebook the seller was right and facebook was wrong.
  - naasking 4y ago
    And on top of that, you don't want buybacks to happen at the expense of other operations. For instance, railway companies bought back a shitload of stock and then cut funding to inspections and other safety measures.
- dfxm12 4y ago
  What is the other option? You can sell your stocks to someone else. The company doesn't have to be the one to buy it. Also, remember, investments do come with risk.

HDThoreaun 4y ago

Large public companies have diverse, non monolithic shareholders who very rarely have similar goals beyond making money. It is exceedingly rare for the majority of shareholders to agree on anything other than maximizing either short term, or long term discounted profits. Sure, it's possible to have other goals, but that almost never happens in practice.

Retric 4y ago

This is also false, but less obviously so. The most clear counter example is officers are allowed to negotiate increased compensation even if it hurts the company. Which illustrates the separation between acting as an individual and an officer. The actual legal obligations are fairly narrow such as protecting minority shareholders. But, that rule is only in effect for the most egregious situations as there isn’t a strict ranking between objectives. Reducing pollution more than legally mandated is a tradeoff between profits, reputation, and shareholder wellbeing. It’s simply not obvious what the correct tradeoff would be and things get even more fuzzy when you include risks.

andrewmutz 4y ago
That's not an example of why this is false, it's an example of a conflict of interests. The CEO, for example, needs to push for a compensation package that shareholders see as fair. If not, they can file a derivative lawsuit as a remedy.
- Retric 4y ago
  Yes shareholders can sue, but they such sue the board not the CEO. In well run public company the CEO’s don’t set their own compensation package they negotiate with a board who does. In that negotiation the CEO has zero legal obligations with respect to the company they are in effect an independent entity at the time. Of course this is assuming an independent board, conflicts of interest can still happen.

rob74 4y ago

The problem with that is just that the best interest of the shareholders is making as much money as possible in the short term, while the best interest of the company is being able to survive long term, which it won't be if all profits are siphoned off by the shareholders rather than being invested in stuff like R&D...

BurningFrog 4y ago
As a shareholder myself, I'm much more interested in long term money.
zuminator 4y ago
Shareholders may be interested in other things beside making money. For example, a shareholder in Hain Celestial might be interested in ensuring that healthy organic food is available in as many retail locations as possible. Or a Fox Corp. investor might feel their best interests are in countering the dominance of leftist dogma in the media.
ahtihn 4y ago
Aren't most shareholders long-term investors? I personally want as much return as possible over a 20-30 year time span, I don't care about next quarter.

michaelt 4y ago

Not only that - the CEO has broad authority to decide what the best interests of the company and shareholders are, within reason. Shareholders can't sue the CEO of Whole Foods for failing to stock profitable Coca-Cola products. If the CEO says that's the right decision for their brand, reputation and market positioning - that's precisely the sort of professional judgement the CEO was hired to make.

kelseyfrog 4y ago

I'd like to be able to read the actual law on this. Happen to have a reference to the section of US Code where this is spelled out?

LatteLazy 4y ago

Of course, if all you do is profit maximise you will be fine. But if you divert from that you get to spend years and millions of dollars in court proving you were not wrong...